UDR Inc (UDR) — Q2 2016 Earnings Call Transcript

Welcome to UDR's second quarter 2016 financial results conference call. Our second quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, 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 requirement. 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 are 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 be respectful of everyone's time and limit your questions and follow-ups. 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, and welcome to UDR's second quarter conference call. On the call with me today are Shawn Johnston, Interim Principal Financial Officer; and Jerry Davis, Chief Operating Officer, who will discuss our results; as well as senior officers, Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call. The second quarter of 2016 was another great quarter for UDR, with 8% AFFO growth, driven by strong revenue growth of 5.7% and continued leasing strength in the 400 million development and lease up. This is a direct reflection of the continued execution of our strategic plan. At the core of our strategic plan are four elements. First, a focus on cash flow growth for our shareholders through operational excellence, which Jerry will touch on later. Second, an accretive development pipeline that can be fully self-funded. Third, a diverse portfolio mix of 20 markets with A&B communities in urban and suburban locations. And lastly, a safe low-levered balance sheet. Combined, these four elements are designed to provide the greatest predictability of cash flow growth through a variety of economic cycles. This is reflected in our updated guidance range for the full year with a midpoint resulting in 8% AFFO growth per share, which Shawn will touch on in his remarks. Before I turn the call over to Shawn, I wanted to add a couple of comments on the recent departure of Tom Herzog, our former CFO. While Tom was an exceptional CFO, he left UDR with an impressive bench, and I feel confident in the skills of those in the finance and accounting team to be more than adequate to handle his absence. At this time Shawn Johnston, our Chief Accounting Officer is serving as our Interim Principal Financial Officer while we evaluate both internal and external candidates. Shawn is an exceptional candidate for the role and we are glad to have him serving in an interim capacity now. With that, I will turn the call over to Shawn Johnston for additional comments on the quarter.

Thanks, Tom. The topics I will cover today include our second quarter results, our balance sheet update, and our third quarter and full year guidance update. Our second quarter earnings results were at the top end of our previously provided guidance. FFO, FFO as adjusted, and AFFO per share were $0.44, $0.45, and $0.41 respectively. Second quarter's same-store revenue, expense, and NOI growth were 5.7%, 5.5%, and 5.7% respectively. Second quarter expense growth was elevated due to a higher than expected property tax assessment on our 2014 development completion in San Francisco. Historically, San Francisco values developments for tax purposes by using a mix of cost to construct and income capitalization. While we budgeted for a mix that was weighted more towards the interim method than precedent would indicate, 100% of the valuation was eventually based on interim capitalization. This unexpected assessment resulted in a charge of $2.2 million during the quarter. $1.1 million of this was attributable to the period that the community was included in our same-store population and was recognized as a digital same-store expense during the quarter. The remaining portion of the charge is for real estate taxes while the community was in lease up, which can be found in Attachment 5. Excluding this negative tax variance, quarterly same-store expense growth for the portfolio and the San Francisco Bay area would have been 3.4% and 9.9% respectively versus the 5.5% and 33.1% realized. Next, the balance sheet. At quarter end, our liquidity as measured by cash and credit facility capacity was $876 million. Our financial leverage on an undepreciated cost basis was 33.2%. Based on quarter and market gap, it was 23.6%, and inclusive of JVs it was 28.1%. Our net debt-to-EBITDA was 5.3 times, and inclusive of JVs was 6.3 times. All balance sheet metric improvements were ahead of our strategic plan. I would like to point out a few changes to our supplemental package. First, you’ll note that we have provided additional GAAP metrics in both our release and supplement in response to the recent SEC interpretation regarding GAAP and non-GAAP metrics. I’d also like to direct you to Attachment 15 or Page 28 of our supplement, where we have updated our full year guidance. We are now providing both our previous and updated guidance for ease of comparison. With that, we have tightened our full year 2016 FFO per share guidance range to $1.76 to $1.80, and tightened and increased our FFO as adjusted and AFFO per share guidance ranges to $1.77 to $1.80 and $1.61 to $1.64 respectively. A few key items have impacted our original guidance. First, our same-store portfolio is performing in line with original guidance, but our Metlife properties which are primarily urban A have underperformed our expectations. This underperformance has been offset by the outperformance of our development lease ups. Second, the S&P 500 inclusion trade resulted in some dilution. However, this issuance gave us the flexibility to change the timing of other planned 2016 capital events to offset the majority of the dilution and ultimately has resulted in an improved balance sheet. Lastly, we expect a reduction in our full year incentive compensation, which is partially offset by higher than expected healthcare costs, resulting in a net reduction to G&A expense of $2 million at the midpoint. A few other specifics from the page. We increased our sources guidance by $75 million at the midpoint to a range of $650 million to $750 million for the year. This is due to an increase in planned dispositions, which we now anticipate being approximately $400 million for the year. In addition to the $400 million of sales, we have issued $174 million of common equity, with the remainder of the sources coming from secured debt refinancings. We do not anticipate any additional equity issuances through the remainder of the year. Our debt maturities increased by $60 million as we have accelerated the accretive prepayment on some existing secured debt to the earliest possible date without penalty. Additionally, we reduced our development, redevelopment, and land acquisition guidance by $50 million at the midpoint due to timing of spend, and we increased our acquisition guidance by $100 million in order to satisfy some Section 31 exchanges that we would like to complete this year. For same-store, our full year 2016 guidance remains unchanged, with revenue growth of 5.5% to 6%; expense growth of 3% to 3.5%, and NOI growth of 6.5% to 7%. Average 2016 occupancy remains forecasted at 96.6%. Third quarter 2016 FFO, FFO as adjusted, and AFFO per share guidance is $0.44 to $0.46, $0.44 to $0.46, and $0.39 to $0.41 respectively. Finally, we declared a quarterly common dividend of $0.295 in the second quarter or $1.18 per share when annualized; 6% above 2015’s level, which represents a yield of approximately 3.2%. With that, I'll turn the call over to Jerry.

Thanks, Shawn, and good afternoon. In my remarks, I will cover the following topics. First, our second quarter portfolio metrics, leasing trends, and the rental rate growth we realized this quarter, and early results for the third quarter. Second, how our primary markets performed during the quarter, and last, a brief update on our development lease-ups. We are pleased to announce another strong quarter of operating results. In the second quarter, same-store net operating income grew 5.7%. These results were driven by a 5.7% year-over-year increase in revenue against a 5.5% increase in expenses. Year-to-date, through June 30th, we've achieved NOI growth of 6.8% behind revenue growth of 6% and expense growth of 4.1%. Our same-store revenue per occupied home increased 6% year-over-year to $1,921 per month, while same-store occupancy of 96.6% was down 30 basis points versus the prior year period. Total portfolio revenue per occupied home was $2,027 per month, including pro-rata JVs. Although we are feeling the impact of new supply in a few of our core markets, namely San Francisco and New York, the positives we see continue to outweigh the negatives. Stable job growth, new household formations, better delay in home purchase, choosing to rent, as well as empty nester baby boomers moving to urban settings with a live, work, play atmosphere. Our portfolio mix benefits from each of these scenarios. Turning to new and renewal lease rate growth, which is detailed in attachment 8G of our supplement, we grew our new lease rates by 4.4% in the second quarter, 330 basis points below the second quarter of 2015. Renewal growth remained robust at 6.3% in the second quarter or 70 basis points behind last year. On a blended rate basis, we averaged 5.3% during the second quarter, a reduction of 210 basis points versus the same period last year. If you look at the 76% of the same-store portfolio not located in New York and San Francisco, our decline in blended rate growth was only 100 basis points. I'd like to point out the exceptional growth we achieved in 2015 was an anomaly. We are now back to a normal operating environment. Typically, renewal rate growth outpaces new lease rate growth by at least 100 basis points. Because we were able to drive our occupancy in late 2014 to the 96.5% to 97% level, we were able to push new lease rate growth in the peak leasing season in 2015, higher than that of renewal leases. 2016 is proving to be a more normalized year with renewal growth outpacing new lease rate growth. While we wish every year could be as strong as 2015, we are very happy with the strength seen in 2016 thus far; especially given that we are currently dealing with peak deliveries in the majority of our markets. Next, move-outs to home purchases were up 150 basis points year-over-year, at 14.1%, and even with our strong renewal increases in the second quarter, less than 9% of our move-outs cited rent increases as the reason for leaving. 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 19% of our total NOI and 14% of our same-store NOI posted year-over-year same-store revenue growth of 1.8%, a slight deceleration from the first quarter, due primarily to very strong bad debt collections in the second quarter of 2015. We are forecasting the market to generate top-line growth in 2016 of between 2% and 3% as we will continue to benefit from our diverse 50/50 mix of A and B assets located both inside and outside the beltway. Our B product outperformed our A's during the quarter by 170 basis points as sporadic supply issues continue to make for choppy results in some infill locations. Orange County in Los Angeles, combined represent 16% of our total NOI and about 17% of our same-store NOI. Orange County posted year-over-year revenue growth of 8.9% with both our A's and B's performing well above 8% and all sub-markets remaining very strong as we face very limited supply. Revenue growth in Los Angeles was 5.2% during the quarter. Our same-store portfolio is primarily concentrated within the Marina del Rey submarket and is currently facing over 2,000 units of new supply, which we expect will be fully absorbed by year-end. We continue to see good job growth, and the supply picture is improving in 2017 for our same-store LA portfolio. New York City, which represents 12% of our total NOI and 13% of same-store NOI posted 4.65% revenue growth for the quarter. While our same-store properties are not directly affected by any new developments, we are feeling the impact from new supply in the Manhattan market as new lease growth during the quarter was 1.9%. New Yorkers who typically have been loyal to their preferred neighborhoods are being enticed by pricing incentives in places like Midtown West. For the full year 2016, we expect New York to have revenue growth in the low 4% range, below our original estimates of approximately 5.5%. San Francisco, which represents about 11% of both our total and same-store NOI is continuing to feel the effects of new supply in several submarkets, including south of market. However, we still expect the Bay Area to be one of our best performing markets this year with revenue growth between 6% and 7%. Same-store revenue growth in the second quarter was 6.3%, due to the extremely strong blended rent growth we achieved in the third quarter of 2015. We currently see our portfolio being affected by lease-up pressures through the middle of 2017. Boston, which represents 7% of our total NOI, about 5% of same-store NOI produced a strong 6.1% revenue growth during the second quarter. The suburban assets in the North Shore were our strongest performers, with growth over 7.5%. Even with new supply downtown, our one same-store assets in the back day posted revenue growth of 4% for the quarter. The Seaport district, home to our 2015 completion on 100 Pier 4 in the South End district, home to our under construction community, 345 Harrison continued to see more growth with additional office and retail tenants in the submarket. Seattle, which represents 6% of our total and same-store NOI posted strong revenue growth of 8.5% for the quarter. 16% of our portfolio is B product, which posted revenue growth of 12.3% where our A quality communities produced 6.6% growth. We continue to benefit from the strong growth inherent in these suburban B assets which are located in submarkets that are less exposed to new supply. Even with new supply pressure, our Bellevue assets posted revenue growth of 6.8% for the quarter where revenue growth in downtown Seattle was essentially flat. Last, Dallas, which represents just over 4% of our total and same-store NOI posted 5% year-over-year same-store growth in the second quarter. Our B properties had revenue growth of five hundred basis points higher than our A's, as having new supply in uptown and along the tollways is impacting rent growth in those submarkets. While new supply remains elevated, we expect deliveries to decline after this year and are confident they will be absorbed by the strength in the diversified job market in Dallas. Our secondary markets, such as Portland, Monterey Peninsula, Florida, Nashville, and Austin which comprised roughly 20% of our portfolio continue to have strong pricing power due to limited amounts of new supply and robust job growth. Our expectation is that these markets have a long runway of growth due to favorable economic conditions. July results came in line with our plan. As we look ahead to the next two months, we see stable pricing power and occupancy. Our 50-50 A&B portfolio located throughout 20 markets has enabled our performance in our Sun Belt markets, Orange County, Seattle, Boston, Portland, and Monterey to offset markets that are being impacted by new supply, namely San Francisco, New York, and Los Angeles. I'll turn now to our four end lease-up developments, which you can find on attachments 9A and 9B or pages 21 and 22 of our supplement. Our pro-rata share of these four properties represents over $400 million or roughly 30% of our pipeline, inclusive of the West Coast development joint venture. In total, these properties are performing ahead of plan. First, 399 Fremont, our 447 home, $318 million 50-50 met by JV leased up in San Francisco, with 50% leased and 43% occupied at quarter end. Today we are 57% leased and 48% occupied with rents exceeding pro forma. We are currently offering six weeks' concession as we’ve begun to see increased competition from other lease-ups in the submarket. Over the last month, we have taken over 30 leases. The following three communities are all part of the West Coast development joint venture. Katella brand I, our 399 home, $138 million lease up in Anaheim, California was 65% leased and 58% occupied at quarter end, and as of today, it's 72% leased and 64% occupied. We are currently offering less than one month of concession at this community and leasing remains very strong with about 30 applications per month. 8th & Republican, our 211-home, $97 million lease-up in the South Lake Union submarket of Seattle was 47% leased and 37% occupied at quarter end and is currently 60% leased and 46% occupied, and we are averaging over one application per day. CityLine, our 244-home, $80 million lease-up in the Columbia City submarket of Seattle was 87% leased and 84% occupied at quarter end. Today, the property is 89% leased and 86% physically occupied. All in, we had a very strong second quarter, and we remain very positive on the outlook for multifamily fundamentals, and our ability to execute throughout the remainder of 2016. With that, we will open the call to Q&A.

Thanks. Just sticking with operations, you outlined A versus B performance across many markets and the 50/50 diversified portfolio. I think you have a unique perspective on this. So when do you expect that spread between As and Bs to contract and when could As actually outperform Bs, just given the current supply picture?

Good question and I’d tell you it varies market by market, but I think overall, and we have stated this probably for the last two to three quarters, we would see As getting closer to Bs probably mid-year, next year, maybe a little bit after that. And then as you get deeper into ’18 I think As probably start competing more head-to-head with Bs. But it’s definitely market dependent. For example, I would think in Washington DC, we’ve seen that spread contract and expand multiple times. Last quarter it was about 50 basis points where Bs were outperforming. This quarter we expanded to 1.7, but we do see a slowdown of new supply affecting our product and DC over the next year and half. So I do think As, because they are typically in better locations by the second half of next year should start doing much better there. When you look at a place like New York, it’s probably a little more prolonged, call it maybe even 2019 or further where we see Bs continuing to outperform. And in San Francisco, I think it's similar. You’re going to see supply continue to offset the market in so many places like that at least through the middle of next year. And I think that will cause As to continue to have to go head-to-head against new supply well into ’18. So I think San Francisco, New York, Dallas, Austin are probably pushed out a bit, but several of the other markets that saw new supply come a little bit earlier, it’s shorter but, on average I'm guessing, it gets closer in late ’17 and probably pulls even in ’18.

Thanks. And then as for the two-year outlook, you put out 2017 operating assumptions. You’ve maintained 2016 same-store revenue growth. I was wondering if there is any update to the 2017 estimate of 4.75 or 5.25?

Yes, I can tell you we clearly saw a deceleration coming in 2017. And as you said, we’ve put that in our two-year outlook, and the range was the 4.75 to 5.25, which implied about a 75 basis points decline from 2016. And we’re continuing to project a slowdown in ’17 based on a lower blended rate growth in ’16 compared to ’15. But at this point, it’s probably a little early to give guidance on where we think ’17 is going to come in. We still don’t have great visibility on pricing for September and the fourth quarter of this year, and we really haven’t fine-tuned our expectations yet for 2017. So a little bit early, but it's probably leaning towards the lower end of that range.

Thanks. And just quickly, on that range, does that contemplate the assets that are not in the same-store pool that you laid out on attachment 7B, that will roll into the same-store pool in 2017?

Yes.

Hi it’s Austin Wurschmidt here with Jordan. Just revisiting Nick’s earlier question on Bs outperforming As in most of your markets. I was just curious what the price differential is between your As and Bs in some of the similar submarkets?

It depends A and B. The difference between A and a B in Dallas is probably $250 to $300. When you get to New York, it's probably north of $1,000 differential. In San Francisco, it's going to be $800 to $1,000. So it can vary, but you are typically looking at it getting close to a $1,000 in some of the high-rise and urban markets on the coast. And when you get into the Sun Belt it can be tracked down to just $200.

So it's fair to say around 20% to 25% in some of your larger markets?

Yes, that sounds right.

Okay, and then just thinking about guidance, what are you assuming in terms of blended lease rate growth in the second half of the year?

In the second half of the year, we anticipate a lower performance. Renewals for July are currently coming in at an effective rate of about 5.9%. Looking ahead to the next month or two, we expect this to remain in the 5.7% to 5.8% range, but in the fourth quarter, it is likely to decrease to around mid-5%. For new lease rate growth, July is currently at approximately 3.2%, and we expect a slight decline over the last three months. We noticed a slight drop in pricing last year during the fourth quarter, so we are not comparing against exceptionally high prices. Overall, the second half is expected to be lower for us compared to the 5.3% seen in the first half.

I have a few quick questions. Jerry, regarding operations, during the first quarter call, you mentioned high guidance and Herzog clarified how the elevated same-store NOI guidance related to leakage, indicating it wasn't necessarily reflecting FFO growth. Now that we see some of your competitors lowering their expectations for the year, what allows you to maintain such a high guidance range? Is it due to the number of Bs you have, or is it the fact that your portfolio includes markets like Dallas and Norfolk, which aren't represented among some of your other bi-coastal peers?

Yes, I’ll start. First, I’d like to remind you that we exited Norfolk in the fourth quarter of last year, so that's no longer a concern. A significant factor to consider is that we saw strong weight growth in the second half of this year as paid benefits. We anticipated a slowdown in rate growth this year, and that has indeed occurred. While we were close in total, we missed our targets on a market-by-market basis. For instance, in 29% of our portfolio, which includes New York, San Francisco, and Los Angeles, we fell short of our expectations. We initially projected San Francisco to be around 8, but it now looks more like 6.5. We expected New York to be in the high 5s, but it’s now anticipated to be in the low 4s. For Los Angeles, we entered the year with a forecast of about 7, and we now believe it will be in the mid-5s. What sets us apart is our diversified portfolio across 20 markets, with a 50/50 split between A, B, and urban properties. A significant aspect helping us is that 42% of our portfolio is outperforming our initial expectations for the year, which mitigates the underperformance of those three markets. For example, Seattle is doing well, and our Orange County portfolio is experiencing 8.9% revenue growth this quarter. Boston also performed well, maintaining revenue above 6 in our suburban portfolio. Both Orlando and Tampa in Florida are exceeding our expectations. Nashville is thriving, particularly with a focus on suburban properties, which are not impacted by the new supply. Additionally, our portfolios in Monterey and Portland are performing well. The strength of our diverse portfolio means we are not reliant on a few markets to drive performance. We understand that this diversified approach will continue to support us in the future, as all markets will experience natural cycles with some performing better and others not as well. Ultimately, it's our portfolio diversification that's proving beneficial.

And historically, like Toomey is talking about, hardest market, the market that you had used to source capital to help fund the development, based on what you're seeing in this cycle, does the weakness in some of the coastal markets pressure at the high end change your view and maybe some of the coastal markets are going to be seen for harvesting rather than some of the markets like Richmond, some of those others?

I think there's still a couple of markets that we probably are ready to exit a little more quickly than others, and I think Harry will talk maybe as soon as I get off this on which ones we’re looking at in our disposition program this year. But markets that we've historically talked about that were in our warehouse, and we kind of stopped talking about that, because we really have come to realize, there are good strong markets, and they're going to perform well over the long term, places like Florida, again Orlando, Nashville, Tampa, places like that, I think we're satisfied to stay there over the midterm and probably long term. There's no rush to exit. But we'll selectively sell assets, and at times get out of markets to fund the development pipeline. But maybe Harry can give you a little more input on what we're looking to sell this year.

Yes, Alex. In the short term, we're always evaluating which assets to sell to finance our development pipeline, particularly this year. We plan to sell our Baltimore assets and reduce our portfolio to some degree. We currently have several assets on the market and intend to sell a few properties in Dallas for the remainder of the year.

Okay. And then Harry, while you’re on, could you just walk us through the ground lease deal that you did in LA and the economics then how this fits in within UDR's investment game plan?

Sure. Well, Alex, as you know, we look at all these trades in the context of best invested return to the shareholders. La Jolla, the effective land sizes of $400,000 per unit, which is a price that's unheard of in Los Angeles, we were able to monetize most or all of our future development gain today, and then convert this one-time gain into another structured deal where we received nearly 7% return on our capital. And so while it's different than Steel Creek, it’s another example of how we deploy capital and then create transactions.

Well thanks. So I guess just turning back to the guidance, specifically on same-store revenue growth, where you’ve gone 6% year-to-date and for the year saying 5.5% to 6% is the range, how should we think about what level of conservatism is built into the guidance? Because it doesn’t seem to imply much of a deceleration in the back half of the year?

Yes, Nick, it’s Jerry. I’d like to share that we are currently at the midpoint of our guidance. There is one main factor that could push us to the higher end, which is if we experience a significant increase in occupancy. We have been working to raise occupancy a bit over the past month or so. Conversely, a further decline in operating fundamentals could bring us to the lower end of our predictions, likely needing to be more severe than we have anticipated in New York and San Francisco, as other regions have remained relatively stable. We’ve projected about a 6% growth for the first half of the year, suggesting a 5.5% for the second half. However, there are a few key points to consider. This year, we have seen a 6.3% growth in rent per occupied home, which has been somewhat mitigated by a 30 basis point decline in occupancy due to tough comparisons from the first half of last year. In the second half of last year, occupancy growth slowed by about 20 to 30 basis points. Currently, we are at 96.6%, though it fell slightly short of 96.8% or 96.9%. Our goal this year is to exceed last year’s occupancy rates, ensuring we maintain revenue growth even amidst occupancy declines, and we are hopeful for a slight improvement. Additionally, our fee income has risen nearly 10% year-over-year, and we anticipate this trend to continue into the second half. This increase is partially driven by lease break fees, as people are moving for job opportunities or purchasing homes. Moreover, we initiated efforts in the second half of last year to boost revenues from parking rent, which have started to show positive results this year. Fee income now accounts for 6% of our revenue and is growing much faster than our rent. As for our guidance midpoint, we expect blended rate growth for the second half of the year to be in the low 4% range. This translates to renewal growth in the low 5% range and new lease rate growth around 3%, which appears to be sustainable at this time.

Okay, sounds fine. I guess just one other follow-up on that. You did talk about the second half blended lease growth of low 4%. It sounds like there are other items in your sort of revenue that are helping as you mentioned fee income, etc. So I guess the point is we shouldn’t be using that low 4% lease rate growth as sort of a directional where your same-store revenue growth is heading. How should we think about that?

Well, I'll say this. Your lease rate growth or what we obtain from new rental renewals benefits you over the next 12 months. A portion of what we’re experiencing in the third quarter of this year is due to the very strong lease rate growth and renewal growth we achieved at the end of last year. This continues to provide benefits for the next 12 months. So what I'm indicating I will do over the next six months has some advantages for that period, but it also benefits the following six months. Therefore, you can't simply focus on what leases I'm currently signing, as that reflects only a percentage of residents or expirations occurring at that moment.

Yes, so I meant that the second half blend of lease growth of low 4%, whether that sort of indicator about where 2017 same-store sales revenue growth would be, not this year?

It does build. You are right. It does build into 2017. The other saying is though, what are rents going to do next year, and we’re going to have some markets where you're probably going to see rate growth continue to go down. But we have other markets, for example, Los Angeles where we’re fighting heavy new supply right now, but I expect that one to pick up quite a bit next year. So some of it is dependent on how we do next year, but we are building up part of our rent role right now for 2017.

Jerry, when you look at 2017 deliveries in the New York area, how much of that is concentrated in Manhattan, and would be sort of direct competition for you guys versus how much of that stuff is in Queens and Brooklyn where you don’t have any assets?

Most of it is not directly impacting us. When you look at proximity to our neighborhoods, we’re not going to head to head with much, but we have been feeling the impact coming from whether it's midtown in west Brooklyn, you have people in New Jersey, as well as Queens, who are all kind of stealing some people away if you can get nice new product for a lower effective rate. I don’t have the numbers off the top of my head about how much is in Manhattan versus Queens though.

When does that property that's just north of View 34, that we followed the property tour, is scheduled to start leasing?

I think it's late fourth quarter or first quarter. We think we'll probably feel some effect from that, but their rents are quite a bit higher than ours.

The guidance on the acquisition went from $0 million to $100 million to $100 million to $200 million. Is that third-party acquisitions or is that you guys buying in some of the Wolf stuff? It's not the Wolf stuff. Generally, it's going to be third-party acquisitions and there are a couple of 10/31 trades that we're looking to execute in the fourth quarter.

You don't own the contracts currently?

A quick question. I think I remember you asking about of this call that you were seeing a little bit more supply pressures in the LA market. That’s maybe a little bit different than some of the commentary you referred to from last year. So I'm curious, how much of that is driven by Class A versus Class B? And are you actually starting to see supply pick up in maybe the Class B space versus the Class A?

It’s a good question. Here's what the deal is. Ninety percent of our same-store portfolio is located in Marina del Rey. So it's three properties over in Marina. Marina is about a two-mile drive to Playa Vista where all of the tech firms are relocating to the area called Silicon Beach. We've got two lease-ups occurring in Playa Vista right now. One is a 1,500-unit deal, the other one I think is 400 units. But they are coming in offering concessions of one to two months free. And what’s really done, it's directly impacting my three properties in Los Angeles that make up 90% of my portfolio. So yes, I don't think any of my peers would be feeling the same thing, because they don't have as much concentration in one submarket in Los Angeles as I have.

So, Harry, you mentioned earlier about potentially moving away from the warehousing concept and considering keeping some assets in certain markets within the portfolio. Could you elaborate on any other strategic adjustments you’re making similar to that? I remember you discussing last year how the 50/50 Class A, Class B structure could evolve into more like a 60 or 70 percent Class A over time. Do you think there might be a similar adjustment in the current environment regarding your warehousing concept?

Rich, this is Toomey. I think abandoning or changing is probably a little bit of an overstatement. I think what we're doing is constantly weighing our market mix and the price point in what we think cash flow is going to grow at. And so when we think we have a market, for example, where Baltimore has performed in the last five years, averaging 3% growth, we kind of look out the next five years and say, we don't think it's really going to change a whole lot. Where else do we think we can redeploy that capital in the enterprise, most immediately in the development pipeline? So we're always revisiting our markets. On the balance of 50/50, the A's that we're putting in today, 10 years from now will be B's. And so I think we'll probably hover around the 50/50, it might go 60/40, but I don’t see a long-term directional change in that allocation. I think what ultimately we’re trying to build, and have done so far and will continue to refine is building cash flow, and where we see it can grow the best. And concentrated positions could create concentrated risk. And so we’re always going to have this diversification. We think over time it works. Some markets having B's work better than A's. Other cases where we look at jobs and where we think they're coming up in the price point, A's are going to be better. So I think that’s the overriding doctrine that we’re overall thinking about our capital allocation and decisions, and markets from time-to-time. Florida is an example right now, talking off the cost, is going to enjoy another couple-year run, but supply will start coming at Florida in the near-future, and then we’ll look at how we feel about our assets positioned in that market and whether we should move more capital out of that, and into other places where opportunities will become available.

Okay. And then as a follow-up, was there anything about the QR print that kind of caused you to at least take another look at your numbers and make sure you weren’t missing anything? The one kind of cynical view is that the rest of the group is going to have to revisit guidance, not this quarter maybe, but next quarter. I’m just curious if there was any level of reaction on your part from seeing that profit take effect?

Rich, I'm not going to comment on EQR or their results and their outlook. What I am going to say is, is that Jerry and his team run a culture from the bottom-up focusing greatly on what’s going on in the ground, reforecasting the business constantly, monitoring our traffic and pricing power, and that feeds right up to us on a weekly basis, and we discuss how does that fit in our outlook for the future, and we’re very comfortable with the guidance we’ve just given. We feel like a lot of the year is pretty much behind us. There's not a lot of leases to price in that fourth quarter window, and we’re trying to really focus on our '17. And I think that’s a credit to his team, to Shawn and his efforts in forecasting FP&L, that we have a pretty darn good handle on exactly where we’re at, what are the levers that we can move, and what’s our range of outcomes. And that’s why we tightened guidance the way we did, but we feel very good about the guidance we’ve given, and it's a credit to Jerry and his operating team, but also in a way it's positioned.

Jerry, rent growth across a number of Sun Belt markets, namely Dallas, Tampa, and Orlando for example, seem to have decelerated throughout the quarter. Do you expect that reacceleration in the back half of the year across some of these Sun Belt markets?

Dallas is likely to remain challenging due to the influx of new supply. Our B product is performing well, but we have properties in Uptown and Plano competing with this new supply. As a result, we anticipate ongoing difficulties in Dallas, though we don’t expect the situation to worsen. In contrast, I believe Orlando will rebound. In the second quarter, we may have been overly ambitious with our renewal growth target of 7.9%, which put some pressure on occupancy levels, leading us to reduce new lease rate growth to improve occupancy. Currently, our occupancy in Orlando stands at 97.1%, up from an average of 96.5% in the second quarter, and we have seen lease rate growth in July increase to 6.6%, compared to the 4.9% reported in Q2. Orlando is looking promising, while Tampa remains stable. We've experienced some lease-ups in a submarket of Tampa that impacted us, but those are beginning to stabilize, and we expect our numbers to reflect that as well.

Pricing is coming in sort of at or slightly above expectations. We expect these things to close mostly early in the fourth quarter.

One follow-up question on the 10/31 opportunity. Would you say that the opportunity on the disposition side is kind of a more compelling reason for the increase in your overall transaction activity for this year, or would you say that the opportunistic use of the capital on the acquisition side is the more exciting opportunity?

This is Harry. I believe there are a couple of questions to address. First, we sell several properties each year to create a capital pool for various needs, particularly for development. We are considering 10/31 opportunities. We anticipate that the pricing on these acquisitions will mostly align with market rates. We plan to reinvest capital in markets such as Washington, D.C., Boston, Southern California, Northern California, and Seattle. We expect the cap rates on our sales, particularly those in Baltimore, to be around 6%. For one of our acquisitions in Dallas, known as Cert, which is a joint venture with Metlife, the cap rate should be approximately 5.25%. There is also another Dallas asset that will certainly be part of the 10/31, and we estimate that this will likely trade in the mid-5s range.

And secondly I was hoping to dig in on Manhattan a little bit. With View 34 being same-store pool this year, and obviously that's been a strong asset so far. Can you talk at all about how the Manhattan portfolio is performing ex-View 34? Or conversely just provide how View 34 has done year-to-date?

Yes. View 34 contributed approximately 70 basis points to our figures. Let me check the details. In the Manhattan portfolio, View 34's revenue growth for the quarter was around 6.1% compared to the previous year.

This is Toomey. I'd add. That's what's reflective when you do a good job on a rehab of a B, and you keep it in that B price point and boy, I wish I could find more View 34s is the answer.

Just wondering if you could briefly run through what your exceptions are across let's say your top five markets for new supply 2016 and then going into the full year 2017?

Sure. When we analyze D.C., in 2016 our expectations for new supply are approximately 13,500 units, while for 2017, it's projected to be around 9,000 units. New York is expected to increase from 25,000 this year to 30,000 next year, making it the only market where supply in our major cities will be higher next year compared to this year. San Francisco will drop from about 13,000 to around 7,000 units, and Seattle is anticipated to fall from about 10,000 to 6,000. Lastly, Dallas is projected to decrease from about 18,000 units this year to about 13,000 next year.

A couple of your peers have commented that they may be using numbers higher than what Axio actually uses. Is there any concern on your part that those numbers may be understated and your 2017 figures could be under more pressure than where the numbers may currently spin out to?

Juan, this is Tom. This is an interesting topic, and I'm glad you kind of got us there, is what is the supply picture look like in the future, because I think everybody is kind of throwing around different numbers. I would tell you some anecdotal information that's critical to this conversation would be is what are banks' lending on, and what is the bank lending environment. If you start digging into that with the bankers, you're realizing very rapidly that the terms on construction loans, the pricing on them, and the availability is contracting at a rapid pace. We've seen several large banks just redline and say we're not doing multifamily loans any longer, period. Or probably now price terms that are prohibitive to make the deals work. So I think you are going to start to see some of those construction numbers start really coming down rapidly, as people start to get into their construction loan draws, and trying to get their terms penciled in. I think it also creates an opportunity for UDR to look at wharf and steel type creek opportunities, that might start becoming available in 2017, should this come to fruition. So I would stay very focused on what the supply of money looks like, the terms of that, and watch how that ultimately unfolds. I know everybody's numbers are all over the map right now, but what I look at is one of the drivers and it's not the opportunities, it's the fundamentals. Those are there. It's the question of capital, the price of that capital and will deals work. We're going to stay focused on that, which is my recommendation for 2017.

And then in Europe any remarks? Tom, you talked about being focused on operational excellence. I think you've hit a little bit on the parking upside. Any other things you could point to that you're working on that maybe we'd say some margin upside and any sort of target numbers you could talk to?

I'll let Jerry clean it up, but I'll start with it. One we're a very operationally focused company, and it comes a lot through innovation. So, there's always as you can see from prior road shows, we've always listed out initiatives that we're focused on. We have basically a biweekly meeting on innovation here, and we're talking about the product, the initiatives that we have underway, what's working, what's not and we're always constantly pressing the next envelope for our customer. We do a great job of listening to what they want, and what they are willing to pay for. And its Jerry and his team to filter through that innovation list and put it in the practical terms. This parking conversation that he alluded to earlier is really a conversation started two years ago, and ultimately we've built systems out, convinced the field about the pricing scheme, and they've done a great job of executing it. I can tell you that at the last count there were 57 initiatives on that schedule. Some will not work, many of them will. So we're going to continue to be innovative operationally, and that's how it makes the difference at the enterprise.

I'll provide a few examples. Tom talked about parking, and while not all initiatives enhance revenue, some do reduce expenses, and others are capital expenditures that generate returns. For instance, converting common area lighting to LED significantly reduces both electrical costs and maintenance time for bulb replacements. We've noticed a decrease in our electric costs this year due to this change. Additionally, we have been installing package lockers; over 40 are already in place, with another 35 currently being installed. We believe this is worthwhile for two reasons: managing packages can consume a lot of time for our onsite teams, allowing them to focus on more productive tasks, and residents appreciate having 24/7 access to their packages. This also contributes to our revenue. The package lockers have an internal rate of return of over 25% to 30%, making them financially advantageous. We aim to implement solutions that residents want, which tends to benefit us as well. Both the LED lighting and package lockers free up time for our maintenance and leasing teams. This year, as reflected in our personnel expense numbers, we have kept personnel costs roughly flat for the quarter and reduced site headcount by about 1.5% to 2% due to these efficiencies. These are just a couple of examples, but as Toomey mentioned, we are always looking for new opportunities, even if some initiatives require time without success. We are continually searching for ways to enhance our margins.

You mentioned that the supply in Marina del Rey would abate to the second half. Are you seeing any of your major markets where the supply could be back half loaded this year?

Let me think about the second half of the year. I believe Bellevue, Washington is one where we see a lot of construction and new supply. Currently, we are performing very well there, achieving around 6.5% to 7% revenue growth this quarter on our same-store segment. However, we anticipated that new supply would have a greater impact on us. This is one reason why our Seattle portfolio is doing better than expected. I think Bellevue has the potential to improve later this year and possibly into the first half of next year. Harry, do you have anything to add?

Well, New York obviously continues to see a heavier supply in the second half of this year and into next year.

I want to point out that this situation will persist, and we do not have any same-store properties in that area, but Downtown LA is experiencing a significant influx of around 3,000 to 4,000 new units currently in various stages of leasing. Therefore, it will be interesting to manage operations in Downtown LA over the coming year.

A couple of quick ones. On the 4.4% new lease growth rate for the quarter, what would that look like if you split it by urban and suburban assets?

Urban and suburban. I don't have that number on me.

Okay. We can follow up. And then a more bigger picture, it sounds like right now it's widely accepted that San Francisco and New York are going through an adjustment phase. But these are markets that I think most have said have come in below expectations and weaker than even maybe six months ago, but it doesn't sound like there's any assumption that other markets could follow that path. Is that right and then I guess what gives you confidence that there is not another one sort of uncertainty around the corner, especially with the urban portfolio? I understand the suburban protection, but any urban environment where supply is pretty pronounced virtually across the country?

Here is how I would think about it. First, New York and San Francisco are not really surprises to us. They are urban settings, when you see supply coming, you see it coming years in advance. Second, we've had great job growth in both of those markets, and both have tapered off to more of the norm. And so that combination kind of gives you what those markets are. As we look towards the future, we don’t see as a big supply pressures coming at the urban portfolios, but we do have a concern about job growth sustaining itself, and I think everybody should. We're waiting to see how the election turns out and how the economy turns out, but in both of those camps, the future will be what it's going to be. So I'm not at all surprised about those two markets. We are not surprised about our outlay exposure. We saw it coming. What we see was this. These are supply-driven numbers that are changing our pricing power. It is not the underlying fundamentals of demographics and or job markets that are driving our business right now. Those are still in very good shape. We're very focused on the supply pressure, and think we have a very good handle on it, and feel good about the way we're running the business to deal with that supply. When it abates, we think we're back to strong pricing, and we'll do very well in that environment.

Even though we don’t see any markets right now, if one pops up for let's say there is job loss in a particular market or something like that, that goes back to the benefit of being in 20 markets and having that A and B portfolio. We've got other markets that can counterbalance something like that.

Great, thank you again for all of your time. Again, I think we had a very solid quarter on all fronts. Certainly we remain focused on the strategic plan and the execution of it. A big part of that is just execution and we're doing it right now. What is the strategic plan focused on? Growing cash workflow through all points in the cycle. We're going through one of those right now. You can see from our results we're still able to sustain and guide to a strong cash flow number, and I think that's attributed to the team in the room, in particular Jerry and his operating team, and their focus on adjusting their strategies by individual assets, by unit types to meet the market and get ahead of it if you will. Also, we're enjoying a very good strong development pipeline that's leasing up very well and gives us confidence for the future. So with that, we thank you again for your time and look forward to talking to you next quarter.