UDR Inc (UDR) 2015 Q2 法說會逐字稿

Good day and welcome to UDR's 2Q 2015 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Shelby Noble. Please go ahead.

Thank you, Operator. Welcome to UDR's second quarter 2015 financial results conference call. Our second quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the investor relation section of our website, www.udr.com. In the supplement we 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 asked that you will he 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. I will now turn the call over to our President and CEO, Tom Toomey.

Thank you, Shelby, and good afternoon, everyone, and welcome to UDR's second 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 call.

The second quarter of 2015 was a busy and fruitful one for UDR as we continue to execute on our two-year strategic plan. This quarter was highlighted by favorable capital allocation and ongoing impressive operating results. As a result, we have again increased our full-year same-store growth and earnings guidance ranges. The following four topics highlight the second quarter.

First, operations continue to accelerate throughout the second quarter with strong new lease and renewal rate growth leading to over 7% effective rent growth for the quarter. This is an increase of almost 300 basis points year over year and over 200 basis points ahead of the first quarter of 2015. Second, our development platform continues to perform very well. Our two communities in lease up, the $218 million development in Boston's seaport and $92 million participating loan in Steele Creek development in Denver are well ahead of budgeted absorption and rent expectations. Including Steele Creek and the West Coast development joint venture projects, we will complete $310 million of accretive development in 2015 and $377 million in 2016, all of which will continue to drive cash flow and NAV growth.

Third, we entered into an agreement to acquire up to $908 million of apartment communities in the Washington DC market in conjunction with the announced merger between home properties and Lone Star funds. This transaction will allow us to increase our exposure to a recovering DC market at favorable pricing. It is consistent with our strategic plan as it will be immediately accretive to earnings, we will be able to issue OP units at or above NAV and it improves our balance sheet metrics.

And finally, we are increasing full-year earnings guidance in same-store growth ranges for the second time this year to reflect the strength evident in our operations. Since issuing initial guidance in February of 2015, we have increase revenue and NOI growth expectations at the mid point by 125 and 175 basis points respectively. Additionally, we now expect full-year FFO as adjusted growth to be close to 9% as compared to 6% at the start of the year. In short, we feel great about the reminder of 2015 and while it's early we think 2016 is lining up to be another great year for UDR.

With that, I'd like to express my sincere thanks to all my fellow UDR associates for their extraordinary work in producing another strong quarter of results. We look forward to continued success in 2015 and I'll now turn the call over to Tom.

Thanks, Tom. The topics I will cover today include our second-quarter results, a balance sheet update, a development update, recent transactions, and our revised full-year 2015 guidance.

Our second-quarter earnings results were at were above the upper end of our previously provided guidance ranges. FFO, FFO as adjusted, and AFFO per share were $0.41, $0.42, and $0.38 respectively. This was primarily driven by better-than-expected second quarter same-store revenue expense and NOI growth which was strong at 5.4%, 1.8%, and 6.8% respectively. Jerry will provide additional color in his prepared remarks.

Next, the balance sheet. During the quarter we received an upgrade from S&P to triple B-plus. At quarter end our financial leverage on an un-depreciated cost basis was 37.5%, on a fair value basis it was 28%. Our net debt to EBITDA was 6.2 times and inclusive of pro rata JVs it was 7.1 times. All metrics continued to improve as we had anticipated in our strategic plan. At quarter end our liquidity as measured by cash and credit facility capacity was $446 million.

Turning to development. We commenced construction on our 516 home, $342 million Pacific City development in Huntington Beach, California. At quarter end, the pro rata share of our development pipeline totaled approximately $1.1 billion and our equity commitment was 69% funded. Currently, the estimated spread between stabilized yields and current market cap rates is at the top end of our targeted 150 to 200 basis points range. Additionally, our pro rata share of preferred equity and participating loan investments in West Coast development joint venture and Steele Creek totaled $363 million at quarter end and our equity commitment was 94% funded. As to future development we continue to underwrite opportunities for the bicoastal focus and we anticipate the size of our pipeline to remain in our targeted range of $900 million to $1.4 billion.

On to recent transactions. As previously announced, in May we closed on the West Coast development joint venture with the Wolff Company. We invested $136 million or 48% interest in a portfolio of five communities that are currently under construction in our core coastal markets. Second, during the quarter we announced an agreement with Lone Star and Home Properties to acquire up to six communities valued at $908 million in the recovering Washington DC market. The terms of the transaction are dependent on the number of Home OP unit holders converting to UDR common OP units which we will know next week.

If all Home OP unit holders convert to UDR common OP units, the transaction will be funded through a combination of $753 million common OP units issued at $35 per unit, the assumption of $90 million of debt and $65 million in cash. This transaction is consistent with our strategic plan and provides several benefits.

First we're able to select from Home's entire portfolio and choose the specific asset that met our investment criteria. These asset includes four newly constructed or recently redeveloped properties and two properties with redevelopment opportunities. With our best-in-class operating platform, we hope to generate operating efficiencies in the acquired assets and there could be additional upside for the properties with redevelopment potential.

Second, if all home OP units holders convert to UDR common OP units, the transaction will positively impact our 2016 balance sheet metrics with debt to assets improving by up to 175 basis points and net debt to EBITDA improving by up to 0.2 times. Third, the transaction will be predominately funded with OP units issued in line with NAV and will have no associated issuance costs. Lastly, the transaction will be accretive to FFO, FFO as adjusted, and AFFO by up to $0.015 per share depending on the number issued in the assets required.

If fewer than 100% of the Home OP unit holders elect to convert, will have the option to acquire less than the six properties, or alternatively acquire some of the properties through 1031 exchanges. We will issue a separate press release when we determine the number of OP units we will issue. More details on these transactions can be found under the presentation section of our website, www.udr.com.

Finally, we sold three communities containing 812 homes in three separate markets, Orlando, Tampa, and Portland for approximately $110 million. Sales were transacted at a weighted average cash flow cap rate of 5.7% and an average monthly revenue per occupied home of $1190 and with 30 years old on average. On to third quarter and full-year 2015 updated guidance.

We increased our full-year FFO, FFO as adjusted, and AFFO guidance ranges for the second time this year due primarily to stronger than expected operations. Our FFO guidance range increased by a penny at the mid point and FFO as adjusted and AFFO guidance ranges increased by $0.02 at the mid point. Full-year 2015 FFO, FFO as adjusted, and AFFO per share are now forecasted at $1.64 to $1 68, $1.63 to $1.67, and $1.46 to $1.50 respectively. For same store we have increased full-year 2015 revenue growth guidance by 75 basis points at the mid point to 5% to 5.5%. Expense growth is unchanged at 2.5% to 3%, and our NOI growth forecast has increased 100 basis points at the midpoint to 5.75% to 6.75%. The increases were driven by strong new and renewal rate growth and stable occupancy.

Third quarter 2015 FFO, FFO as adjusted, and AFFO per share guidance is $0.39 to $0.41, $0.39 to $0.41, and $0.34 to $0.36 respectively. Other primary and full-year guidance assumptions can be found on attachment 15 or page 28 of our supplement. Finally, in the second quarter we declared a quarterly common dividend of $0.2775 per share or $1.11 per share when annualized, 7% above 2014's level and representing a yield of approximately 3.3%.

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

Thanks, Tom, and good afternoon, everyone. In my remarks I'll cover the following topics. First, our second quarter portfolio metrics, leasing trends, and the rental rate growth we realized this quarter and an overview of our current operating strategy. Second, the performance of our core markets during the quarter and, last, a brief update on our development lease ups and redevelopment progress.

We're pleased to announce another strong quarter of operating results. In the second quarter our same-store revenue per occupied home increased by 5.3% year-over-year to $1703 while occupancy was up 10 basis points to 96.9%. This led to second quarter revenue growth of 5.4%. Our total portfolio revenue per occupied home at quarter end was $1885 inclusive of JVs and now mature homes. Our revenue growth for the first half of the year was 5.2% year over year as a result of a 4.9% increase in revenue per occupied home and an occupancy gain of 30 basis points.

As Tom mentioned earlier, we increased our full-year revenue guidance range to 5% to 5.5%. Our strategy this year has been to drive rate growth which will benefit both 2015 but just as importantly 2016. In the first half of 2015 we experienced a slight increase in occupancy compared to 2014. For the second half of the year we do not expect the same occupancy pickup. We're focused on continuing the rate which will benefit 2016 revenue and NOI growth. That being said, we still expect to maintain occupancy levels in the mid-96% range.

Turning to new and renewal lease rate growth which is detailed on attachment 8G of our supplement. Our ability to push new lease rate growth continued to outpace historic precedence during the second quarter by a wide margin. We grew new lease rates by 7.7% in the second quarter, a full 410 basis points ahead of the second quarter of 2014. Renewal growth also remained robust at 7% in the second quarter, or 150 basis points ahead of last year. In July, these trends continued with new lease and renewal rate growth of 7.8% and 7.3% respectively. This strength in pricing and demand served as the primary driver of our sizable 75 basis point increase in same-store revenue guidance at mid point or 125 basis points from our initial guidance provided in February.

Second quarter expense growth of 1.8% came in on plan and brings our year-to-date growth to 2.1%. For the full year, we still expect expenses to increase 2.75% which implies second half growth of more than 3%. In the third quarter, we will begin seeing the phase out of 421G real estate tax abatements at our two properties in the financial district of New York City. The expense related to these two properties in the second half of 2015 will be $375,000. Real estate taxes in general tend to be the expense line that can fluctuate the most over the remainder of our plan.

Moving on to quarterly performance in our primary markets. These markets represent 66% of our same-store NOI and 72% of our total NOI. Orange County in Los Angeles represents 17% of our total NOI. Orange County posted year-over-year revenue growth at 6% and is outperforming versus our budgeted expectations thus far in 2015. Our Los Angeles portfolio posted strong second quarter revenue growth of 6.0% in acceleration over the 3.8% revenue growth reported in the first quarter, and we expect full-year same-store growth to be right around 6% in LA.

Although the portfolio is concentrated in the Marina DelRay Playa Vista sub markets which continue to be impacted by new supply. We are seeing new jobs enter the market which is an encouraging sign for 2016. Companies such as Facebook, Google, Yahoo, and Microsoft are all taking up space in the Playa Vista sub market with hundreds of smaller startups setting up shop along the coast from Santa Monica to Playa Vista. As we indicated a couple years ago, the jobs are finally coming to this growing tech hub in Southern California.

New York City represents 13% of our total NOI. We saw a revenue growth of 5.7% year over year in New York and expect full-year revenue growth to be in the mid-5's. We continue to benefit from our B quality portfolio in the New York City sub market and are encouraged by the 600 basis point reduction in turnover year over year. We believe this is primarily due to low home affordability as the reason to move out for home purchase is less than 5%. We continue to see a long runway of growth potential in our New York City portfolio.

Metro DC, which represents 13% of our total NOI, posted year-over-year same-store revenue growth of 2.1%. We are forecasting full-year revenue growth of just under 2% in 2015. Job growth is returning and in some sub markets supply is easing. The best performing sub markets for us in the quarter for the downtown Logan Circle sub market and Capitol Hill. We will continue to benefit from our diverse 50-50 mix of A and B assets located both inside and outside the beltway. New lease rates in July are coming in at 2%, renewals are over 4%.

San Francisco, which represents nearly 12% of our total NOI, continues to show no signs of slowing down as seen by revenue growth of 9.3% in the quarter. New lease rate growth to date in July is 15.3% and renewals are at 10.5%. Our results were mixed across our sub markets. Santa Clara properties posted revenue growth north of 12%. Our properties along the peninsula saw strong revenue growth of 10%, and our south of market properties are competing against new supply came in at 6%. We are seeing a widespread of performance between A's and B's with B's outperforming A's in the quarter by 270 basis points.

Seattle, which represents 6.7% of our total NOI, posted 6.1% revenue growth in the quarter. Our portfolio continued to benefit from the strong growth inherent in our suburban B assets, primarily those located in Renton in North Seattle which are sub markets that are less exposed to new supply. Long-term, continue to like the downtown Seattle sub market as evidenced by the recent West Coast development joint venture transaction and believe that the ongoing creation of jobs by companies such as Amazon, Facebook, and Expedia will continue to drive demand in Seattle's urban core.

Boston, which represents over 5% of our total NOI, put up 5.5% revenue growth in the second quarter despite new supply pressure downtown. Our South Shore properties continue to see the least amount of new supply pressure followed by our North Shore downtown properties.

Last, Dallas which represents just over 4.5% of our NOI posted 4.6% year-over-year same-store revenue growth in the second quarter. Our Addison properties carried this market while Plano in central Dallas lagged due to new supply that we expect will continue for the remainder of 2015. For the full year, we expect revenue growth to modestly accelerate from our second-quarter results and come in around 5%.

I'll turn now to our in lease up developments which you can find on attachments 9A, 9B, or pages 21 and 22 of our supplement, and our recently completed redevelopment View34. Our pro rata share of these three properties represent over 400 million in spend. And 100 Pier 4, our 369 home, $218 million development in Boston's seaport district was 69% leased and 57% occupied at quarter end and today is 81% leased and 65% occupied. With first move ins in mid-March, we are well ahead of our expectations on both rate and leasing volume. Asking rates today of $4.77 per square foot are ahead of our underwriting of $4.30 per square foot. Currently, we are leasing about 35 homes per month with an expected stabilized occupancy of 90% by October of this year.

Steele Creek, our 218 home participating loan investment in the Cherry Creek sub market of Denver, is currently 60% leased and 45% physically occupied. The property is achieving rents in the $3.30 per square foot range versus initial underwriting of about $3.10 a foot. For the past two months our leasing philosophy is averaging almost 30 applications month.

U34, our 739 home $98 million redevelopment in the Murray Hills neighborhood of New York City is currently over 97% occupied and has been over 90% occupied for the prior four quarters. We have $3 million remaining to spend as we complete the rooftop, finish the elevator banks, and given stabilized occupancy we removed it from the redevelopment schedule on the supplement this quarter. As a reminder, it will be added to our same-store pool in the first quarter of 2016.

As we sit here today, I can tell you that July results came in well ahead of plan. Same-store physical occupancy today is 96.5%. Renewal growth in August is projected to be at roughly the same levels they were in July at 7.3% and leasing remains strong. We see continued pricing power, stable occupancies in almost all of our markets. These factors leave us very confident for the remainder of 2015. More importantly, the impact from our rate increases today will be the catalyst for what we believe will be another strong year in 2016.

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

Thank you.

(Operator Instructions)

Nick Joseph with Citigroup.

Two quick operating questions. For DC, you mentioned the improvement in the results in the job growth, but there's talk of supply picking up again. What sub markets do you think that supply could most likely come to and if the supply does materialize, do you think DC could accelerate from here?

I'll start with that and then probably turn it over to Harry about the sub markets where the new supply is coming. We actually, as you said, Nick, we've seen it acceleration. We think we bottomed in the 4th quarter last year. As we look out to 2016, our expectation is revenue growth is going to accelerate from the roughly 2% that we're expecting this year. We look at what we built in on new and renewals. Renewals have been coming in north of 4, and they continue to do that in the month of July at 4.3% and new continues to be north of 2%, so on a blended ratio probably a little over 3%.

So if I had to guess today, it would be higher revenue growth next year. We are seeing some new supply today that's continuing in our DelRay sub market, which I mentioned in my prepared remarks where heavy new supply is requiring us to finish up the lease up there while still giving away about a month, month and a half free. That being said, the other location that we are located in we have a heavy presence along that U Street, Logan Circle corridor is performing extremely well with revenue growth 3% to 3.5%. We would expect that one to continue to do well. As far as locations of new supply, I know out in Tysons Corner there's quite a bit of new supply coming. Inside the beltway, Harry, you want to take that?

Other sub markets, Noma has several projects in some of these newer neighborhoods around the ballpark in the Southwest waterfront. We're also going to see a significant amount of new supply. As Jerry mentioned, around DelRay, in Northern Virginia we continue to see new supply in that sub market as well.

Thanks. And then just in terms of occupancy, you kept guidance of 96.5%, which is 30 bps lower than what you saw in the first half and also 30 bps lower than the trailing 12 months. Are you expecting to give up some occupancy in the back half of the year to push rate or do you think that occupancy guidance could end up proving to be conservative?

It's probably going to be a hair conservative. We didn't think it was meaningful enough to change guidance, but I do believe in the third quarter especially my occupancy will be less than it was last year as we drive to continue to push rate. But as I stated again at the end of my remarks, we're at 96.5% today. I would expect for the next five months to run somewhere in that 96.5 range which is probably a little bit of a decline from last year, but we're not going to drop off to the point where we're low 96's when we average 96.5 for the year.

Great. Thanks.

Haendel St. Juste with Morgan Stanley.

Good morning out there. Question here. Pro forma the acquisition of the home assets in DC, DC will be about 18% of your NOI. Is that a level you're comfortable at? Are you inclined to add a bit more of the regional coverage or more inclined to cull? And then second part of that question it looks like the going yield on the acquisition was somewhat low 5's. Just curious how you're underwriting NOI growth over the next couple years as part of the acquisition?

Haendel, this is Toomey. With respect to the comfort level around DC, we're comfortable with the 18% exposure. I wouldn't see us inclined to grow that above that level. Certainly we think the DC market is obviously recovering, values will continue to grow there. And at some point we'll look at culling some of the assets. No particular timeframe for that, but we're always looking to try to maximize the value and we think that that market will arrive DC probably 17 or 18. Harry, you want to take the second question?

Sure. In terms of underwriting assumptions, property by property we assume revenue growth during the first year somewhere between 2% and 3% depending on the asset. One of the properties, Arbor Park, is completing lease up after their major redevelopment. That property we underwrote in the low 90s in the first year. It is currently around the mid-80s today, and push that up to 94% in the second year so we have some second year upside on that asset in particular.

Okay. Appreciate that. Are you looking or considering starting development projects in DC today, and not to tie too much to the question I asked before, I understand that you're comfortable at a level where you're at of 18% of NOI, but just curious on your level of comfort to pursue development opportunities in DC today?

Haendel, it's Harry. We don't currently have any land assets that are available for development in the short term. It is, however, a market that we would develop in. It's a recovering market. As we mentioned, we typically like to have one property in each of our core development markets under construction at any given time. We're just completing the lease up of DelRay, hoping expectation would be that sometime in the next year or two we will have another land asset that will facilitate a new construction start.

Okay. A follow-up while I have you on the line here, Harry. Just curious, conversations with potential sellers here in the last couple months with rate risk on people's minds, any change in the number of opportunities you're seeing come to the market and any changes in the [tenor] in your interactions with sellers?

Haendel, it's Harry. We haven't seen any significant change in the volume of opportunities available. There continue to be a significant amount of transactions; 2014, as you know, there were well over $100 billion in transaction volume. We expect 2015 to be something similar. In terms of interaction with the sellers, there's a lot of capital facing these assets. We don't -- we haven't had any interaction that would be unusual. I'm not sure exactly the question you're asking, but it continues to be a very active transaction market.

Okay. Thank you for your time.

Dan Oppenheim with Zelman & Associates.

I was wondering if you could talk about the idea of the turnover and how much of that is being driven by the upward movement of rent and just the inability of current residents to handle that? You talked a lot recently about handling, being happy with low conversion and pushing rents. Wondering overall the depth of demand that you're seeing in terms of the income qualifications for the residents.

Sure. This is Jerry. I guess to start with we've seen move outs due to rent increase probably go up 300 basis points over the last year or so from about 6% of the reasons for move out to a little under 10%. So, still at a level that we're comfortable with. And we look at total turnover in the quarter it was up 110 basis points compared to the second quarter of last year. The majority of the reason for that is we had a higher number of lease expirations in the second order than we had back in 2014 second quarter of about 350 leases.

Probably two or three years ago we started an effort to move more of our [expirations] from first and fourth quarter into the middle two quarters primarily because new lease rate growth at those high demand times is typically 200 to 300 basis points higher and that's what it was this year when the second quarter new lease rate growth was 7.4% compared to 4.2% in the first quarter of this year. So, we pushed it to that level. We also would expect third quarter which will have probably 100 to 200 more [expirations] than we had last year to also have turnover at or higher than it was last year, but then as we get into the fourth quarter we would think turnover would be a little bit less than last year, so when you look at the entire year, turnover should roughly be flat with what it was last year. And you look at rent to income really haven't seen much of a change, it's inched up a little to where it's in the high teens pushing 20%. I would tell you though that is not -- that's a soft number, meaning half of my residents have probably lived with me on average three to five years. Our average tenure is something like 25 months.

We only qualify people at the time they move in, so we don't re-qualify them. So over that three- to five-year period they have been getting salary increases. So, I think any time you hear any of us talk about rent to income levels you should realize we don't go back and recertify them every year on income. I tend to look more is my turnover going up when I'm pushing rate, and when I look in California and the West Coast where I've been pushing rate the most over the last year, year and a half, turnover is actually down in places like San Francisco, Orange County, and locations like that on the year-to-date basis.

And then the other thing I look at is if you're pushing too hard some people will renew but then they turn into bad debt as they become a skip or an eviction. My bad debt has actually gone down year-over-year to the point this year it's at less than 0.2% of our gross potential rent, so I look at those two metrics a little bit more because they are hardy numbers and easier to measure, and if we see a situation where either my bad debt starts to spike or my turnover starts to go up dramatically, that's a better indicator to me that I push too hard.

Great. Thank you.

Jordan Sadler with KeyBanc Capital Markets.

It's Austin Wurschmidt for Jordan. Jerry, you mentioned that you feel like you have a long runway for both the New York. I was wondering if you could just provide some additional detail around your comments and what really gives you the confidence that would supply increasing in 2016 and the burn off of 421A?

Well, the main thing is the 421A is not in my same store. The 421A is at a Columbus Square property which is a joint venture. On the same-store side, what really gives me the most confidence is when I look at the rate growth that I've been getting this year and in New York we got 8.4% in the second quarter on new, 7% on renewals. The month of July new was at 9.3%, so we see strength and incoming traffic and incoming residents rather.

The other thing is two of our properties are in the financial district with the World Trade Center starting to be occupied and retail coming down there it's becoming much more of a livable space. I guess thirdly when we look at our portfolio there it's a B product with two of the properties in financial district, one in Chelsea, and then View 34 or the former Rivergate, will come into same store in the first quarter. We are finishing the redevelopment there. Those are all B properties that none of them will compete directly with the new supply that's really come to Midtown West, and they're going to be at different price points, so we just have not seen the impact of new supply and our feeling right now is will continue to not be directly affected. Our property up north, Columbus Square, does feel a little bit of the effect of the Hudson Yard and Midtown West, but it's still producing revenue growth north of 4%. Now, Harry, do you want to talk about the supply in New York?

Well, there's been a lot of reports written that publicize the significant supply, a number of permits pulled in May and June in New York City. The primary reason is developers were trying to get in under the expiration of the 421A program. The program has since been extended but clearly is not as developer friendly with additional affordable housing units that are going to be required to lease up, somewhere close to 8,000 units in Manhattan for permit hold in the months of May and June, even more in Brooklyn somewhere in the neighborhood of 35,000 permits that have been pulled in all of the burrows over the last couple of months.

Thanks for the detail there. And then just on the capital side I was wondering, looking at the source of funds outlined in guidance, the $750 million to $900 million, does that contemplate the potential units issued for the HMA transaction?

This is Herzog. No, it does not. With the home transaction there would be units in addition to what's been described in the sources we've spoken to earlier.

So then how would you really think about the mix of capital raising throughout the balance of the year to the extent you feel comfortable that the HMA deal is going to go through as currently structured?

Well, the fact is that when we look at our sources and uses for the balance of the year we've got about $200 million to $250 million left to fund in total and that's really unchanged from what we spoke to last quarter. It will be some combination of sales or could be stock or could be debt. Whatever we conclude at the time provides the best pricing and the best outcome for our investors. So, as far as home, again the majority of that comes through OP units. It depends on how many of the home OP unit holders convert to UDR units as to what it will actually look like, and we'll have those numbers sometime in the next couple of weeks. We've got some optionality obviously on whether we would kick some assets out if we didn't have full conversion or do 1031's or the like. So, we're in good shape on that.

Thank you.

Drew Babin with Robert W. Baird.

Hoping you can talk through the unsecured debt market right now and what you're seeing in terms of spreads and what we should think about for modeling purposes in terms of potential bond offering in the next couple quarters?

Yes. We did get a ratings upgrade to BBB+ by S&P and we are Baa1 by Moody's last year. The current spreads are probably in the range on a 10-year deal of 160 to maybe upwards of 170 basis point all-in spread including new issue concessions but probably close to that 160 mark is my guess. That's what the spreads look like on a 10-year deal.

Okay. And just a couple guidance items. I was hoping you could talk through the increase in G&A expense as well as the lower JV FFO guidance.

Yes. The increase in G&A is going to be just two things. We've had out performance during the year against what we had set forth as our plan and therefore the incentive programs pay out at a higher rate and that's what the increase in the guidance that we set forth on attachment 15 is for that. And then as far as the joint ventures, that would've been the Wolff JV and then also the addition of Steele Creek. Some offset for sale of the Texas JV and then there are a few other moving parts within that, but those are probably the bigger numbers.

Okay, that's helpful. Thank you.

Dave Bragg with Green Street Advisors.

A couple questions on dispositions. First, could you remind us what level of CapEx is reserved for in your cash flow cap rate?

The cash flow cap rate, Dave, this is Harry, includes $11.50 per unit in CapEx.

Is that a consistent assumption anytime we see that from UDR? Is that the right number to apply?

Yes.

Okay, thank you. And what's the disposition pipeline looking like from here?

Well, it depends. We've got maybe another -- I guess I would back up. We put it into that pool. We've got to $200 million to $250 million left to fund absent home and that is going to be some combination of sales, debt, and stock. So, again, the funding needs are not great so I hate to put a number on it because it could change during the year based on conditions.

Okay, and you have been planning on a bond offering earlier in the year. What's the latest on that plan?

We've been looking at a 10-year deal toward the end of last quarter and we've got that about two-thirds hedged right now from a treasury perspective, so there wasn't a massive hurry on that. We bumped into the Greece and Chinese crisis which caused the markets to be a bit choppy and concluded that we are probably better off to look to do that sometime probably in the early part of the third quarter. So that's still part of the plan, but we decided to push that event.

Okay, and the last question is there anything qualitative you can share with us regarding the solicitation of home OP units holders?

This is Toomey. Dave, it's a fair question. At this time we will have an answer in a couple of weeks. And so we will probably just be able to come out with a press release shortly thereafter with the facts, and so speculating between now and then really doesn't serve much of a purpose.

Understood. Can you just explain to us how the process worked?

I'm sorry, Dave, in terms of what?

The communication between UDR and OP units holders.

Well, we've been working in conjunction with the team from Home and have been having conversations, meetings, and dialogue with OP unit holders both to kind of explain the transaction along with the Home people as well as explain the options and they have -- they received a 700-page offering document so as you might imagine it's fairly complex, so we are in day-to-day dialogue with them.

Okay. Thank you.

Rob Stevenson with Janney.

Jerry, in terms of the increase in the same-store revenue guidance, were there one or two particular markets that you're really seeing in the back half of the year or thus far this year where it's really surprise versus where you started the quarter it was driving that?

Yes, that's a great question. Really the bulk of the increase -- well, let me put it this way. We only have one market that is not hitting the original business plan and it's not a material market, it's Richmond, Virginia. Every one of my other markets is above plan and they vary to some degree. I would state the biggest surprises to original guidance have come West Coast. Going from -- and mostly from Northern California up through the Pacific Northwest have outperformed by quite a bit to our original expectations. I would say following that the two Texas markets, both Dallas and Austin, are holding up better in the face of new supply than we originally expected. And then when you get beyond that, whether it's SoCal, the rest of the Sunbelt or the mid-Atlantic, they're all doing better than original plan but the biggest drivers were the northwest.

Okay. And then, Harry, what are you see today in terms of construction cost? You guys are starting this new development. Is it where the cost have been sort of 6, 12 months ago on this project versus today and where are you seeing the biggest upward push?

So, Rob, over the last couple of years we consistently saw double-digit cost increases. I can tell you today as we're looking to start new projects and are looking forward to next 4, 6, 8, 10 months cost increases have moderated, in fact we're starting to see decreases in certain materials. Steel has come down 10% plus over the yes year or so, lumber has come down 5%, 6% over the past year. So as we look forward, cost increases have moderated we're now looking at sort of a mid-single-digit type cost increases. The labor market in certain locations continues to be challenging. It is pushing back against some of these material declines, though we've gone from kind of mid double-digit type increases or mid-teens down to mid single-digits.

Okay. And then just lastly in your urban core, what do you see these days in terms of both ground up condo development as well as condo conversions?

Rob, this is Harry. So we're seeing it a lot in New York City so that really was the first market where that materialized, the condo boom. It's manifested itself in land prices which has gone up significantly and so far fewer apartment projects we pencil now is for multifamily use. It's migrated a little bit to San Francisco where you're seeing, for example, a project right across from our 399 Fremont deal is being sold to a condo converter. The project just completed lease up and now is coming out of the rental pool and will be sold to condo buyers. So we're seeing it a little bit in San Francisco. In other markets we're not seeing it to a great extent. You're seeing it a little bit in smaller projects in Southern California, a little bit in Boston, but really a lot in New York, some in San Francisco, and then just a small number in other markets.

Okay. Thanks, guys.

Steve Sakwa with Evercore ISI.

Just one quick question, Tom. What's the actual treasury lock rate that you have for the debt deal?

We came in at about -- let me think back on it. It was about 245 and there was about 20 basis points of forward carry.

So kind of a treasury of 265 plus the spread of 160 you talked about?

Yes.

Okay, great. Thanks.

Ian Weissman with Credit Suisse.

Just two questions. Maybe you can give us an update on that potential sixth acquisition from Wolff and what's sort of been the issue with finalizing that transaction?

Sure. This is Warren. We are currently in negotiations on the sixth asset. We're hopeful we'll be able to consummate that within the near future. The issue is that there's a minority partner on the Wolff side and we've also had to include them in negotiation which have been discussed over the last couple of weeks.

All right. Okay. And, finally, everyone's been focused on DC and New York, just turning to LA for a second. Both you and Avalon reported a pretty nice jump in revenue growth in that market. It's certainly been a long time coming. Maybe you can just talk about some of the drivers in LA today and what you think sustainable growth is in that market?

Yes, this is Jerry. And you're right. We're excited to actually participate in some of the higher revenue growth this quarter after having a disappointing 3.8% growth in the first quarter. We turned it around to 6%. This quarter our expectation full-year revenue growth in Los Angeles for us will be north of 6% and really what's driven it for UDR I'd remind you bulk of our same-store portfolio is in Marina DelRay and there's been quite a bit of the new tech jobs coming in Playa Vista. Over the last two years we've had new apartments come to Playa Vista, so it came, proceeded the job growth, but the jobs are finally starting to come.

I think in addition to that the light rail that goes from Santa Monica into the downtown area is helping drive rates in the west side and one other benefit we more recently seen in our Marina DelRay portfolio is rental rates in Santa Monica have been driving people to head down the coast five or six miles to us. New supply is coming in LA right now and it's kind of shifted from that west side. It's hitting downtown right now and we're seeing a little bit of pressure down there, but we're still optimistic about downtown. It is becoming much more of a livable city with retail and night life and some job growth. But again as I stated earlier our same-store pool is heavily concentrated in that area and we're finally starting to see the job growth fill up our apartments.

And has there been a shift in cap rates in that market now that their momentum is building?

Cap rates have been low in that market for some time. We haven't seen any noticeable decline in cap rates. They have been and continue to be very, very low for good product in the Los Angeles area.

I appreciate the color. Thank you.

Ryan Peterson with Sandler O'Neill Investments.

Thanks, guys. Just a quick question back to unsecured. Have you guys ever thought giving any consideration to shorter term than 10 years? Just heard some peers speak about that and the relative pricing attractiveness and wondering whether you would other consider that.

This is Toomey. When we look at our debt maturity schedule we've got a pretty good open slot with very little maturing in 10 years out, so we'd probably pick that window. And that being said, we're always looking at the price differential but really our overall governing element is to try to keep that level laddered maturity schedule.

Okay, great. Thank you.

(Operator Instructions)

John Kim with BMO Capital Markets.

I had a question on your same-store expenses in your MetLife joint venture. They increased significantly during the quarter and much higher than your balance sheet assets. Was there a specific reason for this and is there something that may translate into your own portfolio given there's an overlap in geography?

No. Those are typically just related to real estate taxes, either increases this year or refunds last year. I can't remember specifically on those what drove it to that level, but I'm pretty sure we did recognize some real estate tax refunds in some of the California assets last year and we may have gotten hit with an increase in one of our Texas markets this year, so it's purely real estate taxes.

Okay. And then on the turnaround that you had in DC on new leases, can you elaborate if there's a particular price point in the sub market that you're finding more success in recently?

Really it's interesting that the A's are doing better than they did last year. A year ago, the spread between A's and B's was probably 500 to 600 basis points, is compressed to the point today where it's closer to what it is in our total Company which is somewhere in the 100 to 150 basis point differential. Like I stated earlier, we're finding some of that urban core A product downtown and Logan Circle, Thomas Circle, and U Street which are right in the same general area are very strong. Our property in Shirlington Village is probably our most struggling property today because of new supply. And the B assets outside the beltway are continuing to do fairly well. I would say our strongest sub market inside the beltway is that U Street Corridor.

And then finally on dispositions, have you disclosed what your IRRs our economic gains are on the assets that you completed this quarter?

We have not but we can. You want to take it, Harry?

This is Harry. The three assets we sold this quarter, the weighted average IRR was around 11%. So we had kind of a 12%, a 9%, and an 11% for the three assets that sold. You recall we sold the Texas JV the first quarter in about 14%, so for the year we're at about 12% unlevered IRR for those asset sales.

All of those numbers you mentioned are unlevered IRRs?

Yes.

Okay great. Thank you.

Wes Golladay with RBC Capital Markets.

With the labor market tightening, are you seeing any turnover at the property level and also at the construction level?

I'll start with the property, this is Jerry, then Harry can take construction. Turnover is up a hair year-over-year and it's predominantly in the high apartment supply market, so when you look at DC, Seattle, places like that we feel dealt a bit of pressure but nothing significant. I do think as we look into 2016 we're going to see a little bit more wage pressure and where as year-to-date our personnel expense is up about 3.5%. I'm guessing it's going to be about 100 basis points higher than that in 2016. Harry?

This is Harry. On the construction side it is a very high labor market for construction management personnel. We've lost one person this year and are in the process of replacing him. We've added a couple others as new projects have started, but it is a very competitive labor market.

Okay. Thanks a lot for taking the questions.

And at this time there are no further questions. I'll turn the call back to Tom Toomey for closing remarks.

Thank you, Operator, and thank all of you for your time and interest in UDR. As we've gotten two quarters down in the year it's very good year for us. We're looking forward to the second half of this continued strength and out performance and certainly the teams remain focused on the strategic plan, the execution of it, and building to the strength of 2016 and we think that's going to be a good year as well. So with that thank you and take care.

This concludes our conference. Thank you for your participation.