UDR Inc (UDR) 2014 Q3 法說會逐字稿

Good day, and welcome to UDR's 3Q 2014 conference call.

Today's conference is being recorded.

At this time I would like to turn the conference 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 yesterday afternoon 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 yesterday'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.

Please note that there's another multi-family recall that begins at 2:00 PM Eastern, so our call will be kept to one hour. Management will be available after the call for your questions that did not get answered on the call.

I'll now turn the call over to our President and CEO, Tom Toomey.

Thank you, Chris, and good afternoon, everyone. And 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 during the Q&A portion of the call.

First, all aspects of our business continue to perform well in the third quarter and remain in line with or ahead of the key targets outlined in our most recent three-year plan. With 2014 largely wrapped up, we are fully focused on setting the Company up for a strong 2015.

In short, but without providing forward guidance at this time, we expect 2015 to look relatively similar to 2014. Meaning that operating fundamentals should remain very favorable and development highly accretive.

Both of these will help drive cash flow and NAV growth in 2015. Nationally, multi-family fundamentals remain strong.

The vast majority of our markets continue to experience outsized demand relative to supply, while single-family housing challenges persist due to changing demographic trends, strict credit standards, and low inventories. We do not expect these dynamics to change any time soon, but we are monitoring the recent news that the GSEs may loosen credit standards.

Against this backdrop and in conjunction with our strong 2014 results to date, we raised our full-year earnings and same-store revenue forecast in today's press release. Tom will discuss the details in his prepared remarks, while Jerry will address the success we achieved pushing rental rates during the quarter to benefit 2015.

In fact, even when faced with higher supply in many of our markets than at one year ago, our advantageous product mix and strong sub-market locations resulted in combined new and renewal lease growth of 4.8% this quarter, 30 basis points above that achieved in third quarter 2013. This acceleration is more noteworthy when considering that Jerry and team accomplished this while maintaining high occupancies during the quarter.

Moving on, the third quarter was successful for UDR on a number of fronts. First, and as previously announced, we closed on 97 million of non-core multi-family dispositions at better pricing than originally contemplated. Proceeds will continue to fund our accretive development projects.

Second, we are under contract to sell all the communities in our Texas joint venture, or approximately 3,400 apartment homes, of which we own 20% plus a promote and fees. We have received hard money and the sale is scheduled to close in January 2015 for approximately $400 million in total proceeds. We expect to achieve a strong return on this investment, although the loss of the management fees will negatively affect our 2000 earnings by around a penny. We will provide additional details when the transaction closes.

Third, we completed $121 million of 1031 acquisitions in Seattle, the market where we were under-allocated from our NOI perspective. The addition of the newly constructed high-quality community satisfies our acquisition guidance for 2014.

Fourth, we issued approximately $100 million of equity at or around consensus NAV during the quarter, which will primarily be used to fund our accretive $92 million Steele Creek participating loan investment in Denver. This use is consistent with our past commentary, that is we will consider issuing equity to fund accretive growth opportunities when our shares trade at or above NAV after fees.

Fifth, we started $125 million 381-home development during the quarter in Irvine, California in a 50/50 joint venture with MetLife. We will continue to develop with Met as we work through the remaining six land parcels in joint venture one. In the fourth quarter we will complete the development of two wholly owned projects for a total cost of $183 million. Jerry will speak on our pre-leasing progress, which is going quite well.

Sixth, we've received a credit upgrade from Moody's to Baa1 and changed outlook from S&P to BBB positive. Tom will provide additional details on these items in his prepared remarks. However, from a bigger picture perspective, these achievements continue to advance the strategic initiatives outlined in our three-year plan, and emphasize our ongoing commitment to generate long-term high-quality cash flow growth, while also continuing to improve our portfolio and balance sheet.

In conclusion, I'd like to thank all my fellow associates for all their hard work in producing another strong quarter for UDR. We look forward to the remainder of 2014 and to a great 2015.

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

Thanks, Tom.

The topics I will cover today include first, the third-quarter 2014 results; second, a balance sheet and credit ratings update; third, ATM equity issuance during the quarter and attendant use of proceeds; fourth, a development update; fifth, an overview of third quarter transactions; and last, our fourth-quarter and full-year 2014 guidance.

First, our third-quarter results came in at the high end of our previously provided guidance. FFO, FFO as adjusted, and AFFO per share were $0.41, $0.38, and $0.34 respectively. Quarterly same-store revenue expense and NOI growth remain strong at 4.4%, 2.9%, and 5.1% respectively. Moving on to the balance sheet, at quarter end our financial leverage at an undepreciated cost basis was 39.2%. And on a fair value basis it was around 31%. It will trend lower by year end.

Our net debt to EBITDA was 6.7 times, and we are on track to reach the mid 6s by year end. Giving this ongoing improvement, Moody's recently upgraded our senior unsecured credit rating to Baa1 and S&P changed their outlook to BBB positive.

The improved ratings will result in approximately $1 million in annual savings on our revolver and term debt in addition to tighter spreads on future unsecured debt issuances. Looking forward, we have $325 million of 5.25% unsecured debt maturing in January of 2015, and another $188 million of 5.9% secured debt maturing in December of 2015.

Current rates look very attractive and we continue to feel good about our ability to refinance this maturing debt. At quarter end, our liquidity is measured by cash and credit facility capacity of $755 million.

Next, as Tom mentioned, we issued approximately 3.4 million shares of common stock during the quarter, using our at-the-market equity program. The shares were issued at a gross price of $29.95 per share, a net price of $29.36 per share for net proceeds of approximately $100 million. The net price stacked up well against our consensus NAV during the quarter, and the proceeds will be used primarily to fund our accretive $92 million participating loan investment in the Steele Creek development property located in the Cherry Creek area of Denver.

Turning to development, at quarter end our under construction and recently completed pipeline totaled $1 billion and was 73% funded. Inclusive of our $422 million of stabilized non-mature developments for wholly owned and JVs, the estimated trended spread on our development projects was 190 to 195 basis points at quarter end.

During the quarter we started one development project in a 50/50 joint venture with MetLife. The residences at 2801 Kelvin are located in Irvine, California, and we have 381 homes at a projected cost of $125 million at 100%. In the fourth quarter our beach and ocean development in Huntington Beach, California and our Delray Tower project in Alexandria, Virginia will reach completion. These projects consist of 505 homes at an aggregate cost of $183 million. Both projects are actively pre-leasing and will enhance the quality of our existing portfolio.

As the future development projects, we continue to underwrite opportunities and will take advantage of our land bank. In the fourth quarter we expect to start two additional development projects, at least one of which will be in a 50/50 joint venture with MetLife. Both will be in core California markets with aggregate projected spend of approximately $200 million to $220 million, and have trended spreads in our targeted range of 150 to 200 basis points.

Next, transactions: in July, we closed the sales of an Orlando community, two communities in Norfolk, and a small commercial asset in Glendale, California for an aggregate $108 million. In total, the multi-family communities were sold at a weighted average cash flow cap rate of 6.2%, or $101,000 per home, contained 963 homes at average rent per occupied home of $1,050, and were on average 20 years old.

Our 2014 guidance currently contemplates an additional $115 million to $165 million in dispositions by year end. We are making progress with these transactions and will provide further details as they become available. A portion of our third-quarter dispositions were classified as 1031 transactions for tax planning purposes. With these 1031 proceeds we purchased two newly constructed Seattle communities, Lightbox and Waterscape, for a combined $121 million.

The communities were acquired for a weighted average stabilized cash flow cap rate of 4.5% and contained 358 homes. Lightbox is in the University district, adjacent to our existing Kennedy community, which will result in operating efficiencies. And Waterscape is located in Kirkland, near Google's expanding Seattle campus. Both assets represent excellent additions to our portfolio.

On to fourth quarter and full year 2014 guidance. Third-quarter earnings and same-store sales growth remain strong, and we are increasing our full-year 2014 FFO, FFO as adjusted, and AFFO per share guidance by a penny each at the midpoints. FFO per share guidance was raised to $1.52 to $1.56. FFO as adjusted to $1.51 to $1.53. And AFFO to $1.34 to $1.36.

For same-store, we are increasing our full-year 2014 revenue growth guidance to 4% to 4.5%, up 25 basis points at the midpoint, and increasing our expense growth guidance to 2.25% to 2.75%, up 50 basis points at the midpoint. The 5% midpoint of our NOI growth guidance did not change, although we did tighten the reigns by 25 basis points on both ends to 4.75% to 5.25%.

Other primary full-year guidance assumptions can be found on attachment 15, or page 27, of our supplement. Fourth-quarter 2014 FFO and FFO as adjusted per share guidance is $0.38 to $0.40. AFFO per share guidance is $0.33 to $0.35.

Finally, we declared a quarterly common dividend of $0.26 in the third quarter, or $1.04 per share when annualized. This represents a yield of approximately 3.6% and will be our 168th straight quarter of paying a dividend.

With that, I'll turn the call over to Jerry.

Thanks, Tom, and good afternoon.

In my remarks I will cover the following topics: first, our third quarter portfolio metrics, leasing trends, and success we realized in pushing rental rate growth this quarter; second, the performance of our primary core markets during the quarter; and last, a brief update on our recently completed and in-lease sub developments.

We're pleased to announce another strong quarter of operating results. Our same-store revenue growth of 4.4% was driven by an increase in revenue per occupied home of 3.8% year-over-year to $1,619 per month, while same-store occupancy of 96.8% was 60 basis points higher versus the prior-year period. Total portfolio revenue per occupied home was $1,779 per month, including pro rata JVs.

Our revenue growth through the first nine months of the year has remained strong at 4.4%, as a result of a 50-basis point improvement in occupancy and a 3.8% increase in revenue per occupied home. We see this strength continuing into the fourth quarter.

Turning to new and renewal lease rate growth, which is detailed on attachment 8G of our supplement, as Tom mentioned earlier blended new and renewal lease rate growth was 4.8% during the quarter, 30 basis points higher than the 4.5% growth we generated in 3Q 2013. While a portion of this acceleration was due to the tailwind provided by still robust market fundamentals, our elevated occupancy of 97% at the end of the second quarter allowed us to push new and renewal rate.

Our 5.1% third-quarter renewal rate growth was comparable to previous quarters, while we grew new leases by 4.5%, approximately 80 basis points above 3Q 2013's rate. This is a complete reversal from what we experienced earlier in 2014, when our first quarter new lease rate growth lagged the first quarter of 2013 by 120 basis points.

As such, our greater focus on pushing new lease rate growth in 3Q when combined with sticky occupancy and annualized turnover that declined by 450 basis points year-over-year, has set us up well to take advantage of further pricing opportunities in the fourth quarter and in 2015. During the fourth quarter we expect the typical seasonal slowdown to occur, but believe there's plenty of gas left in the tank to continue pushing the rate, as evidenced by our current same-store fiscal occupancy of 96.8%, and October new lease rate growth that is 100 to 150 basis points higher than that of October 2013, all with comparable renewal rate growth.

Market-wise, San Francisco, Seattle, the Monterey Peninsula, and Portland performed well, while the Mid-Atlantic region continued to struggle. On the expense front, we increased our annual same-store growth forecast by 50 basis points at the midpoint.

This was primarily the result of higher than expected insurance claims at a couple of our communities and higher property level incentive compensation as a result of our strong rental rate growth, and increased bonus compensation related to the ongoing successful implementation of our repair and maintenance efficiency initiatives. Next, rent as a percentage of our residence income held steady at roughly 19%.

Move outs to home purchase were up 50 basis points year-over-year at 14%, still below our long-term average of approximately 15%. Moving on to quarterly performance in our primary core markets, these markets represent 66% of our same-store NOI and 71% of our total NOI.

Orange County and Los Angeles, which combined represent 16.5% of our total NOI, continued to slowly improve. On our call last quarter I discussed our strategy to lengthen the average lease term at our largest property in Orange County, which represents roughly 50% of our same-store asset pool in the market.

This strategic move had a negative effect on 2Q occupancy and new lease rate growth. I'm pleased to report that our third quarter occupancy increased by 100 basis points to 96%, and our new lease rate growth improved to 4.5% from second quarter's negative 0.5%. We will benefit in 2015 from this move.

New York City, which represents 13% of our total NOI, generated new lease and renewal lease rate growth of 4.5% each, with occupancy of 97.7% during the third quarter. New York remains a good market, and with occupancy currently above 98%, we are anticipating a strong fourth quarter.

Metro Washington, DC, which represents 13% of our total NOI, had occupancy of 97.1% and revenue growth of 0.1% in the third quarter, a strong result considering the ongoing concerns many have for this market. As we have stated throughout 2014, we believe our relative outperformance versus peers results from our 60% fee portfolio in DC, and less direct competition from new supply in our sub markets.

We expect these factors will continue to help us to fare better in the fourth quarter and 2015. We are still expecting positive full-year 2014 revenue growth of just under 1% in Washington, DC.

San Francisco, which represents 12% of our total NOI, continues to generate extremely strong results due to high quality employment growth and a general housing shortage in the city proper. For the quarter new lease rate growth exceeded 10%, with renewals up 8.6%. Our October numbers remain strong.

Seattle, which represents 6% of our total NOI, is a highly new supply market that has held up well due to elevated employment growth. New lease rate growth exceeded 8% in third quarter and renewal growth continues to be toward the upper end of our portfolio.

Austin, which represents 5.5% of our total NOI, had good third quarter revenue growth of 4.7%, driven in part by high third quarter seasonal new lease and renewal rate growth of roughly 7% each. We expect our suburban locations will continue to outperform, as they are less directly impacted by new supply that is being delivered in the downtown core, although move outs to home purchase have recently been affecting us in the South Shore markets.

Lastly, Dallas, which represents 5% of our NOI, is performing in line with our initial budgeted expectations, but we have recently begun to feel the effects of new supply in uptown and in north Dallas. Fortunately, Dallas continues to enjoy strong job growth.

Turning to our recently completed and in lease-up developments, in aggregate, our California developments continue to perform well. Demand at our 467-home, $150 million Bella Terra community in Huntington Beach and our 315-home, $147 million Channel at Mission Bay community in San Francisco remains fantastic. Both properties hit 90% leased in less than seven months, with rents well ahead of pro forma estimates.

13th & Market, our 264-home, $73 million lease-up in downtown San Diego, and Los Alisos, our 320-home, $87.5 million lease-up in Aliso Viejo, California are generally on plan, but have been battling new supply. Beach & Ocean, our 173-home, $51 million lease-up in Huntington Beach, ended the quarter 35% leased and we welcomed our first residents in mid-October.

In DC both our 256-home, $63 million Domain College Park lease-up in College Park, Maryland, and our 332-home, $132 million Delray Towers lease-up in Alexandria continued to perform below expectations due primarily to ongoing market weakness. Despite this, we remain confident in these communities' long-term prospects and for DC in general.

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

(Operator Instructions)

And the first question will come from Karin Ford with KeyBanc Capital Markets.

Hi, good morning. Just a question on the ATM usage in the quarter.

You mentioned obviously you used it for Steele Creek, which you consider to be an accretive use of the capital. Do you guys see additional accretive uses for ATM capital, based on where you could issue stock today and should we expect to see more ATM issuance in coming quarters?

Karin, this is Tom Herzog. Good question. As far as accretive uses, there will be other accretive uses. I mean, the fact is from a development perspective we've always spoken to that being accretive, but that's funded through non-core sales.

As we think about just funding sources in general, there are really three different types of funding sources, as you know. There's equity, there's debt, there's sales, and there are merits to each depending on market conditions.

So as we look into the future, certainly we have to take into account market conditions at those times, as to which of those funding sources makes the most sense for us and our shareholders. So we still like funding in development with non-core sales. We like the match funding aspect to it.

But we don't rule out the possibility that with the right market conditions that we would consider other sources of capital as well, including equity. So we have to wait and see what it looks like as circumstances dictate in the future.

Thanks for the color. My second question is, you mentioned the sale of the Texas JV. Could you just talk about what drove the decision to make the sale at this time and what your expectations are for your remaining Texas portfolio?

Karen, this is Tom. With respect to that sale what drove it, the debt maturity is coming up for prepayment. We looked at the value and the IRR returns that we thought we were achieving at this point in time.

With the partnership with Fannie Mae concluded it would be best to expose it to the market, and we had a price that was very attractive to us and to them. We think it's going to be a good execution and a good benefit for UDR.

Do you expect to exit those markets entirely over time?

I think we're very comfortable with our exposure in Austin and Dallas and see those as dynamic markets and we like our sub market and product fit, and probably comfortable about where we're at on the investment side, but we do like those markets.

Okay. Thank you.

And the next question will come from Haendel St. Juste with Morgan Stanley.

Hey, thanks for taking my question, guys. Couple questions on the operations, I guess for you, Jerry. The gap between new and renewals narrowed from about, let's see, 190 bps at 2Q to about 60 bps this quarter, with meaningful pickup on the new lease side.

First, what was that gap for October? And then also, how do you think that relationship evolves over the next few weaker seasonal quarters? And perhaps can you give us some regional insight on the October numbers?

Sure. I'll start with the GAAP in October. It's actually our current new lease rate growth in October is projected to be probably a hair under 3%. And renewals will be about 5.1%, so it's about 200 basis points. This is normal seasonality, as you know.

New lease rate growth tends to fluctuate with a bell curve and be low in the first quarter and fourth quarter, and then it peaks up in the second and third. So you would expect the GAAP to compress.

Probably more importantly, you picked up, what was it, last quarter and what is it in October. When we looked at what the GAAP was a year ago, because we think that's more important to look at, last year in the third quarter the GAAP was 180 basis points and this quarter it was 60 basis points. And really what we are trying to do, Haendel, we may have spoken about this before, is we've been focusing more on driving up new lease rates because we think that sets a new market rent for our properties.

When you set those new market rents, we think it makes it easier as you go forward to achieve higher renewal growth. So it's hard to continuously have a large gap between renewals and new, and it will eventually put a ceiling on what you can get on renewals. We thought this was the best strategy to have.

I think we can look at our total revenue growth and when you look at how much better new lease rate growth is doing, both in the third quarter as well as so far this quarter, we're pretty optimistic about strength as we go into the remainder of the year and especially into 2015. The part that really surprised us, we said last quarter on this call, that we were willing to take a reduction in occupancy to achieve this higher new lease rate growth, these higher markets.

What we saw was we had no drop-off in renewal, in occupancy. Part of that was because turnover dropped the 450 basis points and it gave us the ability to continue to push new rate. Even though our closing ratios came down a bit, we didn't have to close on everyone.

People that were just price shopping chose to go live somewhere else, and we were able to elevate that. So we think it's going to pay off in the long term. Now, you had another question about --

Regional insight into the new versus renewals for October.

You know, you've seen -- again, I told you October versus 3Q is down about 140, 150 basis points in total. You've seen less of a drop in the west where it's stayed -- the total western part of the United States is at a 5.3%. They were probably at about a 6.7%. So it did drop, but it's still very strong.

The Southwest, which is our two Texas markets, are coming in closer to a 2%. The Mid-Atlantic region is the one that's suffering the most right now. It's at a negative 2%. That's made up of Washington, DC, Baltimore, Norfolk, and Richmond.

All of those are negative with the exception of Richmond. Currently in Washington, DC, we're showing new lease rate growth that's about negative 2.7%, and that compares to negative 1% in September. So you're seeing that typical seasonality of drop.

Baltimore has probably turned more negative than we would have expected based on how well we did there last quarter. Last quarter we had new lease rate growth that was positive 1.8%, and today it's down at negative 3%. So we have been feeling the effects, not only of the seasonality, but of also some new supply.

Then the other one that drops, and I think this is predominantly seasonality, maybe a little bit new supply, is Boston. Boston went from being up on new lease rate growth in the third quarter at 6.9% and in October it's 1.8%. While that seems alarming, when I go back and look at how I did last October in Boston, it was sub-2% also. So that's a typical seasonality.

Everything else has stayed pretty much the same or has had that typical 150-basis points drop, with two exceptions to the upside. New York City stayed stable with where it was in the third quarter at 4.5%. And our Orlando market actually picked up its pace. It was at 5.4% in 3Q and it's up to 6.3%.

Okay. Appreciate that.

Renewals, like I said, Haendel, those stayed fairly stable year round. So the 5.1% has stayed exactly the same in October.

Okay, and you brought up occupancy, which was sort of my follow-up. You got under the quarter here at 96.8%, unchanged from last quarter, highest level in looks like 15 years of operating data that we have in front of us here.

Despite your turnover being -- turnover was down about 450 basis points, as you noted. You were pushing new leases more aggressively, as you mentioned, during the quarter.

My question is, looking back perhaps do you feel like there was some opportunity left on the table in retrospect by not pushing more? And then I guess heading into again 4Q, 1Q, do you expect to maintain a similarly low turnover, high occupancy level?

I think occupancy will probably drop a bit. We do have one or two seasonal markets, like our Monterey Peninsula that will just naturally bring it down.

I think renewals, did we leave money on the table? You know, we have a strategic -- we made a strategic decision really to go after new to reset that mark that would help us on renewals later.

I think you're going to see renewal growth probably strengthen a bit as the rest of this quarter goes and not drop from its 5.1%. But we are definitely more focused on taking care of our existing residents, watching total effect of what it does to our NOI stream.

We do feel the strategy more than anything, Haendel, sets us up for 2015. It's paid off better than I expected in 2014, but it definitely set us up to go into 2015 probably as strong or stronger than we finished last year.

Thank you.

Next will be Nick Joseph with Citi.

Great, thanks. What was the difference in performance of A and B class assets across the portfolio? Then you mentioned DC, but are there any other markets where that variance was pronounced?

Really B's for the quarter, Nick, in new and -- a blend between new and renewal growth, was about 110 basis points better than A's. As we look at the month of October, that pressed to about 60 basis points. Again, we think that goes predominantly to the effects of new supply on A and not on B product. DC was probably the most pronounced.

I will tell you in our Seattle markets we've got A product both in the city of Bellevue as well as downtown Seattle. While they've done well, our suburban product that's more of a B-caliber asset in Renton as well as down south near Tacoma and some of the suburbs up north that cater to the Boeing plants have done a bit better.

Okay, thanks. You talked about the Seattle acquisitions and increasing your exposure there after being underweight. Are there any other markets that you're either over or underweight relative to your longer-term targets?

Nick, this is Harry. I think if you look at the markets where we're allocating capital, and you'll see markets like Boston in particular where we're completing a large development project, the San Francisco Bay area again where we're developing 399 Fremont, we tended to allocate capital to markets in which we want to grow our presence and we're selling out of the markets in which we want to reduce our presence.

Okay, but nothing jumps out other than kind of that slow growth through development or selling on the margin? No markets jump out as either overweight or underweight kind of where the portfolio is today?

That's right.

Great, thanks.

And our next question --

(Operator Instructions)

And we'll go to Dave Bragg with Green Street Advisors.

Hi, thank you. Tom, in your opening comments you alluded to Fannie and Freddie's plans to expand mortgage credit, but can you share your thoughts on the potential impact to your business?

David, it's really early to tell what's going to come of this. As we look through the portfolio of things that come off and surface, we have a very small 3-bedroom portfolio.

That would be probably potentially exposed, but I don't feel that -- I don't feel much exposure at this point to political rhetoric. We've got four months after the election to seat congress.

They're going to have time to sit down and look at this and think about what they really want to do. They have to answer questions about risk retention and how that will be handled. And so this is probably going to be a story for the third quarter of next year, is about the time they get their act together and come out with some clarity.

Okay. Thanks for that. And as it relates to dispositions, it looks like you'll exceed your disposition plans for 2014.

Now that we have a potential reacceleration in single-family housing, plus more multi-family activity in the second half of this year from Fannie and Freddie, is this a ripe environment for you to go beyond the 6, I think you have -- sorry, 400 to 600 million dispositions penciled in for 2015 and 2016, given the risks on the single-family side, plus a robust disposition environment? Might we see you go nicely beyond that range?

Dave, this is Tom Herzog. Our disposition guidance obviously for this year came in about where we expected it, with a couple of minor adjustments that we've made.

As we look to 2015 and 2016, again, we're really looking at it that we've got three different sources of capital. We have to, as we go forward to make the optimal decisions for our Company and our shareholders, we have to look at where equity price is out at, what debt looks like, what the different objectives around those are, and then look to sales proceeds additionally.

And with that, do we have assets that are non-core that we would like to liquidate early or recycle? Those decisions come into play. So we're not ready yet to specify how much each of those different buckets we'll include. And I don't even think that's something when we set guidance at the beginning of the year that we want to get too specific on.

I think that there's a general capital need and it's more directional, and then decisions are made throughout the year as conditions become known. We'll certainly start the year with the type of capital need that we have as a whole and some directional guidance, but as far as specifics that probably comes later.

Okay. Thank you.

We'll go on to Jana Galan with Bank of America.

Hi, this is Jean Wong for Jana. I was wondering if you could provide some outlook for 2015 in Washington, DC, what you're expecting there?

Well, I will say this. Again, this is Tom Herzog and I'll turn it to Jerry for something directional. But as far as providing guidance for 2015 at this point, that's something we're going to save for our fourth quarter call. We've got great momentum going into the end of the year.

As Tom Toomey had indicated, we expect 2015 as a whole to look a lot like 2014, so we're very optimistic, but not providing specific guidance. But directionally, Jerry, any comments you'd make on DC?

I guess generally I would say we would expect DC next year to be slightly worse than this year. I would remind you this year we're going to have positive revenue growth of somewhere between 0.5% and 1%, won't be a meaningful decline.

We think it's a sub market by sub market situation in Washington, DC, and just as we've outperformed there really over the last several years because of our mix of A and B product with Bs being about 60%, while we are affected by supply, it's not quite as much. We're optimistic that next year we'll see more job growth that will help to absorb those new units that are coming on. But I don't think you're going to see it be meaningfully different than what you saw this year.

Great. Thank you. And then just one more quick question.

Thank you for the color on the spreads to cap rates for your development yields being towards the upper end of your range, but can you talk a little bit about prevailing cap rate trends in your markets? Any changes? And for the two starts in California, you expect the 150 to 200 basis point spread, but kind of what are the prevailing market cap rates there today that you see?

Hi, this is Harry Alcock. I think it's in general in types of markets where developing cap rates have remained the same to perhaps come down slightly.

The types of cap rates that we're looking at for our California starts, the Irvine property, for example, is around 4.25%. Most of them are going to be between kind of a net 4% to 4.25% cap rate type range. These are quality properties in high-quality locations as measured by having very low cap rates.

Thank you.

We'll go to the next question from Michael Salinsky with RBC Capital Markets.

Good afternoon, guys. Jerry, just going back to your positive comments about leasing strength heading into October, the uplift you're getting from the outbound leasing efforts, as we think about the earning going into 2015, is it reasonable to expect the earning in 2015 to actually be higher than it was going into 2014? And then Tom, I know you're not providing guidance for 2015, but as you think about the preliminary budgeting, just on the expense side anything that stands out to you at this point?

This is Jerry, I'll go first. You know, we've looked at it and the earn in to 2015 is very similar to what it was last year which leads back to what Toomey said in his initial comments, that 2015 to us is looking quite a bit like 2014 both as far as job growth, supply, and all that stuff coming to hit us. But where we are on the ground right now is, again, we're doing better on new lease rate growth.

We've been pushing that over the last 4 to 5 months. We're going into the year with probably higher occupancy than we went into last year. So you probably won't see next year us get as much of a pick up in occupancy, if any, but we do think we're going to see the same type of strength in rate as we saw last year.

Okay, Mike, Herzog here again. As far as budgeting on the expense side, we're well through the process so I have a feel for that. There's nothing dramatic coming up on the expense side that you need to be concerned about.

That's helpful. And just as my follow-up question, as we think about dispositions, any governor on that just related to taxable net gains, just because you had the 1031s in the quarter?

I notice you're working through some of those non-core and warehouse assets, you've held them for sometime. Can you talk about kind of how you manage the process of tax gains versus issuing equity, just as we think about funding kind of going forward?

Good question. The 1031s in 2014, those are mainly sales out of the PRS. So that avoids any cash taxes as we're recycling some of those assets.

As far as sales out of the REIT, we have to take care to watch our gain capacity, and that is something that the team here is very tuned into and is a limiter in how much frankly we can sell, or any REIT can sell. So that does definitely enter into our calculus.

Appreciate the color. Thank you.

You bet.

And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Tom Toomey for any additional or closing remarks.

Well, again, I thank all of you for your time. And as we started this conference call, we feel really good about the business, we feel great about the business plan.

2014 is a good year for us. We're very focused on 2015 and the execution. It looks at this point in time to be a very similar year to 2014, and we feel very proud about that, and that's driven by solid fundamentals, by a team working very well together on a good plan and execution.

And we know that we'll see a lot of you next week at NAREIT and we'll let you get to your next call. Thank you for your time again today.

Thank you. That does conclude today's conference. We do thank you for your participation today.