UDR Inc (UDR) — Q1 2018 Earnings Call Transcript

Welcome to UDR's first quarter financial results conference call. Our first quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. 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. I will now turn the call over to UDR's Chairman, CEO and President, Tom Toomey.

Thank you, Chris, and welcome to UDR's First Quarter 2018 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; and Harry Alcock, who will be available during the Q&A portion of the call. Our strong first quarter results reaffirm the 2018 macroeconomic outlook we provided back in February, in which we anticipated solid job growth and accelerating wage growth with a bias towards tax reform being a net positive. These factors, when weighed against elevated new apartment supply, contribute to our ongoing view that 2018's pricing power and occupancy will be relatively similar to 2017 levels. Taken altogether, a strong backdrop for apartments. Moving on, the UDR team is optimistic about our prospects. Why? First, our operating platform continues to produce steady results in a volatile world. While it is still early in the year, occupancy is near 97%, and we are set up well entering the peak leasing season. Jerry will further highlight our success during his prepared remarks. Second, our $811 million of development in lease-up is 90% funded, with aggregate rental rates and velocities in line with expectations. Strong pre-leasing at 345 Harrison and a pickup in leasing velocity at Pacific City, our two large developments in Boston and Huntington Beach, reaffirm our view that 2019 development earn-in will improve materially versus 2018. Jerry, again, will provide some color on these communities. Third, our balance sheet remains liquid and safe. Disciplined use of capital during the quarter included $20 million of share repurchases and the funding of a new Developer Capital Program deal. We continue to underwrite a variety of opportunities in the market with a focus on additional DCP investments. Joe will provide more details in his prepared remarks. Last, a special thanks to all our UDR associates for your continued hard work to produce another solid quarter of results. With that, I will turn the call over to Jerry.

Thanks, Tom. Good afternoon, everyone. We're pleased to announce another quarter of strong operating results. First quarter year-over-year revenue and NOI growth for our same-store pool, which now represents 85% of total NOI, were 3% and 2.7%, respectively. After including pro rata same-store JV communities, which are heavily weighted towards urban, A+ product and are battling new supply, revenue and NOI growth were 2.7% and 2.5%, respectively. These results were primarily driven by solid blended lease rate growth of 2.7% and a robust top line contribution from our long-lived operating and technology initiatives. While it is still early in the year, we're encouraged by what we are seeing on a number of fronts as we approach the prime leasing season. First, our year-over-year blended lease rate growth for the quarter was 20 basis points higher than during the same period last year. This crossover is the first positive spread we have seen since the first quarter of 2016. Second, other income grew by 9% in the quarter. As in past quarters, this was driven by our revenue-generating initiatives, specifically parking, which increased by 19%; and our shorter-term leasing program, which has grown nicely since its rollout in early 2017. Third, year-over-year turnover declined by 120 basis points. This is especially impressive given that our shorter-term leasing initiative should result in higher turnover. Fourth, while our quarterly overall expense growth was elevated at 3.6% due to real estate tax pressures, our controllable expenses declined by 0.4% year-over-year. Of particular note, our personnel cost declined by 2.8% due to our continuing focus on achieving efficiencies throughout our business. We remain comfortable with our same-store expense growth guidance of 2.5% to 3.5%. And fifth, rent concessions during the quarter were 22% lower than last year, and gift card expense was down 48%. Both of these indicate a more rational pricing environment for lease-ups. These factors, when combined with our 96.9% occupancy, set us up well for the prime leasing season. Next, a rundown of markets. The vast majority of our markets are performing in line with expectations with a few exceptions. To date, Orlando has meaningfully outperformed our original forecast, while Austin has struggled as a result of new supply pressures. As a reminder, these are both relatively small markets for UDR. Regarding New York City, year-over-year same-store revenue and NOI growth turned negative during the first quarter. This is more so the result of positive one-timers realized in the first quarter of 2017 than a change in market dynamics. We continue to forecast slightly positive growth in New York during 2018. Moving on. We saw minimal pressure from move-outs to home purchase or rent increase at 12% and 6% of reasons for move-out during the first quarter. Likewise, net bad debt remains low at 0.1% of rents, all at levels consistent with previous quarters. Last, our development pipeline, in aggregate, continues to generate lease rates and leasing velocities in line with original expectations. In our $350 million Pacific City development in Huntington Beach, leasing velocity increased significantly during the first quarter as construction was completed. We ended the quarter at 51% leased and sit at 56% today, all with rent rates in line with our underwriting expectations. At 345 Harrison, our $367 million project in Boston, we ended the quarter at 35% pre-leased and are 39% today, with rental rates in line with underwriting expectations. We will deliver our first homes in early May and are enthused by the community's reception to date. Our two JV developments remain on budget and on schedule. Similar to last quarter, our Vitruvian West community, located in Addison, Texas, continues to perform well in excess of underwriting expectations. Our vision on Wilshire community, located in Los Angeles, recently opened its doors and is performing in line with expectations. Community-specific, quarter-end lease-up statistics are available on Attachment 9 of our supplement. Finally, I would like to again thank all of our associates in the field and at corporate for another strong quarter. With that, I'll turn it over to Joe.

Thanks, Jerry. The topics I will cover today include our first quarter results and forward guidance, a transactions and investments update, and a capital markets and balance sheet update. Our first quarter earnings results came in at the midpoints of our previously provided guidance ranges. FFO as adjusted, and AFFO per share were $0.47 and $0.45. First quarter AFFO was up $0.02 or 5% year-over-year, driven by our strong operating results and disciplined capital allocation decisions. I would now like to direct you to Attachment 15 of our supplement, which details our latest guidance expectations. We have reaffirmed our previously provided full year 2018 FFO as adjusted, AFFO, and same-store growth guidance ranges. For the second quarter, our guidance ranges are $0.47 to $0.49 for FFO as adjusted and $0.43 to $0.45 for AFFO. Next, transactions and investments. As previously announced during the quarter, we sold Pacific Shores, a 264-home wholly owned community in Orange County, for $90.5 million at a low 5% yield. Regarding development, our desire to add land to the balance sheet to restock our pipeline over time continues to be a goal. However, given the difficulty in sourcing economical land in many of our markets, our pipeline will continue to shrink for the foreseeable future. Still, there are opportunities that satisfy our disciplined underwriting approach. In line with this, we entered into a contract to purchase a $13.2 million land parcel located in Denver during the quarter. The acquisition is expected to close in the fourth quarter of 2018, subject to customary closing conditions. In our Developer Capital Program, we invested $20 million into a 220-home development located in Alameda, California at a current return of 12%. Additionally, all of DTLA, a 293-home West Coast development joint venture community located in Los Angeles, transitioned to a longer-term hold as the option period for purchase lapsed during the quarter. At quarter-end, our DCP investment balance was $159 million with an effective yield in the mid-7% range and maturities that take place over the next 4.5 years. We continue to favor further investment in our DCP program assuming new opportunities satisfy our parameters. Next, capital markets and balance sheet. During the quarter, we repurchased $20 million of common shares at an average price of $33.69, a strong use of capital given our prevailing discount to NAV and the inherent risk-adjusted return in our stock. At quarter-end, our liquidity, as measured by cash and credit facility capacity net of the commercial paper balance, was $843 million. Our financial leverage was 33.1% on undepreciated book value, 25.8% on enterprise value, and 30.7%, inclusive of joint ventures. Our consolidated net debt-to-EBITDA was 5.8x and inclusive of joint ventures, it was 6.4x. We remain comfortable with our credit metrics and don't plan to actively lever up or down, although you will likely see lower commercial paper balances later in 2018, depending on the size of our forward capital commitments. With regard to the profile of our balance sheet, we continue to look for NPV-positive opportunities to improve our 5.1-year duration and increase the size of our unencumbered NOI pool. Finally, we declared an annualized common dividend of $1.29 in the first quarter for a dividend yield of approximately 3.6% at quarter-end. With that, I will open it up for Q&A.

I wonder if you can walk through your decision to transition to West Coast JV asset to long-term hold versus selling or anything else that you contemplated.

Nick, this is Harry. I'd tell you, we like the asset long term, but realize there's some short-term headwinds in downtown L.A. with supply. Therefore, we didn't want to be a buyer due to the short term nor seller due to the long term. Wolff, our partner, agreed that we ended up with a hold where our return is based on our below-market value, volume, and price.

And the only thing I'd add to that, this is Joe, is just in terms of if you look at our guidance how we moved around the uses. The fact that we did not execute a buy on DTLA, we were actually able to pivot some of those planned uses over into a stock buyback of about $20 million. So we effectively traded a low 4s cap for a midsize on our stock.

And then you mentioned the crossover in terms of blended lease rate growth in the first quarter with 1Q '18 being higher than 1Q '17. Does guidance assume that the positive spread is maintained throughout 2018?

Nick, this is Jerry. Right now, the guidance really assumes it's going to be about even with last year, so maybe slightly ahead. And as we look into the month of April, we're continuing to see it being right on top of where we were in 2017. Our expectation is it may broaden a little bit, depending on how the leasing season goes. But yes, when you look at the blended rate growth for the full year, we think it's probably going to be in the mid- to high 2s, which would be up right about where it was last year.

Just on the same-store revenue guidance. What's the upside and downside risk from here relative to the midpoint? And could you give us a sense of any second quarter trends you're seeing today, either on new or renewal trends?

Sure, Juan. This is Jerry. As we approach the second quarter, rents in April are slightly higher compared to last April, although it's modest. This aligns with the typical seasonal trends we expect. In the first quarter, our new lease rate growth was 0.4%. Breaking that down, we saw a negative 0.3% in January and February, followed by a jump to 1.5%, which reflects normal seasonal patterns. Currently, April's new leases appear to be in the low 2s, indicating continued growth as anticipated throughout the summer. Renewal rates remain relatively stable year-round; we were around 5% in the first quarter, and it seems April will be similar. We expect this trend to carry into the second quarter. Regarding revenue growth, we achieved a 3% increase in the first quarter and predict a slight uptick for the second quarter. Beyond that, growth will significantly depend on the strength of the leasing season. Given our current occupancy rate of 96.9% and lower concession levels compared to last year, along with reduced reliance on gift cards, we feel confident as we move into peak leasing season. In terms of our revenue guidance, which is set between 2.5% and 3.5%, we're currently at the midpoint from the first quarter. Achieving the lower end may be challenging unless there’s a downturn in rental rates later this year. On the upside, additional revenue growth hinges on a continued contribution from other income, which is currently adding about 60 basis points, alongside a potential increase in rates that we hope will align with seasonal trends.

Great. And then just one more question for me, just on supply. What's the level of conviction that '19 supply deliveries will, in fact, be down across your markets? And any thoughts on the volatile, but stubbornly high permit levels and just general comments on access to construction financing?

Juan, this is Joe. So I don't think our overall view on supply in '19 has really changed from last quarter when we spoke to kind of a flat to down 10% type of number. That was predicated on what we saw throughout '17, which was permits and starts activity, both coming down about 10% from 2016 levels. Obviously, the outlook is a little bit more fuzzy with the starting permit activity that we see in the start of the year that's ticked back up a little bit. But when we look at the '17 activity, when we look at our permit-based regression model, and then when we take into account all the qualitative factors, meaning the difficulty in finding land, the difficulty on the construction financing side, continuing to see hard cost exceed rent growth, and therefore, difficulty hitting return requirements. I think you still have a difficult environment and see supply ramp up meaningfully. But overall, we think we're probably flat to down 10% in '19, with markets that are down more in our view would be Orange County, Orlando, Nashville and Austin. And those that probably might see a little bit more flat to maybe even up would be D.C., L.A. and Northern California.

I wanted to maybe just dig in a little bit to the Southwest portfolio and specifically, Austin and Dallas. We hear about some increasing demand in the state of Texas, but it seems like it's becoming a much more nuanced market between cities and even micro areas within cities. So maybe the Southwest was a little bit weaker than we were expecting. So I'm just curious about what you're seeing, maybe focus on Dallas. Would you consider the Houston market? How are you thinking about the Texas market at this point?

I'll start by discussing what we're observing in Dallas and Austin. In Dallas, we have noticed a slowdown in revenue growth compared to last year, despite strong job growth of about 69,000 new jobs anticipated in 2018, which is roughly 2.6%. However, there is significant new supply entering the North Dallas area, particularly in Plano and Frisco. We have a 1,000-unit property in the Legacy Village retail area, and this new supply is currently negating the benefits of job additions from companies like Toyota, Liberty Mutual, and JPMorgan over the past six months and expected in the near future. In the Addison area, our B properties are performing exceptionally well without new supply, achieving approximately 7% revenue growth. Additionally, we are progressing on our fourth project in the Vitruvian Park area, which has exceeded expectations with lease occupancy reaching about 56% in just three months since opening. Overall, the situation varies by submarket, with the Addison area and B products performing particularly well. Uptown, where we have one property, is facing challenges, and the main factor affecting our same-store numbers is the Plano area. In Austin, the narrative is similar. There is strong job growth at around 3.5%, but an influx of about 8,000 homes coming in 2018 is limiting rent growth potential. Interestingly, our MetLife joint venture product, which is a premium downtown offering, has outperformed expectations, achieving stronger revenue growth of 2.6%, even surpassing some of our B properties in the Cedar Park area. Growth is occurring in specific pockets, and downtown Austin is starting to improve, allowing for some growth, but trends are shifting towards other submarkets and price ranges.

Got it. Are you seeing any opportunities in Houston, or are you focused on Austin and Dallas for now?

I think we're very comfortable with our exposure in Dallas and Austin, and we will continue to look for opportunities in those two markets. Houston is not particularly attractive to us at this time.

Rich, our goal, our soft ceiling that we've placed on it is around $300 million, really driven by we want to be an asset to markets that we would want to own long term. And then obviously, the earnings accretion that comes from it is nice. But at a point in time when construction financing may come back in the future, we don't want to get squeezed out and have an earnings cliff despite the fact that we do have pretty long duration on these assets. So we have about another $50 million, call it, of funding related to the DCP other assets that are down in the bottom of 12b. So that will take us to just over $200 million. And I said Harry and his team are still hard at work trying to find additional assets to backfill any future roll-off or try to get to that $300 million. I think we'll hopefully have some success at some point this year on that front, but nothing's been taken into account within guidance at this point.

First one, Jerry, you mentioned rent concessions and gift cards have abated pretty significantly year-over-year, and I'm just curious what markets are you seeing the biggest declines? And any markets that are increasing, I guess, on the flip side? And what are you expecting for that? How do you expect that to trend as the year progresses?

I think as you compare to last year, I wouldn't expect concessions to go up. They'll probably stay fairly stable to down modestly. Seen a little bit more concessionary pressures in New York. I wouldn't say it's significant. Markets that are down most significantly. Our Bellevue properties are feeling less new supply. That could perk up a little bit later this year when another 600 to 1,000 units get delivered. We went through new supply last year and right now, it's fairly stable. And then our San Francisco, specifically SoMa area, properties are down. So most of the decline is in those markets.

Sticking with San Francisco for a moment, it seems that the market started the year better than expected, as you mentioned in the last call. While blended lease rates increased both sequentially and year-over-year, revenue growth slowed down. Is this mainly due to the timing of when the leases were signed, or was there something in the other income component that posed a challenge? Could you provide some insights on this?

It's really not other income, which is still performing well. I believe San Francisco will continue to see accelerated revenue growth for the remainder of the year. When analyzing revenue, it's important to consider the buildup from the previous four quarters. We're encouraged by the current strength in blended rate growth in San Francisco. While the first quarter met our expectations, I think some of the rents we've implemented in the last 60 days should lead to better performance unless there's a slowdown. However, we're noticing some stabilization in that downtown area. Many jobs have been created in the Financial District with the opening of the Salesforce building, and there is job growth in Mission Bay. That said, we did experience some weakness this quarter in the Peninsula.

Austin, this is Harry. I just wanted to highlight one more point. Jerry talked about the jobs, but it's quite impressive to see the amount of office leasing activity happening in both downtown and Mission Bay. Salesforce is leasing 700,000 square feet, while Dropbox and Uber are each taking 500,000 square feet in Mission Bay. There are also rumors of a future single-tenant lease for 700,000 square feet near our 399 Fremont project. These positions are likely to be high-paying jobs, which is really noteworthy.

Appreciate the additional color. What was your revenue assumption for San Fran this year?

Oh, gosh. I want to say it was in the high end of our guidance range. We typically...

He got cut off.

Let's move on.

I want to start by discussing the labor expense success during the quarter. It's quite impressive compared to other trends we've observed. Jerry, could you provide a bit more detail on what was driving the same-store reduction? Was it due to reductions in full-time equivalents or something related to staffing models? What can you share about that?

Sure, Rich. The main factor was what you just mentioned. Our workforce decreased by 2.8%. We usually provide raises at the start of each year, and these raises ranged from 2.5% to 3%. We are committed to increasing employee compensation. However, towards the end of last year, we began exploring ways to make our workforce more efficient, either through technology or reducing staff, which led to a few percent reduction in our field workforce. Additionally, in the first quarter, we made decisions but took longer than anticipated due to a shortage of available labor. This resulted in some intentional staffing reductions, while a smaller part was due to delaying the filling of positions as we aimed to find the right candidates. Looking ahead for the year, we expect personnel expenses to be slightly negative or perhaps flat. I don't foresee a 2.5% to 3% decrease for the rest of the year, but I believe we will maintain good control over these expenses.

All right. That's helpful. And then one quick follow-up there. Are you noticing a divergence between B assets and A assets or different markets where maybe supply has been more of an issue that might lead to more labor tightening as you think about where expenses might grow across the portfolio and where you're seeing those reductions that you just described?

Yes. I think the reductions that we found predominantly were on B garden assets as we really looked at it hard. I think pricing or wage pressure, you're finding being more prevalent in the A assets, specifically in urban locations where there's heavy competition from the lease-ups for people.

All right. That's very helpful. My next question here is probably for Joe. Just in terms of the share repurchase activity for the quarter, is there a message to communicate there to the market in terms of the predictability of those sorts of investments? Or is it just opportunistic as you're able to sell assets and sort of recycle that capital in a way that realizes that positive cap rates spread that was mentioned earlier? How should we think about that in terms of the predictability of the volume, the pace, et cetera?

Yes. I think, Rich, one of the words to use there is opportunistic is probably the most appropriate. When you look at the parameters we laid out in the past around discounts to NAV sources and uses, leveraging, et cetera. The only one that really changed within the quarter was the discount to NAV from last time we spoke. So we got down to a fairly substantial discount. Was able to purchase shares at 5.6%. And what you saw was we didn't actually shift our sources of capital, meaning, we didn't go out there and try to ramp up dispositions to fund it. We simply pivoted from additional development and additional acquisitions. So I think we'll take it week by week, month by month and evaluate when we get to a certain level of discount if we have additional capacity available to us. And like the risk return on buybacks versus some other alternative investments, we'll look to pick away. But we definitely aren't committed to a certain dollar size. We're not going to come out and communicate that. But overall, we like what we're able to execute even if it was a little bit small.

First one just has to do with the short-term lease program that you talked about and the success that you're having. Can you just maybe help frame a little bit how, what percentage of leases today are on that short-term basis? And then any characteristics of the residents that are choosing short term? And any thoughts on why that's been gaining traction?

Sure. I would like to mention that despite its significant impact on our other income growth, we anticipate it will contribute about $3.5 million to $4 million to our bottom line this year. The number of leases at any given time typically does not exceed 100 across the portfolio, with some being part of our MetLife portfolio and others in our same-stores. This represents a relatively small percentage of our total occupancy. We aim to limit the number of short-term leases to no more than 1% to 2% of the unit count to avoid excessive exposure, which mitigates risk. When we analyze the clientele, it is roughly a 50-50 split between business and personal reasons. Many are corporate relocations or short-term assignments requiring stays of 31 days or more, with our average stay being in the 70s, making it more cost-effective than hotels. The other half are personal situations, like needing temporary housing after selling a house or requiring proximity to a hospital due to medical issues.

Okay. That's helpful. And just to clarify, that would only be on new leases. You're not offering that on renewals?

Yes. We would consider it if someone really wanted to, but I think everything we have done so far has focused on new leases.

On the Denver land acquisition, can you just provide some color on the submarket where you purchased the land and the potential timing of construction? And then I think in the past, you talked about Denver being a market with supply pressures. I'm just wondering what makes you comfortable building in this market.

Sure. John, this is Harry. First, it's in a justifying area, right up above Mile High Stadium. It's near transit. It's an area we believe will benefit significantly from continued densification in and around the site. Denver Broncos have a major plan, which is right across the street. Elix Garden's redevelopment is also right across the highway. Continued Sloan's Lake development, et cetera. We wouldn't start construction until the first half of next year, meaning, this is really a late '20 or early '21-type lease-up, which is one of the variables that gives us comfort in terms of a supply. We're really looking at 2.5 or more likely 3 years out. And just in general, as it relates to development, we continue to look for sites given, as you know, we like development and all of its benefits long term. We continue to be disciplined. As you can see, our pipeline at $800 million or so, which 90% is funded. Most of our existing pipeline will be completed by early next year, and this is just the site that conserved the backfill of our pipeline in ordinary course.

Yes, I would like to add a couple of points about that site. Harry mentioned the location, which is very accessible to the light rail. Considering the price point at which he can construct it, the rents will be considerably lower than those of downtown properties. Similar to our CityLine property in Seattle, there is a potential for significant price differences as you move slightly away from the core area, and I believe this location has great potential for success. Additionally, I expect the retail in that area to develop along with the nightlife. However, as Harry pointed out, this is still several years away. The current supply pressures we are experiencing should be easily absorbed by the substantial population and job growth that is happening now and is expected to continue over the next few years.

Okay. And then the 9% increase you had in real estate taxes, how much of that was related to 421-a in New York versus other markets? And are there any opportunities to appeal tax in other markets?

John, it's Joe. So I'll briefly touch on just the 421, and then Jerry can maybe take you through appeal opportunity. So if you actually look on Attachment 6 in our supplement, you can see that down there in the bottom, we do still provide detail related to 421 down in Footnote 2. So you could see in the quarter, about 366,000 or basically 1.4% increase to real estate tax. If you look at our full year expectations, we think it's going to be about $1.3 million, which is again about a 1.4% increase to real estate tax. Obviously, a much lower percentage impact when you go to total expenses and really only about a 15 to 20 basis point impact in NOI overall. So fairly minimal, but we do expect kind of a similar impact going forward for the next several years.

And I would just add on total real estate taxes. We appeal everything. I think there's a few out there that we would expect to win that aren't in our forecast, but I don't think it's going to be a hugely significant amount. As we stated earlier this year, when we gave out guidance on expenses, we knew the real estate taxes were going to be high single digits. We still believe that's probably going to be true. And we're working hard to offset it with controllable expenses being kept in check. This past quarter, they were basically flat, if not down slightly. But in addition to New York, as Joe said, you're looking at valuations going up in places like Seattle, Florida, Texas that are driving a lot of this real estate tax growth, too. So you got to look at the other side of it, while your taxes are going up, so are the values of the properties that are having to pay these higher taxes.

And can you remind us, is the 421-a burn-off a one-time issue predominantly this year? Or is that going to be an issue going forward?

No. It's going to remain an issue for the next several years for us. It peaks out in 2020, not much above these levels and then dwindles from there.

Just quickly, just wanted to know if you guys can comment on your general ability to shelter gains from asset sales to fund buybacks?

Daniel, it's Joe. So we do have restrictions as regards to share in terms of payout of income and gain capacity relative to our taxable income and our dividend. Today, I'd say we have about $100 million of gain capacity in the system, which dependent on the efficiency of the asset, i.e., the embedded gain that exists, can give you anywhere from, say, $100 million to $200 million, if not more, to be able to sell in a given year. Those sales are typically allocated to fund normal course business, meaning our development program, our DCP program, et cetera. So to go beyond that and sell additional assets, you do have certain levers that you can pull, meaning pulling forward dividends and things of that nature. But those are really kind of one-time in nature that may set you up on a go-forward basis and a less advantageous position. So at this point, we don't feel the discount is compelling enough to start to pull forward dividends and gain capacity, but we do have that lever to pull in the future to the extent that we have a much larger discount.

I'm a little new to this, but it looks like you did a $20 million land loan in Alameda with a 1-year maturity. It almost seems not worth the effort for only a year maturity. Is there more to it than that?

John, this is Harry Alcock. Yes, the expectation is that once the developer has a completed development plan and begins construction that we would grow that in actually increase it into sort of a normal Developer Capital Program/preferred equity-type investment. And in fact, in the document, we have a right to provide that, providing the ultimate economics makes sense to us. Our expectation is this is going to roll into a much longer-term investment.

Great. Okay. And then sort of a big-picture question. It seems to me that depending on whose numbers you look at, we're delivering about 350,000 units annually in this country. And that probably equates to at least 2,000 projects. And it appears to me that most of these projects are delivering except in the most aggressive areas, that a 6 yield on cost. Why is it that UDR has chosen to not play that game? This supply is going to come whether UDR or the public REITs build a project or two or not?

John. Maybe I'll just take a little bit of it. One, I think you got to start with cost of capital. You look at where we're at today at a discount to NAV, which doesn't necessarily give you a strong signal to go and be aggressive on external growth. So if you look at alternative uses, we do have other opportunities out there. So we are not just purely a developer. We can pivot at any given point in time, which we've shown with DCP and buybacks. And then lastly, we are participating. We just remained incredibly disciplined around it, which has been shown through the shrinking pipeline over the last couple of years. But now that we are starting to find some opportunities such as this Denver deal, that still meets our 150, 200 basis points spread requirement and gets us up into the 6-plus type of yield. So it's not that we're not going to participate. It's not that we don't want to. It's simply that there's a discipline and alternatives around it that we can go to.

Going back to the property tax conversation. Outside of the typical catch-up from assessed values to market values, are you guys seeing any inflection points from perhaps fiscally strained cities or states that are reaching more aggressively for property taxes, which could persist for a couple of years now?

This is Jerry. The only one I've heard or seen that occurring maybe is in the Seattle market with either King or Snohomish County, but I haven't seen it anywhere else.

The only thing I would add, I think your research has pointed it out. I mean, this is primarily driven by the fact that the asset values continue to go up and operations trends continue to improve. So I mean, our earlier remarks, we continue to believe that the real estate and tax environment is going to be challenging, but reflective, it makes rational sense if operations are improving and values are improving. How states fund themselves, I think there's a wide range of outcomes on that topic. And I'm waiting to see some more research from people when they start looking at deficits and how cities are planning to fund their education for the future.

I have a couple of questions regarding the New York market, particularly in relation to the earlier comments about 421-a. Looking at the expense growth in that market on a same-store basis, it was 7% in 2016, 11.5% last year, and around 7% in Q1 of this year. With that in mind, and considering the previous comments on 421-a, should we anticipate the same-store expense growth to remain at this level until 421-a is phased out? Additionally, you've mentioned concessions, which I understand have been significant in New York. How much of an impact are they having on these figures?

Yes. I'll begin with the growth. We had a challenging quarter, showing a decline of 0.4% primarily due to a few factors. First, we faced a difficult comparison to last year when our utility reimbursements were at a higher level, given much higher utility expenses at that time. Additionally, concessions were a bit higher this year than last year. Currently, New York is very competitive due to new supply. We primarily hold a B portfolio, with two of our properties located in the Financial District and one in Murray Hill. While we are losing tenants to new developments in Long Island City and Brooklyn, we believe that first-time renters who would typically choose us are now exploring other opportunities in those areas. This situation is effectively limiting our potential rent growth. Despite achieving significant revenue growth in New York over the past few years, we are currently facing pressure from competition in these emerging boroughs that have new offerings, impacting our more affordable Manhattan properties. I do not anticipate a return to 4% growth until at least 2020. I expect 2019 to continue presenting challenges, although job growth in New York is improving, and wage growth is above 3%. There is noticeable strength on the demand side, but we need to navigate through approximately 25,000 new apartments currently under construction. Now, as for monetizing, would Tom or Harry like to address that?

Sure. This is Harry. We would consider that in the context of sort of ordinary capital allocation decision processes where we look at overall sources of uses, opportunities to redeploy capital, gain capacity, long-term fundamentals of the market or individual properties, that type of things. So we don't have any immediate plans to talk about. But New York, we consider in the context of these other opportunities.

But it sounds like if the same-property NOI growth is going to trail the portfolio averages for a while, it should certainly be kind of high in the list of candidates to monetize?

I believe it's important to adopt a long-term perspective. We're not focused solely on the next one or two years, but rather on the long-term fundamentals of New York. Therefore, we don't want to rush into making decisions based on short-term predictions.

And if you think about it, just to sort of pile on that a little bit, as tax abatement burns off, therefore, your sort of NOI flattens out, in theory, the cap rate on the underlying asset decreases because again, the long-term NOI growth increases as you look out 10 years or whatever in the ordinary buyer would. So in theory, the value of the asset is going to be fairly priced in the market, and that would be reflected if we were to sell the asset.

Just going back to the Alameda, the 4% yield is quite nice. Is that just a function of the shorter duration a little bit early in the process of the development? Or is there not just not a lot of skin in the game for the developer at the moment?

This is Harry. And again, as you've seen our Developer Capital Program, we've priced these in a number of different ways, anywhere from 6.5% to with a 50% participation all the way up to this one and a couple of others at a straight 12% coupon with no participation and a couple of that are in between. But it's really just a function of a negotiation with the developer between the sort of allocation between current coupon and participation. So there's nothing unusual about this one.

There was just in terms of skin in the game, this is not a legacy land parcel that we're giving appraised value to. This was new cash coming into purchase a land parcel. So we're up to about 80% of cost on this one. So we have sufficient cushion behind us.

Well, thank all of you for your time and interest in UDR today. We started off this call with a statement that it was a strong first quarter. And clearly, from the prospects that we have for the second and the tone of this call, you can see that we're in pretty darned good shape headed into Q2. I want to reiterate that continued focus on our execution, and we have a lot of opportunities with a backdrop of an improving market. So I'm very optimistic as well as the rest of the management team that 2018 is off to a good start and looks to be a good year for us and excited to see you at NAREIT in the future. With that, take care.