UDR Inc (UDR) — Q1 2019 Earnings Call Transcript

Welcome to UDR's quarterly financial results conference call. Our 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've 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 is 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 respectful 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 UDR's Chairman and CEO, Tom Toomey.

Thank you, Chris, and welcome to UDR's first quarter 2019 conference call. On the call with me today are Jerry Davis, President and 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, highlighted by FFO as adjusted growth of 6% and the value creation we produce for our shareholders, again confirmed that we are successfully executing on our overarching strategies, which focus on operational excellence, maintaining a diversified portfolio, accretive capital allocations, maintaining a liquid investment-grade balance sheet, and promoting a culture of empowerment and innovation. Big picture macroeconomic drivers remain supportive of stable apartment fundamentals during the quarter, something we had anticipated and built into our sector-leading 2019 same-store growth guidance. While we are only four months into the year and just starting peak leasing season, we continue to see positive momentum in leasing trends, record low turnover, and strong occupancy. As the majority of peak leasing season is yet to come, we are not providing guidance updates at this time, but operations look good. Jerry will provide additional color in his remarks. Moving on, we had a busy first quarter for transactions with numerous acquisitions in markets targeted for expansion when we reported on the fourth quarter call, which represented accretive near-term uses of the $300 million of equity we issued last December. Our strong cost of capital persisted throughout the first quarter, and we took advantage, issuing approximately $192 million of new equity at a premium to NAV through our ATM program. In his prepared remarks, Joe will guide you through the high-level value creation potential for our $517 million year-to-date uses and an additional $109 million acquisitions we have under contracts. All in, the market has generally provided us a signal to grow since last December, and we have responded with accretive deals that strengthen our position in targeted markets while also maintaining geographic and asset quality diversification. Lastly, I and the senior management team would like to express our gratitude to Lynne Sagalyn and Rob Freeman, both of whom have faithfully served our shareholders as Board members for over 20 years. They have decided not to stand for reelection this year. We thank them for their dedication and leadership during their tenures and wish them the best moving forward. With that, we’d like to extend a special thanks to all our UDR associates for your continued hard work. And now I will turn it over to Jerry.

Thanks, Tom, and good afternoon everyone. We're pleased to announce another quarter of strong operating results, with same-store revenue and NOI growth rates of 3.8% and 4.1%, both near the top end of full year 2019 guidance ranges. As first indicated on our fourth quarter call, we continue to believe that more of our 2019 topline growth will be driven by rent increases versus 2018's occupancy gains and other income growth. Examining the three primary drivers of same-store revenue growth, we saw that blended lease rate growth was 3.3% during the quarter or 60 basis points above last year's comparable period. For the remainder of 2019, we are continuing to forecast that our year-over-year spread will remain near this level. Occupancy declined by 10 basis points year-over-year during the quarter to 96.8%. We continue to forecast flattish occupancy in 2019. Other income grew 12.7% or 350 basis points above the rate produced in the first quarter of 2018. While this result is encouraging and above our initial forecast, we caution that some of the outperformance was due to one-timers. Other income ramped significantly throughout 2018, thereby increasing the difficulty of each quarter's comp moving forward. Regarding expenses, the process and procedural improvements we implemented throughout 2018, and thus far in 2019, continued to produce solid results. The two controllable expense line items where these successes are most evident are personnel and repairs and maintenance, as presented on attachment 6 of our supplement. During the quarter, personnel was down 4.3% year-over-year or approximately $620,000. Repairs and maintenance grew by 14.1% or approximately $1.1 million, but included $300,000 in unusual weather-related costs. After excluding these unexpected costs, combined growth in these two categories would have been less than 1%, and well below inflationary norms. Moving forward, we encourage those listening to examine personnel and R&M expense growth in concert with one another, as our ongoing platform initiatives will likely continue to push the respective growth rates in opposite directions, but also reduce the combined growth over time. For non-controllable expenses, real estate taxes increased by a rather modest 3.4%, as we realized better than expected refund activity. That being said, we are still forecasting full year growth in the 5% to 7% range for this category. All in, we feel good about our operations and believe we are running on all cylinders. As Tom indicated in his remarks, we are not providing a guidance update on this call. But absent a macroeconomic hiccup or some other exogenous shock, the probabilities of hitting the low ends of our full year same-store revenue and NOI growth ranges appear remote at this time. Moving onto a platform update, as indicated earlier in my remarks, we're seeing solid returns from the implementation of process and procedural improvements on our controllable expense categories. On the revenue side, we have upgraded approximately 9,200 homes to-date with smart home technologies and are achieving the incremental rent premiums we underwrote. Therefore, phase 1 of our upgraded operating platform, which focuses on these attributes, as well as outsourcing and centralizing non customer-facing tasks is progressing as expected. Phases 2 and 3, which entail the launch of an expanded suite of self-service options for our residents available on their smart devices, and utilizing the internal data we tracked to better operate our communities are on schedule, on budget, and will provide benefits in the years to come. In future calls, I will continue to provide updates on our progress. Next, a quick overview of year-to-date market level performance. San Francisco, Washington DC, and Austin, which represent 34% of our same-store NOI, have marginally outperformed versus initial expectations, as a result of increased demand for our apartments, which drove occupancy, as well as above-average contributions from other income items, such as parking, short-term furnished rentals, and rentals of common area spaces. Conversely, Orange County and Seattle, which comprise 22% of our same-store NOI, have underperformed due to uncharacteristically harsh weather during the first quarter, and in the case of Orange County, weaker job growth. All other markets are performing more or less in line with our initial expectations coming into this year. Last, a short update on our developments and redevelopments. During the quarter, we started the second phase of Vitruvian West in Addison, Texas. The community will comprise 366 homes with our 50% share of the cost to construct at $32 million. We are excited about this project, given the highly successful lease-up of phase 1, which consisted of 383 homes and took only six months during 2018. The remainder of our development projects outlined on attachment 9, are now physically stabilized at over 90% and continue to march towards economic stabilization. In aggregate, we are pleased with how these communities have leased up, the lease rates we have, and are achieving, and the value creation they will continue to provide to our stakeholders. On the redevelopment side, which you can review on attachment 10, 10 Hanover Square in lower Manhattan and Garrison Square in the Boston Back Bay were removed from our same-store pool during the quarter and placed into redevelopment. Expected spend on these two communities is approximately $35.5 million, with completion scheduled for late 2020 or early 2021, as unit interiors will be updated. These are both examples of accretive capital being put to work in markets we are targeting for expansion. As a reminder, the 2019 full-year same-store guidance ranges we provided on our fourth quarter call contemplated the redevelopment of these communities. In closing, I would like to thank all of our associates in field and in corporate for producing another strong quarter of operational growth. With that, I'll turn it over to Joe.

Thanks, Jerry. The topics I will cover today include our first quarter results and second quarter guidance, a transactions and capital markets update, and the balance sheet update. Our first quarter earnings results came in at the mid to high end of the previously provided guidance ranges. FFO as Adjusted per share was $0.50, up 6% year-over-year, driven by strong same-store and lease-up performance, and accretive capital deployment. Next, as indicated earlier in our prepared remarks, we're not providing an earnings or same-store guidance update on this call, due to how early we are in the year. However, updated sources and uses expectations and second quarter guidance ranges are available on attachment 15 of our supplement. Moving onto transactions and capital markets; as previously announced, we acquired four operating assets located in New York, suburban Seattle, Orange County, and Tampa, for a total investment of approximately $362 million in the first quarter at a weighted average year-one FFO yield in the high fours. In addition, we purchased two development sites located in Washington DC and Denver for $41 million. Combined, these acquisitions along with smart home investments and funding Developer Capital Program commitments represented accretive uses for the $300 million of equity we issued at a premium to NAV last December and the additional leverage this equity allows. Positively, our equity cost of capital remained advantageous throughout the quarter. As such, we took advantage and issued approximately 4.4 million shares for net proceeds of $192 million via our ATM program at a 5% premium to consensus NAV. We believe that our disciplined approach of identifying near-term uses prior to sourcing new capital best serves our investors by not speculatively diluting our earnings stream. Primary uses of these incremental ATM proceeds included a post-quarter acquisition of Rodgers Forge, located in Towson, Maryland for $86 million and the pending acquisition of Park Square located in the King of Prussia submarket in Philadelphia for $109 million. Park Square is expected to close during the second quarter, subject to customary closing conditions. Near term and longer-term value creation from our year-to-date acquisitions comes in a variety of forms. First, and as already indicated, they have been funded with accretive capital. Second, they are in markets targeted for expansion by our predictive analytics work. Third, there is plenty of upside by improving core ops and implementing legacy other income initiatives. Last, these communities fit well with Jerry's next-generation operating platform. Economically, all of these transactions exceeded our weighted average cost of capital, enhanced our portfolio growth rate and IRR, and our NAV and FFO accretive. Please see our first quarter press release and supplement for further details on our transactional and capital markets activity. Regarding development, as Jerry indicated, we started construction on the second phase of Vitruvian West with our partner MetLife, and we continue to assess other new development opportunities, but remain disciplined in our underwriting. Over the next several years, our view is that our pipeline will stabilize in the $400 million to $600 million range, a level well below where we have been for much of the cycle, assuming targeted spreads hold. Moving on, our Developer Capital Program investment inclusive of accrued preferred return stood at $213 million at quarter end. Thus far in the second quarter, we have closed one new commitment, Modera Lake Merritt located in Oakland, California. This transaction represents an approximately $27 million commitment, with a yield in the high single digits and a profit participation. After closing Modera, we have approximately $100 million of additional capacity that we can choose to deploy if opportunities present themselves. Big picture, we have a variety of capital sources and uses with competition taking place within each bucket. We will remain flexible with our deployment and will continue to pivot to take advantage of the best risk-adjusted return available, as long as opportunities meet our hurdles and can be accretively funded. Next, balance sheet. At quarter end, our liquidity, as measured by cash and credit facility capacity net of the commercial paper balance, was $1 billion. Our consolidated financial leverage was 30.6% on undepreciated book value, 20.4% on enterprise value, and 24.6% inclusive of joint ventures. Our consolidated net debt to EBITDAre was 5.3 times and inclusive of joint ventures was 5.8 times. We remain comfortable with our credit metrics and don't plan to actively lever up or down from average 2018 levels. With that, I'll open it up for Q&A.

You've become more active on external growth, what gives you the confidence to accelerate it at this point and how do you balance using your current cost of capital in the market signal to grow versus being pretty far into the business cycle?

Nick, it's Joe. So in terms of activity, it's probably good to break it into a couple different buckets because some of this is pretty long-lived activity that's been in the works for a while. So the two options we talked about last quarter, we're really a byproduct of the 2015 loss JV. So those were not necessarily representative of us being aggressive for time and cycle or more active. It is simply we had assets that we could buy below fair market value. Same with kind of the land prices or land deals that we did, those were both one year and three years in the making. I think all the new activity though that we're talking about, the New York deal, Tampa, Baltimore, and Philly, really just a byproduct of where our cost of capital has been. So when we raise capital back in December, at a premium to NAV, and again during the first quarter at a premium to NAV, we really tried to size that to be commensurate with the uses that we had out there, with the goal of making sure that we had minimal near-term dilution and then of course added to longer-term accretion. So I think what you're seeing is $0.5 billion of equity raised thus far at premiums, which has translated into about an extra 0.5% growth when you get out to 2020 and beyond. So I think pretty good value creation coming off that. In terms of going forward, what would cause us to do more activity. We continue to have a variety of uses going down the stack from acquisitions to redevelopments, DCP, development et cetera, as well as a variety of sources, be it equity, dispositions, free cash flow. So we're going to continue to monitor these to look at the opportunities in front of us. Can we drive more accretion, better long-term growth and better IRRs for investors? If so, we'll look to continue to be active.

And other than the cost of capital, what other signals are you going to focus on before committing to more projects?

In terms of other signals that we're looking for, we want to make sure that from a risk standpoint, we don't take on additional risk for the enterprise. As you said, where we're at in the cycle doesn't seem prudent to add risk. So balance sheet-wise, we are going to continue to maintain leverage metrics in line with 2018, sources and uses line capacity through our liquidity and continue to make sure that any activity that we do does not violate any of the principles that we have on that side. Match funding I think we've done a very good job of making sure that we are lining up the uses with the sources in an appropriate amount of time. We do take on a little bit of dilution, freezing that equity right before we deploy. But we do make sure that we've got a pretty good line of sight into those assets that we're deploying into on the acquisition side. I mean and go into contract working for due diligence and a pretty good visibility on closing. So we're going to continue to kind of maintain those couple principles. So if we're fortunate to have a cost of capital or fortunate to find uses of that capital continue to be active.

Joe, I want to appreciate that given where we are in the calendar, revisions to guidance were not in the cards even after the very solid print last night. But maybe to the extent possible, I guess within that parameter. Can you help us understand the FFO walk from what happened in the first quarter relative to same-store plus the acquisition volume that obviously increased pretty tremendously versus prior guidance and then maybe the subtractive effect of the ATM shares, just from a modeling perspective?

Yes for sure, so from a same-store standpoint, I think you heard Jerry say things are coming in very nicely, very positive on where we're at. We effectively are saying that it would be very difficult given what we see today to come in at the low end for the full year. So I think it's fair to say that that came in a little bit better than expected on the operations side. In terms of the accretion dilution, we did take on slight dilution from the additional ATM activity. We talked last quarter about the $300 million raise that we had and that cost us roughly a little bit less than a penny on the full year. Majority of that you kind of felt in the first quarter and then the extra $192 million that we raised throughout the quarter, we didn't really start deploying that until subsequent to quarter-end with the Baltimore acquisition and the pending Philadelphia acquisition. So, we did take on a little bit more dilution, but it's not really more than a couple tens in the quarter from the additional ATM issuance.

And then maybe secondly here, just with respect to the DCP program. Can you describe the competition you guys are seeing maybe from whether it's other REITs or non-bank lenders for the paper that you're buying in that program? Just what that landscape looks like?

Sure, this is Jerry. I mean, as we know we've been doing this for five plus years. There continues to be demand for this product, which is good. It's a product - it's an asset that we like from an investment standpoint. I think you've seen some other regions who they are as it certainly has an active program. I think a majority of our competition is either from private funds and there are several of them out there. The large PE firms are also very active, and they all have their sort of different take on this activity. But the amount of capital chasing these deals has certainly increased over the last three or four years. But still has the demand given the sort of relative reduction in construction financing proceeds and that type of thing.

Yes, thank you.

Hi Rich.

So you've spoken about expanding your New York footprint and you took a step forward that by acquiring Leonard Pointe. And I'm just curious with pending changes to legislation in New York, are there any additional opportunities you're seeing on the transaction market?

This is Harry. I think Joe could talk a little bit about legislation. I think at this point, you saw we acquired Leonard Pointe in Brooklyn. I think at this point, there are opportunities out there. Our general preference is to take a wait and see approach to see how the legislation plays out next month before committing additional capital to that market.

And I guess, following up on that from a bigger picture perspective, there are some rent control and proposed affordability measures, not just in New York but in various markets across the country. So how is that influencing your thought process for potential development to acquisitions and I guess more broadly, capital allocation decisions?

Trent, it's Joe. Yeah, I think on the positive, we are seeing a lot of good discussions taking place amongst all constituents out there in the market. We're not going to go through and speculate on how any of these individual kind of evolving situations play out. But we do continue to believe that the long-term solution here to affordable workforce housing is not going to be restrictions on rent growth or economics to the owners, which would most likely result in less capital invested and less supply. So hopefully, we do get to a point where you see more upzoning, more densification, less red tape, and more programs like the 421 program in New York. I think one of the best parts about the strategy overall, is diversification. So while we do have exposure to some of these markets and states that we're talking about, we do have 20 different markets. We have diversified sub-market exposures, price point exposures. So that is one of the better parts that allows us to pick and choose or source capital from certain locations and use capital in certain locations because this does play into how we think about capital allocation at the end of the day. We've talked a lot about our predictive analytics platform in the past, but again that's a quantitative-based approach. That is one factor into our process, if you will, but we do spend a lot of time thinking about rent control and other qualitative factors when we're trying to decide how to allocate that capital. So we are thinking about it, and it continues to evolve.

Just curious how you guys would characterize the depth of the acquisition pipeline you have today, and as well as just competition for deals. And then how should we think about your willingness to use the ATM program moving forward as a funding mechanism, versus maybe the traditional overnight that you did last December as you look to fund potential new investments?

So I'll kick it on kind of ATM overnight sources of capital piece and then I kick it over to Harry to talk about transaction market. Yeah, I kind of broached there earlier in terms of the diversified sources of capital and how we're thinking about ATM or overnight, equity relative to dispositions. I think when it comes down to the overnight versus ATM discussion, I think if you go back to what we did the last couple of quarters, we did factor in or did take on a little bit of dilution with the large overnight deal of $300 million back in December. And at that point in time, we kind of said we don't want to put more dilution onto the investor base in 2019. So by utilizing an ATM in the first quarter, we think we minimized the impact of dilution and still set ourselves up well for accretion on a go-forward basis. So I think if we have an appropriate amount lined up for accretive uses and the timing works, you could always consider an overnight. But I'd say ATM at this point would be a preferred use if the pricing is there and the uses are there.

In terms of looking at acquisitions, we do have a diversified portfolio. We are looking to deploy capital in several different markets that you've seen us thus far this year deploy capital in, in Baltimore, in Philadelphia, in New York, in Orange County, in Seattle. So that does create a fairly broad sort of acquisition template. In terms of competition, it really depends on the deals and I could tell you the deals that you've seen us transact either the situations like the New York deal we have, we did a direct deal where we didn't have sort of a traditionally competitive situation. Many of these other acquisitions that we've looked at have been in markets that perhaps haven't been chased as heavily by sort of the traditional national capital sources. So we're competing with more regional type groups, which gives us a very strong competitive advantage.

Just switching maybe then to Philly and the success you had there with the acquisition in suburban Philadelphia. Curious what you consider to be kind of a scalable level in that market, and is there a preference today for suburban versus urban and what's kind of the backlog there on either the acquisition or development side, more near-term?

Yes, in terms of trying to get to scale, there is a scaled number that over time we would like to reach. We have half an asset and the pending asset plus the DCP deal that we hope to get access to in the future or at least participation on. So that's clearly not at scale. But I think the economics that we're getting on each one of these deals, outweighs that lack of efficiency that exists today. So we're going to continue to be prudent. Like we said on a predictive analytics model and a lot of other qualitative factors, we like Philly. So we are going to want to try to increase exposure there. That could come in the form of acquisitions, development or DCP. But we're going to be prudent in terms of timing. We're not going to set a target and then just rush to get there. So I think we'll be patient on that front.

Question for Jerry, on the leasing spread out performance year-over-year, it was about 60 bps and last quarter was closer to 100. A quarter before that, back at 60. I guess you've heard that pretty healthy year-over-year second derivative improvement, I guess implied by the midpoint of full year revenue guidance; sort of are we still going to be seeing that year-over-year improvement in blended leasing spreads in the third quarter and fourth quarter in your opinion, and if so, what might that margin look like?

Yes Drew, I think it's going to be very similar to what it was this quarter, it may expand a bit. But we are looking at that 50 to 70 basis point increase. One thing to factor in, we'll get a little bit of contribution from our smart home roll-out. We're going to have probably between 15,000 and 18,000 smart homes in place by the end of the summer. So as those roll in, increases - rent increases of $20 to $25, it should help elevate that spread a bit. But we're still seeing continued growth to the positive, both on the new - especially on the renewal side, when you look at renewals this past quarter, they came in at 5.2%. As we look into the second quarter, it's up into the mid-5% sourcing and strength there, and it's pretty prevalent throughout the entire portfolio. So things are still good today as we look into the prime leasing season.

And then on New York and Boston, I just wanted to touch on something, it looks like year-over-year revenue growth actually slowed a little bit sequentially in those markets, with your peers kind of reporting the opposite. Obviously, especially in New York for the smaller portfolio. A lot of things could be going on there. But I was curious whether the removal of the redevelopment properties in both of those markets might have created some noise there, or kind of what else might be going on that might be influencing revenue growth in the short term?

You know in Boston, I think it was probably a little bit pulling Garrison Square out. The South Shore though, where we have probably a third of our same-store pool, has only grown at about 2%. So it has slowed a bit due to supply issues. Our deal in the Seaport is popping at about 5% and our North Shore assets are coming in at 5%. So pretty good strength, although this is a market that we see occasional fluctuations in contribution from other income that can make growth rates quarter-to-quarter go up and down a bit. But Boston does feel good right now. New York City, you're right, we came in at 0.5% growth, which was pretty close to what we were expecting, pulling out of 10 Hanover affected a bit, but the bigger issue was probably - last year we had quite a bit of a larger contribution from other income and not quite as much this quarter. And secondly, you're absolutely right. When you only have three assets in the same-store pool, if one submarket is sluggish, it can bring down the entire portfolio. The sluggish submarket for us this quarter was our Murray Hill Asset Q34, it had revenue growth of negative 0.4%. When you compare to the other two same-store assets, our 95 Wall deal in the Financial District was just under 1%, and our deal up in Chelsea was almost 3%. So I think low sample size is probably the biggest factor here.

And just one last one on the King of Prussia acquisition, Rodgers Forge, it looks like the occupancy is 91%. But the renovation that occurred is - I think almost about 10 years ago and so, obviously you'd want to get occupancy up there. Kind of what's the opportunity there, is it under management, is it capital, what is that kind of full potential - how does the full potential of that asset kind of come together over the next year or two?

Drew, you named two of them, it does need some capital infusion. We will be spending several million dollars there to improve the curb appeal, mostly. Unit interiors in decent shape but there can be some improvement there. There are also some amenities that we plan to add to the community. But I think there's a capital infusion that will enhance the yield. I think as far as the management of the property, we obviously feel like we have the best platform in the sector, and we do see opportunities, whether it be on pricing, on how we do lease expirations, just the entirety of running the property, we see a lot of benefits. But you know, what we really liked about this deal, and it's something you can't change is the location. It was in a great neighborhood with top schools. So we do expect to be able to derive benefit that product should have been getting, given its location.

Drew maybe just one other thing to give you there. I'm not going to go into the specific economics on that Baltimore deal, but I think it is important to think about what the economics are from all the capital activity we're doing here. So we talked previously about those two option assets, $130 million of capital we expended, that was a blended FFO cap rate of about 5-3. When you look at these four other one-off acquisitions that we've done for about $430 million, the year one FFO yields in the high 4s, and by year two, it's going into the mid 5s. So whether it's the Rodgers Forge deal and the operational upside we see there. Park Square has a lease-up upside and then Peridot in New York, both have operational upside in our eyes. So we are getting about a 10% year-over-year growth by year two off of these acquisitions that we're putting capital into. So I think the economic story to go along with operational story Jerry is talking about springs pretty well for us.

Joe, you quoted on your acquisitions and FFO yield in the high fours. I was wondering if you could provide NOI cap rate? And also this FFO yield is tighter than what you acquired in the fourth quarter, I'm just wondering if you are seeing cap rate compression in your markets?

So just in terms of the FFO yield, it's basically a pre-management fee CapEx number. If you go to market convention with management fee and got $250 million, $300 million of CapEx, you're down to about a 4.7% type number. So I will call it a 20-25 basis points to go to what's traditionally known as a market cap rate.

In terms of cap rate compression, we're not - it does point, there continues to be a lot of capital, as we know that they chase multifamily deals, transaction volume in the first quarter was relatively similar to last year, down slightly, but it continues to be fairly robust. But we're not seeing a cap rate compression. Cap rates continue to be very similar to what they've been in the past.

And then on your development spending guidance for the year of $100 million to $150 million. For the remainder of the year, do you expect to have development starts or just positional land acquisition part of that?

Well, you saw we just started one project in Dallas. So that gets us to the low end of the guidance. In addition to finishing up our other development and redevelopment projects to get to the high end of the guidance would require either the Denver acquisition and/or the, the DC acquisition to start construction, sometime this year, which we expect to occur.

Just one big picture question on the record low turnovers. I get a lot of questions on this, what has happened over the years, why tenants are staying longer, is this temporary? Do you think this is more of a permanent shift change? How are you guys thinking about this?

Yes. This is Harry. And as you saw, our turnover was down 110 basis points. I'd remind you because of our short-term furnished rental program, if you back the effect of that out of both periods, it would have been 170. So it's even a little better than it comes out in print. I think it's a couple of things. I think it has something to do with demographics. I think it also has something to do with leasing strategies that new supply has put out there, and you know, when you have rational pricing and we've said this before, one month free on a lease-up. It typically doesn't draw outsized move-outs to competition. And I think in most of our markets, you're seeing lease-up concession levels between probably half a month and a month. So has kept it in line. When we look at move-outs to home purchase; for us, it actually got down to the lowest level I've seen, probably in the last four to five years, at about 10%. But I think you're just finding an environment demographically, and with all of the housing supply, whether it's multifamily or single-family that's coming out there, that it's not drawing people out to move.

Jeff, I might add, this is Toomey. You know what's interesting to me having done this for 30 plus years is the product we put up today. The amenities that we offer and the service level we offer. That you find a lot of people looking at it and saying, that's better than the home they could buy or maintain, and it gives them the time. And I think we're all in a race for time and what we want to do with it. And so, to me, it seems like a long-term permanent inflection point has been reached, and as I talk to my children, they look at it and say homeownership, why? That's just more work I've got to put in on taking away from travel and all of the other things I want to do in life. So I am not sure that we can look in the past and say that these are levels that may even go lower, in my view, as it relates to turnover and length of stay. And you can see it in our numbers, where an average resident is staying with us 27 months, and the average age is 38. So it's probably more of the housing stock's permanent nature.

That's very helpful.

But I think it would still lead down to price point. Everything we look at is revolving around location and price point. So we're kind of careful about anything that's impacting supply and development in particular, emerging markets as well.

Can you talk a little bit more in terms of the scope of the 10 Hanover and Garrison Square redevelopments? $55,000 per unit seems a little pricey for just kitchen and bath upgrades, and can you also talk about what returns you guys are looking at there?

Yes, I'll start and Harry can jump in if I leave anything out. We are doing full interior renovations, as you described. Those are probably more in the - I'd say $25,000 to $30,000 a door level. When you get to 10 Hanover, again, I'd remind you that property was converted from an office to apartments I think in 2005. So it's about 14 to 15 years old. We're rightsizing a lot of the major systems, which were still set up for office use. We're resealing and doing some things with the entry plaza level, which I had some issues, we're redoing the lobby area, as well as some of the amenities. So it's not just interior units, it's all of those things to finish it off. It has got an 8% to 9% cash-on-cash return on that deal. So you're going to see rents at that property go up somewhere between $300 and $350, above whatever mark it would go. And we would expect this entire process, because it's 493 units, to take probably 15 to 18 months. We've completed about 11 units to date, and so far things are going well. Garrison Square is a 160-unit property in the Back Bay. That property is, I think it's about 20 years old, 25 years old. Had a whole lot of work done on the unit interior, so they are very dated. It's in a killer location, the Back Bay, but the unit interiors were sparse. So those are getting a full upgrade. In addition, we had an adjacent building that we had bought a few years ago, where we are going to add amenities, it was basically an amenity-less building. So we're going to add a fitness center, a small clubhouse and a leasing office, because we have been leasing out of unit. That property, again, we expect to get about an 8% to 9% cash on cash, and if the rents are going up somewhere in the $400 to $450 range.

And then has anything changed in terms of Airbnb and the other rental programs in terms of the positive or negative takeaways from you guys and your residents from having people renting units next door to them?

No. I mean we still don't - our leases don't allow for Airbnb. So I mean, I'm sure they get in there sometimes. But we don't participate with Airbnb, we do continue to have an active short-term furnished program for leases over 30 days, the average term is much longer and we've talked about it on calls for the last year and a half. I can tell you, that that program continues to grow, and in the first quarter, it was up another over - well over 100%. So when you look at the contribution to our revenue stream, it continues to come in heavy from other income, which is a lot of it is parking, which grew at 21% this quarter. Short term furnished grew over 100%. We started leasing out our common area spaces to non-residents through an external platform, that, while it's small is up about 150%, and then the fee income we realized from our package lockers is up almost 90%. So other income grew at about 12.7% during the quarter, which honestly was a bit of a positive surprise. We expect it to moderate down throughout the year and probably have high single digits for the year.

Just some quick questions. First on New York, I think most of your portfolio is actually sort of on the newer side despite some of the older buildings. But can you just go over sort of what percent of your New York, Brooklyn, portfolio is either subject to some sort of 421A or 1974 vintage rent stabilization?

Alex, it's Joe. So I think last quarter maybe we gave a couple of details on that. Market rate units for us on a pro-rata ownership basis, inclusive of Columbus and inclusive of the new acquisition of Leonard, we're about 80% market rate with the other 20% being rent stabilized.

And then the 20% of the mix is the legal cap and the preferential rents. Okay. And then on the recent energy initiative that was passed, how do you guys think your portfolio stands versus the 2024 mandate, and then that the jump up in 2029?

Alex, it's Joe. It's pretty early at this point. Our operations team and asset quality teams have been working together and kind of doing a preliminary assessment. But it looks like at this point, relative to the '24 target, the majority of our assets are already in compliance. So we'll continue to take a look at it and figure out what we need to do to be in compliance 100%, as well as look out to 2030 and figure out what the capital plan is to get there. But at this point, it looks like we're pretty much already there, given previous activity that we've had.

Then just a final thing, on Vitruvian, you guys have owned this asset a long time, and I remember - and I'll confess, I haven't been there in a number of years. But a while back, it was sort of - there was a lot to do there. There was a lot of surrounding supply and maybe that area hadn't come around yet to warrant more investment. But clearly you guys are starting, so some things have changed. Can you just update on where this submarket stands now, versus where it was a number of years ago? Like when you had your NAREIT event there in Dallas, that was like, maybe four or five years ago?

Alex, this is Toomey. On Vitruvian, I'd characterize it as this. When we build product on the first couple of phases, I think our oversight there or miss might have been the realization that the Uptown was getting a heavy dose of supply and capped our potential. And so we pivoted in the next couple of phases to more of a moderate price, and you saw it in this last phase where we are leasing 90 units a month. And so as we contemplate going forward, we'll look at the marketplace and see where we think the right price point fits and still very anxious about what the outcomes will be. So we'll be more prudent about it going forward, but the next phase is right at that last, and we hope it enjoys the same 90 units a month kind of lease-up phase. So I think long-term, great asset, great submarket. The city is still thriving in aspects of restaurants and nightlife, and that's where our residents want to be.

In terms of just Southern California overall and your portfolio in particular, you noted that Orange County was slightly weaker. What is your outlook going ahead for that market? Some of your peers have highlighted it being a little weaker, just curious what you guys think?

Yes, we would agree. Orange County has had slower job growth. It is projected to pick up a little bit. We'll see how strong that comes in. The other thing that affected us in the first quarter was extreme rain events, which kept traffic down. So we had depressed numbers there. It's probably the one market, I would tell you, that we're missing versus our plan this year. But you know, we'd like the market long-term, but I think it's going to be a struggle this year. When you get up to LA, we had 5% revenue growth. We feel much better about LA with the tech jobs that are coming. Our same-store pool there is not located downtown, where most of the new supply is coming, it's over in Marina Del Rey. So we're close to well-paying jobs, and there is limited supply coming in there.

And just as a quick follow-up on your largest market, I guess on DC, do you think there is potential maybe just looking beyond '19 even, that DC could see a meaningful acceleration in revenue growth, even if the supply kind of trajectory remains where it is, or just your outlook on DC just a little longer term?

I think DC is going to continue to have supply issues. Obviously, you have Amazon coming in and other tech jobs. So on the job front, it's going to be good. But you've still got supply issues hitting, especially in the district that I think will keep some cap on the ability for revenues to grow significantly higher than the national average.

This is Toomey. I'd add on long-term DC. The one thing that always strikes me when you look at it over a long horizon is it has one job engine that nothing else can be recreated, and that's called the Federal Government. And that doesn't appear to be on the horizon to be shrinking anytime soon. So it's got a natural engine to it, and it will have supply windows. But I'm confident that the government is going to continue to grow in size and scope.

Quick question on capital allocation. I know it's hard to predict acquisitions, but maybe for some of the long lead time projects, developments and redevelopment, how should we look at the mix of capital going into those buckets going forward? Looks like there is a nice even mix to begin the year?

I'd expect more of the same I think. One of the things we continue to try to do is pivot to the opportunity that exists in front of us. So whether it's the DCP, the development acquisitions, or redev or some of the smart homes and platform spend. We're going to continue to pivot based off the opportunities that come along. So you saw a couple of those land parcels in the first quarter that were very long lead time. The Group continues to look at other land opportunities, as well as densification opportunities within the existing portfolio. So hopefully sometime in the next 12, 24 months, we will have more to speak to there. So we do have the desire to ramp that up. But obviously, up to independent, so we may never get there. So just sit back and we'll try to pivot where we can and create some value.

And then on densification, is that more your assets or are you actually looking at retail densification projects?

I think we've talked a little bit about our own densification opportunities that we've been looking at. We're looking at one larger scale opportunity in DC that we're still going through kind of the process there trying to figure out if we can make sense of the cost and the returns. We've talked about utilizing vacant land or underutilized land within our portfolio, as well as going after parking garage spaces. We have - and especially in San Francisco, parking garages that are over-parked and we have a pretty high degree of vacancy in those parking lots and so trying to figure out how to put additional units there, that both help us from an economic and densification standpoint, as well as help the city with more affordable housing, given the size and price points of those. So I think you'll see more of that. Then on the retail side, I think from that standpoint, it is a piece of the industry that continues to recalibrate and we continue to look at with any deal, any standard development or land parcel. It's going to be dependent on sub-market, the real estate, the risk, and the economics. So we're looking at it as we look at all things, but that's kind of where we're at.

Just one question from me, your Sunbelt exposure has been a nice hedge versus your coastal peers. The last, call it three to five years. Staring out over the next three to five years, would you underwrite higher lower revenue growth across your Sunbelt markets versus the coast?

John, it's Joe. I think one of the things we talked about before. Our predictive analytics and the ability to potentially tilt us kind of tilt the rent growth forecast in our favor. To the extent that we're following that, as well as thinking about qualitative, you can see where we think rent is going to do well going forward. So where we're deploying capital, Tampa, as an example of that down in the Sunbelt. But most of our other capital deployments are coming up in New York, Boston, Vitruvian, Baltimore, Philly. So some of these under-loved markets that have not done as well of late, we think are set up to probably come back here over the next three to five years.

John, this is Toomey. I'd add that not just the market diversification has helped us but also the product price point diversification has helped us and it's a credit to Jerry and his team to produce sector-leading operating results on that portfolio. But for us, I think it's always been to try to have enough markets to always be looking at opportunities, recognizing the cycles move and change and having diversification and price point. So that in any market we can look at it and say it's an A or B opportunity. Let's go after that so it's playing out very well for us and I would see us continuing in the future to hold that same template of diversification across markets and price point products.

So Tom specifically on the point on that question, John just asked I'm curious. And again I think earlier in the call, you had made the point that you're not trying to call any point in the cycle here but I'm curious on your thoughts on possibly expanding your B-quality exposure your B certainly turned out in Form A's late in the cycle. And there is no doubt we are leader in the cycle. So I'm curious what your thoughts are on growing that exposure and then any color you can provide on how the demand, and that's how the market looks like, what the cap rate spread between A's and B's is that interesting enough for you as well?

I'll let Harry speak with respect to cap rate compression in spreads, but from our perspective, I don't think we have a tilt towards A or B. We tend to end up looking at a particular market and a community and you saw it in the case of Baltimore, a solid B, but in Tampa we saw the opportunities in A and so we want to take a unique and underwrite one opportunity at a time, it would be cognizant of the overall balance to the portfolio. So it's not this perfect, if you will, platform of we're going to be 50-50 or we're going to take them one opportunity at a time and try to balance where we think the best risk-adjusted returns are going to come out. Cap rates?

Yes, well, I think, Tom, got it right that we're, I would say relatively agnostic about A versus B on the investment side, we look at each opportunity and underwrite it on its own merits, whether it would be Baltimore where we have CapEx and operational upside, whether it be Tampa, where we have operational synergies. Given that we have other properties in the sub-market. Whether it would be Brooklyn, where we have a clear operational upside call it an A minus B plus type asset, whether it be Philadelphia where it's been an A minus type asset, we like price point and we're trying to grow scale and operational efficiency in that market. So each individual investment we assess in the context of its own merits.

In terms of just Southern California overall and your portfolio in particular, you noted that Orange County was slightly weaker. What is your outlook going ahead for that market? Some of your peers have highlighted it being a little weaker, just curious what you guys think? Yes, we would agree. Orange County has had slower job growth. It is projected to pick up a little bit. We'll see how strong that comes in. The other thing that affected us in the first quarter was extreme rain events, which kept traffic down. So we had depressed numbers there. It's probably the one market, I would tell you, that we're missing versus our plan this year. But you know, we'd like the market long-term, but I think it's going to be a struggle this year. When you get up to LA, we had 5% revenue growth. We feel much better about LA with the tech jobs that are coming. Our same-store pool there is not located downtown, where most of the new supply is coming, it's over in Marina Del Rey. So we're close to well-paying jobs, and there is limited supply coming in there. I think DC is going to continue to have supply issues. Obviously, you have Amazon coming in and other tech jobs. So on the job front, it's going to be good. But you still got supply issues hitting, especially in the district that I think will keep some part of a cap on the ability for revenues to grow significantly higher than the national average.

So you spoke about expanding your New York footprint and you took a step forward in that by acquiring Leonard Pointe. And I'm just curious with pending changes to legislation in New York, are there any additional opportunities you're seeing on the transaction market?

Thank you and thanks all of you for your time and interest in UDR today. And again, I want to thank all of our team for a great quarter. As we head into the leasing season, I think we're well positioned, and we're going to put up some good results. As you can tell, we're taking advantage of what I consider a very good economy and certainly robust apartment fundamentals with a wide range of match funding capital deployment. And I think that path continues going forward as the opportunity set continues to underwrite to good returns. As we look towards the future though, we're really excited about the implementation of the next generation of the operations platform, and again the goal there is to create an increased margin off of our existing communities and those that we will build and acquire in the future. And also it's in response to our residents and the way they want to do business in the future, and we're excited about the implementation of it and the progress we're making, and hats go off to Jerry and the team for the work they're doing there. And lastly, we look forward to seeing many of you at NAREIT next month. And with that, take care.