UDR Inc (UDR) — Q4 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 have reconciled all non-GAAP financial measures to the most directly comparable GAAP financial 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. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. 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, Trent. And welcome to UDR's fourth 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 fourth quarter results highlighted by robust same-store NOI growth of 4.1% and FFO as adjusted per share growth of 7% continued to demonstrate strong execution across all aspects of our business. To recap, 2019 was a very good year for UDR and our shareholders. First, we continue to perform well on operations, which drove approximately 65% of our 2019 FFOA per share growth. The year was highlighted by the ongoing development and execution of our next gen operating platform, which allows our current and prospective customers to engage with us online and in a self-service manner they have demanded across most aspects of their lives. Second, our capital sourcing and allocation remained disciplined, using equity priced at a premium to NAV and low-cost debt to creatively grow our business through $1.8 billion in acquisitions. These acquisitions have significant operational and investment upside, are in markets targeted for expansion, and will produce outside FFOA growth in 2020 and beyond. Third, we wound down KFH JV and halved our relationship with MetLife via an accretive asset swap. These actions simplified our business and added more high-quality real estate on our balance sheet. Fourth, we proactively and accretively derisked our enterprise through well-timed issuance and pre-payments that extended our duration and improved our liquidity. And last, we accomplished these goals while dramatically improving our resident satisfaction scores, maintaining strong employee engagement and completing a wide variety of ESG-related initiatives that enhanced our return. In summary, 2019 was a very good year and representative of what investors can expect from UDR as we continue to execute our long-term strategies. My thanks to the UDR team for their hard work in making 2019 a very special year. Turning to 2020, our business is strong as the fundamental landscape for apartments appears to be fairly similar to that of 2019. Specifically, we expect a relatively robust economy and balanced supply-demand environment, set against the volatility that we have all come to see as normal. But whatever the macro environment, we believe we have the right strategy, portfolio, and team in place to grow FFOA and the dividend per share at an elevated rate over time through a variety of value creation mechanisms. For 2020 we are expecting 6% FFOA per share growth at the midpoint of our guidance and announced a 5% year-over-year increase in our dividend per share. Last, Warren Troupe, our Senior Executive Vice President will be transitioning to a consulting role with UDR effective April 1st. I have worked closely with Warren for 18 years and I'm thankful that UDR and its investors will continue to reap the benefits of his expertise in transactions, legal, risk management, and capital markets activities for years to come. With that, I will turn the call over to Jerry.

Thanks Tom and good afternoon everyone. We are pleased to announce another quarter and full year of strong operating results. Fourth quarter same-store revenue, expense, and NOI growth rates were 3.3%, 1.3%, and 4.1%. Full-year 2019 same-store growth rates were 3.6%, 2.5%, and 4%, respectively. As Tom alluded to in his prepared remarks, UDR's primary operating objectives are to consistently generate above-peer average same-store growth while also expanding our operating margin, both of which drive FFOA per share growth over time. Over the years, we have successfully executed these objectives in a variety of ways. Prior to 2019, we primarily focused on top-line growth initiatives such as parking, short-term furnished rentals, and common area rentals. In 2019 these top-line growth initiatives continued to produce outstanding results, but we also pivoted our strategy to more actively minimize controllable expense growth through the implementation of our next-gen operating platform. Why did our focus shift? Three reasons. First, our customer increasingly expects to conduct business with us on their time; across a wide variety of industries, intuitive, easy-to-use, self-service apps have come to define high-quality service. Interacting with our customers should be no different, which is why the backbone of our NextGen operating platform is built on self-service. Second, centralizing certain operating functions, outsourcing others, providing better self-service to our current and prospective customers and more actively utilizing the data we collect will result in greater efficiencies in our cost structure. By 2022 we expect these efforts will expand our controllable margin by 150 to 200 basis points, which translates into $15 million to $20 million in incremental run rate NOI or $300 million to $450 million in value creation at a 22 times multiple. Third, the consistent adoption and execution of operating initiatives that boost revenue growth, constrain expense growth and enhance FFOA per share growth is ingrained in UDR's cultural DNA. But the NextGen platform is and will remain somewhat of a distraction to our teams in the field and at corporate until fully implemented by the end of 2021. As we consider the sequencing of growth initiatives over the coming years, cost efficiency will be the focal point in 2020, with additional revenue growth initiatives beginning to come online in 2021 and beyond, once our property technology and data analytics platforms are fully built out. Moving on, we are now a year and a half into the implementation of the platform and have achieved approximately 25% of the original underwritten NOI improvement. Thus far, our controllable margin has expanded by 60 basis points, and slight level headcount has been reduced by more than 15% through natural attrition. After reducing our same-store controllable expenses by 0.4% in 2018, 2019 controllable expense growth was just 0.9%, resulting in average annual growth of only 0.3% over the last two years, versus 1.8% for the peer group. For 2020, we expect our controllable expense growth to be at or below this level. At the same time, 2019 resident satisfaction scores improved by 11% and we anticipate further improvement in 2020. As such, expanding our margin through cost and headcount reduction is clearly not resulting in a decline in actual or perceived customer service. Rather, it is more efficiently delivering a superior all-around experience to our customers. Our NextGen operating platform is proving to be a win-win for UDR, our associates, our residents, and our investors. We are excited to update you on our continued progress and expected economics throughout 2020 and beyond. Next, 2020 has started well; occupancy remains high at 96.9% and our $1.8 billion in 2019 acquisitions are ahead of underwriting expectations. As a reminder, we expect the weighted average yield on these acquisitions to improve from a trailing 4.7% of purchase to above 5.5% by year three. These accretive investments will continue to drive our FFO growth and value creation for years to come. Looking ahead, full-year 2020 same-store revenue, expense, and NOI growth ranges are 2.7% to 3.7%, 2.2% to 3.0%, and 2.9% to 3.9%, respectively. Drivers of our revenue growth include higher rents including Smart Home contribution and slightly higher occupancy; offset by a lower contribution from other income, as the growth rates from initiatives rolled out over the past several years such as parking, short-term furnished rentals moderate and lower utility expenses reduce our reimbursement revenue. It is important to note that as 2020 unfolds, our quarterly same-store growth rates will be higher than our year-to-date same-store growth rates as 2019 acquisitions move into our quarterly same-store pools. In addition to MetLife JV communities acquired in 2019, these are included in our full-year 2020 same-store pool. Their inclusion will provide more transparency throughout 2020 beginning with our first quarter supplement. At the market level, we expect 2020 top-line growth rates will exhibit less variability than in years past. The Monterey Peninsula, Portland, and Boston markets are forecast to grow same-store revenue at a rate above the high end of our 2.7 to 3.7 portfolio growth rate range in 2020. New York, Baltimore, and Orange County should come in below the low end. All other markets are forecast to grow revenue within the collars of our portfolio growth ranges. Regarding accelerating versus decelerating markets in 2020 versus 2019, we expect Portland, Tampa, and New York will generate the highest year-over-year acceleration in 2020 same-store growth. San Francisco, Seattle, and Baltimore are forecast to decelerate the most. In closing, I would like to thank all UDR associates in the field and at corporate for producing another year of robust operating growth, successfully integrating $1.8 billion of acquisitions, and continuing to embrace the future in the form of our next-gen operating platform. 2019 was an eventful and very rewarding year. I'm immensely proud of each of you. With that, I will turn it over to Joe.

Thank you, Jerry. The topics I will cover today include our fourth quarter and full-year 2019 results, full-year 2020 guidance expectations, a transactions and capital markets update, and a balance sheet update. Our fourth quarter earnings results came in at a midpoint of previously provided guidance ranges. As adjusted per share was $0.54 approximately 7% higher year-over-year and driven by strong same-store and lease-up performance, accretive capital deployment and lower interest rates. Full-year FFOA per share was $2.08 representing year-over-year growth of over 6% and driven by factors similar to our quarterly results. Next, our full-year 2020 guidance. Full-year FFOA per share guidance is $2.18 to $2.22 driven by continued strong operations, 2019 capital deployment and interest expense savings. Primary drivers of these $0.12 of growth between our 2019 FFOA of $2.08 and our 2020 midpoint of $2.20 per share include: a positive impact of approximately $0.07 from same-store, stabilized JVs, and commercial operations; a positive impact of approximately $0.05 from transactional activity, DCP, development, and redevelopment; a positive impact of approximately $0.03 from lower financing costs; flat year-over-year G&A; and the negative impact of approximately $0.03 from a variety of other corporate items, including ground lease recess and amortization of certain next-gen operating platform investments. A full guidance update including sources and uses expectations, and first quarter guidance ranges, is available on attachment 15 of our supplements. Moving on to transactions in capital markets, during 2019, we acquired approximately $1.8 billion of communities at a weighted average trailing yield of 4.7% with equity priced at a premium to NAV and low-cost debt. As Jerry mentioned in his prepared remarks, we see this weighted average yield grow to about 5.5% by year three generating an additional 10% NOI growth above and beyond the 3% annual market rate growth we used in our underwriting. This encapsulates UDR's value proposition when we are able to overlay our well-tuned operating platform combined with targeted CapEx investment on undermanaged assets that are located in markets targeted for expansion. In short, we can buy assets at market prices but drive above-market returns and growth over time. We utilized this value creation equation again subsequent to quarter-end by purchasing the Slade at Channelside, a 294-home community in Tampa for $85 million or $290,000 per home. Similar to our 2019 acquisitions, we anticipate Slade's yield growing from 4.6% in year one to 5.3% by year three. Next, during the quarter we pre-funded the majority of the acquisition of Brio, a 259-home community in Bellevue, Washington on which we have a $170 million fixed purchase price option in 2021 with a $115 million note at a 4.75% interest rate. This property is contiguous to our existing elements and elements two properties in Bellevue and after stabilization will be operated as a phase of those properties, thereby garnering operating efficiencies. Regarding the Developer Capital program subsequent to quarter-end, we exercised our purchase option to buy the 51% we did not already own of the Arbory, a West Coast Development JV Community with 276 homes in suburban Portland. Our cash outlay for the transaction totaled $54 million including the payoff of debt. The Arbory is expected to generate a year-one FFO yield of approximately 5.4% on our all-in blended price. Finally, on the topic of transactions, during the fourth quarter, we closed the $1.8 billion UDR, MetLife joint venture transaction that was originally announced in August, which effectively halved our relationship with MetLife. We believe this deal was a win-win for both sides and continue to value our partnership with Met. Turning into 2020, we will remain disciplined with our capital sourcing and allocation and pivot to investments that provide the best risk-adjusted return should we have an advantageous cost of capital and can match fund. If further external growth opportunities present themselves in 2020, we will continue to evaluate all capital sources. Currently, we have approximately $300 million of assets being marketed for sale. Regarding capital markets, in December we settled all 1.3 million shares sold under our previously announced forward sales agreement at a forward price of $47.41 with net proceeds of $63.5 million. No additional equity was issued during or subsequent to the quarter. During the fourth quarter, and as previously announced, we continued to take advantage of the low-interest rate environment by issuing $400 million of unsecured debt at a weighted average effective rate of 3.1% with a weighted average of 13.9 years to maturity; $300 million of this debt qualified as a green bond and represented our first use of this ESG-friendly product. Proceeds were used to prepay $400 million of 4.65% unsecured debt. Please see our supplement for further details on our transactional and capital markets activity. Moving on to the balance sheet, at quarter-end, our liquidity as measured by cash and credit facility capacity, net of the commercial paper balance was $867 million. Our consolidated financial leverage was 34% on un-depreciated book value and 26% on enterprise value, inclusive of joint ventures. Consolidated net-debt-to-EBITDA RE was 6.1 times and inclusive of joint ventures was 6.0 times. Our consolidated leverage metrics at year-end look slightly elevated due to only having one month of NOI from the acquired MetLife communities set against the full debt load of those communities. Normalizing for this would bring our consolidated net-debt-to-EBITDA RE down to approximately 5.8 times and within our targeted range. Over the next three years, less than 3% of our debt comes due after excluding our commercial paper facility and working capital credit facility. Additionally, our weighted average duration is now over seven years. Both of these put us in an advantageous position regarding three-year liquidity. We remain comfortable with our credit metrics and don't plan to actively lever up or down. Moving on, in conjunction with our release yesterday, we announced a 2020 annualized dividend per share of $1.44, a 5.1% increase over 2019. Last, we would like to officially welcome Trent Trujillo to the UDR team as our Director of Investor Relations. Trent will be running our day-to-day Investor Relations, and we are happy to have him on board. With that, I will open it up for Q&A.

Thanks. Jerry, you talked about the same-store revenue growth assumptions. What is embedded in guidance in terms of blended lease rate growth and if you can discuss new and renewals expected in 2020?

Yes Nick, this is Jerry. Blended lease rate growth is expected to be fully comparable to last year, right around that 3% range, with renewals probably in that 1% or so range. And what was your second question?

No, that was that entire question. I was thinking to ask about the new lease rate growth in the fourth quarter. We saw turn negative and the spread between that and the previous year widen. So I was wondering if you could provide some more color on that.

Yes, really when you look at that Nick, 4Q of 2018 was a pretty exceptional year where you didn't see the normal seasonal softness that we witnessed in prior years. We look at 4Q of 2019, new lease rate growth was negative 0.5, that compares to negative 0.5 in 4Q of 2017 and to a flat in 4Q of 2016. So 2018 at 1% was more the aberration. In that quarter, we didn't feel the effects of new supply that we have seen in the other three years in the past four. I will tell you when you look at January though, we have seen a normal seasonal acceleration. Blended growth is up 2.4%, which is higher than it was in the fourth quarter, but honestly, it is 60 basis points higher than it was in December. So you are seeing good sequential monthly acceleration, but it still is 40 basis points less than it was in January of last year.

Thanks. That is helpful.

Thanks. Just going to the guidance, Jerry. Just a couple of questions. I think you said that for 2020. Obviously, the same-store pool is changing a lot. But did you say that there is no real benefit or detriment from having a higher pool meaning that, if we didn't change the pool, your same-store numbers would be similar?

Yes. When I said well the inclusion of the MetLife portfolio into the full-year same-stores the delta to revenue and expenses is fairly immaterial. What we are really saying is, as you see the sequential or each quarterly growth rate as the year rolls on, acquisitions we made last year will be rolling into the pool. So those are expected to have higher growth rates than in the full-year pool of same-stores.

Hey Nick, this is Joe. Maybe just to add to that a little bit in terms of MetLife. That goes back to one of the reasons that we had talked about in terms of why we liked the assets that we acquired, meaning that they had less near-term supply pressure. So I think investors are used to seeing MetLife portfolio underperform a little bit relative to legacy same-store. But for Jerry's comments, you are seeing that the MetLife assets that we acquired are right in line with our same-store legacy portfolio. And we will end up breaking that out for you on attachment five, starting in 1Q of 2020 so you can see legacy MetLife, as well as the combined, which is what we guided to.

Okay that is helpful. And then I don't know if I missed this, but can you just quantify what the impact is from rent control initiatives in New York and California on 2020 same-store revenue?

So it is in that 10 to 15 basis points range. I think back in the third quarter, we told everybody New York was 500 to a million range. We did the calculation after that came out is about $300,000 or so. And then you know the other thing that is impacting this a bit is anti-gouging laws that went into effect in California in response to wildfires in the fourth quarter. And a bit of an effect on 2020 as far as short-term furnished rentals in California of a couple hundred thousand dollars.

Okay. Just one last question is going back to 2019, the final number on same-store NOI growth. It looks like you ended up hitting the bottom of your guidance range, and I think you also revised it up a little bit that range in the third quarter. So what happened? It ended up driving you know the low end of the revised range?

Yes, it was really a couple of things primarily. One is we had two significant fires in the portfolio that in October took somewhere in the 40 to 50 unit range out of service for the entire quarter, which drove down our occupancy a bit. Secondly, as I said on the California anti-gouging laws that were put in place from late-October through late-November, it had not only an effect on short-term furnished rental income in the first quarter of 2020, but also some impact in the last month or two of 2019. And we had elevated levels of insurance expense, as well as some elevated electricity costs.

Alright, thanks everyone.

Thank you.

Hey guys, thanks for taking the question. So I guess my first question has to do with occupancy. So this coming year, you are thinking a little bit higher in occupancy. Is that a function of kind of bringing those 40, 50 units back online or is that a little bit of a shift in strategy in maintaining your occupancy by pulling back on rates?

It is really not pulling back on rates. I will tell you, as we get more information on data analytics, the third phase of our platform is data science, and there are a couple of things we have been determined as we have had first looks at this we think are going to allow us to reduce the number of days units are vacant from when a resident moves out to when they move in. Every day we can reduce that is about 12 basis points of occupancy pickup. So it is really more focused on that than anything with playing with rent versus occupancy.

Got it. That is helpful. And so my second question is on your Smart Home initiative. So you guys have gotten around 60% of the homes so far. So can you talk a little bit about your cadence in 2020 and the contribution to revenue growth from the initiative?

Yes, in 2020, our expectation is to add another, call it 7,000 to 10,000 homes, probably most of those would be completed in the first half of this year. So as the earnings come in, the expectation when you look at how much it is going to contribute to that portion of rent growth, call it 60 basis points, when you factor in the follow through from what we did last year as well as the new leases that go into effect in 2020.

Perfect. Thank you.

Hey good morning guys. Just a quick question on NextGen OP and is there an impact to FFO and then you are going to capitalize certain parts of the total costs? Or can you just walk us through sort of the accounting there and maybe how much of the amortization of certain expenses that is hitting FFO and just break it down that way really quickly.

Yes, hey Rich, it is Joe. So in terms of the, call it $30 million that we have laid out for expenditures for the platform that is being spent in 2019 and 2020, we ended up capitalizing that and depending on the actual investment it typically averages out to about five to six years of amortization. So once that is prepared and ready to be put into service, we start the amortization period, which is really starting to kick in here in the first quarter as we bring more of the process or project online. In terms of the impact, it starts out at call it between one and two pennies this year and ramps up to around two pennies on a go-forward basis until it burns off and - through it also, say non-cash impact is just non-OREO depreciation that works against us from a FFOA points perspective.

Got it. Okay. Thanks for that Joe. And then maybe just a little bit bigger picture question, as we contemplate 2020, if you had to pick one or two factors maybe across supply, growth, job growth, or changing customer preferences as we think about maybe a move out to the home purchase and things like that, you know, where do you think the biggest risk to your forecast could be at this time?

Yes, I think more so on job and wage front. I think on the supply side, we have a pretty good handle in terms of where we are leveling out there in terms of supply being flat to up 10% in our markets. On the irrational pricing front, we really haven't seen any on a market-wide basis. Of course, some of that is taking place on a sub-market specific basis. So, I think we have a good handle on the supply front. The demand front is where we would be more concerned, either to the upside or downside that could drive pricing power in either direction. But obviously, the jobs report the last couple of months have been fairly strong; wages have been strong, power have been strong. So, we feel good about it at this point, but that is probably the bigger variable for this year.

Got it. Thank you Joe.

Thank you. Just to clarify the same-store results that you have this year. So, it sounds like the quarterly results will be higher than the full-year figure just given the acquisitions from last year being added to the pool. And I was wondering if you could just quantify what that difference may be if you averaged the quarterly versus the full-year?

I don't have that number right in front of me. We will probably have to give you a call back with that unless Joe has it.

No. We will come back to you on current quarterly impact, but you will probably see between 10 and 20 bips pickup between quarterly pool and full-year pool as we move throughout the year.

Okay. It has been a couple of months since the press reported your interest in the multifamily portfolio, and it's not included in your guidance. Can you describe the current situation regarding your involvement with that deal?

Hey John, it is Joe. Obviously not going to make any comments on rumors that are out there in the market. So, don't think we are in a position to talk on that front. I guess what we would say is generically when it comes to external growth and capital deployment. We have laid out a pretty clear set of parameters by which we have operated and tend to continue to operate, be that making sure we get near-term FFO growth and accretion. Make sure that we are match funded, leverage neutral, risk neutral. And making sure the assets we looked to acquire have NOI and platform upside to help drive some of that accretion. So, none of that has really changed. The other piece with external growth to think about is we have talked in the past about development pipeline where we want that to trend towards. We spent most of the cycle at a billion plus. We have talked about getting back to 2% to 3% of enterprise value. I think when you look at the current pipeline of $300 million plus land that we have and opportunities that we have internally, I think we have a good path to get back to that. So, let's get the comment so we can make an extra growth at this time.

Okay. understood. Thank you.

Good afternoon guys. Jerry, when you guys did your budgeting for 2020, what market has the widest bands between the likely top and bottom in terms of possible outcomes on same-store revenue?

Probably Seattle. Seattle is one every year you look - projected to have significant supply impact. But job growth always seems to come in and surprise to the upside. We also have been very adept in recent years to push through and get high penetration levels on our other income initiatives. But, it is one of those, I can tell you, for example, in Redmond, we have one asset, there are a couple thousand units coming online there. Right now, we are not feeling as much of an impact from that as you would have expected. So it is just interesting to watch, especially on that East side of Metro Seattle, their ability to both take supply, but because of the significant job growth that you see in places like Bellevue, Redmond, and Kirkland, that it gets absorbed so quickly at such a high rate. This past quarter, our Bellevue assets had revenue growth of 5.2%. Now, you look at Amazon, which has jumped across Lake Washington to there. And they have 2,000 jobs in Bellevue today, going to increase it by another 2,500 by the end of this year, and I believe they have taken well over 3 to 3.9 million square feet of space that could accommodate eventually 25,000 Associates on that side of the lake. You compound that with other tech companies that are coming over into the East side, whether it is Facebook, Microsoft, expanding their campus, Google, things just feel very strong. So that would be the one that I would say probably has the widest variants followed by San Francisco; we have told you, fourth quarter we began to see or feel the impact of new supply both in Soma as well as down in Santa Clara. San Francisco is another market that if you don't feel a rational pricing, and we are not feeling it yet today, that job growth and its quality job growth can absorb those units very quickly. So that is another one, I would say that can surprise to the upside.

Okay. And then when you guys look at supplying your California markets over the next, whatever, 18, 24 months or whatever, you guys have good data on. How much of this stuff has condo maps? And do you guys expect that the various legislation and ballot initiatives in California are going to make condo projects and or conversions more attractive, which could also help a little bit on the supply side on the rentals?

Hey Rob, it is Joe. So when we look at our supply when we track the permitting data that is out there, and say California generally is probably one of the markets that has trended lower from a permit activity. So, over the last three to six months, you have seen permits nationally tick higher, really is led by more of the Sunbelt markets and a little bit on the East Coast. But West Coast has been looking better. As it relates to the condo mapping, we have not gone to that level of detail to figure out how much of that supply or permit activity is related to that. So really no comments on that front.

Okay. Because presumably your high rise stuff in these West Coast markets is the stuff that where you have supply coming online is probably the easiest to do condos, right? I mean, and so some of your supply if you are going to get hit with would make the best condo conversions or condo sales just right out of the box. Is that right?

Yes, potentially.

Hi guys, I just have a few DCP questions for you. What are your expectations for Alameda point block?

Wes, this is Harry. Right now we have a land loan in this project that we have had for a couple of years. The land loan matures at the end of March. The developer continues to work through final pricing and in the like; we have an option upon satisfying certain conditions to provide sort of permanent DCP and that, but we are not at a position yet to be able to comment on it.

Okay, a potential expansion may happen; would that be a potential assumption there?

Wes, this is Toomey, certainly, that would be one consideration. We will look at what Harry highlighted when the numbers come in, but what we are excited about Alameda is in August, I believe the Ferry starts its operations and so that whole corridor is going to be activated and we like the price point relative to the markets around it. So I think it is going to be an area to keep your eye on. And we are hopeful we can find a deal inside of that.

And Wes, I guess that the project itself has made tremendous progress in terms of infrastructure, in terms of road now connecting the rest of Alameda to the waterfront. The first market rate apartment project has started construction, and the first two town hall water sale projects have started construction. So it has now turned into a real viable project at this point.

Okay. And then looking at Brio, could you just bought that asset today and done the lease-up yourself, it looks like, you know, you guys would do a much better job on the lease up than a developer. So how would you think about that versus doing a secured loan for a year?

Wes, this is Harry. So the structure is that we funded $115 million at 4.75% with an option to acquire the property one year post TCO, which will happen sometime next year. UDR, if we are managing the lease-up, we get some significant operational synergies on this, and the structure allows us to mitigate lease-up dilution while still managing the lease-up. It gives us a fixed price option next year. We fund 75% of the purchase price today. Now we have done business with this developer in the past. We like the asset and location.

You know, what I would add to that. Harry said we get synergies just to let you know this deal is in Bellevue. I just gave you an update of all the positive things happening over in Bellevue, Kirkland. But, what makes this deal more enticing to us is it is contiguous to two additional phases of elements, buildings that were built by the same developer. We will have price differential between Brio and the 10-year and I guess nine-year-old product that it will be run with. But series said you will get synergies, we think we will be able to run meet this property on stabilization, maybe one extra person in the office and one extra person in maintenance. So, quite a bit of a benefit being located right there and being able to lay on our operating platform.

Yes. It makes a lot of sense. Thank you.

Hi good morning. Jerry, you mentioned that you plan to turn the focus back to revenue initiatives in 2021. You will still be reaping the benefits, I guess from the expense efficiencies over the next three years, but can you give us a sense of what those new revenue initiatives are that you are exploring and the potential magnitude of that opportunity?

Hey Austin, this is Toomey. Maybe I would step back and I will get to let Jerry answer that question, but a couple of things come to mind. And you know, I have been at this 25 plus years and I have seen over that trend developments, excuse me, investors focus shift away from development capabilities, to consolidations to market mix to the last five years has probably been around revenue. But our strategy and our view has always been that long-term value creation, share price appreciation comes from cash-flow growth. And you have got seven companies today that are really good and you can see it in the convergence of our revenue on top of each other and very little differentiation. But ultimately, starting in 2017 we started to look at it and say, where is our customer going, where is our margin going because mature businesses eventually arrive at that conclusion and after 2017 concluded and started implementing in 2018 our operating platform and whether you have a billion of revenue or three billion, 100 to 300 basis point margin expansion, it is a heck of a lot of value on the table. And I'm really happy that we are after that you can see our progress that Jerry and the team are reporting on that front. And I think the best days lie ahead. But when I look back at the last years, one thing I'm struck by is in 2018 we grew cash flow 6%, 2019, 6% and 2020 at the midpoint 6%. I would like to keep that trend goal and I think what Jerry and the team are all working on with respect to the initiatives in the platform certainly are going to be the biggest driver of that going forward. So, I think the industry is arriving at a new door of opportunity. We are all going to go through it. There is no doubt in my mind about that because our customers already stepped through that door, and how we implement it and the speed at which we implement it will be the differentiating point. But you talked about revenue potentials off of the platform. I will kick it back to Jerry and let him talk about where he is headed.

Yes, I mean I answered some of this earlier. But when we look at the data science component of the NextGen operating platform, I would tell everybody here that is got first glimpse of it, it has gotten pretty excited. We see opportunities to better price our homes when you can see things spatially through heat maps, opportunities jump off the page at you and you can identify and really quantify where there are opportunities that you were missing when the information was either in a spreadsheet or just not quite as visible. The other thing I think we are going to be able to do much better job on is improving resident retention, as we are able to accumulate more information about our residents and where the best place we can go acquire those residents in the future. I think it is going to help us drive down turnover, increase retention. And, I think we are also going to be able to gain more and more data, comparing communities to each other and find best practices to reduce the time it takes to reoccupy homes or the way we always say this is to reduce the number of vacant days. So, I think what you are going to see is most of it is going to come on the true occupancy and rent side, not other income initiatives that we are going to find through this data science.

That is helpful. I appreciate all the commentary and thoughts there. And I guess that kind of goes a little bit into the next question, given the ability to acquire market cap rates and generate upside and cash flow growth. At this point, your acquisitions though, have been largely one-off more surgical opportunities over the last couple years and spread out fairly well geographically, but just wondering if there are any markets where you feel like you are significantly underexposed or under-indexed to, that you would like to take a little bit more of a concentrated run at potentially through a larger transactions or a series of one-offs.

Hey Austin, it is Joe. I believe our diversified strategy continues to evolve in terms of when we invest capital. Over the past 12 to 18 months, we have been active along the East Coast and in the Florida markets, as we discussed regarding Brio in Seattle. We would like to be more engaged in certain areas, but we are assessing the risk-reward dynamics and the relatively compressed cap rates we encounter there. Therefore, you can expect us to maintain our diversified approach, optimizing our investments to pursue opportunities for increasing net operating income across our platform.

And I would just say, there is a lot of opportunity when you think about our footprint today and buying the one next door, buying the one down the street. We don't lack for an opportunity set; we just have to be very disciplined about making sure that we accrete create the value and not the seller. And so we are going to stay focused on what we have been doing and it has worked.

Understood. Thanks guys.

Hey guys. Hey Joe, I think this might be a question for you given it is maybe a little bit of a guidance question. But it sounds like you guys are getting much, much smarter on your NextGen OP big data. So I'm wondering as we think about that 3.4 full-year NOI guide, how are we supposed to think about that cadence? Is it still very time to peak leasing season? Are we supposed to think that as you get smarter and more efficient that we are going to start to see some acceleration in the back half of the year?

Hey Rich, it is Joe. We have traditionally not provided quarter-by-quarter guidance as it relates to same-store. So, probably not going to start at this point, we would provide a 1Q FFO guidance. So probably going to leave it at that. And then you will see the cadence develop throughout the year.

I figured I tried Joe; I'm not asking for thoughts. But I figured I tried. Understood, understood. So coming back to the development. I think we have chatted in the past that maybe that could get up to $500 million versus a $1 billion at the peak. So I think you have referenced some land deals are starting to pencil out a little bit more. Can you just walk us through what is driving that increase in development potential?

Maybe just some quick historical context. Maybe here Harry will jump in too. We had been at a billion plus for most of the cycle, so we have been very disciplined around making sure we get that 150 and 200 basis points. We haven't been focused on maintaining it at a billion at all costs. So you saw that billion shrink to zero from the 2016 to 2019 timeframe as deals were completed. At this point in time, we have been working on land for quite a while. You saw the Denver parcel that we acquired last year. You saw the Union Market deal in DC that we acquired last year, both of which have been worked on for an extended period of time. Today, we have the $300 million pipeline across three deals. Union Market is not in the active pipeline as of quarter-end, but we expect it to be shortly. That is about a $140 plus or minus deal. So that will take the pipeline up. In addition, the Vitruvian to the MetLife transaction, where we had Vitruvian West 1 and now West 2 in the pipeline. We have been getting good deals with those on the mid-sixes. And so we have Vitruvian West 3 that we think will be able to move forward with here in short order. So that will get you back to that plus or minus a half billion; I think, depending on circumstances, cost of capital, and opportunities, that probably ticks a little bit higher than that in the 2% to 3% range of enterprise. So call it $500 million, $600 million, $700 million, $800 million. But that is easy to fund when you think about the cadence of it, and the free cash flow that we throw off of $120, $150 a year, the leverage capacity that we have each and every year. And then the dispositions that we typically put out there as normal course business. So definitely not anything insurmountable from a funding standpoint.

Got it. And just for clarification, this is in addition to and not in lieu of the CDP program, right?

It is standalone, so when we talk about $500 to $700, that is typically ground-up, consulted at development that we are speaking to. When you look at DCP, we always traditionally throw out there kind of the $300 million, $350 million, $400 million type of number, of which we sit in the high 2s today, we have some capacity to add there as well.

Got it. I'm sorry for the confusing question. What I really meant was you wouldn't be reducing development capital program to increase development; it would be development increasing while the development capital program stays where it is, maybe even increasing a little bit more.

Correct.

Hey good morning out there. First just a congrats to Warren, so well done. So two questions Jerry on the Smart Home technology front. In answering one of the earlier questions you mentioned the revenue opportunities, occupancy and expenses, you know, the expenses I get, obviously you guys had talked about personnel retention, being able to retain your better employees and not have to go through the people cycling in and out. But as far as occupancy and rent, you know, you guys are like 96% plus. You know, the industry has had yield star or LRO any number of the pricing systems. And you said that this really isn't about driving other income. Can you just elaborate more where the Smart Home - I get it on the operational, on the expense side, but where on the revenue side if you have had really good occupancy and you have had really good rent growth through the system is where the Smart Home will help you grow on the revenue side?

On reality Smart Home, we get a rent increase at a new lease terms, call it that $20 range. We do think there is efficiency that we gain either through our maintenance people, our prospective residents being able to do some kind tours and be able to utilize the Smart Homes. Implementing leak detection devices drives down RNM as well as insurance costs. But I don't foresee Smart Homes are going to drive occupancy. I think there is that rent pickup that you get as you add that amenity that again allows a lot more flexibility for entering your apartment, dog sitter or somebody like that have access to it. But when we look back as we have installed these Smart Homes and look at what our market rent has done in those communities from the time before we installed till after we are comfortable that we are getting that $20, $25 pop in rents.

Okay. And then, Joe, just the perfunctory rent control obviously the latest from Albany is if they are looking at CPI plus three, which is, you know, light better than the CPI plus one and a half, but still obviously would not be a positive thing. Maybe you can just give your latest thoughts on what will happen in Albany and then also how that is affecting you guys looking at New York City, if you are still actively looking in New York or if you are interested in the region is now exclusively in the suburbs.

Hey Alex. So maybe just to clarify on Albany, you may have more information than we do on this, but I think the way we looked at it, it was the greater of CPI times 1.5 or 3%. So it seemed like they were setting a 3% floor on renewals, but you still have vacancy decontrol. So, just want to clarify that. So if that is the scenario and you still have vacancy decontrol, you still have the upside on news and you get 3% renewals as a floor. It is not what we would ideally like to see. You know, we would like to see a more constructive discussion around public, private partnerships, up zoning densification, less regulation, things of that nature. But it is a factor that plays into our thinking when we are thinking about New York City and allocation there, as well as the broader region as well. It goes into a qualitative factor but that is pretty consistent nationally as well. You know, we are seeing increased activity nationally, and so it goes into our thinking everywhere, but that is why we like to diversify the platform that we have.

But would you still consider buying in New York or you are more focused on Jersey?

We would still consider New York. We would consider New Jersey as you saw with One William last year. New Jersey also is talking about CPI plus 5% I believe. So, I think there are a number of markets out there that are looking at that. So we will take into account each time we look at a transaction.

Hey guys thanks. First, I want to touch on capital allocation. Given your track record, very good operating ability and capital costs, both on equity and debt that are favorable. Just maybe could you talk about why the acquisition or potential acquisition outlook in your guidance was pretty light and also, if you have anything you are potentially looking at right now, that would be great.

Hey Neil it is Joe. In terms of guidance, historically, our practice has been to not guide a speculative activity. If you go back to our guidance last year, clearly, we surpassed that from an acquisition standpoint, we were able to find creative opportunities and match fund those with well-priced equity and debt. So the acquisition guidance you see there on attachment 15 is the $140 million. That is really just for Slade channel side that we announced, as well as the buyout of our group joint venture. So going forward, we will continue to do what we have done over the last 12 or 18 months, which is, look at the pipeline try to find opportunities that can drive additional upside as we did this year and drive more earnings accretion and growth. And if we can do that, we will figure out where to pivot towards in terms of the source of capital. I did mention that we have $300 million of assets in the market today. So, generally normal course business for us, but we have a pretty diverse slot of markets and cap rate rentals that we are looking at. And we like the feedback we are getting so far. So we are looking at that as well as a source of capital.

Okay. But you can't - I mean, you are talking about $300 million of assets on the block. But I mean, in terms of the pipeline or the pool of assets that are potential acquisition candidates, I mean, has that trended higher just in terms of how the market flows or your cost of capital?

I think back in November, the pipeline had slowed down a bit. However, I don't know if you attended NMHC recently. It’s usually around this time when we see an increase in market activity. Typically, the pipeline begins to grow at this point, so we anticipate more deals entering the market. Nevertheless, we will maintain discipline regarding the criteria we need to meet and will not just pursue acquisitions merely to take advantage of our cost of capital.

Okay, thanks. And the other one for me is could you just talk about your outlook for supply in Northern California and Seattle? The data vendors, there seems to be a fair amount of disconnect between data vendors. What ethics this talks about? I'm just wondering what you are seeing in those markets or what you expect to see for 2020.

I think when you look at both Northern California and Seattle, when we look at third-party data, permit data in terms of the regression approach that we take and then talking to individuals on the ground, as we work through our budget process, both of those markets are expected to be up generally. Seattle is a little bit more flattish at a market level. San Fran overall probably a little bit more first-half weighted depending on the slippage that we see there. And then when you flip over to kind of the longer-term look, and think about what we would see going forward, the permitting activity in Northern California has dropped off quite a bit more over the last three to six months versus where it had trended. Whereas Seattle has remained a little bit more static.

Hey guys, thanks for taking my question. Joe, maybe this one is for you. You mentioned your balance sheet or your leverage is at 5.8, if I calculate the full run rate of cash flow, the JV deal you guys closed in the fourth quarter? At 5.8, if you were to acquire something that is a $2 billion portfolio, I'm not saying it is the Matt Kelly one or not. But if you were to take down a deal like that. How much more could you lever up or what is the appetite to lever up, if you have an opportunity like that, that makes sense? And is the current leverage kind of inhibiting you or driving you to not make those decisions, because of where it is?

Maybe it is good to just kind of layout what we communicate in the past in terms of the goals on the balance sheet. We have talked about five to six times debt to EBITDA, fairly consistently, and our desire to stay within that range. The plan calls for that. So I guess if you say, on a justice basis, we are at 5.8 times, I guess you could say that we have the ability to lever up point two times to get to our plan or stay within the range we have laid out. So we really don't have any intent or desire to lever up at this point in time. We like being the solid BBB plus, BAA1, like the cost of capital that affords us. And we have really been focused beyond debt-to-EBITDA on a lot of other metrics, i.e. fixed charge free cash flow, duration for three year liquidity, et cetera. So in totality, I think it is important to take a holistic approach to thinking about the balance sheet. Not just walking in on that debt-to-EBITDA metric, which did tick up, but obviously due to one-time issues related to MetLife time and so I wouldn't say you should expect us to lever up for transactions.

Got it. I guess maybe taking in a slightly different way. If it was to be an attractive deal out there that required a lot of capital, you would need to also have the cost of equity to kind of take it down, because as you mentioned, your balance sheet only allows you to 0.2 times?

It is either an attractive cost of equity or we have dispositions. We have free cash flow, we have other levers to pull as we look out over the next two to three-year business plan. So it is not always cost of equity when multiple sources of capital they tap into.

Hey I guess good afternoon. I guess most of mine have been asked, but I have got a couple of market-specific questions. First on the Boston Market. A market that you guys have outlined you expect to grow at a pace better than the overall portfolio assets. A market that is expecting to see a lot of supply come online this year. So just curious and by the way in the urban core, where I believe you do have a number of assets. So just curious what gives you the confidence for that kind of statement facing that kind of supply? And then maybe some comments on the lease-up over at Garrison?

Hey Haendel, this is Jerry. I think we can agree that there will be supply pressures downtown, which we have already experienced at Seaport. In the fourth quarter, Pier 4 saw a revenue growth of just 2.1%. However, our properties in the North Shore and Southport should face less supply pressure and perform better. It really depends on the specific assets being evaluated. The only property in our same-store pool located downtown is Pier 4 for full-year same-store comparison. Again, we acknowledge that there will be supply downtown, but it will be lighter in the suburbs, especially for some of the B products we have in the North Shore. Garrison is performing well, currently 82% to 84% occupied. We have completed the renovation of the amenity building associated with that project. We expect to re-engage on unit turns in the next couple of months, and while we are leasing amidst considerable new supply, the location in the Back Bay remains highly desirable. As construction wraps up in that small area, this asset is likely to be very appealing.

I appreciate that. Jerry, what type of spread are you projecting or as you think about the revenue outlook for Boston in terms of the urban versus suburban?

Spread between those is, I think it is about a 200 basis points.

Hey John, are you there? You might be on mute. Operator, do we have anyone else left in the queue?

Thanks a lot for the time. Harry, hoping you could describe for us on the DCP front and a bit intense year-end. Just last three to six months how the competition has fared one way or the other?

Sure, John, I think you have seen supply has been relatively stable. There continues to be demand from developers. There is also additional competition from a number of debt funds. It has been the same the past 12 or 18 months; we are continuing to find opportunities that sort of fit our parameters in terms of the assets that we want to own long-term. They fit our return hurdles. You saw us close a deal in Oakland last year. We have others that we are looking at as we look to not only backfill our historic pipeline, but also add incremental.

As the pricing within that solid deal flow, has the pricing on deals become more competitive?

I think there are circumstances where it has been. Again, just as you have more players in the space. But the deals we are doing, we are underwriting a consistent IRR. We are always looking for deals that fit our parameters. So our expectation is that the transactions we enter into the returns will be very consistent to what we have done historically.

Well, a quick closing. I want to thank you for your time and interest in UDR. Clearly, you can hear that we are excited about 2020 and certainly our future beyond that. We have the right team, the right plan. Just look forward to executing on it. And we look forward to seeing many of you in the conferences in the near future. Take care.