UDR Inc (UDR) — Q4 2016 Earnings Call Transcript

Welcome to UDR’s fourth quarter financial results conference call. Our fourth quarter press release supplemental disclosure package and 2017/2018 Strategic Outlook document 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. Prior to reading our Safe Harbor disclosure, I would like to direct you to the webcast of this call located in the Investor Relations section of our website ir.udr.com. The webcast includes a slide presentation that will accompany our 2017/2018 Strategic Outlook commentary. On to our Safe Harbor, 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 our 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 respectable of everyone’s time and limit your questions and follow-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to our President and CEO, Tom Toomey.

Thank you, Chris, and good afternoon, everyone and welcome to UDR’s fourth quarter conference call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers, Warren Troupe, Harry Alcock and Shawn Johnston, who will be available during the Q&A portion of the call. Later in this call, we will present our 2017/2018 Strategic Outlook as we have done in the last four years. As is evident in the outlook document, we continue to execute well on our primary strategic objectives, which are operational excellence, maintaining portfolio diversification, allocating capital to accretive growth opportunities and strengthening our balance sheet. Focusing on these core principles provides a robust environment for driving total shareholder return, and we'll continue to make UDR our full cycle investment. Moving on to 2016, it was another strong year for UDR, and one that included a number of achievements for the Company. First, the strength of our best-in-class operating platform and portfolio diversification was again evident, allowing us to maintain same-store guidance throughout the year, while effectively combating the marketplace that was choppier than expected. Second, our external growth remained highly accretive. Third, our balance sheet metrics continue to improve, enhancing both liquidity for the Company and safety for our investors. Fourth, we joined the S&P 500, an accomplishment that places us in a select group of only 27 other property REITs. In short, these accomplishments showcase another year of successfully executing our long-term strategies, as set forth in our Strategic Outlook. All of the credit for these successes goes to our associates in the field and in the corporate office as they face daily market challenges and a CFO change. I would like to sincerely thank everyone in the organization for their dedication and hard work throughout 2016. Next, as we move into 2017, we are confident that the outlook for the long-term apartment fundamentals remains strong despite short-term challenges in the form of new supply coupled with elevated concession levels, which are forecast to abate as we move into the second half of 2017. In total, we expect this year will again produce topline and bottom line growth in excess of long-term averages. Lastly, we remain confident that UDR is doing the right things, and has the right team in place to create long-term value for our shareholders. Adhering to our Strategic Outlook’s core principles will continue to help us generate high-quality cash flow, dividend, and NAV growth for many years to come. I will provide further commentary regarding our 2017/2018 Strategic Outlook later in the call, but will turn it over to Jerry for additional comments on the quarter.

Thanks, Tom, and good afternoon, everyone. We're pleased to announce another quarter of strong operating results. During the fourth quarter, year-over-year same-store revenue and NOI growth were 5.0% and 5.3% respectively. For full-year 2016, same-store revenue and NOI growth totaled 5.7% and 6.5% respectively. During the fourth quarter, we saw a continuation of the topline operating trends evident throughout 2016. That is overall fundamentals continue to normalize with localized demand/supply dynamics in markets determining our ability to generate revenue growth. Making up 45% of our same-store NOI, strength was evident in Orange County, Seattle, The Monterey Peninsula, Boston and our Sunbelt markets. While San Francisco, Los Angeles and New York, which comprised 30% of our same-store NOI, remained challenged primarily due to concentrated new supply and elevated concession levels. For the year, the strength of our operating platform, combined with our diversified portfolio allowed us to effectively combat these supply-driven headwinds, generating portfolio growth that compared favorably versus the apartment group average. I would like to thank all of the operating associates for making this happen. Similar to what you heard on our last call, we focused on driving occupancy during the fourth quarter to remain full during the seasonally slower periods. While each market and community is different with regard to the trade-off between rate growth and occupancy, I envision us maintaining this strategy at the portfolio level through at least the first half of 2017. During the fourth quarter, our occupancy averaged 96.8%, that's 20 basis points higher than in the first half of 2016 and 30 basis points higher than the fourth quarter of 2015. Next, portfolio-wide new lease and renewal rate growth were flat and positive 5.1% year-over-year in the fourth quarter. We continue to see minimal pressure from single-family competition with move-outs to home purchases staying flat at 14% during the fourth quarter. Portfolio-wide affordability remains a non-issue with move-outs due to rent increase at 5%. Net bad debt remains low and at levels consistent with previous quarters. Year-over-year same-store expense growth of 4.2% was elevated during the quarter. Real Estate taxes were the primary culprit, growing 9.5% year-over-year. We continue to see pressure in New York from 421 burn-offs and across many of our markets due to still rising incremental valuations. I'll provide market level expectations later in the call when we address our 2017/2018 Strategic Outlook. Last, our development lease ups continue to perform well, achieving rates in aggregate above original expectations and with leasing velocity is generally ahead of original forecast. The average value creation spread built into our pipeline is in excess of the top end of our 150 basis point to 200 basis point range. Community specific quarter end at lease-up statistics are available on Attachment 9 or Page 21 of our supplement. Summing that up, the fourth quarter was another good quarter and 2016 was a solid year given the challenges we faced. We remain laser-focused on maximizing revenue growth and constraining expense growth when possible and are confident in our ability to execute in 2017. With that, I'll turn the call over to Joe.

Thanks, Jerry. The topics I will cover today include our fourth quarter results, a transactions update, a balance sheet update and capital markets update, and our first quarter and full-year guidance. Our fourth quarter earnings results were mid to above the high end of our previously provided guidance. FFO, FFO as adjusted and AFFO per share were $0.47, $0.46 and $0.40 respectively and were driven by solid same-store growth. Full-year 2016 earnings results came into the mid to high-end of our previously provided guidance with FFO, FFO as adjusted and AFFO per share at $1.80, $1.79 and $1.63 respectively. Next, transactions; subsequent to the quarter end, we exercised our fixed price purchase option to acquire CityLine, a 244-home West Coast Development Joint Venture community located in suburban Seattle. The Company's total investment in CityLine was $86.5 million, roughly a 15% discount to the community’s estimated fair market value. This equates to a 5.3% cash flow cap rate. As it relates to future options on the West Coast Development Joint Venture communities or Steele Creek, we will evaluate those options as they become available based on our funding capacity and potential value creation for our shareholders. For an overview of other transactions consummated during the quarter and year, please see the transaction section of our 4Q earnings press release or Attachment 13 of our 4Q supplemental. Next to the balance sheet. At quarter end, our liquidity as measured by cash and credit facility capacity was $1.2 billion. Our financial leverage on undepreciated book value is 32.1%, on quarter end enterprise value, it was 23.9% and inclusive of joint ventures it was 28.8%. Our net debt to EBITDA was 5.1 times and inclusive of joint ventures was 6.2 times. All credit metrics continue to track well versus our strategic outlook. Lastly, on the balance sheet. As it relates to our new $500 million commercial paper program announced last week, the program offers us an incremental source of low-cost floating rate capital and is fully backed by our line of credit. Looking ahead, we do not intend to increase our floating rate debt exposure as a result of putting this facility in place. I would like to make it clear that this facility will be utilized in place of, and not in addition to our existing line of credit. We extend our thanks to the rating agencies and our lending partners for making UDR, one of the very few REITs with access to this form of capital. I would now like to direct you to Attachment 15 or Page 28 of our supplement, where we have provided full-year and first quarter 2017 guidance. Our full-year 2017 guidance ranges are $1.83 to $1.87 per FFO and FFO as adjusted, and $1.68 to $1.72 per AFFO. Our full-year 2017, same-store guidance cost for revenue growth of 3.0% to 4.0%, expense growth of 2.5% to 3.5%, and NOI growth of 3.25% to 4.25% with average 2017 forecasted occupancy at 96.7%. Other primary full-year guidance assumptions can be found on Attachment 15. For first quarter 2017, our guidance ranges are $0.44 to $0.46 per FFO and FFO as adjusted and $0.42 to $0.44 for AFFO. Finally, we declared a common dividend of 29.5% in the fourth quarter or $1.18 per share when annualized this equates to a yield of approximately 3.2% as of quarter end. With that, I will remind those listening that there is a link to our 2017/2018 Strategic Outlook document on the Investor Relations page of our website. We will pause for a moment, so that everyone can gather the outlook materials.

Thanks, Joe, and while you are pulling that up I just want to welcome Joe to his first of many earnings calls and it's been a joy working with him and we're looking forward to many more years of this. But now turning to our 2017/2018 Strategic Outlook, which was published in conjunction with our earnings release yesterday afternoon. I'd like to start with some big picture thoughts. First, as you page to the document, you will note continuity with previous strategic outlooks. Our focus on optimizing operations for preserving a diversified portfolio, investing in accretive external growth, maintaining a safe and flexible balance sheet, enhancing transparency has worked well for us and driven strong cash flow, dividend and NAV growth for our shareholders. We believe adherence to these strategies position UDR well to capitalize on opportunities in a variety of economic backdrops and parts of the real estate cycle. Specifically, our diversified portfolio accomplishes several goals, including lowering our relative exposure to any one market supply and demand trends giving our transaction team more avenues to accretively deploy capitals and provide our shareholders with a predictable growing cash flow stream. When combined with our excellent operating platform, this is what ultimately differentiates UDR and makes us a full cycle investment. Moving to Page 3 of the outlook, we lay out our core principles. These are comprised of long-term consistent strategies that govern the path and direction of our enterprise takes. These are, one, maximize revenue and NOI growth in our markets through innovative and margin enhancing efficiency initiatives. Two, invest when appropriate in accretive internal and external opportunities that optimize returns for our investors refresh our portfolio, maintained diversification and better position us for future growth. And three, maintain a safe liquid balance sheet capable of fully funding our enterprise throughout the cycle. These strategies represent our core tenants and we believe when executed upon well, drive predictable cash flow, dividend, and NAV growth over time, while also contributing to an equitable environment for robust TSR. Moving to Page 4. Our tactical execution of our long-term strategies can take different forms, depending on a variety of factors, including shifting market fundamentals, available growth opportunities and access to accretive capital. On this page, you can see a number of different topics that impact our daily businesses. Being flexible and proactive in all aspects of our business is crucial to our success and a differentiating factor. Next Page 5. Consistently executing our long-term strategies has led to strong AFFO, dividend and NAV growth since our initial Strategic Outlook was published in early 2013. During that time, our shareholders have been rewarded with a compound annual total shareholder return of 14.9% versus the NAREIT apartment index of 12.3% and NAREIT equity index of 9.2%. Moving on the next 9 Pages of the document outlined how we have performed versus our previous four published outlooks, in key aspects of our business and where we are going in these areas in the future. We are not going to turn each page today, but I encourage you to read through these pages in detail. You will see that our operating capital allocation, balance sheet, cash flow growth and NAV growth results since our initial outlook was published in February 2013, compare well versus previous plans. Now, a couple highlights from that section. First, we do believe that we have the best-in-class operating platform. Whether we measure this by our ability to forecast results and trends or how we perform at the market level versus peers, we compare favorably. Second, our diversified portfolio makes UDR a full cycle investment. We value this attribute and intend to maintain diversification by MSA price point and submarket in the years ahead. Third, our developments continue to be highly accretive. We are looking to maintain our pipeline in the range of 5% to 9% of enterprise value, but will not stretch if a deal doesn't pencil. Last, we have made significant progress on derisking our balance sheet over the years. We are comfortable where our metrics are, but we'll continue to make progress from organic growth moving forward. Prior to closing out my comments, I'll provide a brief overview of our macro view, and how it impacts our outlook. While our budgeting and outlook process is granular and built from the bottom up, we also employ a macro overlay as a check. Today, we face the uncertainty of government deregulation, tax reform, volatile interest rates and fluctuating supply demand fundamentals at the market level. While we do not know where these factors will ultimately settle, we lean towards an optimistic longer-term outlook on apartment fundamentals balanced against the pragmatic patient view of our business. Consensus expectations for continued job growth of 150,000 to 200,000 per month in 2017 feels appropriate and results in a relatively balanced supply-demand environment through the first half of the year before supply begins to subside in the second half of 2017. From an incremental capital deployment perspective, we are in an excellent position to remain patient, but will still look to capitalize on growth opportunities, should they meet our hurdle rates using conservative underwriting. Ultimately, we are willing to say no to deals if they do not pencil and simply focus on operating our real estate. To close out my comments, the runway for solid growth in the apartment industry remains long in our view. While it is true that new supply has presented short-term challenges, we see this choppiness in the market as an opportunity for UDR to outperform versus peers. We look forward to another strong year in 2017 and successfully executing our latest Strategic Outlook. With that, I will turn the call over to Joe to speak about 2017/2018 expectations.

Thanks, Tom. Please turn to Page 15 of the document. On this page, we lay out our 2017 guidance, much of which I covered in my prepared remarks and our initial outlook for 2018. We expect that both years will produce same-store growth in excess of historical averages, I would like to stress that our initial 2018 expectations reflect how we currently view next year's fundamentals point out. Of course, expectations for 2018 will change as 2017 progresses, but as in years past, we will not be updating our out year expectations until we provide 2018 guidance a year from now. Moving down the sources and uses, as you can see we have minimal debt coming due in 2017 with more debt coming due in 2018. As we move through 2017, you can expect that we will be continuously evaluating our options with regard to the 2018 maturities. Lastly, development spend will remain a primary use of capital during both 2017 and 2018 largely funded with free cash flow and dispositions. Regarding the balance sheet, we expect our credit metrics to continue to organically improve at a measured pace in both years. Now I will turn it over to Jerry to comment on the market level expectations.

Thanks, Joe. Please turn to Page 16 of the document for our market level 2017 same-store revenue growth expectations. See from the map, we expect that the Pacific Northwest, the Monterey Peninsula, Southern California, Boston and many of our Sunbelt markets will continue to generate same-store revenue growth in excess of our portfolio average. This includes Los Angeles where we were negatively impacted by new supply in 2016. Washington D.C. is expected to incrementally accelerate versus 2016 and is now forecast to be a portfolio average growth market in 2017. Please note that this forecast incorporates same-store additions and D.C. in 2017, including five of the six home properties, which will increase D.C.’s share of our same-store NOI to approximately 19%. New York, San Francisco and some smaller markets will continue to struggle in 2017. New York and San Francisco especially will continue to be impacted by still elevated supply coming online in 2017, although San Francisco additions are expected to peak in the first half of the year, potentially setting us up for a better 2018. Last, as we consider new supply in 2017, our data providers are forecasting national deliveries of approximately 370,000 new apartment homes. Of this, 175,000 homes or 47% of national deliveries are expected to impact the markets where we operate. Of the supply coming into our markets, around 28% or 48,400 homes are expected to be added in our submarkets in 2017. Regarding how supply will be delivered as 2017 unfolds, our submarkets are expected to see average quarterly deliveries of approximately 13,000 homes in the first half of the year as compared to 11,000 quarterly deliveries in the back half of 2016. In the second half of 2017, deliveries should fall back to approximately 11,000 per quarter on average. With that, I'll open the call up for questions.

Thanks. For 2017 same-store revenue guidance, what are the assumptions embedded in achieving either the high end or the low end of that range?

Yes. Nick, this is Jerry. Basically the key differentiating factor on that is going to be, what kind of pricing to the lease-ups put out there. And are they going to offer two months free or one month free? And the second one is job growth, but I can tell you the assumptions that we put in really get to that midpoint is job growth between 150,000 and 200,000 jobs. Our expectation is delivery should peak in the first half of 2017 that shows that our data providers are expecting roughly 370,000 homes for the year. Possible if it repeats what happened this past year that some of those could slide into 2018. Now when you look, take that 370,000 national deliveries, the 70,000 are going to be in our markets and 48,000 of those are going to be in our submarkets. That's 13% of the total 2017 national deliveries are going to be in our submarket. We dial it down a little bit closer, when you take our top seven markets which make up about two-thirds of NOI, only about 20% of the 2017 deliveries in those seven markets will be within one mile of the UDR property. So you really go from 370,000 deliveries and when you get down to our top seven markets, a UDR property is having to deal with probably 15,000 or so of those deliveries on a more specific basis. That being said, that’s talking about 2017 deliveries. We are in some markets still facing lease up pressures from 2016 deliveries.

Thanks. What markets have the widest range of potential outcomes in 2017?

I would say, Seattle. It's one that we're optimistic about job growth in some of our submarkets, for example in Bellevue, it was recently announced Amazon is going to come over to the East side, Salesforce is going to hire about 500 people about a block away from the two properties that we bought MetLife out of this past year, but you do have potential versus some supply pressures. Bellevue got about 800 more units delivering there. We don't have much product in Downtown Seattle. So the glut of 50% of the supply that's coming into metro Seattle was Downtown, so that shouldn't overly affect us. But I would say Seattle is one that probably has a fairly broad range. The other one, just because of what happened last year would be San Francisco. Our expectation is the bulk of the new supply, especially in SoMa gets absorbed first – a lot of gets delivered and then absorbed throughout this year, depending on what kind of pricing that people impose, it could move a bit, but I would say those are probably the two markets that I think could swing the most when we look at it.

Thanks.

Hi. Thanks for the time. I was just hoping you could speak a little to the expectations on new and renewal growth embedded in your same-store NOI across the larger markets New York, San Francisco, LA in particular for 2017?

I don't have that exact data with me. I can probably give it to you later. I can tell you on a more macro basis, when we look at 2017 with the midpoint guidance of 3.5%, we would see blended rate growth between new and renewal somewhere in that 3% to 4% range.

Okay. Any sense on the blended for those top markets, if you don't have the newer renewals just to see kind of where New York, San Francisco and LA shake out amongst the many different markets you're in?

Yes, I don't have that on me. I mean I can't tell you, I can give you a bit of an update to what's in the supplement on Page 20 of the sub. We give the effective new and renewal growth for the fourth quarter. I can't tell you for example, in San Francisco where we had negative 5.8% new lease rate growth in the fourth quarter. In the month of January, that number came down to negative 3.2%, so while negative. At this time appears to be stabilizing somewhat, I don’t know if we'll be able to maintain that, but it has got a bit better. And then when you look at New York. New York in the fourth quarter, we had a new lease rate growth of negative 2.7%, so far this month we are at positive 0.9% in New York City. So that has improved and at the same time, what's really encouraging to us is our occupancy today in New York City is 98.2%. So we are able to really build up a high occupancy in the fourth quarter, which was part of our strategy to have been able to maintain it and not have to give away rent in the first quarter. And then our occupancy today in San Francisco is 97.5% which is 90 basis points higher than it was in the fourth quarter.

Great. On the expense side, I was just hoping you could talk to the assumptions around expense growth kind of picking back up into 2018, but maybe a little lower than at least we expected in 2017 and kind of what's driving that movement in 2017 and 2018 and any color would be appreciated.

I'd say, really what you see is in the fourth quarter for example of this year, our expenses came in a bit higher than we expected at 4.2%. It was really due to real estate taxes, which were up 9.5%, a big part of that was the phase-in of the 421s in New York and we also got hit with real estate taxes year-over-year in San Francisco and Seattle. Last year, we also had quite a bit in the fourth quarter of some real estate tax refunds. So we came in a little heavier on expenses in 2016 than we'd anticipated which basically brought down some of the growth rate in 2017. So it was a comp year, but our current expectation is still that when you look at the components of expense growth next year, it's still going to be heavily weighted towards real estate taxes, which will probably be high single digits. You've got utilities call it in the 3% to 4% range. We expect repairs and maintenance to be flat to slightly negative. We think our marketing will be negative growth in 2017, and our personnel we expect to be about 2%. As you jump over to 2018, where we have a range of 3% to 5%. There's a lot of unknowns at this point. Part of it – the biggest component is real estate taxes. We can see what's going to happen with 421s, but over the last couple of years that valuations of our real estate and sales comps have gone up, which has driven real estate taxes. We are not sure at this point, how much will get into real estate tax refunds from prior years. Then the other component on the expense stack that we are looking at pretty intently, especially as you get into later this year, but especially in 2018 is personnel cost. We're just not sure if they're going to spike, we've been able to maintain those it basically sub-inflationary levels, as we've been able to realize some efficiencies and even though we've been giving people raises of 3% or so, we've been able to reduce some headcount. Not sure how much more that we have, but really the things that will swing it from the three to the five are probably mostly related to the real estate taxes and personnel lines.

Thank you.

Sure.

Hi, guys. It's Austin Wurschmidt here with Jordan. Just wanted to touch on the same-store revenue guidance again. It seems like through the second half of 2016, you guys are north of 5%, so you've got a pretty healthy rate, earning into the first half of the year. And Tom, you mentioned in the concessions should abate in a lot of your markets in the second half of 2017. So I guess really what are you assuming for the second half of the year for same-store revenue growth, to get you down to that 3% to 4% range?

Well really the assumption is obviously that you may or may not, if you get down to the 3%, have the pricing power that we're expecting, which is the blended new and renewal lease rate growth between 3% and 4%. One thing that benefited us quite a bit in the second half of 2016 was we had a positive variance on different line items. One was occupancy; in the fourth quarter, we were 30 BPs higher than the fourth quarter of prior year. The second one is late 2015, we started pushing up new initiatives that bore fruit last year. One was charging for parking spaces throughout the portfolio even on some suburban garden communities. Actually, the pickup in parking revenue attributed about 15 basis points to our revenue growth for the full-year and most of that was occurring in the second half. So some of that will not be repeatable, but yes, really when you look at the second half of the year what could drive us down, and what's really hitting us right now is some of this irrational pricing that you’ll see in our high supply markets where people are giving away two months free. Obviously, when you look at what our blended growth was in the fourth quarter at 2.4% and 0% on new and 5.1% on renewals, some of that was seasonal, some of that was weakness in the markets. We're anticipating easier comps in the second half of the year, but I think the biggest factor that you really need to realize is the impact in the second half of 2016 from the improvement in occupancy and the improvement in some other fee income that may or may not repeat.

Thanks for the color, Jerry and then just sticking maybe with Northern California, one of the higher supply markets. What are you seeing across the different submarkets between San Jose, downtown San Francisco, and the East Bay just on the ground?

They’re all tough, I guess to start with. There is none that are doing great that some are much more challenged with new supply. I can tell you, SoMa is probably the most difficult where you've got a new lease rate growth that’s at least negative 5% and we had our revenue growth revenue growth there in the quarter, I think was something like some SoMa was I think negative 0.8% for the fourth quarter. So it was weak. Santa Clara was probably our next weakest we've got two or three properties down there and it was 2.1%, but we had a couple of strong producers to our San Mateo were at 4.5% our best market in the fourth quarter was Mountain View we've got one asset their net revenue growth 6%. I guess the commonality we’ve done really well is they were not combating new supply at all. They are maybe B minus properties. But you're getting new supply down and Mission Bay and SoMa it's very difficult and you're repricing units negative mid single-digits, which is creating revenue growth that's slightly negative.

Great, Thanks for taking the question.

Sure.

Thank you. I guess without delving too far into politics, how concerned are you about headwinds to demand under the new administration? And in particular, we're already seeing major changes to immigration policy, and I'm wondering how much you think that may impact some of your coastal markets?

Yes. Thanks, John. This is Joe. So we’ve been a lot of time going to take and through the variance, scenarios here and kind of decision free analysis of tax for deregulation, border taxes, immigration, et cetera. But to be honest, a lot of it is really just big picture going to theoretical at this point. So trying to actually come up with decisions based off it's a little bit difficult. I think we’re going to the optimistic side, of course on deregulation and tax reform in terms of what it means for the company longer-term, but in terms of what it means for our forecasting and near-term business, how we're thinking about it. We're going to remain patient and prudent about it and not making a big picture decisions based off the theoretical at this point. Harry are going to take through a little bit more detail offline on GSE or tax reform, et cetera, but at this point, nothing major impact in the business.

How about in particular like H-1B visas? Is that something you track within your portfolio as far as number of residents that are under this visa plan?

Yes, this is Jerry. I don't have that information.

Okay. Thank you.

Thank you. I actually wasn't going to mention Trump, but John got me in the mood. One of the things we were thinking of is, we came across this list of the 50 Trump infrastructure projects most likely to get done. I was wondering if you've looked at your portfolio, and where maybe you have exposure, where there's apartments close to these projects, where maybe you could see some demand increases. I don't know if you've looked at that yet?

This is Toomey. We haven’t seen the list, but I'll be interested in send in our production and if you look forward to Chuck Schumer and the Dems would help as well.

Okay, well I can forward it to you, at least. I don't know if I could – Schumer hopefully has already seen it. My second question is an open-ended one for Joe. To jump on your first call by the way. I was just curious if you haven't been at UDR very long but you have a history of following the Company, and I'm wondering if there's anything you've seen so far maybe that has surprised you or things you think you could do differently. I don't know if the commercial paper program has your fingerprints on it, but just if you have initial thoughts or things you and Tom have talked about?

No, I guess as you said I’ve been around the industry in the Company for quite a while at this point. So knowing the team here, 10 plus or minus years, so got another more over time, their strategies, how they operate and as part of the process, I think both sides did a lot of due diligence in terms of understanding each other and where the organization is going with the resources are available, et cetera. So no surprises at this point. Really just trying to get up to speed and kind of learn the side of business a little bit more and add value where I can. In terms of the CP program, that was really the work of Warren and Abe Claude from the Treasury team really taking that forward and they getting that in place. So excited about that they work pretty hard with the rating agencies to get the A2 and P2 ratings from S&P and Moody's and then all of our lenders to get that put in place. So pretty excited about that is just another alternate form of capital that we have available. Again as said in the opening remarks, so keep in mind that an alternative to our line. That is not in addition to our line of credits or intent is not to take on additional floating rate debt exposure. It's not additional capacity as we see it. It's just access to potentially a lower price cost of capital for us, but the line which today indications are kind of inside of L plus 50 on CP possibly even tighter than that. So we feel pretty good about that.

Okay, thanks.

Hey, thanks and good morning. So I'm looking at the tone of the call here, and the development spending number in particular of $400 million at the midpoint. Tom, you alluded to keeping development in the range of 5% to 9% of enterprise value. Is $400 million of the development spending a low number, like maybe the floor that we could expect from UDR, or could it even be lower than that?

Okay. Rich, good morning or good afternoon, either way, it's about the midpoint of it. We think that range of 5% to 9% gives us flexibility to continue to find opportunities. But we will weigh them one deal at a time and let the market dictate where the best cost capital is against the return and risk.

Okay, so $400 million if second half doesn't go the way you think, could go to $300 million or something lower?

Yes, maybe. Deal is not a clear that hurdle and if it doesn't, I’m not married to that number, I’m married to proper capital allocation decisions.

What’s the situation with Los Angeles? I remember a year and a half ago, everyone was getting all warm and fuzzy about the market, and then it disappointed in 2016 because of supply, and now it's back up in one of your favorite markets. It's really kind of come full circle in a really short period of time that's not really typical of a market. Can you describe what's going on there and why it’s such a kind of wipes – all kind of event over the past year and a half? I’d love to it, Rich. Yes, I mean we discussed this in prior calls, but our LA portfolio is really predominantly concentrated over Marina del Rey, got three of our four properties there. And that city is about two miles from Playa Vista, which is where the bulk of Silicon Beach and you’ve got significant tech jobs going here. But last year, we also had a couple thousand units, really two operators that came in and had to lease up their properties last year and they came in with some of this what we've been calling irrational pricing. We are going away two months free on 12 and even though their base rents were probably 15%, 20% higher than ours, when you come in with two months free you basically kill any pricing power we had in our assets. So it took us from a, call it, the fourth quarter of 2015 in Los Angeles, we have revenue growth of about 10% I believe. And when you look at the fourth quarter of this year, it was down to 2.8%. It was really because we have no pricing power throughout the year. Some time in the fourth quarter both of those deals stabilized, get up to 90% occupancy, and all of the sudden, we’ll start pushing rate again. So again, if you were to look at the new and renewal growth page in our supplement, in the fourth quarter, we had new lease rate growth in LA of 1.4%, which was above average for the Company and it's 2.1% so far in January. So our expectation is LA – our submarket of LA had the biggest wave of supply in it, once it went away. We are able to get back on track and start pushing rate again and we currently think Los Angeles is going to be performing above average for UDR. Now if you go to Downtown LA, it's a different story. There's probably 3,000 to 4,000 units coming online in 2017. There is a couple thousand units in lease-up there right now. I think most of them are giving away about a month free, so it's not irrational, but it's just heavy doses of new supply downtown. So one of those deals depending on where your properties are located, you could have different results and because we have so much concentration at Marina del Rey. You can see us swing I think from having a great 2015 to underperforming if you will, by peer comparisons in 2016, and I think in 2017, we'll probably do about as well as everybody else, maybe a little better.

Hey, Rich. This is Harry. I just wanted to add one point. If you look longer term in Los Angeles, there's been a couple ballot initiatives, one that’s on the March ballot that is actually proposing to impose a moratorium on all new development in Los Angeles. It's a little unclear how those are going to play out, but clearly with the heavy doses of new recent supply, you have some local pushback, which from a fundamental standpoint could bode well for that market long-term.

Got it. That's very helpful. Just wanted to get your strategic thoughts on it. That's all for me.

It’s too early to say. I would say it’s either average or it would be a green. We do see D.C. as being one of the markets that we see continued improvement as you get out to 2018. As we stated this year, we're going to be in the 3’s that's up from mid 2’s in 2016, but yes, we're really not in – our portfolio, I think that’s the answer just that our portfolio is not going to head-to-head with much new supply in D.C. We have one asset that's really going against fairly sizable way down by the ballpark or Southwest waterfront, but that one deal happens to be our rent control deal, which is pricing significantly lower, but yes, I think, D.C. if I'd guess today it’s going to be average to above average. The other market we think very likely will show some improvement in 2018 over 2017 just because how bad it's getting beat up this year would be San Francisco. We think San Francisco is going to definitely be a below average market this year as we go through absorbing supply, especially in the downtown area in the first half of 2017. But what we're hopeful for and I can't say that Los Angeles story repeats itself, but what we're hopeful for is that once you get through that supply pricing comes back, and you get to get back at it.

Great. Thanks.

Sure.

Hi. Good afternoon, guys. And welcome, Joe. So first question is related to sort of this comment about irrational pricing and some of the new lease-up competition within your submarkets. So how much of your view on the composition of the builder base, meaning merchant builders, or people with expensive mezz financing going to catch that, or people like that. How much of that colors your view on how long this irrational pricing dynamic will continue, and would you say any of that is reflected in guidance for the year?

This is Harry, and I then turn it over to Jerry. I think you hit sort of an important element of our business as we look into 2017 that for the merchant builders in particular who rely on construction financing, that financing is clearly much more difficult to obtain lower loan to values, higher spreads, sort of redlining certain developers in certain markets. So that financing is not merely as readily available as it has been a year-ago, which inherently I mean that combined with continued rising costs and deceleration in fundamentals should result in fewer starts in 2017 that we've seen in the past two or three years.

Yes, I would add Rich, to say how much is built into our guidance. I would say if there is significant irrational pricing, yes, we think that's what probably would push us down to the low end of our revenue guidance and if a lot of those get leased up or if there's a lack of that irrational pricing in 2017, I think that's what gets us up to the top end, but we think that is one of the biggest variables that we face on the revenue side. I think we can maintain the occupancy. I think we see the supply, the other wild card obviously is the job picture, but that pricing as what we feel really did the most damage to us and the sector this past year whether was in San Francisco, Los Angeles, even in New York City. I think there's a bit of a slowdown in job creation in San Francisco last year, but we do think what got us most was two months free on a 12.

Rich, this is Toomey. Just some additional color. The GSEs have a program and I’ve use this is kind of an escape valve. Whereby they will go to permanent financing as well as a drawdown schedule if you will, on properties that are in lease-up. So you can go from – you don't have to be at 85%, 90% occupancy, you can start financing on a permanent basis as low as 60%. Now it cuts proceeds, but clearly the GSEs have programs should some of these developers as their lease-ups look for an avenue to go to perm in a quicker pace, they just have to look at the pricing grid and determine if that's the better option forms. So I think is that program starts getting more traction in the space, it maybe a little bit of a relief valve on that urgency to get to 90% so you can get to permanent financing.

Okay. That's actually very helpful color. Second quick question, you guys mentioned five of the home properties in DC are entering the same-store pool in I think the first quarter of 2017. Can you guys give us a sense of sort of the basis points of contribution to same-store revenue growth that are held within those assets?

Sure. Honestly, we have 3,400 total units coming into the same-store pool in the first quarter. We got the five home properties, you've got one property that was a development deal we did in Del Ray area of DC. You've got one renovation deal that's in the Pacific Heights area of San Francisco and then eighth property is our Pier 4 deal up in the Seaport area of Boston, and you combine all of those in contribution to total same-stores is basically zero. They kind of net out, a lot of it is because of the locations they’re at. San Francisco was sub-performing market, DC is kind of right in the middle. Boston is probably at the high end the blended altogether. They probably don't make significant impact really on the total same-stores and even within DC, the contribution of those five home assets, the contribution is minimized.

Okay. That’s great. Thanks Jerry.

Sure.

Hi, everyone. Going back to your 2017 market revenue growth expectation page here, and New York, Francisco or solicited below 3% revenue growth, something to get a little bit more precise of a range of outcomes for those two markets?

Yes, we typically don't give anymore precise. I will tell you this, at this point, they're not negative.

Okay, so not negative. All right, and then for those two markets, where are your in-place rents versus where you're trying to get new leases signed today? Are you still below market?

I do not have that on May, I'm fairly certain I would have a gain to lease which is what you're saying on both of those right now.

Okay.

And yes that’s basically when you do look at new lease rate growth that we show on the page of the supplement, typically if you see the numbers in negative remains what your in-place rents are greater than what current market rents are. So you're going to reprice negatively when you have a turn. So yes, I don't have the numbers on me, but I'm fairly certain those are going to lease.

Okay and just last question, Tom I think you talked about concessions abating second half of 2017, I think some of that was related to San Francisco, but if we think about Francisco, New York. I mean maybe there is a little bit different of a supply delivery completion picture in 2017, but there is still 2018 to come more supply. I’m wondering is this – when we talking about concessions abating, I mean do they go away on 2017/2018 or they just kind of bounce around and make both markets still challenging markets to be trying to compete versus new supply?

Yes, it's Jerry. I'll let Tom elaborate if you'd like, but in San Francisco, our expectation is that while we don't anticipate concessions disappearing entirely, we do expect them to decrease significantly. For instance, in the fourth quarter of this year, our concessions in San Francisco were over 300,000 more than in the same quarter last year, which accounted for about 40% of our total concessions. As supply levels change and the number of lease-up offerings reduces, this will alleviate pressure and help stabilize deals. So while concessions should decrease, I can't predict an exact figure, though I believe the pressure on concessions will be shorter-lived in San Francisco compared to New York. As we've mentioned before, we expect New York to remain a challenging market for us and other competitors well into 2018 as supply continues to grow.

Hey, Nick, this is Toomey. Just to give you a little bit more longer-term trend view from my point and I’m closing on 25 plus years of doing this, 60% of the time in the market, you can get your deal leased up with one-month concession. 20% of the time, you don't need to offer that. That was 2015. We did not have to offer any concessionary in almost any of our lease ups to gain the traction in lease up velocity, we are striving for in the pricing power. So 2016 fit a lot into that 60% bucket and then that's just a function of either job loss or excessive supply and you identified in both cases San Francisco and New York and 20% of the time you're in a recession, you're delivering a deal and you are going two to three months free. We don't see that horizon out there in our marketplace. We think the market's moving back to its normal pattern, which it operates 60% of the time. One-month free, as soon as that is leased up, people pull off the concessions, go back to full pricing and that's when we're seeing that exhibited for example in a market like LA. And our theory for 2017 is a handful of markets operate in that 60%, some of them are going to be on the lower side and still offer that concessionary, but Jerry and his team are pretty sensitive to it and you can see the responses been driving occupancy, and being very successful at it. So I think the key is, is being very nimble about your pricing schemes and sensitive to the concessionary markets. And I've always cautioned people on your side of the fence, you would learn a lot more by looking at the confectionery market than you will the same-store market. It is a leading indicator towards our pricing power, strengthening or weakening.

That’s good perspective. Thanks, Tom.

Hey, good morning out there. And welcome, Joe to the other side of the conference call dial-in. Just a question, Tom, and maybe you are answering it when the phone cut out, but as far as concessions go, do you think that they have reached sort of a stable level and therefore as far as somewhere mid 2017 for the back half, then they’ll go down or do you guys anticipate in some of the markets that concessions pressure could continue to increase in the first part of 2017?

Well, I think it’s a market-by-market specific question, and if Jerry wants to speak to or you want to address this particular market and its concession pattern, it's probably best directed at him. Mine is just an overall trending of how I see the market reacts and it's pretty darn predictable in my view.

Yes. I would say this Alex. This is Jerry. I think for now, they appear to be stable. I don't think they're increasing. A few markets that are actually coming down and we've had some success on lease-ups in a few markets where you're at that normalized level that Toomey was talking about. For example, we've got a deal in Irvine called, The Residences on Jamboree this past month, we signed 40 leases, we open this place about I guess two to three months ago, but we had 40 leases this past month add one month free and today we're 40% leased and almost 20% physically occupied. So it is market by market, I think when you get up to San Francisco, we're finishing up to lease-up it 399 Fremont, and we're down to the last couple of probably least desirable units. And yes, we are now going to offer closer to two months free to finish this thing out. So it’s dependent on the submarket, but I do think is significant supply gets absorbed in places like San Francisco, you're going to see it go back down, but it's stable today.

Okay. So the bottom line is Jerry that whereas last year, there is a bit of how much it surprise, but surprise sort of mid-year with the amount of concessions and supply. Right now, you don't see that happening in the first part of 2017 and sort of a stable situation and then should abate towards the year-end it sounds like what you're saying.

Yes. I think San Francisco is similar to what it was last year. We're not going to get surprised, because we're in it, but I do think it's going improve about in the second half.

Yes. We’ll go with that.

Hi, guys. Looking at the construction lending environment, it continues to get tougher and tougher. Do you think this will lead to more of a supply and demand imbalance late 2018 and 2019, where you get back to that above trend, maybe 4% or 5% national growth for same-store revenue?

This is Harry. I think, I mean just to focus on the first part of your question where you think about construction lending environment is difficult. The fundamentals are increasingly difficult with respect to these individual development assets. So I think it's likely that we will see somewhat of a slowdown in terms of new development starts in 2017, which, to your point could translate to lower deliveries in 2018 and 2019. I think you are seeing some of the merchant builders however focus on projects that they can't start, which means they are rotating out of the urban infill areas that drove much of that sort of this current wave of new supply into the suburbs, so that the absolute numbers of units may stay relatively similar. Although, I think there's also a decent possibility that delivers late 2019 slowed somewhat. Jerry, do you want to think about what that could mean from a supply demand standpoint?

I think as long as job growth continues and you think about what Toomey said a minute ago about homeownership rates. Yes, I think you see a pullback in on supply in our markets. Yes, I could see, getting up to that level, you see the top end of the range we've given for 2018 peers into that range you're talking about, so I can see that potentially happening, but it's really most dependent on jobs.

Okay and then, are you seeing more alternative transactions like the Wolfe transaction you did a few years ago to help these developers out?

This is Harry again. There clearly is a market for that type of financing structure given that sort of with the reduced loan to cost available through the third-party construction lenders you have a natural gas in the capital stacks. So those types of investments are clearly available and clearly is a market for them and we're continuing to look at them as they materialize.

Okay, thanks a lot. End of Q&A.

Thank you, all of you and for the extended session, I thought it was very helpful and I hope you found the same. In summary, we feel great about the business, the plan and the right team and now it's just a matter of continuing to execute on a day-to-day basis and build on the success that we have. With that, I'll close and say, we look forward to seeing many of you on the road as we get out there and continue to communicate what the attributes of UDR and our success around execution.