UDR Inc (UDR) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the UDR's third-quarter 2013 conference call. During today's presentation, the lines will be a in-listen only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions).

I would now like to turn the call over to Chris Van Ens. Please go ahead.

Thank you for joining us for UDR's third-quarter financial results conference call.

Our third-quarter press release and supplemental disclosure package were distributed earlier today and posted to our website www.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg-G requirements.

I would like to note that statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in this morning's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-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 our President and CEO, Tom Toomey.

Thank you, Chris, and good afternoon everyone. Welcome to UDR's third-quarter conference call. On the call with me today are Tom Herzog, Chief Financial Officer, and Jerry Davis, Chief Operating Officer, who will discuss our results, as well as senior officers Warren Troupe and Harry Alcock, who will be available to answer questions during the Q&A portion of the call. My comments will be brief today.

First, we had a good quarter in all aspects of our business, and feel great about the balance of 2013. Jerry and Tom will cover the details. Second, we remain focused on executing our three-year strategic plan. With the first-year nearing completion, we are on track, or ahead of plan, on all fronts. Our three-year plan is focused on growing cash flow, NAV and dividends, while continuing to improve the balance sheet and portfolio quality. As we look towards the future, we see an economic environment, and supply/demand fundamentals in our markets that confirm our view that our three-year plan remains the best course. Our team remains highly focused on successfully execution of this plan.

Looking at the drivers of our plan, as you are aware, the vast majority of our cash flow comes from the operating platform. Over the past six plus years, we produced same-store revenue growth in our markets that place in the top third of the peer group 60% of the time. This success has been achieved through Jerry and his team's unwavering drive to consistently improve our operating processes through the advancements of our technology platform and, of course, the hard work of our community teams. We have a development/redevelopment pipeline of $1.2 billion. Of our $1 billion in development that remains under construction, 30% will be delivered by year-end. Overall, we are meeting or exceeding our expectations, and I'm grateful to Harry and his team for their foresight to get these communities under way in 2010 and 2011. We continue to see favorable development opportunity in our core markets.

On the balance sheet front, we are executing on-plan and expect that our balance sheet metrics will continue to improve through cash flow growth from our development/redevelopment pipeline. Our portfolio quality continues to improve. Revenue per home has increased dramatically over the years, and we have a good mix of markets and A and B-quality communities. We will give you full 2014 guidance and a full update on the three-year plan on our February 2014 conference call.

Finally, I would like to thank all of my fellow associates for their hard work in producing another great quarter. With that, I will turn the call over to Tom.

Thanks, Tom. The topics I will cover today include first, our third-quarter results, second, Hurricane Sandy insurance recoveries, third, a balance sheet up date, fourth, an update on our development pipeline, and last, our fourth-quarter and full-year 2013 guidance.

I will begin with our third-quarter results. FFO per share was $0.37, inclusive of $0.025 of final settlements of Hurricane Sandy insurance recoveries that resulted from damages and business interruption incurred in 2012 and 2013, none of which was contemplated in our previous guidance. Our FFO as adjusted per share was $0.36, inclusive of $0.01 of Hurricane Sandy business interruption recoveries incurred in 2013, which offset lost commercial rents of the affected properties. The $0.36 of FFO as adjusted exceeded our Q3 guidance at the midpoint by $0.02 as a result of the $0.01 of Sandy recovery, and an additional $0.01 of miscellaneous timing items. Third quarter AFFO per share was $0.31, which also exceeded our Q3 guidance at the midpoint by $0.02. Next, in September we reached final settlement of our Hurricane Sandy claims. In total, we recovered $27.5 million of $30.4 million in damages and business interruption losses. We are pleased with this outcome.

Moving on to the balance sheet, at quarter-end, our financial leverage on historical cost basis was 39%. On a per-value basis, it was 30%. Our net debt to EBITDA was 7.0 times, which is also approximately where we expect to end the year. These metrics are consistent with the three-year plan expectations set forth at the beginning of 2013. Moving forward, we will continue to gradually de-lever the balance sheet through non-dilutive means, while targeting DDD+ credit metrics. As previously announced, in September we issued $300 million of 3.7%, seven-year unsecured debt, and those replaced debt that matured earlier in 2013 and the proceeds were used primarily to pay off our revolver. From a liquidity perspective, our balance sheet is in good shape, with $1 billion of available funds at the end of the third quarter, consisting of cash and credit facility capacity.

Turning to our development projects, we expect to deliver approximately $290 million in developments, a 30% of our active pipeline during the fourth quarter of 2013. As Tom mentioned in his earlier remarks, our end-progress pipeline should be solidly accretive to earnings and NAD when comparing current and trended yield expects against market cap rates, and our cost-to-funds. We continue to estimate these developments will, on average, deliver a current trend of spread of 150 to 200 basis points. As of the end of the third quarter, there was $320 million left to spend to complete our current $1.1 billion pipeline. As detailed on attachment 11 of page 23 of our supplement, we are actively in process of reloading our development pipeline with a number of projects. We expect to announce a new start or two later in the fourth quarter or early first quarter of 2014. Additional starts can be expected as 2014 unfolds. Plus, development continues to represent a very positive risk-adjusted use of capital.

On to 2013 guidance, we are raising our full-year FFO, FFO as adjusted, and AFFO per share guidance adjustments to $1.43 to $1.45, $1.38 to $1.40, and $1.22 to $1.24, respectively, to reflect to the Sandy-related insurance recoveries previously discussed. Our same-store guidance is also increasing, with full-year revenue now expected to grow 4.75% to 5%, expenses 2.75% to 3% and NOI 5.75% to 6%. Additional guidance assumptions can be found in attachment 15, or page 27, of our supplement. For the fourth quarter of 2013, we are providing FFO, FFO as adjusted and AFFO per share guidance of $0.34 to $0.36, $0.33 to $0.35 and $0.29 to $0.31 respectively. During the quarter, we paid a quarterly dividend of $0.235 per share, or $0.94 when annualized, our 164th consecutive quarterly common dividend paid. Lastly, we will provide 2014 guidance and a full update of our three-year strategic plan during our fourth quarter call in February.

With that, I will turn the call over to Jerry.

Thanks, Tom and good afternoon, everyone.

In my remarks I will cover the following topics. First, third-quarter operating results. Next, fundamentals in our largest core markets, as well as recent A versus B performance in our portfolio, and finally, a brief update on our development lease ups, redevelopment projects. We are pleased to announce another strong quarter for operating results. In the third quarter, same-store net operating income grew 6%, driven by 4.9% year-over-year increase in revenue, against a 2.6% increase in expenses. Our same-store revenue per occupied home increased by 4.7% year-over-year, to $1,490 per month, while same-store occupancy of 96.1% was 20 basis points higher year-over-year. On a total portfolio basis, including our pro-rata share of joint ventures, revenue per occupied home was $1,640 per month. Sequentially, third-quarter same-store net operating income declined by 10 basis points due to normal seasonality.

Turning to new and renewal lease rates, in the third quarter, effective rental rate on new leases at our same-store communities increased by 3.7%, while renewal rate growth was strong at 5.5%. San Francisco, Seattle, Boston and New York remain vibrant, while the mid-Atlantic region struggled. As a reminder, new and renewal lease rates and turnover by market for the third quarter, are available in our supplement on attachment 8G. Annualized turn over in the third quarter increased by 160 basis points year-over-year, but was still 50 basis points lower on a year-to-date basis. The third-quarter increase of the results initiative over the past year, to move more of our 2013 lease expiration into the third quarter, which exhibits better demand characteristics than the first or fourth quarters. Rent as percentage of our tenants' income held steady at roughly 17%. Move out to home purchase was the same as third-quarter 2012, at 12.7%.

Expense growth was 2.6% higher for both the quarter and year-to-date, as real estate tax pressures were offset by reductions in repairs and maintenance expense and marketing costs. Making our service teams more efficient, which enables them to do more work in-house, has been a top priority. We've seen positive results from this.

Next, some remarks on our primary core markets, forward of contribution to NOI. New supply in Washington, DC stands to more directly affects us here in the middle of the third quarter. However, we still see blended rental-rate growth remain positive in the fourth quarter. San Francisco remained strong despite some typical seasonal slowing. We are seeing good demand in the city proper, and our Mission Bay development is pre-leasing very well. Orange County employment growth is improving. Our results are getting better in this market after weaker first-half 2013.

Downtown Seattle has the supply coming in, a job growth seems to be absorbing. Bellevue may still be the best top market we have right now. As mentioned last quarter, New York is fully recovered from Hurricane Sandy, which is evident in the strength we saw in rental rate growth and occupancy during the third quarter. Finally, Boston has been one of our better markets in 2013, but it is entering it's seasonally slower period. Still, we expect this market to remain well above average as we look into 2014. Dallas is generating significant jobs right now, but also a lot new supply. We're not seeing a major difference between our North Dallas, Addison, or uptown product with regards to demand, and it continues to be a good market for us.

Moving onto performance of our core A and B communities. In the third quarter, As -- Bs, excuse me, outperformed As in our core market for the first time since we began tracking the data a couple of years ago. However, the disparity was not as large, at 4.9% blended lease rate growth for Bs, versus 4.6% for A. I want to remind everyone that while we have moved our portfolio toward the heavier mix of As over the past decade, our core market A-B mix is still roughly 50-50. This inflection point in the lease rate -- lease growth, is likely due to our lower quality properties not competing is directly with new supply in our higher-quality communities and the easier growth comps Bs have versus As. At the market level, this dynamic was evident in Washington, DC, Austin, Dallas, Orange County and San Francisco during the quarter.

Turning to our development/redevelopment programs, which are highlighted in attachment 9 and 10 of our earnings supplement. During the quarter, we completed the sale of 520 homes on $70 million in incremental spend. Lease ups at Bella Terra and Huntington Beach, Channel and Mission Bay and San Francisco, and 13th and Market in San Diego, are tracking well had of initial underwriting expectation at this point. Most of the lease ups in Mission Vallejo and Domain College Park, across the street from the University of Maryland's business school, are achieving lease rate and closing ratios in line with our underwriting expectations. The Orry at the Trivian Park JV is achieving the rental rates we expected while leasing units at a slower pace than anticipated. Finally, Capitol View -- our only completed project at this juncture reached stabilized occupancy during the summer, roughly 9 months after welcoming our first residents. All in, we are quite pleased with how the lease ups are progressing.

Moving onto redevelopment's, during the quarter, we completed the redevelopment of 209 homes on $22 million in incremental spend. Both Rivergate and 2775 Mesa Verde are generating renovated-home rent increases in line with our initial expectations. As a reminder, additional details regarding quarter-end lease and occupancy percentages for both development and redevelopment can be found on attachments 9, 10, of our earnings supplement.

With that, I will open it up for Q&A. Operator?

(Operator Instructions)

Derek Bower with ISI Group.

Jerry, just wanted to follow-up on the A versus B performance. Can you talk about what that spread was, in the DC market specifically?

You know, I don't have it in the DC market. I've really broken down DC more between submarkets, and what I can tell you is our weakest submarket in DC, right now, is the product we have in suburban Maryland. We are doing a little bit better when you look at the [B D-minus] product. We only have one of those within the city, where we had revenue growth north of 5%. But most of the product inside the Beltway is fairly close to the 3.3% revenue growth we had. When you go outside the Beltway, it's about the same, except when you get into supply-impacted areas such as Woodbridge, for us.

I did see your call note this morning where you were asking about the effective rent-stabilized homes in DC. I did want to address that. We really only have -- we only have one asset in Washington, DC, that's rent stabilized. It's called Waterside Towers. They represent about 13% of the total revenue in Washington, DC. It produced 5.4% revenue growth. If you take that out of our DC portfolio, we still would have had revenue growth at 3.9%.

Perfect. Great. Thanks.

Just going to the reduction for the development/redevelopment spend for the year. Can you just speak to -- is that reduction cause for a reduction in attractiveness in rates? Or are you being less aggressive with deploying capital, as I assume you are still not going to issue equity below NAV at this point?

Derek, this is Tom Herzog. It has nothing to do with performance or access to capital. It's all due to timing. As I think you know, we've got one or two starts we are expecting in the fourth quarter of 2013, and then more in 2014. So, this is all just timing.

Got it, great.

Just last one. There was a pretty large pop in the Sacramento same-store performance. It sounds like you guys may be actively marketing that according to a couple publications. So, can you talk about the performance of those assets and the timing of dispositions and how that might affect capping -- cap rate pricing? Thanks.

This is Jerry. I will take the performance, and then I'll turn it over to Harry to talk about the transaction activity.

I would remind you, first, Sacramento represents 1% of our total NOI. So, it's small. We've always been looking to exit that market for the last several years, when the timing was right.

I can tell you, I think fundamentals in that market have improved a little. There's no new supply. They've added about 11,000 jobs there. I would also add that our team at the two properties we have there is the best we've had in years. What you are really seeing, in that growth, is a recovery over how we performed in the last year or two.

But when you do look at it, it is significant revenue growth, and it's really been pushed not only by some occupancy gain, but also above-average new lease rate growth. The team is doing well. The market has improved. I think it's an optimal time to be exiting the market, because the condition we have those properties in.

I will let Harry talk about the other part.

Jerry answered most of it. We are in the market with the two Sacramento assets. As Jerry mentioned, it is a market that we have always intended to exit. Candidly, from a timing standpoint, selling the property when the fundamentals are positive tends to yield a more positive result.

Great. Thanks.

Nick Joseph with Citigroup.

Going back to DC, how did new and renewal rates trend over the quarter, and where are (technical difficulty) out today?

Hold up one second. Renewals trended throughout the quarter -- July was 5.2%, August was 4.6%, September was 4.3%, and October is 4.1%. And what we are sending out in DC for the next two to three months is probably in that 4% range. I don't have the exact numbers for DC with me.

I can tell you -- when you look at the trending for the total company, same stores, we trended 5.8% renewal growth in July, and then it was 5.4% in August, 5.4% in September. October is looking like a 5.3%, and what we sent out, company-wide average for the next -- in the three months in the 5.25% range. We typically do achieve very close to what we send out.

Okay. Thanks.

Then, in terms of the development pipeline, what construction cost pressures are you seeing today? Could continued pressure affect potential decisions with starting new developments going forward?

This is Harry. First, there's no question costs are rising. The amount really depends on the market and construction type. I think generally, costs are up as little as 5% over the last 12 to 18 months, to as much as 10% to 15%. We do expect cost to continue to rise over the next year, perhaps another 10% to 15% -- 5% to 10%.

Looking forward, rent increases are generally offsetting these cost increases, although, again, that's product and market dependent. We do consider the impact of the increased costs in our underwriting.

As we look at our land portfolio, we are confident that we have a number of projects that we'll pencil in the future. We won't start a new project unless we have 100- to 150-basis-point spread, at least, to current market cap rates, until we have a complete set of drawings, until we have a max price contract with a third-party general contractor.

Great. Thanks.

Jana Galan with Bank of America.

Maybe following up on the construction of the development pipeline, it looks like the scheduled completion was pushed out a quarter for San Francisco and the Alexandria projects. I was just curious the reasoning behind that?

This is Harry. I will talk -- Mission Bay -- the initial deliveries are going to be this quarter as scheduled, but given the high number of deliveries that we had -- unit deliveries in November and December from a construction standpoint, we simply pushed some of these units into January and February. There are no construction delays.

In terms of Delray, the construction is delayed about six weeks from our original estimate. We originally thought the end of Q1. Current schedule shows the middle of Q2. We are confident that we'll meet this revised forecast.

Thank you.

Then, Jerry, if you can let us know -- maybe move outs to homeownership in third quarter?

Sure. It was 12.7%, which is basically flat with 3Q of last year. It's down slightly from 2Q of this year.

One thing we did see is move outs to home purchase were a little bit heavier in the A product than the B product, which you would expect. They're more qualified. Our As were at about 14%. Our Bs were at about 11%. The two markets that we have, where we had move outs to home purchases that were north of 20% of the reasons for move out were Charlotte and Boston, where we have a very high percentage of the portfolio is a A.

Great. Thank you very much.

Haendel St. Juste with Morgan Stanley.

Jerry, question for you. I appreciate your earlier comments on turnover, but I wanted to dig into the SunBelt a bit. We saw a healthy bit of turnover this past quarter in the SunBelt. Can you give us a bit of the story behind the numbers, and talk about the Sunbelt in relation to New York, the West Coast, where the turnover was relatively unchanged? Is the turnover being driven by past waning pricing power? Perhaps a supply concern? Appreciate some context.

Sure, Haendel. I don't think it is pricing power. What I would tell you is, about a year, year and a half ago, we finally came to the realization, after seeing that for multiple years, that pricing power on new leases has a definite seasonality in the apartment sector nowadays, where new leases in the third quarter and second quarter tend to be 300 basis points higher than they are in the first quarter. What we did last year is we worked to move more of our lease expirations from the fourth quarter into those higher lease rate quarters in the second and third.

So, we effectively moved about 200 to 300 lease expirations into third quarter from fourth quarter. And assuming about half of those people renewed, half moved out, that accounted for about 150 more move outs in the second -- in the third quarter than we had last year.

Now, most of those, as you saw, did occur in the Sunbelt markets. What I would tell you is when I look at my month of October turnover, I have 120 fewer move outs in my same-store portfolio in October of this year than I had in October of last year. So, our strategy of being able to re-price those 150 units at more of a 4.5% rent increase rate instead of the 1.4% or so that I'm experiencing today in October, worked.

Got you. Okay.

Just a follow-up to that. Can you share with us the October and November renewals? And then, perhaps, break it out by -- give the Sunbelt numbers, specifically?

Sure. October renewals -- currently, they are running at about 5.3%. In the Sunbelt markets, in doubt, they are more in the Florida and Texas markets, in the 4%, 4.5% range. What gets me up to my 5.3% renewal rate growth in October -- what lifts it is more of my California influence, as well as Boston and New York.

Great.

One last question on taxes. We saw you lower the high end of your expense range. Just curious about your experience on the real estate tax acceptance during the quarter. Is the lowering of the high end of expenses largely reflective of perhaps more successes there?

We got a little bit of success, you know, that we were able to show in the third quarter. And we are hopeful, as we go into 4Q, that we will have more success. But, yes, a lot of that is tax-rate driven.

All right. Thanks, guys.

Nick [Ulico] with UBS.

I'm wondering, on a development side, what, at this point, is holding back starting the projects in LA, San Francisco, and then even looking at the MetLife parcels, which are all in California or Bellevue.

Nick, this is Harry. In each of those cases, we are working through, as we speak, in some cases, the entitlement process. In some cases, we have entitled assets and are working through the design development process to get through to a permit-ready or shovel-ready project. So, it's really just the timing of completing those events that dictates the start dates.

Certain of the projects we are going to be in a position to begin construction the first part of 2014. Other projects are further out in later 2014 or even into 2015. That relates to both the UDR wholly owned projects, as well as certain of the land parcels that we own in partnership with MetLife.

Okay. So, it sounds like some of them are going to start next year, some might wait later into 2015. I guess what I'm just wondering is -- how should we think about that? Because California is already -- fundamentals are doing very well. Is this really going to be another three-year sort of cycle for California? What's the risk for kind of missing starting development in California at a time where fundamentals are so strong?

Nick, this is Tom Toomey. You make a couple very good points. Let me try to provide some clarity.

Within the confines of the three-year strategic plan that we put forth, we identified and said we would spend on an annual basis $400 million to $500 million. And that we would only commence development when we have a GC contract in hand, when the investment as a spread over existing cap rates was 100 to 150 basis points. And that we had a funding source that made sense on an accretive basis, both NAV and earnings-wise.

So, that's the driver behind us making the decision to go forward with the development activity. We will stay within those parameters, $400 million to $500 million on an annual spend.

With respect to markets, looking at the current pipeline of deliveries, you have about 45% that will be delivered probably in the next year, 18 months in California, another 10% in Boston. So, I feel good about the market mix of our delivery and the timing of the strengthening of those markets. I think we will do well on the lease ups of those with Jerry's team, and feel good about that.

Backloading it, Harry's right. We are going through the process on all the other opportunities we have. And as we get them there, and if they meet the return requirements, then we will push them into the pipeline and announce them as they get there. But we feel good about the quality of it, about the returns, about our execution capability, and the size and scope of it, given the size of the Enterprise.

Okay. Thanks, Tom.

Andrew Schaffer with Sandler O'Neill.

Your positive revenue growth in DC was pretty impressive, given your peers have been reporting negative growth. I was wondering if you could highlight anything specifically that you did in order to achieve these results?

This is Jerry. I think, like some of my peers have already discussed, we went out and tried to attack renewals, really 90 days before expiration, to get a better indication of what people were going to do, so we could address notice to vacate more proactively.

I think the other factor that I brought up many times is I think our team in DC is second to none. And I think the locations that we operate in, while they are somewhat affected by the new supply, the exception of U Street corridor and out in Woodbridge, we are not really feeling the direct impact that some of the other multi-family REITs are.

Okay. Thank you.

Secondly, for your Pier 4 development in Boston, I was wondering what the expected average unit size is, and the rents are, for this project?

This is Harry. If you remember, we are not going to deliver first units on that one until the first part of 2015. The average unit sizes in that one are a little over 800 square feet. We expect the rents per foot to be slightly above $4 per foot.

Okay. Thanks. That's it for me.

Rich Anderson with BMO Capital Markets.

So, does the three-year plan, with a fair amount of development involved in that plan, suggest a slower FFO growth model for that -- over that period of time? (multiple speakers) Relative to your peers?

Rich, we've got -- this is Tom Herzog. In the three-year plan, we had indicated somewhere in the vicinity of $400 million to $450 million in 2014 and 2015 -- just the numbers that we've put out. We are not straying too far off those numbers.

We'll have a little bit of a gap in the timing as a result of the starts at the end of 2013 and into 2014. But I don't see it having a marked difference in the numbers that we are running as we look forward in 2014 and 2015 for this particular item. So, we haven't given our three-year strategy for 2014, 2015 and 2016 yet, which we will on the next call, but I don't see this being a major factor at this point.

Okay. If you are out there with a three-year plan, and it sounds like you're going to roll that forward, can you remind us of your image of the fundamental landscape at the end of 2015? And assuming that you had an image and kind of worked backwards to develop the strategic plan, what do you think the market for multifamily real estate will look like from an economy standpoint, a supply, a rent growth standpoint? What's the vision you have?

Well, we set forth the various expectations in the three-year strategy document, with the various economic factors. At this point, given our timing, we are not ready to provide an update to that. We will, in the February call. But we are not going to roll that forward at this point.

I apologize for not having that committed to memory. Is it -- just to put it a yes or no, I mean, do you see the fundamental picture for multifamily extending much further than what maybe the common perception is in the market today? Is this a second or third inning that we are in right now? Give me a just a little color on that end?

I'm going to give you my take, and then I'm going to turn it to Tom Toomey. I will tell you this. As we look to where we are at in 2013 and how we are performing, what our numbers look like, ops, development, balance sheet, et cetera, we are tracking on or ahead of plan. As we look into 2014, I think we have a lot of momentum. We feel good about where it's going.

Again, we are not going to give specific numbers, but Tom, let me turn it to you to see if you might have some things to add.

Rich, certainly I don't think anybody's got a good crystal ball. But our clarity probably would be much of the same fundamentals that we see today, in that you see a steady job growth diet of 150,000 jobs a month. What I think is more importantly is what's the weighting of our markets to that national number. I think our portfolio will perform well versus the national numbers, primarily because of our exposure to tax, energy, certainly import/export markets, and I like our exposure to biotech.

So, I think we've picked the right markets for the right jobs over the next two or three years. I think that will be reflective. I think we've picked the right A/B mix in those markets to garner better than average in performance.

With respect to what's beyond that supply, you know, my guess is we are right in a transition period in the banking industry, with respect to lending, and that's going to have a great influence on the amount of supply. I don't see the swelling of capital or bank lending pattern that's going to indicate that we are going to get in about 350,000 deliveries on an annual basis. So, I suspect we won't see the threat of supply that we have typically seen in the past in these economic periods.

And then, what's the wild card? Obviously, on the finance side you've got the GSE reform question that looms. The fact that they can't even agree on how to run the government probably means they won't change a whole lot in that front. So, I see stability, but not a robust capital environment that leads to a great deal of inflation for asset values. It's probably just going to garner out cash flow growth.

So, on that, I guess, Rich, look at our assumptions. You asked a question about how our FFO growth is going to compare to peers. I don't know what the rest of the peers are forecasting.

What I do know is we are targeting annual AFFO growth in the 8% to 10% -- that's what we put forth in the 2013 plan that we put over the next three years. And we will update it in February if we see it materially change. So, we feel good about the Business. (multiple speakers)

I think part of what is holding down the sector has been this perception that it's good but decelerating growth on a year-over-year basis. Is that the thesis, too, when you look to 2015, that it's good but it's decelerating from one year to the next? Or do you think you can stay in the mid-single-digit type number over the course of three or four years?

To continue to expound upon that, it's going to turn into markets -- the right combination of markets and exposures. I think that that will be what your job is, is to sort through what those individual market dynamics are and how they are painted out.

My view is, is the fundamentals of the Business point to -- and I thought that the guys at Avalon had it right. There's a potential shortage of housing in America from a number of fronts -- from the single family, from the multifamily front. And that we are going to run at a very high occupancy and pricing power is going to be dependent upon job growth and wage inflation. And, so, I feel good about those two dynamics playing out to better than what the expectations are from the street.

We'll see how that dynamic plays out. I think we've got a great operating platform to take advantage of it, if it's there. I'm more optimistic. Have always been glass-half-full type person, and just see a more positive, robust opportunity than maybe what most of people are publishing these days.

I would add to it, Rich, costs go up for replacing these assets. The value of your in-place inventory has to continue to grow if it just costs more to replace it. So, I think the combination of cash flow, cost increases, probably is going to lead to a little bit more NAV growth than people are forecasting at this present time.

Good stuff. Thanks.

Dave Bragg with Green Street Advisors.

First question is on the development yields. If I understood correctly, the 150-basis-point spread that you target, is that untrended development yields versus today's cap rates?

Dave, this is Tom Herzog. We think about it this way -- we think from two ways. It's 100 to 150 untrended, and 150 to 200 basis points trended on average across our development pipeline. So, there will be some at the high end, some at the low end, and some down the middle. That's how we've expressed those.

Okay. So, when we see you start deals later this year or early next year, you'll be looking for 100- to 150-basis-point spread over prevailing cap rates? (multiple speakers)

On an untrended basis, 100 to 150 basis points.

Thank you.

Second question is on attachment. Looking at two expense line items that we think are outside of your same-store expense pool -- property management and other operating expenses. We noticed outsized growth for these items on a year-to-date basis, relative to the same-store expense pool. Can you talk about the drivers of these two lines?

I'm sorry, property management and what was the other one?

Other operating expenses.

The property management, we are going to have -- the Vitruvian is one of the items within that. I tell you what, these items are not included in attachment 5 when you get down to those same-store results, or any of those operating results. Those lines are excluded when you are trying to get to your margins on attachment 5. If that's part of what you are looking at?

Tom, do you mean attachment 6?

No, I think it's attachment 5. Is it 6? (multiple speakers)

Those two lines are not included in attachment 6, same-store expenses?

Yes. That's correct.

Okay. What's driving this 6% growth for property management expense and the 22% growth for other operating expenses on a year-to-date basis?

You know something, Dave, I'd actually have to take a look at that. I can't answer that right off the top. If you give me a call after the call, I will be able to take you through that.

We will follow up. Thank you.

Okay.

Michael Salinsky with RBC Capital Markets.

Tom, just going back to the starts, when should we expect those to be on balance sheet? Are you looking more towards joint venture capital, given where the stock's trading right now, in terms of new developments?

Harry, maybe you want to take that?

(inaudible) It really just depends on the property itself. Some of these properties are owned in joint ventures with MetLife and, therefore, they will naturally be JV properties. Some are wholly owned and, therefore, we will develop them ourselves.

Would you expect to sell any into joint ventures?

This is Toomey. That always weighs in our decision about moving forward is the capital source, and the size and scope of the development pipe -- found an opportunity, but felt that it stretched our capital capabilities beyond where we'd want to go. We'd certainly look at joint venture partner to offset some of that.

We are going to stay in the confines, Mike, of the $400 million to $500 million of our spend on an annual basis, stack the best opportunities we can inside of that number, and weigh capital as one of those alternatives.

Okay. Fair enough.

Jerry, question for you. Can you give us where the loss lease stands at the end of the third quarter? And also, if we look at in-place rents today versus current market in DC, how does that compare?

I don't have DC on me. My guess is in DC there's probably no loss to lease at this point. The in-place is comparable. Again, I don't have that with me. I will get it for you later on a follow-up call.

For the Company, the loss to lease at the end of the third quarter was 1.5%.

Okay. Finally, just as you are looking at the three-year capital plan right now -- curious, as you look out at potentially slowing -- to go back to Rich's question -- does that give an impetus to maybe accelerate some of the recycling you'd planned out over the three-year plan? Maybe pull a little bit of that forward in terms of capital raising and funding the next cycle -- the next go round of developments?

You know, probably not, Mike. When we look at -- as you noted from our three-year strategy, we had acquisitions and dispositions generally matched up. We'll be funding certain assets and acquiring assets that would be more core for us. That has not caused us to necessarily accelerate the plans around liquidation of those assets.

As you'd been out in the market, looking to sell a few assets there, are you seeing price escalation or re-trading on any of those?

Mike, this is Harry. I think if you look at the A assets, the may-to-main type assets, there continues to be significant investor demand, and these buyers tend to be less leverage sensitive. We haven't seen any re-trading there.

As you move to the Bs, you have seen some cap rate expansion. There was, clearly, some re-trading activity going on last summer, when we initially went through this volatile interest rate environment. Today, I'm not sure we have seen enough trades to form a definitive conclusion. But interest rate movements have calmed down, interest rates have actually floated down, which is going to help with values and predictability. But suffice to say, there has been a little bit of cap rate movement on the B properties.

Appreciate the color, guys. Thank you.

Paula Poskon with Robert W. Baird.

Jerry, just a question for you. How are rent-to-income ratios trending? Is there any notable difference between As and Bs?

I don't think there are. I looked at it last quarter, and there wasn't a notable difference. I can tell you right now, rent to income is staying very consistent with what I've reported over the last, probably, five to six quarters in that 16% to 17% range. Right now, it's at 17.1%. Last quarter, it was 17%. A year ago it was 16.9%. It stays pretty stable.

Thanks, Jerry.

Thank you. That does conclude our Q&A portion of the call. Please continue with any closing remarks.

Well, again, I thought we had a great quarter as a team, as a Company. Our associates on the ground doing a great job. We certainly are happy with the three-year plan, and the first year almost in the bag, and where we stand with it. Look forward to giving you more details about 2014 as we wrap up the business plan part. We will see many of you at NAREIT shortly, and with that, take care.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. You may now disconnect.