UDR Inc (UDR) — Q1 2016 Earnings Call Transcript

Welcome to UDR's first quarter 2016 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, ir.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'd 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 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 that you respect everyone's time and limit your questions and follow-ups. Management will be available after the call for any 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, 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 for the Q&A portion of the call. The first quarter of 2016 was another great quarter for UDR, with strong same-store results and development lease-ups continuing to perform well. As you have come to expect from UDR, we remain focused on executing our previously communicated two-year strategic plan, which is still the right plan, given the long-term strength of the apartment business. From a big picture point of view, we're now in our sixth year of achieving 5% plus NOI growth. Over the past two years, most of our markets have seen accelerating growth trends due to supply/demand imbalance, and while our overall 2016 same-store operating trends continue to improve year-over-year in a few markets as anticipated, we have started to feel the impact of concentrated new supply. We believe apartment growth is sustainable, and supply can be absorbed with steady job growth and household formations. Deliveries of new apartment homes are projected to peak in the cycle in 2016 at around 380,000 units, and will subsequently drop in 2017 to 300,000 units, while job growth is forecast to be in the 2 million to 2.5 million range in both years. In this environment, market mix and price points will be key, and this plays well to our overall strategy which centers around our diverse portfolio mix of 20 markets with A and B quality communities in urban and suburban locations, which we expect to continue to perform well through the cycles and provide consistent cash flow growth. Our two-year strategic plan issued in February showed strong expected 2016 revenue and NOI growth of 5.75% and 6.75% at the midpoints. And we spoke to an anticipated solid, but slightly decelerating 2017 operating environment with revenue and NOI growth of 5% and 5.5% at the midpoints. Since then, there have been a number of publications speaking to flowing revenue trends in certain markets. And as such, I have asked Jerry to provide an update on our market expectations for the balance of 2016 and how we currently see 2017 stacking up. I hope you find this useful and that you reach the same conclusion as the UDR team: it's a great time to be in the apartment business, and therefore, we're reaffirming our full-year guidance provided in the initial outlook and will provide an update during the second quarter earnings call. Also, let me take a moment to mention that we were pleased that in early March we were added to the S&P 500 index, which is a testament to our investors and the entire UDR team who made this possible. With that, now I will turn the call over to Tom.

Thanks, Tom. The topics I will cover today include the first quarter results, our balance sheet and capital markets update, our casualty loss update, and development and transactions update, and our second quarter and full-year guidance. Our first quarter earnings results were in line with our previously provided guidance. FFO, FFO as adjusted and AFFO per share were $0.43 and $0.41 respectively. First quarter same-store revenue, expense, and NOI growth remained strong at 6.4%, 2.7%, and 8.0% respectively. Next, the balance sheet; at year-end, our liquidity as measured by cash and credit facility capacity was $1.1 billion. Our financial leverage on an un-depreciated cost basis was 33.0%. Based on today's market cap, it was 23.8%, and inclusive of JVs it was 28.2%. Our net debt to EBITDA was 5.4 times, and inclusive of JVs was 6.5 times. All balance sheet metric improvements were ahead of plan. During the quarter we issued $174 million of common equity at a net price of $34.73 per share in conjunction with our inclusion in the S&P 500. In addition, in January we paid $83.3 million of 5.25% medium-term notes. On to casualty losses; in conjunction with the previously announced damage to our 151 homes, 717 Olympic Community located in Los Angeles, we recorded a casualty loss of $1.1 million during the quarter attributable to business interruption and temporary housing for our residents. This resulted in a charge of approximately $0.50 to FFO, which was 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. As a reminder, 717 Olympic is owned by the MetLife II JV. It has no impact on our same-store results. As of today, all damage has been fixed. The community is fully operational and we're over 88% leased. Turning to development, we commenced construction of our 585-home, $367 million 345 Harrison Street development in Boston's South End, which we intend to fund with non-core asset sales. We have identified a number of assets that we'll be marketing to satisfy our funding needs for the year, with a significant portion of these sales coming from the mid-Atlantic markets. At the end of the first quarter, the company had an under-construction development pipeline for its pro-rata share totaling $1 billion. The development pipeline is currently expected to produce a weighted average spread between estimated stabilized yields and current market cap rates above the upper end of the company's 150 to 200 basis point targeted range. Next, transactions completed in the quarter; during the first quarter, we sold our 95% ownership interest in two land parcels located in Santa Monica, California for $24 million. This resulted in a gain to FFO of $1.7 million, which was backed out of FFO as adjusted. On to the second quarter and full-year 2016 guidance, second quarter 2016 FFO, FFO as adjusted, and AFFO per share guidance is expected to be between $0.43 to $0.45 and $0.39 to $0.41 respectively. At this time, we are maintaining our full-year guidance ranges for both earnings and same-store metrics. Full-year 2016 FFO, FFO as adjusted, and AFFO per share is forecasted at $1.75 to $1.81, $1.75 to $1.81, and $1.59 to $1.65 respectively. For same-store, our full-year 2016 guidance remains unchanged, with revenue growth of 5.5% to 6%, expense 3.0% to 3.5%, and NOI 6.5% to 7.0%. Average 2016 occupancy remains forecasted at 96.6%. Due to the $174 million equity issuance in the quarter, we no longer anticipate a bond issuance later this year and are updating our full-year interest expense guidance to $121 million to $125 million, from $128 million to $132 million. Other primary full-year guidance assumptions can be found on attachment 15 or page 26 of our supplement. Finally, we declared a quarterly common dividend of $0.295 in the first quarter or $1.18 per share when annualized; 6% above 2015's level and representing a yield of approximately 3.3%. With that, I'll turn the call over to Jerry.

Thanks, Tom, and good afternoon everyone. 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 with a high-level update for 2016 and 2017; and last, a brief update on our development lease-ups. We are pleased to announce another strong quarter of operating results. In the first quarter, same-store net operating income grew 8.0%, our highest growth rate since the first quarter of 2012. These results were driven by a very strong 6.4% year-over-year increase in revenue against a 2.7% increase in expenses. Our same-store revenue per occupied home increased by 6.7% year-over-year, to $1,897 per month, while same-store occupancy of 96.5% was down 20 basis points versus the prior year period. Total portfolio revenue per occupied home was $1,995 per month, including pro-rata JVs. Stable job growth, limited impact from new multi-family supply, and rental preference from both new millennial households, empty-nesters, and everyone in-between are all driving this continued growth. Turning to new and renewal lease rate growth, which is detailed on attachment 8E of our supplement, we grew new lease rates by 3.7% in the first quarter, 50 basis points below the first quarter of 2015. Renewal growth remained robust, at 6.9% in the first quarter, 120 basis points ahead of last year. On a blended rate basis, we averaged 5.3% during the first quarter, an improvement of 40 basis points versus the same period in 2015. In April, these trends continued with new lease and renewal rate growth of 4.2% and 6.8% respectively. Our current physical occupancy is 96.5%. Our leasing success and stable occupancy gives us confidence that demand is more than sufficient to continue pushing rates higher throughout the upcoming prime leasing season in the majority of our markets. Next, move-outs to home purchases were flat year-over-year at 13%, in line with our long-term average. Even with our strong renewal increases in the first quarter, less than 9% of our move-outs cited rent increases as the reason for leaving. Before I move on to the quarterly performance of our primary markets, I'd like to give a general update on our overall portfolio. First, third-party data indicates that in every one of our markets we expect supply to peak this year, with the exception being New York City. Second, job growth remains robust, and we continue to have strong pricing power in the majority of our markets. The overall economic environment we see today is very similar to what we provided in our two-year outlook. Now, moving on to the quarterly performance in our primary markets, which represent 70% of our same-store NOI and 75% of our total NOI. Metro DC, which represents 18% of our total NOI, posted year-over-year same-store revenue growth of 2.1%, compared to 1.9% in the first quarter of 2015. We are forecasting the market to generate top-line growth in 2016 between 2% and 3% as we continue to benefit from our diverse 50-50 mix of A and B assets located both inside and outside the Beltway. In the first quarter, our A's and B's had very similar growth rates. Apartment supply in 2016 is expected to increase by 13,600 homes and then fall to 9,000 homes in 2017. While job growth in 2017 is expected to increase by 1.9%, up from 1.6% in 2016. Our current forecast is that DC will have modestly accelerating revenue growth in 2017 compared to 2016. Orange County in Los Angeles combined represents 16% of our total NOI. Orange County posted year-over-year revenue growth of 8.4%. We remain very optimistic on Orange County as the market is only expected to see 5,000 units of new supply and nearly 35,000 jobs, implying a 7:1 ratio, which is roughly twice the long-term historical average. Revenue growth in L.A. was 8.8% during the quarter, a continuation of very strong results in the back half of 2015 due to job growth and supply absorption in our Marina del Rey concentrated submarket. Lease-up pressure from almost 2,000 recently delivered apartment homes in the neighboring Playa Vista market began negatively impacting our pricing power in the middle of the first quarter, and we think this competition will continue to affect us through the end of the third quarter. Fortunately, tech-related jobs continue to come to this part of Silicon Beach. Overall, L.A. will see over 12,000 apartment homes delivered in 2016 or about 1% of supply, and the market is projected to create 88,000 new jobs, again a 7:1 ratio. 2017 and 2018 are each projected currently to see deliveries flow to 7,000 to 8,000 homes per year, with job growth only slowing slightly. L.A. looks poised to be a strong market over the next several years. After we get past the short-term lease-up pressures in our Marina del Rey-Playa Vista submarket, we will get back on track to above-average growth. We still anticipate full-year 2016 revenue growth in L.A. to be in the 6% range, and would expect 2017 to also be in that range. New York City represents 12% of our total NOI and posted 5.8% revenue growth in the quarter. While our same-store properties are not directly affected by any new developments, we are beginning to feel the impact from the new supply in the Manhattan market. New Yorkers, who typically have been loyal to their preferred neighborhoods, are beginning to be enticed by pricing incentives in places like Midtown West. 2016 deliveries of 25,000 apartment homes are adding 1% to existing supply. 2017 is expected to have deliveries even higher, at 30,000 apartment homes. The higher deliveries in these years are directly related to the expiring 421 tax abatement program. Once we get through these multiyear elevated supply levels, new development should decrease significantly. Job growth in 2016 and 2017 is expected to be right around 1.3% each year. For full-year 2016, we have revised our revenue growth expectations down to about 5% in our New York portfolio, which is 50-60 basis points below our original business plan because of the continuing pressures from new supply; we currently would project 2017 revenue growth in New York to be modestly lower than it will be in 2016. San Francisco, which represents 11% of our total NOI, is feeling the effects of new supply in several submarkets, including the software market. However, we still expect the Bay Area to be one of our best performing markets this year, with revenue growth of 7 to 8%. Same-store revenue growth in the first quarter was 9.6% due to the extremely strong blended rent growth we achieved in the second and third quarters of 2015. The good news is that 2016 will be the peak of deliveries this cycle at 12,600 apartments or roughly 3% of existing stock, and the number gets cut roughly in half to 6,800 homes in 2017, representing approximately 1.6% of existing stock. Annual job growth in 2016 and 2017 is expected to average about 2.5% each year. Although the Bay Area is slowing, we still expect to be in above-average market this year and next. Boston, which represents 7% of our total NOI, produced a strong 6% revenue growth during the first quarter. One same-store property in the Back Bay neighborhood had revenue growth of 5%; our suburban assets in the North Shore were our strongest performers with growth of 7.5%. The Seaport district, home to our completed 100 Pier 4, continues to see more growth with additional office tenants in the submarket, including the news that GE will be relocating to Seaport about one-half mile from our property. We started an additional this quarter in the Boston South End, a 585-home, $367 million project at 345 Harrison Street. New supply in Boston is projected at 6,100 homes in 2016 with slight deceleration in 2017 to 5,500 homes. Both years represent less than 1.5% of existing stock. Job growth is currently forecasted to be about 1.5% in both years. We expect revenue growth in 2017 to be comparable to this year. Seattle, which represents 6% of our total NOI, posted 8.4% revenue growth, continuing to benefit from the strong growth inherent in our suburban B assets located in submarkets that 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, Google, Facebook, and Expedia will continue to drive demand in Seattle's urban core. The Bellevue submarket is amidst fairly heavy new multifamily development that has not put up significant pressure on our portfolio, as evidenced by 7.7% revenue growth in Bellevue this quarter. Deliveries in metro Seattle are expected to peak in 2016 at 9,800 apartment homes, before falling to 6,200 homes in 2017, while job growth continues at more than 2%. We expect revenue growth in 2017 to be comparable to this year. Last, Dallas, which represents just over 4.5% of our NOI, posted 5.8% year-over-year same-store revenue growth in the first quarter. Our B properties had revenue growth that was 400 basis points higher than A's, as heavy new supply in uptown along with tollways is impacting rent growth in those submarkets. New supply in Dallas is projected to peak in 2016 at 18,000 new units and then drop to 12,700 in 2017. Job growth in the Dallas market should remain strong both years above 2.4%. Outside of our primary markets, such as Portland, Monterey Peninsula, the Sun Belt, Nashville, and Austin, which comprise roughly 20% of our portfolio, we are above our initial expectations provided in our two-year outlook. So we continue to have strong pricing power due to a limited amount of new supply and robust job growth. Our expectation is that these markets have a long runway of growth due to favorable economics. April results came in line with our plan, and as we look ahead in the next two months, we see improving pricing power along with stable occupancy. Our 50-50 AB portfolio located throughout 20 markets has enabled our performance in our Sub Belt markets, Orange County, Portland, and Monterey Peninsula to offset markets that are being impacted by new supply in San Francisco, New York, and L.A. On a national basis, and within our core markets, apartment deliveries are expected to peak in 2016. Current projections from Axiom Metrics have 2017 deliveries coming down over 25%. New York is the only market that we operate in that looks to experience a higher number of deliveries in 2017 than it had in 2016. Remember, that earlier this year, in our two-year outlook, we indicated a 75 basis point deceleration in 2017 with a revenue growth guidance midpoint of 5%. Our overall view has not changed. I'll turn now to our four lease-up developments, which you can find on attachment 9A and B or pages 19 and 20 of our supplement. Our share of these four properties represents $316 million or roughly 23% of our pipeline, inclusive of the West Coast development JV. In total, these properties are performing ahead of plan. 399 Fremont, our 447-home, $318 million lease-up in San Francisco, California, took its first move-ins in mid-March and was 26% leased and 15% occupied at quarter-end. Today, we are 29% leased and 24% occupied, with rents exceeding pro forma. We are currently offering a one-month concession, as planned, as this community acknowledges that we will see increased competition for other lease-ups in the submarket in the near future. Katella Grand I, our 399-home, $138 million lease-up in Anaheim, California, in the West Coast development JV, was 37% leased and 29% occupied at quarter-end. As of today, it is 47% leased and 37% occupied. We are currently offering less than one month of concessions with this community, and leasing has been very strong in April, with 41 applications. CityLine, our 244-home, $80 million lease-up in the Columbia City submarket of Seattle was 37% leased and 34% occupied at quarter-end. Today, the property is 66% leased and 52% physically occupied. 8th & Republican, our 211-home, $97 million lease-up in the South Lake Union submarket of Seattle was 8% leased and 0% occupied at quarter-end. Today, it is 16% leased and 6% occupied. The first units were available for move-in in mid-April. All in, we had a great first quarter, and we remain very positive on the outlook for multi-family fundamentals and our ability to execute during the peak leasing season and throughout the remainder of 2016. With that, I'll turn the call back to Tom.

Thank you, Jerry. And before opening up to Q&A, I want to take a moment to sum up our prepared remarks. We still feel very good about multifamily fundamentals and are at a phase in the cycle where market mix and price points of our portfolio are critical. As Jerry mentioned, due to changes in conditions, some of our markets are underperforming, while some are outperforming our original expectations. However, on balance, our outlook for the portfolio is unchanged. This is a testament to our overall strategy and market mix, which is less volatile and more predictable, on average, throughout the cycles. We feel good about 2016 and '17, and remain on target. UDR has the right plan with the right team in place to execute, and we feel confident about our future opportunities. With that, I will open it up to Q&A. Operator?

Hi, good morning. It's Austin Wurschmidt here with Jordan. Just wanted to touch a little bit on the non-core asset sales. I was curious if you guys were looking to do a portfolio sale. What's the potential timing, and will you exit any additional markets? I know you mentioned a concentration in the Mid-Atlantic.

Jordan, this is Toomey. With regard to that, we're going to market probably $300-plus million on an individual asset basis, and we'll see what the pricing comes in at on those. We feel like it's a good strong market to expose assets and we'll get good pricing on them.

And how should we be thinking about pricing? What's sort of your cap rate expectations at this point?

Sure. This is Harry. It depends a little bit on the product mix. I can tell you that, in general, coastal Class A assets and main-to-main locations are trading at four, sub-four. The Class B assets that would likely comprise most of what we sell are going to trade between 5%-5.5%, depending on location and specific asset type. There continues to be a strong bid for these assets, particularly in the B space, but A and C continues to be readily available. I can tell you that Fannie and Freddie both expect to meet or actually exceed 2016 volume versus 2015. So it's a good time to sell assets right now.

Thanks for the detail there. And then just touching a little bit on D.C., I mean, you continue to get a little bit of traction on new and renewal lease rates there, and I was just curious how that acceleration stacks up versus your expectation, and any detail you could provide on submarket trends and what you're seeing subsequent to quarter-end?

Yes, of course, Austin. This is Jerry. Regarding D.C., we believe it reached its lowest point about a year and a half ago, in late 2014, but we're still noticing supply pressures in various submarkets across the Metro D.C. area, particularly in Arlington and Alexandria. Interestingly, there has been a narrowing gap in performance between Class A and B properties, currently sitting at under 100 basis points. Our properties located in the 14th and U Street area, including Capital View, View 14, Andover Place, and Thomas Circle, are seeing approximately 3% revenue growth. However, some areas near Columbia Pike in Arlington are reporting negative revenue growth. Outside the Beltway, while the performance is generally better out there, we have a couple of properties in Woodbridge that are either flat or slightly negative. The mix of Class A and B properties has historically worked in our favor, but we are now observing neighborhoods in D.C. where supply has decreased and rent growth is picking up. Overall, D.C. is performing as we anticipated. Regarding the home portfolio we acquired last October, it is aligning well with our plans. We've identified some opportunities to reduce expenses and are investing close to $20 million in initial capital expenditures for both unit interiors and property exteriors. As we move forward with this investment, we have seen occupancy rates rise from about 92% when we purchased the portfolio to between 95% and 96% today. I can confirm that D.C. is progressing according to our expectations. This year, we anticipate revenue growth between 2% and 3%, and looking ahead, we expect continued absorption of supply, with 2017 outperforming 2016.

Great. Thanks for the color, and I'll yield the floor.

Thank you. I just wanted to clarify your reduced outlook on New York. So it seems like you have 6% renewal growth this quarter and unusually low turnover of 20%, but see revenue declining in 2017. So I just wanted to ask if that's purely due to increased vacancy, or do you see rates coming down as well?

I believe the trend will be more influenced by rates. I expect occupancy to remain in the 97-98% range, currently in the high 96%. The reduction in turnover was mainly observed in the first quarter as we shifted more of our activities to the busier second and third quarters. This reduction was not solely due to better retention; rather, it was because we had fewer activities in the first quarter. We are certainly experiencing the impact of supply pressures in areas like Midtown, West, and Brooklyn, which are starting to affect our Financial District properties. Analyzing our performance in the city during the first quarter, our two Financial District properties saw revenue growth of around 4.5%, while our Chelsea and Murray Hill properties exceeded 7%. The Financial District is feeling the pinch a bit more. At our MetLife JV property in Columbus Square on the Upper West Side, revenue growth is around 1%-1.5% due to supply effects there as well. Therefore, the slowdown I mentioned for 2017 will likely be more related to rates than to occupancy.

And how comfortable do you feel with your 2016 outlook in New York, given, as you mentioned, we're heading into the busy leasing season?

Yes, New York is actually doing about as well in April as it did in the first quarter. I mean, I would've hoped it would've accelerated, but it hasn't yet, but new lease rate growth in April is about 2.5%-2.6%, but renewal rate growth has jumped up to 6.7%. So I think we did a good job pushing those into the stronger periods, but we feel good about where I expect now. I think I said on the prepared remarks that we've revised our expectations there from being high-fives to low-fives. I guess there is the possibility if we continue to encounter more significant supply pressures that could come a bit lower, but right now, I'm pretty comfortable in that five range.

Hey, good afternoon guys.

Hey, Rich. So just a quick question on the schedule of new and renewal rates in the press release, really appreciate the detail there. As it relates to the different markets with different factors sort of offsetting one another, is there a way for you to peg the likes of hitting above the midpoint of the same-store range that didn't really change the several puts and takes during the quarter, in that sense? I guess I would say this: overall, the first quarter came in where we thought it would. So far, in April, we're right on track also. You're always going to have some markets that perform a little better than expectations. Some that are below, and obviously, the three that we spoke to in the prepared remarks that are currently underperforming are San Francisco, New York, and Los Angeles. The reason for this underperformance really is the effects of new supply. We've talked for years that continuing to get 10% revenue growth in San Francisco wasn't long-term sustainable. And I guess the developers and city officials also took notice of this. This previously undersupplied market is getting a slug of new supply right now. Fortunately for us, it's going to peak this year, then start to decelerate next year. But what we notice too, and I had this in our remarks, is the success of new lease-up properties that are putting some of this pressure on us. Our 399 Fremont lease-up is well ahead of leasing velocity. We're getting rental rates that are above pro forma rents, which were $6 a foot, and we're giving away one month free. So what really shows up is there is demand and traffic for apartments. But we have a lease-up property that's basically getting discounted down 8% because of one month free. You will find it harder to push rates on properties. But yes, we do have three underperformers, and as I stated earlier, we've got about a third of the company that is exceeding expectations. Those are Orange County, which is, I won't say significantly, but it's ahead of where we expected, as are our two markets in Florida, Orlando and Tampa, which are significantly ahead of what we would have expected when we did our business plan. So is Nashville, Portland, and Monterey. The big difference between the underperforming and outperforming markets is which ones are being affected by new supply. Those that are outperforming tend to be B product, which doesn't compete as much with new supply, and they're in markets that really are not getting heavy doses of supply.

All right, that's very helpful. Then maybe as one quick follow-up, there as it relates to the A/B strategy and Bs outperforming on account of new supply, is it entirely a function of less supply with the B assets versus A, or is there also an element of trading down or anything else on the demand side of the equation that might be leading to outperformance in general?

I think it's predominantly a lack of new supply. I mean, there could be some situation of trading down. We've seen reasons for move-outs being rent increase to about 9% stable with where it was a year ago. We've got two markets that are above 20%, those being San Francisco and Los Angeles. Even though you could think maybe it's because they're getting priced out of the market. When we see forwarding addresses on where these people move to, they're frequently moving to that brand new supply down the street that's offering one month free. Or in the case of Marina del Rey, a month-and-a-half to two months free. The price is then similar to what we were asking them to pay. So we're able to trade up, if you will, into a brand new community, but it's at the same rate. So I don't think it's price fatigue. There's probably a little bit of that inching in there, but I think it's predominantly supply.

All right, great. Thanks, Jerry.

Thanks. Can you give us an update on the West Coast Development JV, and it looks like a few of the assets are now in lease-up, and what you're seeing in those markets?

Sure. I'll start, and then Jerry can jump in. Two of the assets are in lease-up: CityLine in Seattle, and Katella I in Anaheim. As Jerry mentioned in his prepared remarks, they're both leasing up very well. We just started leasing 8th and Republican, and South Lake Union near Amazon. We've leased about 10% or so of the units...

But Nick, I'll give you a little more color on how well those lease-ups are doing. As Harry said, they're all at or above what we expected. Katella Grand has probably been my biggest surprise. It's up in the Platinum Triangle. We're getting rents that we anticipated, call it the $2.25 to $2.30 a foot range. We have driven that to about 37% leased and 36% occupied using typically less than a month free. That one's been a big surprise to me, how strong it was. I think it is a special project. CityLine up in the Columbia City location got off the ground a little slow. We cut rates a bit to get velocity going in the first quarter. But we caught back up to our budgeted occupancy level, and today, that property is 66% leased and 52% physically occupied. We've gotten rents back above market rate, and we brought concessions in at about a month free now. The third one that is doing real well right now is 8th and Republican. We opened the doors to that one about two weeks ago, and as I've stated, we're about 16% leased and 6% physical. One extra benefit that we found out a month or two ago is we thought we were getting dropped right in between Amazon land. Google announced recently that they're going to be putting a few offices up within several blocks of this property too, and they will be out in a couple of years.

This is Herzog too, Nick. I'll add one other thing. Keep in mind, with the West Coast development JV, we do get a 6.5% pref until such time as the assets are stabilized as defined, and they absorb any operating losses during that time period. So, in the meantime, while these are stabilizing, we're earning a 6.5% on our investment.

Thanks, and then just on the new development in Boston, can you talk about the desirability of that project and expectations in terms of the spread over existing cap rates that you expect to achieve?

Sure, Nick. This is Harry. I'll talk about this for a couple of minutes. First, we're building a project in a location that will appeal to a broad range of renters. I'll talk about the neighborhood first, and then economics. This is a new location within the South End, which is one of Boston's most desirable neighborhoods. It's primarily a residential district with old 19th century brownstones. This particular location is only a 10-minute walk to the Financial District, the Back Bay, and GE's new headquarters, which will bring 800 new employees to Boston. There's tons of restaurants, bars, galleries, and boutiques along Fremont Street. Our site is located directly across the street from a new Whole Foods Market that opened last year. There have been some recently built apartment projects, such as ink block and the Troy totaling more than 800 units that are nearly fully leased up. The first condo building across the street sold out at more than $1,000 a foot, and they have just started construction on a second condo building, which related companies purchased a site kitty-corner from ours, and they are into the city for approval of 175 apartments and 100 condos. In terms of economics, yield based on today's rents is about 5.5%. If we get 3% revenue and expense growth for the three plus years, the yield will grow to above six, and more than 200 basis points above today's cap rates. Rents today are more than $400 below our Pier 4 deal that we leased up in seven months last year. When comparing similar unit types and like similar assets in Boston, the cap rate for this asset would be very low, like lease-up 4% cap rate. We believe, in fact, that this location could outperform Boston overall, which according to Axial averages nearly 4% per annum through 2019. In addition to Whole Foods and retail and residential construction, our units and our 40,000 square feet of retail will help complete the transition of this new location within a very established and desirable overall neighborhood. Downtown Boston expects to average less than 1,500 unit deliveries per year through 2020, and we also believe supply is manageable.

Thanks.

Thanks, Nick.

Thanks. Good morning out there. So if you are doing 8% same-store NOI growth this first quarter, and it sounds like you're going to have a good second quarter, and your guidance is 6.75% still, should we be assuming that you're expecting a supply-induced meaningful deceleration in the second half of the year? Is that how we should read this at this point?

Rich, I will start that. This is Jerry. I mean, really when you think about what makes up your revenue growth, it's really any change in your occupancy year-over-year, and then it's really the weighted blended average of increases for renewals and new leases over the preceding 12 periods. When you look at how our revenue growth will decelerate, you're really having to look at, for example, in the second quarter what did we do in the second quarter last year on blended growth and what do we expect to do this year in the second quarter on blended growth. Because last year, the second and third quarters were extremely strong, and as we go into this year's second and third quarters, the rate growth is going to be less than it was last year. You have a natural deceleration. I guess you could say that it is primarily coming from new supply deceleration that is predominantly occurring in those three markets I talked about earlier, because they have the heavier weighting on our total revenue growth. But I think you kind of hit it on the head; I just wanted to make sure people really understand what the components are that drive the rate growth. For example, in the first quarter of this quarter, what we achieved in the third quarter of 2015 is having more impact on first quarter revenue growth than what we achieved in rate growth in the first quarter.

Let me add to that. One of the things I'd have you keep in mind is that we had a good start to 2016 from a same-store perspective. As we look at guidance for the balance of the year, it's still too early to make any modifications in our view. We want to get more into the peak leasing season, but we feel good about where we are at, and we will revisit this next quarter.

I appreciate that. Thanks, Tom. One of the little tidbits I find interesting is that your development pipeline is at the top end of your kind of range of incremental yields, close to 200 basis points, and yet you're worried about supply all around you. Why do you suppose that those two opposite sort of things are happening right now? I would think maybe with elevated levels of supply your own development pipeline would be at least underperforming a little bit in that environment. Can you just kind of walk through that?

Rich, this is Toomey. I think it's a testament to Harry and his team. They have found very good sites, have done a good job of reading what the market opportunity is, and providing a good product. You’re seeing that both last year with Boston and this year with San Francisco. So I think it's a little bit of that aspect. We're really focusing on the forward aspect of the business. We want to stay disciplined about allocating our capital and sustaining that type of gap or accretion, if you will. And normally people wander into the subject of would you expand it? I don't think we will. We're going to stay very disciplined about our development and keep going forward.

Okay, sounds good. Thank you.

Thanks. I was hoping you could shed a little bit more light on why the joint venture assets are underperforming so much on a same-store growth basis; they did 1% same-store NOI growth versus 8% for the rest of your portfolio. I guess you talked about in New York what else is going on there?

Yes, Nick, this is Jerry. When you really look at it, and I think we stated this earlier, Class A and especially Class A plus product competes more against new supply than Class B. We stated before that the spread between Class A and Class B in your same-store pool is probably about 100 basis points. But when you do look at the MetLife assets, there are 24 assets I believe in the same-store pool in MetLife. There are five of them that are in urban cores where heavy new supply is hitting that is definitely hitting A plus product. One of those is in downtown Seattle. One is in Washington D.C. One is Columbus Square, up in the Upper West Side. One is in uptown Dallas, and then the last one is in downtown Austin. Those five properties make up 41% of the total NOI for MetLife JV, and they have revenue growth of 0.6%. If you look at the expense side, you have situations where I believe last year in the first quarter we had pretty good real estate tax; the appraisals have benefited us, but it's predominantly because of those five properties that are in urban core locations with heavy new supply.

Okay, yes, that's helpful. I guess my follow-up on that was, you know, if I go through your proxy and I look at some of the short-term compensation metrics for executives, one piece is that same-store revenue growth in market versus your peer group. Then I'm wondering why then it makes sense to be carving out, I think that calculation calls out the MetLife JV assets, which seems like it would actually be that beneficial if you're thinking about how your portfolio is being compared to your peers, who often have less JVs or don't have as much exposure with the JV in a market like New York or Boston?

Nick, this is Toomey. It's a good question. First, when we manage and set forth budgets with Met, we have them as a partner in the room, and they weigh in on how they want their assets run, and we weigh in on it. We usually arrive at how we're going to manage the assets. Second, we saw the pressure that Jerry alluded to, with ultra A assets, and we have that conversation around those assets in that manner, and we have since day one disclosed it transparently. With respect to the comp point on the issue, we're very comfortable; we have deliberation with the Board internally that we've got the right comp plan, and we launched the right actions. I think we do that pretty consistently, and I think it's a testament to Jerry and his operating team and the innovation that they drive. So we're comfortable with our plan, and how we treated the Met JVs and disclosed them.

Good afternoon. Thanks for taking the question. First question, just kind of going back to Nick's question on MetLife; the expense growth was relatively high in that JV. To your point about working with MetLife, do you control the expenses? Is there anything in that you might do differently if you're in 100% control of the property, or is there anything that can be done on the expense side, or is that kind of just an outsized impact from 421 in New York?

Some of it's an outsized impact; some of it's also real estate tax, the timing of real estate tax refunds last year versus this year, and really need to see a full year and not judge it purely on a quarter. But you will find also in some of these locations where there is heavy new supply, such as competition to get the best employees to work for you. So that can drive that number up, too. But I can tell you this; we typically attempt on any initiatives that we're rolling out for expense reductions, whatever we do for UDR, we typically do that with the MetLife portfolio also.

Makes sense. And then secondly just looking at private equity appetite for real estate assets, obviously there's been a very strong bid for theoretically more stable suburban properties with home properties and associated states being bought, with Starwood buying your portfolio, etc. What are you seeing in these eight markets in TBDs in terms of who is looking at assets? Are you receiving any interest externally from any of the large private equity players? Is their appetite geared towards stable, more stable assets with theoretically higher yields?

This is Harry. I think there is generally a divided buyer class between the main Class A assets, which are primarily pension funds and sovereign wealth funds, and we've started noticing increased investment coming from Canada, the Middle East, and Asia. To a lesser extent, private equity funds usually have higher internal rate of return requirements, so while they have significant capital available for purchasing A properties, they predominantly go for A minus properties historically. Currently, we are observing that both asset classes have strong buyer interest, which has positively influenced asset pricing. In terms of external interest, we regularly receive inquiries from private equity firms, sovereign wealth funds, and other buyers, which tends to occur consistently throughout the market cycle.

Nick and Drew; if Nick you're still on the call, I want to loop back on the Met issue. A couple of points occurred to me: looking at this math coming up on its sixth year that we've been co-investing with them in this JV, the IRRs are now at better than 15.5%. So I think it's been a very good investment, a very good relationship, and one that we look forward to continuing in the future.

That's helpful, thank you.

Jerry, thanks for the operating update for April in New York; could you share new lease and renewal growth trends for April in San Francisco, and what you're seeing heading into May?

Sure. I don't have May on me right now, but in April, San Francisco's new was 2.8%, and renewals were fairly stable with where they were in the first quarter at 7.5%.

Thanks. And lastly, what drove the decision to sell the two land parcels in California?

This is Harry. These two projects are in Santa Monica; they both had sort of retail type operating assets on the parcels, and as we pursued the re-entitlement of those sites over the past several years, it became obvious to us that the city was not going to cooperate and allow a re-zoning of those assets. So we sold them to retail units.

Okay, great. Thank you.

Thank you. Jerry, I really appreciate the market outlook for supply and job growth. Do you think we also need to see wage growth accelerate to continue the success you've had in your renewal increases?

I don't think it would hurt, obviously. I still think even with the wage growth that we've been having over the last several years, we've seen, and with what's going on with the rent growth we've had, we still have a rent to income level that's pretty consistent with where it has been at about 23%. We haven't seen a huge spike in turnover. So we're not driving out many more people because of rent growth. But yes, I think anytime you can see some wage growth improvement, that's helpful. I'd say a couple of things that have helped somewhat is for our suburban, especially B renters, lower gas prices have supplemented their wage growth. For urban dwellers, I'm not sure it's so much wage growth that's affecting us there; it's their ability to jump to new lease-ups, but I'm never going to argue against wage growth. When you see indications that whether it's in California or Seattle having done rents in the minimum wages to $15, even though we don't have many people that make below $15 an hour for an unskilled job, when you have skilled workers, that will spread that gap up. I think overall, I think wage growth like that is good for our sector and would help us continue to drive rates.

Thank you. That's it from me.

Thanks, Jana.

Thanks. Jerry, in Tampa and Orlando, how long do you expect to be able to keep this up, and is there a situation where you worry about now, it's sort of $1200 a month rent for largely Class B products that you're getting to the point where people can afford townhouses and condos in those markets, and you could start seeing some move-outs and accelerate?

I mean, you always worry about that, and you have worried about that in the past. Today, about 15%, a little over 15% of our move-outs in Tampa are to purchase homes. So it's not huge. The people that qualify for homes want to own a home, and I do think in that market you can see high single-digit new and renewal growth for a long period of time. I don't think it's going to last forever. I think it's been a very good multiyear run. I think it can continue to run for another year or two, because we haven't been affected by new supply. Job growth has been better than in the past; it's been higher quality biotech and medical jobs coming to places like Orlando. But now, do I think it can continue at the levels that it's at today for multiple years? I don't think so, but I don't think it decelerates rapidly in 2017 either.

On a lighter note, I think Jerry is going to give all our existing residents a Netflix account and send them the movie 'The Big Short'.

Well, how aggressive have you guys been these days in terms of land? Is there anything reasonably priced in your core markets, or is it now sort of going to condo developers and other bidders at higher levels that you guys are comfortable buying land for future development?

Well, I guess there's a couple of things: One, we're continuing to look at land sites in markets where we historically have built on the coast, and in addition, we're continuing to work through the MetLife land bank. We've got projects in Seattle and in L.A. in the East Bay, and expect to continue to grind through those and expect to start some of those over the next couple of years. You should think about it; the sites that we are looking at, these are going to be sort of late 2017 and 2018 starts. When we are looking at the fundamentals of these markets, where we have declining supply really in '17 and '18, these are going to be '19 and '20 deliveries. When we are looking at it, there are somewhat more challenges. Clearly, the number of percentage of projects that pencil today is much lower than it had been historically, but we expect to continue to find enough projects both externally and within our MetLife JV, using consistent underwriting standards without any type of aggressive rent growth assumptions. We'll continue to maintain a similar development pipeline as we have historically and fit within our $900 million to a billion core type target. Does this force you to do more sort of Santa Monica-type of things, where you have to buy stuff on the anticipation that you could try to get re-zone and take that sort of risk out there these days in order to find sites?

Not necessarily. It doesn't mean we won't do a little bit of that. Again, we try to manage the amount of preconstruction risk we take, but for example, if you look at a market like Boston, where we just started a project, we would expect to start the next project sometime in two or three years. Clearly, if we found an adequate site, it's conceivable that we would take some entitlement risk. But we don't necessarily think that's something that we are going to have to do a lot of.

Okay, thanks guys.

Hi. Thank you. You talked quite a bit about supply peaking everywhere, but New York in 2016, and I was just wondering how comfortable you are that 2016 will be the peak supply year. Because as long as you have strong fundamentals, higher occupancy, positive rent growth, low cap rates, it may entice more people to build. It's working for you, right? So it might work for others. So just curious what your thoughts are on that?

Michael, this is Toomey. That's a very good question. A few years ago, we noted the increasing consolidation and regulation in the banking industry and anticipated its impact, particularly the Federal Reserve's potential to restrict construction loans. Currently, private developers are finding it increasingly challenging to secure financing for new multifamily developments. As a result, they are likely to reduce their activity due to the need for more equity and limited loan proceeds amidst stricter underwriting standards. Additionally, the complexities involved in operating environments and the difficulties cities face with zoning and entitlement processes will significantly slow development. In discussions over the past three months with various private developers, no one has indicated plans for increased activity in 2017; instead, everyone seems to be cutting back and reassessing their financial positions, which will likely require them to seek additional equity. Therefore, I believe that this will be the main barrier to new supply, while demand remains strong and is expected to continue in the coming years. The supply side will experience significant constraints.

Thanks. Your answer brings me to my second question. You have an outlook extending through 2017. Do you believe that by the end of that outlook, the trend of the suburbs outperforming the city and B properties doing better than A properties will begin to change, or do you think that will still be the prevailing situation?

Well, you're asking a very broad question, and it's hard to draw a blanket over the whole U.S. We can take individual markets and probably take it offline and go through those, but my view on long-term is that a lot of developers are moving out to the suburbs, where they are building an A minus product for a price-point-sensitive customer, and they are going to be able to put up a lot more doors quicker in that type of environment. The suburbs by the time '17 arrives will be probably turning over. I think they will be a good spot for '16 and '17, but after that I would suspect that they are going to start seeing the same supply pressures that we are seeing in some of the urban markets today. So they will probably start turning over then.

Hey. Thank you, and sorry, I hopped on late this busy earning day. So if you answered this, I apologize. But on the Santa Monica land, did you guys say how long you owned that land for?

Alex, we bought it in the second half of 2012; so about three and a half years.

Okay. And just given that you guys know the coastal markets well, was it just something, did the pushback on the entitlement change much? Was it much different than you originally thought, or did you always think it would be a difficult one to get done and you were just willing to buy it and see if you could get it done?

Well, Alex, at the time that we acquired it, Santa Monica was granting these re-zoning types of projects that would allow for a certain density in a lot of these sites. Shortly after we acquired it, the city basically shutdown, and I remember in the year 2014, they issued something like 50 total building permits. It became obvious to us over three years that we were not going to get these sites re-zoned anytime soon. Given that they had existing retail uses, and we had retail buyers available, we decided to get rid of them.

Okay. And do you have any others in the rest of the portfolio, any land positions, anything that's sort of comparable?

No.

Okay, thank you.

Hey, guys, it's Austin here again. Just one quick follow-up, Jerry, I was wondering if you could give a little color on your thoughts on some of the rental rate moratorium and other regulations that we have seen in Northern California, particularly with regard to the vintage of your Northern California portfolio.

Yes, you know there have been a few things that have come up, and there were some meetings last week, or the week before in San Mateo that talked about properties built I think before 1980, or 20 to 30-year-old product, but it seemed like it got shot down pretty quickly. Our two deals in San Mateo are older than that. So, if passed, those potentially would be affected. The other ones that we've heard about, but are not directly affected are, I think it was a 90-day restriction on renewal growth in Oakland, which does not positively affect us. The other one that was getting talked about I believe was in San Jose, proposing moving the cap on renewals on rent control buildings from 8% to 5%. Ours is not a rent control building. So I don't think it would have any effect on us in San Jose, and our asset there is a little bit newer. At this point, I think the only one that could potentially affect us, if it did get passed, it seems like it shot down pretty quickly by City Council in San Mateo.

Well, thank you all for attending this call today. I know it was a long call, but I thought it was very fruitful to have a good dialogue and go through the markets in detail. A reminder to you as I listen to the questions and read the call notes, a lot of you are currently focused on the short-term, but we are focused on the long-term aspects of the business, which remain positive. The demographics are on our side. The supply/demand curve is on our supply side to execute our strategy, deliver solid growing cash flow and pay dividends. The construction of the business is great, given our strategic standpoint of being in the markets we're in, the mix of portfolios, and the management team to execute on that. We think the future is very bright. We think just as we've always tried to be very transparent about the operations of the business, when you back up and look at the end results of cash flow growth, the prospects for the balance of the year in '17 as well, we're very excited about those prospects and eager just to keep working on those. With that, I will close, and we thank you and look forward to seeing many of you in the next conferences over the next couple of months. Take care.