UDR Inc (UDR) 2015 Q4 法說會逐字稿

Good day and welcome to UDR's fourth-quarter 2015 conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Shelby Noble. Please go ahead.

Welcome to UDR's fourth-quarter financial results conference call. Our fourth-quarter press release, supplemental disclosure package and updated two-year strategic outlook document were distributed yesterday afternoon and posted to the Investor Relations section of 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.

Prior to reading our Safer Harbor disclosure, I would like to direct you to the webcast of this call located in the Investor Relations section of our website, www.UDR.com. The webcast includes a slide presentation that will accompany our two-year strategic outlook commentary.

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

When we get to the question-and-answer portion we ask that you be respectful of everyone's time and limit your questions 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, Shelby.

And good afternoon, everyone, and welcome to UDR's fourth-quarter and 2016-2017 strategic plan update 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.

During this call we will present our updated two-year strategic outlook, as we have done in the last three years. In 2015, we again met or exceeded all primary objectives of our strategic plan, and to date have meaningfully outperformed each of our prior plans. Tom will address this outperformance and the next two-year strategic outlook in detail later in the call.

Turning to 2015, it was another great year for UDR and we continue to see strength in all aspects of our Business. A quick recap of the team's accomplishments during the year. First, our operations continue to run on all cylinders and delivered strong same-store results across the board, with same-store NOI growth of 6.7%, a full 220 basis points ahead of our initial expectations.

Second, we delivered over $300 million of developments, which leased up well. And we expect to hit our targeted returns of 6.2% or better at stabilization.

Third, we entered into two accretive problem-solving transactions, namely the $559 million West Coast Development joint venture and the $901 million Washington, DC acquisition, in which we kept to our principles of self-funding, accretive to cash flow growth, and continued strengthening of our balance sheet.

Last, we grew AFFO per share by 12%, a strong rate, which resulted in a 7% dividend increase and meaningful consensus NAV per share growth of 15%. We continue to believe that growth in these two metrics translates into strong total shareholder return over time.

Looking towards the future, we feel very positive about our business and our prospects. Multifamily fundamentals remain extraordinarily strong. The positive demographic trends amongst our prime renters, the 22- to 35-year-old population cohort, is expected to grow through 2030, and is not reversible. This, coupled with steady job growth, leaves us confident that our operating platform, which is our primary driver of our cash flow growth, should continue to generate impressive results in the future.

Our self-funded development pipeline is expected to generate the incremental cash flow and value creation we originally forecasted. Expected additions to the pipeline in 2016 will maintain our targeted size at $900 million to $1.4 billion, and are forecasted to be highly accretive. Our ability to fund this pipeline with asset sales largely reduces our dependency on capital markets. And, as we've stated in prior years, we will continue to focus on improving our debt metrics.

In summary, there remains a long runway for growth at UDR and we have the right plan and team in place to capitalize on the opportunity. With that, I'd like to express my sincere thanks to all my fellow UDR associates for their hard work in producing another strong year of results. We look forward to a great 2016.

And now I will turn the call over to Tom.

Thanks, Tom.

Our fourth-quarter earnings results were in line with our previously provided guidance. FFO, FFO as adjusted, and AFFO per share were $0.41, $0.42, and $0.37, respectively. Fourth-quarter same-store revenue, expense and NOI growth remained strong at 6.2%, 5.2% and 6.6%, respectively.

For full-year 2015, FFO, FFO as adjusted, and AFFO per share were $1.66, $1.67, and $1.51, respectively. Full year same-store revenue, expense and NOI growth of 5.6%, 3.0% and 6.7% exhibited continued strong demand for apartments, and were above our initial expectations provided last February.

At year end, our liquidity, as measured by cash and credit facility capacity, was $987 million. Our financial leverage on an undepreciated cost basis was 34.6%. Based on our current market cap, it was approximately 26%, and inclusive of JVs it was approximately 30%. Our net debt to EBITDA was 5.7 times, and inclusive of JVs was 6.7 times. All balance sheet metric improvements were ahead of plan.

On to first-quarter and full-year 2016 guidance. Full-year 2016 FFO, FFO as adjusted, and AFFO per share is forecasted at $1.75 to $1.81, $1.75 to $1.81, and $1.59 to $1.65, respectively. For same-store our full-year 2016 revenue growth guidance is 5.5% to 6.0%, expense 3.0% to 3.5%, and NOI, 6.5% to 7.0%. Average 2016 occupancy is forecasted at 96.6%. Other primary full-year guidance assumptions can be found on attachment 15 or page 28 of our supplement.

First-quarter 2016 FFO, FFO as adjusted, and AFFO per share guidance is $0.42 to $0.44, $0.42 to $0.44, and $0.40 to $0.42, respectively. Finally, with our release today we have increased our 2016 annualized dividend to $1.18 per share, a 6% increase from 2015, and representing a yield of approximately 3.25%.

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 fourth-quarter portfolio metrics, leasing trends and the continued success we realized in pushing rental rate growth again this quarter and into January; second, the performance of our primary markets during the quarter and expectations for 2016; and, last, a brief update on our lease-up developments and the Washington, DC acquisition.

I'm pleased to announce another strong quarter of operating results. Our fourth-quarter same-store revenue growth of 6.2% was driven by an increase in revenue per occupied home of 6.5% year over year to $1,794 per month, while same-store occupancy of 96.5% was 30 basis points lower versus the prior-year period.

Our fourth-quarter strategy of holding rate high, along with aggressive rate increases throughout 2015, benefits us in 2016, as we entered the year with almost 2.75% of our revenue growth already baked into our rent roll. Our robust full-year same-store revenue growth of 5.6% was driven by a 5.5% increase in revenue per occupied home and flat occupancy. We see strong rate growth continuing in 2016.

Turning to new and renewal lease rate growth, which is detailed on attachment 8G of our supplement, we continued to push rate in the fourth quarter. New lease growth totaled 3.8%, or 170 basis points ahead of the fourth quarter of 2014. Renewal growth remained resilient, improving 170 basis points year over year to 7%. This year-over-year acceleration was accomplished with only a 40-basis point increase in fourth-quarter turnover.

Next, move outs to home purchase were up 120 basis points year over year at 14%, in line with our long-term average. Importantly, our full-year 2015 turnover rate increased by just 20 basis points versus full-year 2014.

Even with renewal increases at a seasonally strong 7%, only 7% of our move outs gave rent increase as the reason for leaving in the fourth quarter. However, we expect turnover to increase roughly 100 basis points in 2016, as our revenue growth is highly predicated on the rate growth and not year-over-year occupancy gains.

Moving on to quarterly performance in our primary markets, which represent 69% of our same-store NOI and 75% of our total NOI. Metro DC, which represents 18% of our total NOI, posted positive full-year revenue growth of 1.7%. We expect improving full-year revenue growth in 2016 of around 2.5%, as we continue to benefit from our diverse exposure of 50% B assets and 50% A assets located both inside and outside the Beltway.

Orange County and Los Angeles combined represent 15.4% of our total NOI. Orange County posted sequential revenue growth of 160 basis points and continues to outperform our budgeted expectations early in 2016. LA is materially stronger due to our heavy concentration in the Marina del Rey sub market, as new jobs have continued to migrate to this highly desirable sub market.

Fourth-quarter revenue growth in LA was an impressive 10.2%. Our current expectation is that both of these markets will generate revenue growth in the 7% range in 2016.

New York City, which represents 12% of our total NOI, posted full-year revenue growth of 5.6%. We saw seasonal weakness in the fourth quarter and early January, but future trends are pointing to strength within our sub markets. We continue to expect new jobs from technology, finance, and media, which will benefit our lower Manhattan properties. Our 2016 forecasted revenue growth of 6% is above 2015. I would remind everyone that View 34 is in our same-store pool beginning in first quarter of 2016.

San Francisco and San Jose, which represent 11% of our total NOI, posted full year revenue growth of 9.7%. Although we saw weakness in the fourth quarter, it is indicative of the first- and fourth-quarter seasonality that we've seen in this market in the past. With that said, we believe this weakness is possibly more than just seasonal and do not expect this market to post the double-digit revenue growth it has in recent years, and we have forecasted a deceleration in 2016 to revenue growth of 8% or so.

Future trends are slowly improving from what we saw in the fourth quarter, but we are keeping a close eye on the job growth and absorption levels within our sub markets. Keep in mind, San Francisco job growth has been above 4.5% for the past few years. Axiometrics' current forecast calls for job growth to decelerate to 2.5% to 3%, but still well above the national average of 1.75% to 2%.

Seattle, which represents 6% of our total NOI, benefited from strong growth from suburban B assets that are less exposed to new supply than A assets downtown. Although new supply will challenge us somewhat in downtown Seattle, and to a lesser degree in Bellevue, we expect 2016 to be slightly below our 2015 numbers, or roughly 7% growth.

Boston, which represents 7% of our total NOI, should continue to see new supply pressure downtown, but our suburban assets in the North and South Shores should fare relatively better in 2016. Long term, we like the downtown sub market, and look to continue to grow through development in this sub market.

Most recently GE announced the relocation of their global headquarters to the seaport district. This will bring another 800 jobs into the sub market which should directly our 369-home 100 Pier 4 community and our future 345 Harrison development in Boston's south end. Our forecast calls for revenue growth to accelerate slightly from the 5.5% growth posted in 2015.

Last, Dallas, which represents 5% of our total NOI, posted 5.1% year-over-year growth in the fourth quarter. We expect new supply pressure in uptown and Plano in 2016.

January results indicate that these sub markets are performing slightly better than initial budgeted expectations, and 2016 revenue growth is projected to improve to roughly 5.5% from 5% in 2015. As you can see on attachment 7B of our supplement, our 320-home Los Alisos community located in Orange County, our 196-home Waterscape community located in Seattle, and our 740-home View 34 community located in New York City will join the same-store pool in the first quarter of 2016.

Turning to our in lease-up developments, Katella Grand I, our 399-home, $138 million lease-up in Anaheim, California in the West Coast Development JV, was 16% occupied at quarter end, and as of today is 20% occupied and 27% leased. We are currently offering less than one month of concessions at this community and leasing has been very strong in January, with 25 applications.

CityLine, our 244-home, $80 million lease-up in Seattle, Washington, was 9% occupied at quarter end. We are on budget and meeting our lease-up expectations.

Finally, 399 Fremont, our 447-home, $318 million lease-up in San Francisco, began leasing during the fourth quarter. At quarter end we were just 2% leased and today we are over 10% leased with rents exceeding pro forma. We will have our first move-ins in March of 2016.

Now, a quick update on the Washington, DC acquisition. We're three months into owning these communities and everything is going according to plan. Currently we're making CapEx improvements at two of the properties to either cure deferred maintenance or drive a higher return through revenue-enhancing improvements. We still expect these communities to perform in line with our DC portfolio this year with revenue growth right around 2.5%. Currently we would expect five of the six communities in this portfolio to enter our same-store pool in the first quarter of 2017.

With that, I will remind those listening that there is a link to our updated two-year strategic outlook document on the Investor Relations page of our website. We will pause for a moment so that everyone can gather the two-year outlook materials.

We'll now turn the call back over to Tom Toomey.

Thanks, Jerry. And please turn to page 3 for some high level thoughts.

First, we view this year's update as a continuation of the last three plans. We believe this continues to be the right path for UDR. Here's why.

The plan's primary objective is to drive high-quality cash flow growth, while incrementally improving our balance sheet and portfolio -- in other words, consistent, sustainable growth that is funded in a safe, low-risk manner. We believe that successful execution of these objectives will drive strong total shareholder return.

There are four key points I'd like to highlight why we think there's a long runway of accretive growth ahead. First, fundamentals. You have seen plenty of published data on this, and clearly demographics, supply, demand characteristics are in our favor, and any good business that is going to grow for a number of years needs solid fundamentals.

The second is strategic position. Where do we start? We're in 20 markets, 50% A-B quality mix. We like this position. We think it solves for the number one critical element of any future growth, which is the positioning of our portfolio such that our residents will continue to be able to grow to pay higher rents.

The third is the team and the skills. Operationally, we'll continue to innovate, invest in technology and training programs, all of which are designed to increase our margins, which now stand above 70% at the NOI line -- extraordinary for any business. On the development side, we'll remain focused on looking at our risk-adjusted returns and staying disciplined.

Third is problem solving. Clearly we operate in a cyclical economy and along that line there will be challenges and opportunities. We have a team that is very experienced of managing through these cycles, if not anticipating these cycles and these opportunities. Certainly I feel confident that the team has the ability to capitalize on these opportunities as they become available.

Lastly, and just as important, is managing risk. We see ourself managing this through, first, our diversity of our market mix, our discipline around our development, and certainly a continued improving balance sheet set of metrics, and, lastly, our transparency and disclosure and communication style.

We believe these main objectives continue our cash flow growth and optimizing our total shareholder return. We remain fully focused on executing them.

With that, I will turn over to Tom to discuss in detail the updated outlook.

Please turn to page 4.

As Tom mentioned earlier, we have met or exceeded all of our primary financial and operational objectives to date, as set forth in our prior three-year plans published in 2013, 2014 and 2015. In particular, our same-store growth and development deliveries have outperformed over the past three years and have served as primary drivers of our better-than-expected cash flow growth and improvements in balance sheet metrics.

Turning to page 5, perhaps the most critical driver of UDR's value-creation strategy is our best-in-class operations. We are continuously implementing new revenue growth and cost efficiency initiatives throughout the organization to improve how we do business.

As noted on this page, we have consistently produced better overall top-line growth versus peers and the US average since the initiation of our three-year plan in 2013. During this time we have grown our total revenue per occupied home by 26%, increased occupancy by 100 basis points, reduced turnover by 310 basis points and improved our margins by 220 basis points.

So how have we maintained our operational advantage and how do we intend to keep it in the future? Please turn to page 6. Many listening to this call are familiar with the primary revenue generation and expense control initiatives that are under way. These, along with potential future initiatives, are presented in the table on this page. Importantly, all of our growth and efficiency initiatives have one thing in common -- they either provide our customer a wanted service or allow our associates to do their jobs better. Current initiatives should continue to drive our bottom line, and our list of potential future initiatives is extensive.

Please turn to page 7. This page lists some of our operational projects that have been implemented over the past couple of years and their impact on our NOI. As is evident, we have made solid progress on each initiative to date and our bottom line has benefited greatly. We will continue to capture additional NOI efficiencies from these initiatives.

Operations has been and will continue to be a significant competitive advantage for us. This is not just because of our superior blocking and tackling in the field, but also because of the creativity our operations team employs to continuously improve the business.

Turning now to capital allocation and development on page 8, development remains a vital component of our value-creation strategy. While not as many deals pencil in today's environment, development remains accretive and will continue to be a primary means through which we continuously improve our portfolio.

At year end our underway development totaled $670 million for which the equity requirement was 55% funded. Additionally, our share of the West Coast Development joint venture going-in value was $271 million, for which 100% of the equity has been funded. This pipeline is concentrated in our primary coastal markets. Inclusive of the West Coast Development JV we expect to deliver $375 million and $220 million of projects in 2016 and 2017, respectively.

Our annual targeted spend of $400 million to $500 million per year, and our targeted trended spread versus cap rates of 150 to 200 basis points, have not changed. While construction costs continue to increase, so do rents.

To mitigate market risk around new development projects we employ the following disciplines. First, prior to a development commencing we generally seek and title land, demand full drawings and a GMAX contract, thereby locking in costs and reducing risk.

Second, we diversify our geographic exposure. Our goal is to commence a new development in a target market as the previous development is leasing up.

Third, we utilize conservative top-line growth assumptions to underwrite our projects. And, lastly, we employ a self-funded strategy to fund our development pipeline and reduce dependency on capital markets.

Through our free cash flow and non-core asset sales we can fully fund our annual development spend. In other words, we are match funding our risk as we recycle older, non-core assets to develop new, core assets in our primary markets.

In 2016 and 2017 we will continue to mine our current land bank, as well as add new land sites. We are planning two to three starts in 2016 which include one large wholly-owned project, 345 Harrison in Boston, and one to two smaller, 50/50 JVs with MetLife. As of year end 2015, our shadow pipeline was approximately $900 million at our pro rata ownership and represented $425 million to $475 million of value creation, assuming current spreads.

Please turn to page 9. We anticipate that upon full stabilization, which occurs at different periods for each project, our pipeline of underway and completed developments is expected to generate accretion of $0.07 per share with growth thereafter. On an NAV basis we expect our pipeline to generate $1.75 per share at stabilization, approximately 35% to 40% value creation over cost.

Page 10 exhibits some of our recent developments.

Please turn to page 11. As focused as we are on operations and development, maintaining a strong balance sheet along with a self-funded plan are just as important. We exceeded the balance sheet metric goals provided in our 2013, 2014 and 2015 strategic plans. And we expect further improvement in 2016 and 2017.

This has also been acknowledged by the rating agencies. In 2014 we received a credit upgrade from Moody's to be BAA1, and in 2015 we received an upgrade from S&P to BBB-plus.

On the capital markets front, our 2016 and 2017 capital needs will be funded through a combination of asset sales and new equity and debt, of which we will utilize the most advantageous source depending on our strategic objectives, market conditions and pricing at the time the capital is needed.

Please turn to page 12. In 2015 our AFFO per share growth was a strong 11%. In 2016, AFFO per share growth is expected to average in the 6% to 9% range. This growth will continue to be driven primarily by favorable same-store growth and development earn-in, and these will be partially offset by a few items, including non-core dispositions, higher expected interest rates, and 421-a and 421-g property tax impacts.

In 2017 AFFO per share growth is expected to be in the 5% to 8% range. This 100 basis point delta is primarily due to lower same-store assumptions. As in our prior strategic plans, we rely on third-party data providers for our future growth expectations in the out years, and, of note, these estimates have proven conservative in the last several years and our team has been able to outperform. We expect the business to drive 9% to 11% NAV growth in 2016 and 8% to 10% NAV growth in 2017.

Please turn to page 13. This page provides our 2016 guidance, initial 2017 expectations, and detailed modeling assumptions. In 2017 we are expecting solid same-store and cash flow growth based on still strong third-party job growth expectations against moderating new multifamily supply growth in our markets. In addition, our expected asset sales and entrance to our same-store pool in 2016 and 2017 will enhance our same-store mix toward higher growth markets.

Finally, page 14 our 2016 top-line growth assumptions for our markets are presented on the map. We expect the West Coast and Southeast to grow at a rate above the portfolio average. The Mid-Atlantic will continue to perform below the portfolio average, but will improve slightly, and is still expected to outperform relative to our peers due to our 50/50 mix of As and Bs in DC and less direct exposure to new supply inside the Beltway.

With that I will turn it open to Q&A. Operator.

(Operator Instructions)

Your first question comes from the line of Nick Joseph of Citigroup.

Thanks. I'm just wondering what the two-year plan assumes for the broader macroeconomic environment and if it bakes in any recession over the next 24 months.

Nick, this is Jerry. We really look at the Axio and Moody's data, to start with. What they're forecasting is continuation of job growth, not too far off from what it was in 2015, call it a little over 200,000 per month. Supply is going to impact us this year probably a little more than it did last year, and then in 2017 there's a drop-off. So, we look at the macro data and then we start looking at specific sub markets where we operate and take into account how directly we're going to be affected by that.

In addition, when you really go through it, there's a few other things to consider. We will continue to spend about $35 million to probably low $40 millions in revenue-enhancing improvements to our properties, so it will add probably between 50 and 25 basis points into 2017, and probably about that much in 2016.

And as we look further out into 2017, there's probably only a couple of markets that look to us like they would be decelerating from the growth rates that we anticipate in 2016. Those are Northern California, Seattle, for the most part. And then we see some that we think are going to be improving, and that would be the Mid-Atlantic. We also see Boston most likely improving for us. And then the rest of our portfolio, whether it's SoCal or the Sunbelt we would expect to be modestly down. When you blend all that together it takes you from our midpoint this year of about a 5.75% growth down to that 5%.

Again, we don't really anticipate a recession. We don't claim to be economists. We subscribe to what they say. But that's how we're looking at the business.

Thanks. And then you're clearly benefiting from strong operating trends and the developments delivering ahead of expectations. But we're a little surprised that your expected 2016 core FFO growth isn't higher, given the expected same-store NOI growth, the benefit from the two accretive 2015 transactions, and the benefit of leverage. So, could you walk through what is driving expected core FFO growth that's actually below expected same-store NOI growth for 2016?

Sure, Nick. This is Tom Herzog. To your point, the same-store comes in with a $0.12 positive number. Development comes in at $0.02, which is lower than what we had in 2015, and that's purely due to timing on what got delivered.

In 2015 you had Channel, View 34, 2775. In 2016 you're looking at Pier 4, Beach and Ocean. But you've got some drag from 399, Pac City, Jamboree, 3033, and Domain Mountain View. All great projects but at this point there's some drag. That lowered the development by a bit from what we had seen in 2015.

As to some of the items that would have leaned against the FFO growth relative to the NOI, it would have been floating interest rates are up about 40 basis points in our model. That's a penny. The average revolver balance is going to be down some, call it $150 million or so. That's a penny and-a-half. That was just due to the timing of that mid-September debt issuance. The [tax] benefit goes from $3.9 million to $1.5 million. That's a penny. Non-1031 exchanges picks up another penny.

And then to your point earlier, that is partially offset by the accretive West Coast JV and some accretion on the home transaction. Those are all the moving parts. This is as we would have expected our core and base growth going forward is just as strong but we just had a few items that caused FFO to come in a little bit lower relative to the same-store.

Thanks. I appreciate the color.

Your next question comes from the line of [Janna Gowan] of Bank of America.

Thank you. Jerry, I was wondering if you could expand upon the comments you had made earlier on the fourth-quarter softness in San Francisco and San Jose, what you're seeing that could mean that it could be more than just seasonal.

Yes, it's hard to tell at this point, Janna. We did see or have some occupancy and pricing power pressures in the fourth quarter. But as we've rolled into January, we started to see signs of improvement. New lease rate growth in the fourth quarter is 5.2%, renewal growth was 9.3%.

As we look at January, our January new leases are up 4.2% in San Francisco, San Jose, and that compares to 3.3% in December. So, it is improving. And our January renewals are still well above 8%, at 8.4%, our occupancy's at 97%. So it has strengthened.

As we look at job growth, which is the primary concern in those markets right now, it's been running about 4.5% for the past couple of years. And when we have talked to Axiometrics, they're forecasting for job growth to decelerate to 2.5% to 3%. While that's about a 150 to 200 basis point deceleration, it's still well above the national average of job growth of 1.75% to 2%.

So, we'd like to think it's all seasonal. We're going to know in the next 60 days if it is. And over the last three to five years there's probably been two or three times in the first quarter when I grew concerned about the strength of San Francisco, only to see things turn around as we got into the month of March and April. So it's just a little bit early to tell.

But on the ground, we're not seeing any significant job loss from any single employers. And as I said, as we've come out of the fourth quarter and entered the first quarter, we have seen fundamentals start to strengthen again.

Thank you, Jerry. And on the operational initiatives, very impressive to get to your 70% NOI margins. How much room is left in terms of reducing days vacant or maintenance staff efficiencies?

I think days vacant, we've gone from about 26 days to 20. We're not going to be able to get it much lower, I don't think. Call it maybe another 2 days but we've been chopping a day, day and-a-half off each of the last three to four years. It's starting to slow a bit.

The only thing you can do to reduce it quicker is to cut rate. That's how you can really move apartment homes. And we're more focused on driving rates, so we'll let that vacant day stay about where it is.

On the staffing efficiency, I think we can continue to drive that metric even better. There's a few things technologically we're working with our property management software provider to help us go to the next step on. But I would tell you, as we created our expense budgets for 2016, we do have our repairs and maintenance coming in at flat.

Once again, this is probably going to be the third or fourth straight year that it's been either negative or up 1%. So we've kept that in pretty good control while we've been able to achieve turnover that's remained flat. We use those guidelines not just to push price down but to enhance service which helps us maintain a steady turnover.

Thank you.

Your next question comes from the line of Ian Weissman of Credit Suisse.

Good afternoon. How you doing? You guys put out guidance for the year about budgeted spend of $550 million to $700 million, a combination of debt equity and sale proceeds I think for the balance of this year. Maybe you could just talk about the attractiveness of each in this environment as we sit here today.

Ian, it's Herzog here again. I think about it this way. If we're looking at debt, let's just start there, typically we're going to use unsecured debt to refinance debt that's maturing. That might be coming in at the, call it, 4.2%, 4.3% range. In our model it would be cheaper right now. But I think of debt in terms of that type of cost on an unsecured basis. That's on a 10-year.

Let's go to equity. Equity, I'm going to look at an AFFO yield on a current-year basis. And just based off of AFFO projected forward to the midpoint, today's share price, that comes in at about a 4.5% current. Of course we're going to add growth to that, so I have to look at it in a cost of equity basis, and that's probably going to be somewhere just shy of probably 8% or something like that on a cost of equity basis.

And then you move to sales of assets, and again, on a current yield, it depends on what cap rate of assets that we're selling. I think our sales for 2015 came in at a 5.8% cap rate. Harry, is that correct?

Yes.

5.8%. But, again, it depends on the mix of what we're selling. And as we think about how we fund our business, the debt maturities, which are rather modest over the next couple years, probably come from refinancing of debt. When you think about the development spend, call the development spend $500 million including redev, including land, we can fully self-fund that, as I said in my scripted remarks, through our free cash flow, through our 1031 exchanges on land, and on a portion of our development spend, with the balance funded through sales and gain capacity at about $125 million, $130 million.

So, if we choose to we can fund the entire development spend on a self-funded basis and our debt maturities through refis. In the meantime, we have $1 billion of capacity right now on our revolver in cash. Again, back to the point of our business being quite self funded. When we look at each decision as it comes to pass during the year against these various forms of capital, those are the different data points that we look at when we make a decision on how to fund the activities.

The question, though, in terms of asset sales today, if you just think about the window of opportunity, do you think that window has changed in this environment?

This is Harry. For asset sales, right now there's still a tremendous amount of capital chasing assets, A assets, B assets. Cap rates are very favorable, capital is readily available to acquire these assets. We don't see that changing any time soon. Debt remains readily available. Cash flows continue to grow.

We're seeing investors, not just pension funds but also sovereign wealth funds. FIRPTA changes potentially have opened up additional investment in US real estate to foreign entities. So, at this point the disposition market continues to be very liquid.

That's helpful. Just lastly, just to clarify, your $500 million of development spend, what does that imply for starts this year? Did I miss that?

We're going to have two to three starts this year, 345 Harrison in Boston and then one to two other JV starts with MetLife.

Ian, in terms of dollars, that will be somewhere in the neighborhood of $350 million to $450 million, which is very consistent with our starts every year since 2011.

Okay. Great. Thank you very much.

Your next question comes from the line of Jordan Sadler of KeyBanc.

Good afternoon. It's Austin Wurschmidt here. I was just curious, given the continued focus on driving rate in 2016, does the 2017 outlook assume a similar level of revenue as earned in, headed into 2017 as you entered 2016?

Austin, this is Jerry. I would expect it to be a little bit less. We do not anticipate, as you get to the back half of this year, to have quite as much ability to drive new lease rates or renewal rates. Our expectation when we did our budgets was that market conditions would be a little bit weaker across the board -- well, not across the board but in aggregate, call it, 70 to 80 basis points. So, if I had to guess right now what I think we would go into next year with, instead of it being the 275 it's probably going to be somewhere closer to the 240, 250 in order to get that deceleration from midpoint to midpoint of about 75 basis points.

That's helpful. And then I was just curious, Jerry, you mentioned New York strengthening as you look out a little bit. Could you just give some color on where you're sending out renewal lease rates for New York?

Absolutely. Right now they're going out between 6% and 7% in January, probably in that 6% -- that's what we achieved in January. As you look out over the next two months, it's probably a hair less, call it 6% to 7%. But we are seeing strength -- I won't say strength, we're seeing a stable environment in our New York portfolio. And I would add our occupancy today in New York is at 97%.

When you look at New York, we're in three sub markets. We're in Chelsea. We have two assets. Three sub markets -- we have two down in the financial district, we have one in Murray Hill and then we have our last one which is a Met JV, is in the Upper West Side. The Upper West Side is definitely the weakest of the group where in fourth quarter we had revenue growth of about 1%.

When you look at the other three that were in our same-store pool, which is the two downtown as well as Chelsea, revenue growth was 5.5% to 6%. We're not seeing supply issues anywhere except the Upper West Side. You're not really seeing affordability, to a great extent, right now, and we're also not seeing job loss anywhere.

That's helpful. From a demand perspective you mentioned you're not seeing any job loss but as you look out, do you think if job growth were to slow that some of the demographic trends in New York, do you think could that be enough to backfill demand given the supply that we're seeing in New York?

Yes, I do because a lot of our portfolio is B, with the exception of probably our Chelsea property as well as our Upper West Side. Our Murray hill and our two downtown properties really do cater to that B renter. And I think people trade down if they wanted to from the A's to come to us. Several of our floor plans, especially over at view 34, are very large so IF people did feel the squeeze AND had to double up, I think that would be an alternative too.

Great. Thanks for the detail.

Your next question comes from the line of Nick Yulico of UBS.

Thanks. Just going to that attachment 7B where you break out all the projects being added to the same-store this year, it looks like it's almost 1,600 units and you had about 35,000 in your same-store so you're adding something like 5% units. Could we get a feel for what the revenue growth assumption is for these assets that are being added to your same-store to figure out how much of a benefit to your overall same-store it is?

I'd probably just cut to the chase and tell what you the benefit is to my same-store. It's about 20 basis points. It's predominantly coming from View 34 and these other two.

Just to give you a little indication, our New York, which when Herzog was going through the two-year outlook, we had said New York revenue was going to come in really within our midpoint, 5.5% to 6%. It's much closer to 6% than 5.5%. But View 34 was adding roughly 80 basis points to New York. So, without that one, I would have been in the low 5%s. But, again, when you look at the components of each one of these that's going into the full year this year, call it 20 basis points. Without those it would have been 5% to 5.6%.

Okay. Thanks. That's helpful. And then maybe this one's for Tom Toomey. As far as, if you think about the Class B piece of your portfolio, maybe it's in some markets, Orlando or other places, how are you weighing keeping that as a hedge against new supply? Assets have done quite well versus all the talk coming out of NMHC, which was that redevelopment value-add, if you could sell those properties to people today you're getting the most aggressive pricing the market's ever seen.

I look at it this way. Through cycles B's tend to hold up very well. When you find markets that -- we look at income, to the ability for the resident to pay, to our ability to continue to push rent increases through to them, the B's probably have a bigger bandwidth, in our mind, to absorb it. And then on the down side they're probably insulated more than the A's.

So I've always drawn to a good, solid B in a great location as a good long-term cash flow driving machine. And so we'll probably always have a good mix of B's in the portfolio and we'll solve really for our ability to grow cash flow over time.

And as far as B's go, what percentage of your portfolio do you think is Class B at this point?

We think it's about 50/50 right now between A and B. And over time those A's will turn into B's and we'll have to continue to reload at the top end. But we'll always probably be a company that will have that balance of 50/50.

Okay. Thanks, guys.

Your next question comes from the line of John Pawlowski of Green Street Advisors.

Thank you. With regards to CapEx, can you let us know what percent of NOI you're expecting to spend in 2016 for both recurring and nonrecurring?

I'm sorry, just as far as what the CapEx numbers are? I can give you those real quick. CapEx per door on the recurring is at $1,100 a door. For revenue enhancing it's about a $550 a door. And then for K and B's, whatever that number would be, we plan to spend about $15 million in total. You could do the quick-door calc on that. I don't know that I answered your question.

This is actually the question, I think came up from a call earlier today when one of our competitors was talking about looking at CapEx as a percentage of revenue rather than on a per door basis. I don't think we have that number off the top of our head but it's fairly easy for us to calculate and get back to you.

That's fine. That's great. Thanks. Second question, the past few quarters you've suggested that the increase to G&A guidance has largely been due to higher than expected incentive program payouts from outperforming targets. It looks like G&A ended up 15% higher than initial guidance. So, could you just give us a little color on what specific metrics were hit that drove the $8 million overrun?

Yes. When you look at G&A there are a number of different -- by the way, you're right, it was STI and LTI that drove the higher G&A. Our metrics center around things like same-store development spreads, balance sheet metrics, TSR. And then on top of that we had a couple major transactions that were very good for our business including the West Coast Development JV, the home transaction, the Washington, DC acquisition. We hit on all of our metrics in 2015, without exception, and it did result in to the metrics that we had set forth higher than average LTI payouts and STI payouts.

One other thing I would have you note, though, that might get missed is that we have the transitional plan in place moving from the old LTI program to the new, where now we have the three-year cliff-vest on the TSR portion and we didn't used to have that. So, the transitional piece is about $3.5 million of that $10 million variance. Just keep that in mind.

John, this is Toomey. I'd just tell you, 2015 we hit everything right out of the ballpark, from ops, to transactions, to the financing of the Company, to the TSR. I'm grateful for that performance and happy as hell to pay out bonuses across, up and down the entire organization. We'd like to do it again, frankly. If we hit all those metrics and perform at that level again we will be paying at that level.

Okay. Thanks.

Your next question comes from the line of Alex Goldfarb of Sandler O'Neill.

Good afternoon. Just a few quick questions here. First, on slide 7, Jerry, where you guys talk about the benefit of reducing the down time, the days vacant. And then you also talk about going back and resuscitating old leads, both as increasing NOI. It would seem like resuscitating old leads would cut down on vacancy. So, are the two NOI impacts, that would seem to be overlapping. Are they two distinct NOI benefits or you're just citing the difference of different initiatives but in aggregate you wouldn't add those two together?

There's probably a little bit of overlap. You're right, what part of what helps us fill vacant units faster is going back after lost leads. There probably is a hair bit of duplicity in there. What we're really looking for is, again, on the resurrection of discarded leads is trying to help out our site associates that at times don't have enough time to do adequate follow-ups. There's probably a little bit of that, that could be occurring.

So, what else is driving, apart from resuscitating old leads, what else drives reducing the down time of the units? It takes a certain amount of time to clean the unit. There's regular marketing traffic which you guys are pretty good at. What else goes in to cutting down that down time on the unit?

It's a multitude of things. One, we spread the lease expirations throughout the month instead of having them all occur at the same time. It's much easier just to say leases expire at the end of the month, but when you do that and you have 30 people move out at a 600-unit property, your maintenance team can't get to the 30th apartment to turn it until day 22. By spreading it throughout the month, you're able to do a little bit better.

The other things you do is you try to entice people to push up their movement date. If you know an apartment is going to be market ready on the 26th of the month and somebody comes in and says: hey, I want to move in at the end of the month or the beginning of the month. You basically tell them when they will be moving in. You push them closer to the 26th instead of automatically just putting them in as a move in on the 30th and that could cut off three days.

So, some of it's strategic. Some of it is putting in more demanding metrics on our maintenance team for expectations of when apartments need to be turned. Old school way of doing it, you wouldn't go turn a unit until it was leased. The way we try to do it is turn it as quickly as you can from when somebody moves out so you have ready inventory. Those are probably the major factors.

Okay, that's helpful. Sticking with you, Jerry, you made the comments earlier on San Francisco, and too early to tell if it was just year-end softness versus there's something nefarious happening in the job market there. But just curious, given your other tech market exposure, like in Seattle and maybe Boston, as well, do you get a sense that there's linkage so that if there were a slowdown of tech, let's say, in San Francisco, your team in Seattle or Boston or other tech-oriented markets would feel it? Or the view is that a number of what could be happening at a local doesn't necessarily happen in the other tech related markets?

I don't think it happens quite as much. There's more startup activity, honestly, in the Bay area. So, if funding for Unicorns and the other tech startups slows, I don't think it has as much of an effect in places like Seattle. Down in LA where Silicon Beach is becoming really a tech hub or out in Boston, those are typically more established organizations that aren't dependent on financing.

Okay. And the point is you're not seeing any softness in any of those other three markets you just cited?

No, we're actually seeing strength in all three of those other markets.

Great. Thank you.

Your next question comes from the line of Rob Stevenson of Janney.

Good afternoon, guys. Jerry, either in terms of what you've been seeing in the third and fourth quarters or what's baked into your 2016 guidance, is there any real bifurcation between the various DC sub markets these days, operating performance-wise?

I think your B's are still continuing to outperform. They have compressed at times and then widened. Our B product outside the Beltway continues to carry us versus our inside the Beltway. When I look at our A's, they are currently coming in probably close to -- our A urban had revenue growth in the fourth quarter of about 1% and our B's, which are predominantly in the suburbs, came in about 2%. So, on a revenue growth basis, call it 100 basis points.

Okay. And then Tom Herzog or Jerry, when I think about turnover for you guys, turnover ratcheted up modestly year over year to 52%. How should we be thinking about the impact of 100 or 200 basis points of turnover in terms of the bottom line? What did that represent penny-wise for you guys if turnover goes up 100 basis points in 2016 over what you're expecting?

It really depends on what you're getting for rate growth. If I'm pushing renewals at 8% and my turnover goes up 100 basis points it's probably positive to my bottom line. Also it depends how quickly I can reload. I don't have the exact number off the top of my head. I will tell you, my expectation for this year, 2016, is my turnover is going to grow by 100 basis points because we're going to continue to try to drive rate.

I don't think you're going to see it continue to come down. We're not seeing an increase in move outs to home ownership. We're not seeing it for money problems. The one metric that is tending to migrate up a little bit is move outs due to rent increase but it still has not gotten to a level that I see as pushing an inordinate amount of people out the door.

If you look at that schedule that's in our supp, which shows the turnover metrics comparing this year to last year, it's attachment 8G, there's really only one market where you see a significant increase, and that's our Monterey County which went probably from 49% to almost 57%. That's also a market where we had revenue growth this past year in the low to mid teens. We would do it all again. And places like San Francisco and areas like that, it's going up 100, 150 bps, and I'll take that too as long as I'm getting renewal growth that's approaching double digit.

Okay. And then on the real estate tax side, what's the impact from 421-b expirations? And what's the overall assumption for real estate tax growth in 2016?

I'll give you the second part, then Herzog's going to talk more 421s. Overall this next year our expectation is real estate taxes are going to go up in that probably 7% range. That sounds like a huge number. This past year our real estate tax expense we thought was going to come in 5.5% to 6% and it actually came in right around 3%.

We benefited dramatically from appeal wins. It was probably pushing close to $1.8 million to $2 million that brought us down almost 200 basis points. When we factor in and budget for real estate tax growth we do not expect or build in any refunds. So again, it's going to be roughly up at that 7% range, is what we're showing today and a chunk of that, as Herzog will tell you in a minute, is due to the 421s. Tom?

Yes, Jerry, from a same-store perspective, Rob, the 2016 same-store expenses, as a Company we would expect that to be impacted about 45 basis points, and in 2017 about 70 basis points. I will mention that in the schedule 8 series of our supp, we do footnote for the total portfolio and for New York specifically the impact on same-store expense and same-store NOI so that you can see it with and without. And from an AFFO perspective, in 2016, it's about $670,000, roughly, just from the burnoff of the abatements and whatnot, and in 2017 it would be about $1.3 million. That's what built into the numbers right now.

Okay. Thanks, guys.

Your next question comes from the line of Dan Oppenheim of Zelman & Associates.

Thanks very much. I was wondering if you can talk a little bit in terms of the 2016 expectations, where you see the greater risk. If you think about the revenue side potentially here in the Bay area, we're certainly seeing some of the deceleration as of late, but then also on the expense side talking about R&M being flat or certain personnel costs, which probably have to come down from where they have been lately, or the tax side. How do you think about weighing the risks as you go through 2016?

I'll start with that. This is Jerry. I see little risk on the expense side. Again, we have expenses budgeted at 3.25%. When you have a margin like us, what really moves the business most is the revenue. I already told you what we have in our model currently for real estate taxes at 7%. It really don't have refunds calculated in and I'm confident we're going to get some of those.

The other expense categories we're looking at and that we built in, the second largest component of our expense stack is personnel, which is about a quarter of our total expenses. We expect that to go up between 4% and 4.25%, higher than it has the last several year as we have more competitive pressures to attract and retain our associates.

All of the other categories, marketing we expect to go down. Our marketing team's done a great job both with our website as well as working with the ILSs to bring down our costs. Repairs and maintenance, I don't see that going up dramatically. I think we have that locked down pretty well. So, on the expense side, I think it's not overly risky.

The revenue side there's always risk. And probably the two markets that we're keeping our eyes on the most would be San Francisco, because we hear all those same information you guys hear. New York, we're watching that closely, too. And as I've said earlier about both of those markets, they both today, it's not apparent to us whether it's seasonal issues that created weakness in the fourth quarter because we're starting to strengthen, of it is something more.

As I look at it, there's really three markets that today you would say are kind of risky, and it would be those two as well as Austin. What I would also say is those constitute 25% of UDR's total NOI. When you look at all of the other markets combined, which make up 75%, we see strength.

We see strength in Southern California. The entire Sunbelt with the exception of Boston is extremely strong today. DC, while it's still going to be a laggard by comparison, it's improving. And we think Boston's improving. So, while there may be risk in a market or two, the benefit of having a geographically dispersed and asset class differentiation between the A's and B's, I think gives us pretty good protection.

Great. Thanks for the color on that.

Your next question comes from the line of Rich Anderson of Mizuho Securities.

Thanks. Good afternoon. I just have one question because I guess everything else is perfect. On the debt, the 5.7 debt to EBITDA today, going to maybe as low as 5 in 2017 looks so great. But then when you wrap in the joint venture impact, 100 basis points up now, it muddies it a little bit, maybe significantly in the eyes of some people. I'm just curious what you think about that in terms of managing your leverage at the joint venture level so that the full leverage story looks better than what it appears at this point.

Rich, it's a fair question. This is Toomey. I think your math is about right. And as we think about the joint venture, what maybe the Street doesn't always look through to is the strengths of our partner in MetLife and their position and strength. They're very comfortable running these development joint ventures, and then when they're completed they'll finance them out at 40% to 50% leverage, which would be high for UDR as a corporate entity but we're comfortable with them as a partner financing around that level, and feel that they're there for a long period of time and will perform if necessary, and have shown a track record of doing so through many cycles.

So it will be same 100 basis point impact two years from now, you think?

I would put it at that.

Okay.

I think that's fair. The way it looks organically right now, everything Tom said, I obviously agree with, as well. One of the things you have to take into account is that when you look back at what's taken place in the Company over the last number of years, we have dramatically reduced leverage, but over the last few years it's been purely or substantially organically. So, you've got the organic improvements that will occur. But also, as we had an opportunity to do a home or a West Coast Development JV, if we were trading at a place where we could issue stock at a premium, that does give us an opportunity to further delever the enterprise by acquiring assets on an accretive basis at a premium, and that lowers the leverage at the enterprise.

The other thing I'd mention is when we look at our current leverage levels with the rating agencies, and we have had studies done by three different banks as to where we're rated at, the BBB-plus, BAA1, and what the sweet spot has been determined is at the leverage level that we're at, at the BBB-plus, BAA1. So, to go through unnatural means to further improve that leverage and do so in a dilutive basis is not something that's all that enticing, as we think we can continue to improve it over time in the ways that I just described.

Okay. Fair enough. Thanks. I appreciate it.

Your next question comes from the line of John Kim of BMO Capital Markets.

Thank you. I had a question on your reduced acquisition guidance compared to last years. I realize this is really just for modeling purposes but has your risk appetite changed? And, also, can you provide some color on the volume and characteristics of potential deal flow compared to maybe a few months ago?

Sure, John. This is Harry. I think we do acquisitions primarily as opportunity based. The significant acquisition we had last year, which was the Home acquisition, really we were able to solve the problem in that we had a currency that was required in order to get that deal done. As we look forward, again, if something like that came up we certainly would take a look at it.

But as we started last year, we don't have any expectations that's going to materialize again. If it does, we'll certainly take a look at it but we don't have any reason to expect that will recur.

What about your risk appetite?

Again, our risk appetite has remained unchanged. And you also asked about deal flow. There are tremendous amounts of deals in the market today. You saw last year was nearly $140 billion in transactions across the multifamily space, which was a record year.

At NMHC a couple weeks ago the broker community is indicating that they're actually ahead this year of where they were last year, so we expect there to be a continued frothy deal market. But, again, it's very difficult for us right now to compete with the pension funds, the sovereign wealth funds on the assets we want to buy. Again, if an opportunity materializes where we can solve a problem we think that might be a spot where we could potentially capitalize.

John, this is Toomey. I would just characterize it as this way. It's not an element of risk. It's more of an element we believe the fundamentals of the industry have many years ahead of strength. It's just a function of pricing and opportunity. We would rather save our currency for where we can have more predictability, and that's in our development pipeline today.

On the acquisition front prices are pretty good. I think assets still have some room to run. But we want to be a self-funded company that can internalize our growth, if you will, and the best path for that is continued development today. We'll continue to look at the market on an acquisition front but really do not feel that pricing-wise we're going to get the same type of returns that we would be getting in our development pipeline.

Okay. And then I think, Jerry, you mentioned that you see Southern California decelerating in 2017. Can you break that down between Orange County and LA, if there's any difference.

I said I thought it would be stable to slight deceleration and that's mainly just based on how strong we see it this year. They're both going to be coming in at our current projections, close to 7%. If I had to forecast between the two, it's probably about even. I think they're both going to remain strong for a while. They're both late to the game.

You've got fantastic tech job growth in that Marina del Rey sub market where most of our assets are located in LA. I don't see that slowing down. I think the jobs still haven't fully arrived. If I look down Southern California, I just read the other day there was more job growth there in 2015 than there has been since I think the late 1999 level. So, it's picked up. You don't have any one large employer.

You don't really have significant supply issues in Orange County, and in LA most of the new supply's coming downtown where we're not located. I would say at this point I don't see a significant differentiation between how the two are going to perform next year. This year I would expect our LA portfolio probably to be a hair higher than our Orange County.

Thanks for the color.

Your next question comes from the line of Greg Van Winkle of Morgan Stanley.

Hi, guys. You mentioned seeing some outperformance from B's versus A's right now in DC. Are there any other markets where you're seeing a significant bifurcation? Does that hold true in a lot of the markets where there's a lot of new supply? And is that gap widening at all?

Greg, it will expand and contract quarter by quarter. Today, the differentiation is probably about 150 basis points nationally. You're right, you tend to see that differential in almost every market where new supply is coming into compete against our A product. I would say on a national basis for us, that's probably about what the differences is, call it 150 bps.

I saw it probably reached its peak a year, year and-a-half ago when it was well over 200 basis points. At some point earlier this year, I remember looking and it felt like it had contracted down to about 50. But in the fourth quarter it was about 150.

Okay. Thanks. And then something that's not contemplated in your two-year plan is stock buybacks. If the market continues to provide limited opportunity for acquisitions with a favorable window for asset sales, and your stock trades at a discount to NAV, is that something that might be on the table at some point, or not something that you really think about?

Not at this point, Greg. We're trading somewhere in the vicinity of NAV. As you know, there's a lot of friction cost that's involved. We'd be nowhere near looking at stock buybacks at the current date.

Okay. Thanks, guys.

Your final question comes from the line of Wes Golladay of RBC Capital Markets.

Hello, everyone. A quick question on the Unicorns. How big of an issue do you think this is? And if you had to estimate how much your new leases come from startup employees, what would you think that is?

This is Jerry. I don't know how big a risk it is. Currently, I wouldn't say it's a huge risk but that could change in the next 90 days as we see more. So, I wouldn't put the risk as extremely high.

As far as percentage of my leases that come from those types, I don't track that data, or at least I don't have it on me. I don't think it's a very high percentage.

Okay. Thanks a lot.

Thank you. I will now return the call to President and CEO Tom Toomey for any additional or closing remarks.

Certainly. And, again, thank you for your time and interest in UDR today. Certainly wrapping up 2015 was a great year. And as we talked throughout that year we were positioning the Company for a great 2016. I think we're off to a very solid start on that front and we look forward to updating you after the first quarter.

Thank you for participating in today's conference call. You may now disconnect.