UDR Inc (UDR) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the UDR first-quarter 2014 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, April 29, 2014. I would now like to turn the conference over to Mr. Chris Van Ens, Vice President of Investor Relations. Please go ahead, sir.

Thank you for joining us for UDR's first-quarter financial results conference call. Our first-quarter press release and supplemental disclosure package were distributed earlier today and posted to our website, www.UDR.com. In the supplement we've reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. 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.

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-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to our President and CEO, Tom Toomey.

Thank you, Chris and good afternoon everyone. Welcome to UDR's first-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 during the Q&A portion of the call. My comments will be brief and focused on five topics.

First, all aspects of our business continue to perform well in the first quarter. Operations is hitting on all cylinders and our development completions and returns in aggregate are meeting or exceeding expectations. Apartment fundamentals in our markets remain favorable and our momentum entering the prime leasing season remains very positive. Second, our first-quarter results came in at the high end or beat our initial guidance ranges provided in February on both earnings and same store basis. Much of 2014 has yet to unfold, but we feel good about where we are and we'll re-evaluate and update you on our full-year guidance on the second-quarter call. Likewise, we are in line or slightly ahead of the expectations set forth in our 2014 to 2016 strategic plan. We continue to view the plan as a solid road map for long-term value creation and remain fully focused on its execution.

Third, we completed $295 million of accretive coastal development during the quarter. Maintaining a consistent development pipeline improves our portfolio quality and geographic footprint, and remains a primary driver of our expected cash flow growth in the coming years. We are excited about the $566 million of development projects we have completed over the past six months, as well as the $183 million that is expected to come online during the remainder of 2014.

Fourth, we completed the migration of the final eight operating assets out of our original UDR/MetLife I joint venture with another set of transactions. After three years of hard work, this brings the operating community portion of the UDR/MetLife I joint venture to a close. Over this time, we have been pleased with the progress made in increasing our ownership interest to 50% in 16 of the original 26 condo-quality communities that are located in our core markets. And we are excited about the continued expansion of our relationship with a stable, long-term partner in MetLife. I'd like to acknowledge Warren and Harry for their hard work that created a mutually beneficial outcome for both UDR and Met. Tom will provide further details on our investments to date, including our current estimated IRRs.

Fifth, we are making progress on our planned dispositions for the year, and while it is early to provide details, pricing has come in favorably versus original expectation. Tom will provide an update on our capital courses and uses in his prepared remarks. And finally, I'd like to thank all my fellow associates for their hard work in producing another strong quarter for UDR. We look forward to the remainder of 2014. With that, I will turn the call over to Tom.

Thanks, Tom. The topics I will cover today include: first, our first-quarter 2014 results; second, our balance sheet and debt maturity update; third, a development update; fourth, an overview of first-quarter and post-quarter transactions; fifth, our second-quarter and full-year 2014 guidance; and last, I'll provide clarification around UDR's guidance relative to future equity issuances. First, our first quarter results. FFO, FFO as adjusted, and AFFO per share were $0.36, $0.36, and $0.33 respectively. Each of these earnings metrics were at or above the high end of our guidance range provided in February.

Moving on to the balance sheet. At quarter end our financial leverage on an unappreciated cost basis was 39.9%. On a fair value basis, it was 32%. Our net debt to EBITDA was 7.2 times, but is forecast to trend at the mid 6s by the year end. We will continue to manage our balance sheet to BBB-plus credit metrics. Our balance sheet remains strong with approximately $630 million of cash and credit facility capacity at quarter end. In the first quarter, $184 million of 5.1% debt matured was temporarily funded in our revolver. April 1, we paid off an additional $129 million of 5.5% debt. We intend to refinance these obligations in the unsecured market later this year. The only remain debt maturing in 2014 is $34 million of secured debt that comes due in December.

Turning to development. During the first quarter we completed three projects containing 891 homes for $295 million at a weighted average spread between expected trended yields and current market cap rates of approximately 220 basis points. Of these completions, Channel at Mission Bay in San Francisco is expected to yield well above the upper end of our targeted 150 to 200 basis point trended range.

Domain College Park, which is across the street from the University of Maryland Business School, and Los Alisos, which is located in Mission Viejo, California are expected to come in 20 to 25 basis points below our targeted range. But will still be well accretive to earnings and NAV, both with solid double-digit IRRs projected at the point of stabilization. Of our remaining $671 million pipeline of projects still under construction, $183 million of which is expected to be completed in the second half of 2014, we continue to trend near the mid-point of our targeted range; in total, our $1.1 billion development pipeline is 65% funded.

As to future development projects, we continue to carefully underwrite opportunities and look for new land sites. In the first quarter we closed on the previously announced $78 million Pacific City land parcel, a 516 home project located in Huntington Beach, California and three blocks from the Huntington Beach Pier. We're currently completing the design process and expect to break ground in early 2015. Looking ahead, we also expect to announce two to three new starts in the second half of 2014, and will range from $100 million to $150 million in total.

Next, our first-quarter and post-quarter transactions. In January we sold for approximately $49 million Presidio at Rancho del Oro, a 27 year old 264 home community, located in North County, San Diego. The community's fourth-quarter 2013 average revenue per occupied home was $1,485 per month, and the sale was transacted at a 5.4% cap rate. As Tom mentioned, we have several assets for sale currently in the market and are on track in moving forward with the planned dispositions set forth in our guidance. Pricing on such transactions look to be a bit more favorable than our original expectations.

In addition, during Q1 we sold our minority interest in two small UDR/MetLife I JV operating communities to MetLife and received cash proceeds of approximately $3 million. The two communities had a combined market value of approximately $85 million, with an average cap rate of 3.8%. First-quarter revenue per occupied home for the 118 homes in these assets averaged $4,817 per month.

Subsequent to quarter end, we increased our ownership interest from 12% to 50% in the remaining six operating assets in the UDR/MetLife I JV for a payment to MetLife of $82 million, and contributed the assets to the UDR/MetLife II JV. These six assets have an aggregate market value of approximately $505 million, with an average cap rate of around 4.8%. The six assets comprised 1,523 homes, with a first-quarter average revenue per occupied home of $2,563 per month. All recently constructed communities located in Los Angeles, San Diego, Dallas, Washington, DC, Baltimore, and Boston.

Let me now take a step back and provide some context around life to date activity of the UDR/MetLife I JV since its formation in November of 2010. When we entered into the venture it comprised 26 recently constructed high-quality operating assets with 5,748 homes and 11 potential development sites with UDR acting as the property manager. UDR owned approximately a 12% interest in the operating assets and a 4% interest in the land parcel.

Since then we have engaged with MetLife in four ownership swap transactions as well as other activities, wherein, we increased our ownership interest from 13% to 50%, and 16 of the original 26 operating assets encompassing 3,932 homes, and contributed them to the UDR/MetLife II JV. We sold our minority interest in the remaining 10 operating properties to MetLife. The JV sold or swapped 4 of the original 11 land parcels including the sale of 1 parcel to a third party. We recapitalized certain operating communities as debt matured, and the JV made distributions of available net cash generated to the joint venture partners.

Let me share with you some key take-aways of how we currently view the economics of the deal. We estimate that UDR's current 50% share of the assets in UDR/MetLife II JV excluding Columbus Square is valued at approximately $460 million, versus cumulative investments over the three year period of around $340 million. The annual IRR computed for all cash flows along with the fair value of the real estate holdings at April 2014 is over 18%. As a reminder, UDR/MetLife JV I still holds several land parcels for which we hold 4% interest for a total investment of $6.6 million. These assets provide us the opportunity to participate with Met in the development of well located land with a total basis of approximately $180 million. We are in various stages of the evaluation and entitlement process on these land parcels, and will provide updates as our plans are finalized.

We are very pleased with the value that has been created to date with these ventures and with our strategic relationship with MetLife. This relationship will allow us to continue to jointly own an outstanding portfolio of high-quality assets in our core markets and develop the remaining land parcels over time while earning management and development fees. We continue to look forward to additional value creation opportunities with MetLife going forward.

On to 2014 guidance. First-quarter earning metrics and same store results came in at or above the upper end of our original guidance expectations and our momentum is good. But given how early it is in the year, we're maintaining our full-year 2014 FFO and FFO as adjusted per share guidance of $1.47 to $1.53, and AFFO guidance of $1.30 to $1.36 per share. In addition, we are maintaining our full-year 2014 same store guidance with expected revenue growth of 3.5% to 4.25%, same store expense growth of 2.75% to 3.25%, and same store NOI growth of 3.75% to 5%. We will revisit both our earnings and same store guidance ranges during the second-quarter call.

Other primary full-year guidance assumptions can be found in attachment 15 or page 25 of our supplement. On this page you will note we reduced our 2014 acquisition guidance by $100 million at the mid-point, raised our 2014 disposition guidance by $100 million at the mid-point, and reduced our acquisition disposition cap rate spread by 50 basis points at the mid-point based on current pricing and the potential basket of assets to be sold. Second-quarter 2014 FFO and FFO as adjusted per share guidance is $0.36 to $0.38, and AFFO per share guidance is $0.31 to $0.33. Also, during the quarter we declared a quarterly common dividend of $0.26 or $1.04 per share when annualized, an 11% increase over 2013. This represents the yield of approximately 4% and 166 uninterrupted quarter of payment dividends.

One final item I would like to address. The topic of UDR potentially issuing new equity seems to have received a lot of attention during the last couple of months. In a public presentation at the Citi conference we made a point to clarify that our commitment to not issuing equity at a discount to NAV does not imply that we will issue equity immediately upon trading at NAV. We have a $1.4 billion portfolio of capital warehouse and non-core communities that we plan to sell over time for strategic reasons. The proceeds from such sales are capable of fully funding our development plans for the next few years.

Accordingly, we do not currently need new equity capital. However, when our stock again trades at a premium to NAV we will of course consider accretive opportunities as they arise. The equity issuances set forth in our three-year strategic plan provide a place holder for such opportunities. With that I'll turn the call over to Jerry.

Thanks, Tom. Good afternoon. In my remarks I'll cover the following topics. First, our first-quarter operating results. Second, the performance of our core markets during the quarter. And last, a brief update on our development lease-ups. We're pleased to announce another strong quarter of operating results. In the first quarter, same store net operating income grew 5.6%, driven by a 4.5% year-over-year increase in revenue against a 2.2% increase in expenses. As a reminder, fourth quarter of 2013 revenue and NOI growth was similar at 4.5% and 5.4% respectively.

We are encouraged by our continued ability to keep expense growth in check, especially given the difficult winter we experienced in the Eastern portion of the US. All in, first-quarter winter related expenses were approximately $530,000 above initial expectation. Offsetting this were lower repairs and maintenance and personnel expenditures, as we continued to gain efficiencies through our investments in technology and process improvement, as well as slightly lower property taxes as a result of a few prior-year refunds. Our same store revenue per occupied home increased by 4% year-over-year to $1,520 per month, while same store occupancy of 96.2% was 45 basis points higher year-over-year. Our total portfolio revenue per occupied home at quarter end was $1,687 per month, including pro rata JVs.

Turning to new and renewal lease rate growth. First-quarter effective rental rate on new leases increased by 1%. Renewal rate growth remained strong at 5.1%. San Francisco, Seattle, Portland, and Austin performed especially, while the mid-Atlantic region continued to struggle. Further details can be found on attachment 8-E or Page 18 of our supplement. Annualized turnover in the first quarter decreased by 120 basis points year-over-year. As was the case in 2013, this decrease was attributable to our ongoing focus on lease expiration management and the lengthening of our average new lease term. We continue to move lease expirations from the first and fourth quarters into the higher-demand second and third quarters, where we can realize better rate growth. Our average new lease term reached 11.9 months in the first quarter of 2014, versus 11.6 months in 2012 and 2013.

The lengthened term helps us in the following ways. First, in geographies where new supply is pressuring fundamentals, like Washington, DC, we are better able to maintain occupancy than the market in general. Second, our churn costs and vacancy loss improve as fewer apartments turn over annually. And finally, longer tenures drive higher occupancy which allows us to proactively be more aggressive on rate and fee increases. This focus on intensive lease management should continue to benefit our current and future-year results. Next, rent as a percentage of our residents' income held steady at roughly 18%. Moveouts to home purchase were up 230 basis points year-over-year at 14.1%, but still below our long-term average of 14.5%.

Moving on to the quarterly performance in our primary core markets. Orange County and Los Angeles, which combined represents 16% of our total NOI, continued to improve and are expected to perform well in 2014. Our 467 home recently developed Bella Terra community in Huntington Beach continues to be a rocket ship and is currently 97% leased, with rents 10% above pro forma estimates.

Pricing power in New York City, which represents 13% of our total NOI, improved meaningfully as the quarter -- first quarter progressed and we continue to feel good about the city's prospects during the upcoming prime leasing season. New supply in Metro DC, which represents 13% of our total NOI, continues to hamper fundamentals. But our diverse mix of A and B product, as well as less direct submarket exposure to new supply will help us fare better than many of our peers in 2014. We are still expecting positive full-year revenue growth of approximately 1%.

San Francisco, which represents 10% of our total NOI, remains very strong with employment growth continuing to be driven by high-paying professional jobs. Demand is robust throughout the city, peninsula, and Silicon Valley. In North San Jose we are experiencing some pricing pressure due to new supply. Our 315 home Channel development in Mission Bay is 70% leased, just four months after opening its doors and at higher rates than initially expected. Like Bella Terra, Channel is a home run.

Seattle, which represents 7% of our total NOI, remains a very good market for us. Supply is coming but jobs are as well. Seattle has added over 40,000 jobs since March of last year, enough to absorb new product thus far. Lastly, Boston, which represents 5% of our total NOI, is emerging from its typical seasonally slower period of the year. The winter was brutal but we are seeing a seasonal pick-up in leasing. Turning to our development lease-ups. Channel at Mission Bay in San Francisco and 13th and Market in San Diego, comprise $218 million in aggregate estimated cost. Weighted average effective rents are nearly 11% above plan and leasing velocity of 13% ahead of expectation. These lease-ups continue to perform well.

Los Alisos in Mission Viejo, Domain College Park across the street from the University of Maryland Business School, and Fiori at our Vitruvian Park JV in Addison, Texas comprise $199 million in aggregate estimated cost. Weighted average effective rents are 1% below plan while leasing velocity is 17% below where we would have expected at this point, primarily due to Fiori. As the prime leasing season gets into full swing, we expect that demand at these projects, especially Domain College Park and Los Alisos will pick up. We are seeing strong leasing activity at all of our lease-ups in April. In fact, each one of these properties is achieving at least one lease per day thus far. All-in, we remain very positive on how the lease-ups are progressing in aggregate.

With that, I will open the call to Q&A. Operator?

Thank you, sir. We will now conduct a question-and-answer session.

(Operator Instructions)

And our first question is from the line of Jana Galan with Bank of America. Please go ahead.

Thank you. I was wondering if you can give some color around the changes to transaction activity for 2014, was that largely led to what you accomplished in the first quarter or are you seeing less potential acquisitions out there?

Hi Jana, it's Tom Herzog. As far as the transaction activity, we reduced the acquisition number down by $100 million at the midpoint. We increased the disposition guidance by $100 million at the midpoint. Equity, we just clarified that that's at zero to 150, and the cap rate spread we just tightened up by 50 basis points.

As it pertains to -- the reason for the changes, the acquisitions we've got the Pacific City that was purchased in January. We're using that as one of the reverse 1031s, reduced the need for acquisitions. Dispositions we raised, that created $200 million of extra cash flow. We've got the joint venture contribution that we described that comes in at a net $79 million. And then we have Steele Creek that comes in at about $60 million, that we expect to fund during the year, leaves a little bit of extra cash flow in the mix. So those are the moving pieces that we have.

And you mentioned the $1.4 billion of non-core and potential dispositions. Just given the strong demand for apartment assets would you potentially increase that disposition number further?

As far as the dispositions at the range that we've set, there really isn't going to be reason likely to increase the disposition number. We do have of course, the capacity to do that if we needed to, but we're not expecting at this time that that will be modified.

Thank you.

And our next question is from the line of Nick Joseph with Citigroup. Please go ahead.

Great. Thanks. You mentioned that the pricing for the planned dispositions has been better than expected. Are you seeing any increase in condo conversions in any of your markets?

Nick, it's Harry Alcock. First of all, none of our assets that are in the market are going to be sold to condo converters. But in terms of the question itself, we're starting to see a little bit of condo activity on existing operating assets, creep into a couple of markets, New York was first. We're starting to see a little bit of it in San Francisco, and we're seeing more of it in those two markets on land sites where many of the buyers are now going to develop for a condo use.

Thanks. And then in terms of guidance, what are you assuming on the pricing for that unsecured bond issuance this quarter?

Well, if you looked at what current pricing is, Nick, this is Tom Herzog again, on a 10 year we would assume somewhere roughly in the vicinity of 4%. If we went with a seven year it's more in the vicinity of 3.5%. We've got our guidance number in a little bit lower than that. So we've got a little bit of upside if we get to that between now and then.

And finally, what's the timing of the potential development starts in that MetLife I JV?

Nick, it's Harry Alcock. The first couple sites could start as early as later this year. We've got another two to three sites that could start in 2015, and then the remaining two or three would potentially be further out.

Okay. Great. Thanks.

Our next question is from the line of Derek Bauer with ISI Group. Please go you ahead.

Great. Thanks. Given the MetLife funds carry higher leverage, can you speak to what your pro rata leverage metrics look like pro forma the transaction? And how do you expect leverage including the JVs to trend relative to your guidance in the three-year plan?

As far as leverage on the MetLife joint venture or just leverage in general, as I think that you're aware, we see our net debt to EBITDA is the one I'll focus on; ticking down during the year probably on a consolidated basis, ending the year somewhere around 6.5, and then further ticking down during the period of our three-year plan down to about a 5.7. As to with the inclusion of JVs, we would see that number coming in at somewhere in the mid-6s by the end of the year.

The impact of the MetLife swap was quite negligible to the look-through, if you will, net debt to EBITDA number, somewhere around 0.04 times. The transaction itself on the fixed assets came in at I think 56% leverage on that particular component, bumped up against our actual leverage in the Company. And when you do the math on all that it really does not make that big of an impact.

Great. Thanks for the color. You've talked in the past about your desire to increase your ownership stake in the MetLife funds. Now that you've done that into Fund II, can you speak to your desire, intent to, further increase your stake or own the remaining assets outright?

Derek, this is Toomey. Our intent in the short term with Met is to continue to expand our relationship on a 50/50 basis with the development pipeline. And beyond that we're comfortable right now at a 50/50 relationship on the operating assets, and we'll continue to always have dialogue with Met on a range of topics. So we're comfortable where we're headed.

Great, thanks. And then just lastly, Jerry, how much more work is left to right-size lease exposure schedule? And are you having to use concessions to do so, and how should we think about the impact of these efforts on 2015's growth?

Sure. We're continually moving lease expirations to get them to the higher traffic months, which is second -- which occur in the second and third quarter. A lot of the work has been done, so I think the impact in 2015 it will be a little bit more of a normalized year, as far as occupancy affected by these lease expirations changing, as well as new lease rate growth.

Really not using concessions to achieve this. Actually, concessions when you look at first quarter of 2014 versus first quarter of 2013 are down 29%, so haven't had to use that. It was really more through lease expirations.

One thing we have seen is our resident base selecting on their own to go a little bit more with longer-term leases. We've offered up in some of our markets, such as DC and some of the Texas markets, up to 14 month lease terms and we found people opting more for these. This has expanded our average lease term from 11.6 months to 11.9, which has helped to drive down turnover.

One thing it has done, is when you look at new lease rate growth, in the first quarter we were at 1%, so far in April we're at 2.5%. Short-term leases tend to have a bit of a higher premium so they will help new lease rate growth. So we've seen a little bit of an impact on that. But even though people are selecting those longer-term leases, we're finding people that need to move for jobs or that select to move for home purchase, they will pay a lease break fee and we've seen our fee income actually go up 7%.

So while we are not overly happy with our new lease rate growth of 1%, which is about 120 basis points lower than it was in first quarter of last year, we understand why it's happening. We think it's helped us push occupancy up to that 96.2% in the quarter. I would tell you today our occupancy is at 96.8%. So we're running very high occupancy, probably given up a little bit of new lease rate growth, but it's really more resident selection.

Great, appreciate it. Thank you very much.

Just before we move on to the next question, I want to clarify one thing. In your question on the net debt to EBITDA with the JV pro rata debt, I think I said 6.6% at the end of the year. I meant to say at the end of the three-year strategy period. At the end of the year it would be more like 7.4 times. So 6.6 times at the end of 2016, 7.4 times at the end of 2014.

Got it, thanks again.

Our next question is from the line of Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Good morning out there. Just some quick questions here. One, on the increase in the disposition guidance, how does this compare to the dividend? Does this mean more pressure on paying out the dividend or there's sufficient weather coverage or ability to shelter the gains?

Alex, this is Tom Herzog. The dispositions had nothing to do with gained capacity or ability to cover the dividend. Literally, it was cash flow decisions that we made. So nothing to do with the dividend.

Right, right. The point is that by increasing dispositions you're not changing the trajectory of what you think the dividend growth is going to be like?

No.

Okay. Okay. And then Tom, just you made your comments on equity issuance, down-playing that. There's still some in the guidance but it sounds like from your comments it's not going to happen.

So over the next three years, as we think about the development program, should we just factor in sort of a like amount of dispositions? So as we're modeling it out as the developments deliver, we sort of have an offsetting amount of dispositions? Is that the way we should think about it or is there, I guess, a different way?

Alex, good question. How we think about the dispositions is that the development program will be funded with these dispositions. And so as far as looking beyond that, I don't think there's a whole lot more to say.

As far as equity issuances in the plan, those are more of a place holder. I kind of look at it this way. The cost of issuing equity is probably call it, what, 4.8%, 5% on a yield basis. And the cost of dispositions, maybe call it a 6% NOI cap rate or 5.5% is probably the vicinity of what we have in built into our numbers. So there's not going to be much impact on the FFO as a result of if there's movement between those two numbers.

So if there's fewer equity issuances, that's offset by dispositions. I'd just put it that way. The two numbers are irrelevant.

Okay. And then just lastly, while we have to wait for updated guidance on the second quarter should we just assume that the increased disposition guidance, is that more towards the back part of the year, like fourth quarter, or we should be expecting some pretty big trades in the upcoming few weeks, months?

Alex, it's Harry. We closed one deal in January. I think the next two to three deals could close in the second quarter and the balance will be the second half of the year.

Okay. Thank you.

Our next question is from the line of Karin Ford with KeyBanc Capital Markets. Please go ahead.

Hi, good morning. Just a question for Jerry on same store revenue growth. You didn't see any deceleration really from fourth quarter to first quarter.

How much deceleration are you expecting here in the back half of the year? I know you have more difficult occupancy comps, but it sounds like you're running pretty far ahead. Is your expectation that we should see same store revenue growth trend down from 1Q levels for the balance of the year?

Yes, Karin. I definitely think it will trend down from the level we had in the first quarter. But we're just now entering our prime leasing season. So far, things have been going well. Our traffic and applications have held up a little bit better than last year. Turnover, as we've disclosed in the supplement, is down 120 basis points. And I can tell you through the month of April -- April versus April of last year, another 130 basis points. Occupancy levels today are very high at 96.8% on the same store pool.

But we do have more difficult comp and I think you will see a deceleration. We're not updating guidance at this point, but if I had to handicap it right now I'd say we'd be above the midpoint rather than below the midpoint of our full-year guidance, and we'd just like to see how the next two to three months play out before we update guidance.

Thanks for that color. Did you tell us where renewal notices are going out for, I guess, June and July?

They're averaging right about 5.5%.

Okay. That's helpful.

I can tell you in the month of April, I'm sorry, month of April we achieved 5.7%.

Great. That's helpful. And then just last question is on do you have an estimate of if there would be any change to the same store growth if you backed out any kitchen and bath activity this quarter?

Yes. If we look at -- let me actually take a moment on that. Here's how we think about it. So first of all, we don't have any K&Bs that are in place at the current date, but we do have revenue enhancing spend. And I think when you think about revenue enhancing spend you need to look at it based on probably three pieces of data.

The first one is the amount of capital spent, which I think as you know we've disclosed in our three-year strategic plan. The second is expected return that you get in the first year end and subsequent years. Third, I think one has to consider the rollover effect of those enhancements that are dropping off from prior years. So in our case, we spent $10 million in 2013. We'll bump it a little bit in 2014, I think to $11 million, is the number.

As I said in the past, and Jerry said, we typically underwrite to around a 20% year-one cash-on-cash return because these are relatively short life improvements often 10 years or so. And we seek to get an IRR hurdle of at least 200 basis points in excess of our WACC. The impact of $10 million of spend in the year of the spend, is probably about 15 basis points on same store. If you took a full year's worth you're probably at 30 basis points.

But because we've been doing this for a long time and the rollover effect occurs, I'm guessing that the same store growth is probably closer to zero because there's as much rolling off as that's coming on.

One other point that I would make around this is the impact of redevelopments, which we've all heard a lot about recently. And especially major redevelopments like a 2775 or Rivergate and just to be clear, we do not include these in our same store sales. And these projects are typically call it, $70,000 to $100,000 per door, usually stripping them to the studs. So major projects and those are excluded from our same store results all together. If anybody has desire to want to dig deeper into how we do these calcs and how we look at it, I'm glad to take any of those questions offline.

Thanks for the color.

Our next question is from the line of Michael Salinsky with RBC Capital Markets. Please go ahead.

Good afternoon. Tom, I know you didn't update the guidance but you just injected $79 million in the joint ventures. If you were to update guidance, what kind of lift would we expect on the joint venture buy-in there, just given the mark-to-market on the debt there?

Mike, this is Herzog again. The impact of the swaps themselves had a very slight positive impact in 2014. It will be a bit more positive in 2015, but not enough to be probably adjusting your numbers for. Harry, I know you had looked at those too. I think it was quite small. I don't think we have an exact.

It will be in the fractions of pennies rather than full pennies.

Okay, fair enough. Second question. The three planned starts for the back half of the year, do you hold the parcels on those already?

We do. Two of those three are MetLife parcels and the other's a wholly owned deal in Los Angeles.

And with those, you'd buy in the 46% you don't own and go from there on a [varied pursuit]. Or would you fund the development costs or how would you fund that?

That's the expectation that we would develop those on a 50/50 basis with Met.

Okay. And finally, you got the debt maturing on the Texas joint venture. Obviously Texas has been a strong performer over the last couple years. Just can you give us an update what your thinking is on the Texas joint venture, whether there's a plan to market any of those assets or just extend that debt maturity.

Michael, this is Toomey. I think the intent in our conversations with our joint venture partner is when the debt is prepayable to expose those to the market and see what price. We feel good about the pricing of those assets at this time and the job that Jerry and his team have done in running them. So, they'll probably be able to be sold sometime early next year.

Thank you.

(Operator Instructions)

Our next question is from the line of Haendel St. Juste with Morgan Stanley. Please go ahead.

Hey, guys. I guess good afternoon out there. A question on development. Understanding you're seeking yields 150, 200 basis points above market cap rates. Given we're late in the cycle and the recent softness at your Domain, Los Alisos, and Fiori, wanted to know whether you've considered raising your return requirements for new development starts.

Haendel, this is Harry. First of all, it's clearly costs are rising. Land prices are rising but rents are also rising. I think yields are generally flat.

We don't intend to increase our yield requirements, per se, but we will take all of those factors into account in underwriting these deals and won't start a new deal until we hit those thresholds, which is 150 to 200 basis points. So it's true, not all deals are going to pencil today, clearly less than we would have penciled two to three years ago.

Okay. Can you talk more specifically? You talked about -- you seem more optimistic on Domain and Los Alisos, but more muted on Fiori. Perhaps can you go into -- am I reading that correctly first of all? And then maybe can you talk a bit about the Fiori asset, what you're seeing there. Is it pricing that's the issue? Is it weak demand? Is it supply in uptown? Can you talk a bit more about that?

It's Jerry. Fiori, most of you know is in Addison, Texas. We built a product that was comparable to what is built typically in uptown about 10 miles north up in Addison. We priced it very similar to uptown assets and we're getting the pricing, the velocity just hasn't been there.

We would attribute a large portion of that to general weakness in the uptown market today, where a lot of new supply's been coming online. That's prevented us from getting the pricing we would have like to have gotten at Fiori. We recently have cut pricing at Fiori to get leasing velocity back on track. In fact, this month we've had 40 gross leases in the month of April. Our expectation is to continue with it.

One other sign of encouragement for Fiori is that Toyota announced yesterday they were going to move their headquarters from Torrance, California to Plano, Texas and add about 4,000 to 5,000 jobs. Plano is about five or six miles north of Addison. We have about 1,200 units in Plano, as well as the 1,000 or so units at Vitruvian Park that we think will really help us out there too.

But a lot of it has been softness in uptown due to new supply. Some of it has been due to we were introducing the new price point to the Addison market and the leasing velocity's been just slower than we expected.

Appreciate that. We haven't talked much about it lately, it seems, but A versus B performance in your portfolio this past quarter, is there any discernable performance and any thoughts as we head into deep leasing season here?

B's are a little bit stronger, but it's not enough to really call anything on. What you typically find is in some markets, if your product is A and it's near new supply, it's obviously going to be competing more against lease-ups that tend to have higher concessions. But overall, B's are less than, probably 70 basis points better on pricing. And as far as occupancy, my entire portfolio is occupied at a very high level right now.

Okay. One point of clarification of you mentioned I see that the first quarter same store expense in the Northeast were, I guess, pretty far below expectations. You were talking earlier about some lower R&M costs, maybe some real estate tax benefits. Was that primarily the reason for the Northeast portfolio, the low year-to-year expenses, increase in expenses, or was there something else there?

I'm glad you asked. It's really two things. One, we've done a good job of hedging our heating cost up in the Northeast, about 90% are hedged. So that put a collar, if you will, on some of the utility expenses.

The second thing is that we got hit pretty hard last year with snow removal up in Boston, and typically in Boston you buy a contract on the number of inches of snow that can be removed. We bought this year an unlimited amount of snow removal for a fixed rate and we locked in that rate for the next three years. Because of that and because of the harshness of the winter, and especially up in Boston, we didn't have as much snow removal cost up there as you would have expected.

Thank you for the clarity.

Sure.

And our next question is from the line of Dave Bragg with Green Street Advisors. Please go ahead.

Thank you. Good afternoon. Could you please share some of the specifics on the new Huntington Beach development deal? Looks like a really interesting site, and it would be great to hear your expectations for the total cost, rents per square foot, and the yield on today's rents.

Dave, it's Harry. I think you know we acquired the site for $78 million. It's zoned for 516 units. We're still in the midst of the design process.

The design will ultimately, sort of determine the costs and the rents we expect. I think we're probably a little bit early to start talking about those. We expect to start the project probably in sometime early next year and we'll talk about it more once we've completed our work.

Okay. All right. We'll circle back then. How about on 399 Fremont, now that that one is started, how is that one looking in terms of rents per square foot and yield on today's rents?

Dave, it's Harry again. We're well under way on that one. The cost numbers are published. Expect to spend approximately $318 million. Development is going fine thus far.

We expect that one to finish in late 2015, early 2016. Rents today should be somewhere in the neighborhood of $5.25 per foot, and will trend up from there. We expect stabilized yield on that one somewhere in the low $6s.

Thank you, Harry.

Ladies and gentlemen, there are no further questions at this time. I'd like to turn the call back over to Mr. Tom Toomey. Please go ahead, sir.

Thank you, operator. And thank all of you for your time today. Closing remarks I guess I would say this. We're very excited about the position that we're in, with leasing season upon us, team's are pretty focused, and certainly seeing the traffic and the operational platform is running on all cylinders, so we're excited about that.

I thought we had a very good quarter all the way down the line on all metrics, and clearly are performing at our three-year plan or ahead of our three-year plan. And I would expect us to continue that trend for the balance of the year and we look forward to seeing you guys in NAREIT. With that, operator, we'll end the call. Thank you.

Ladies and gentlemen, this concludes the UDR's first-quarter 2014 conference call. This conference will be available for replay after 3:00 today through May 29 at midnight. You may access the replay system by dialing 1-800-406-7325 and enter access code of 4676019 followed by the pound sign. Thanks everyone for your participation and you may now disconnect.