UDR Inc (UDR) 2016 Q1 法說會逐字稿

Good day, and welcome to UDR's first-quarter 2016 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.

Welcome to UDR's first-quarter 2016 financial results conference call. Our first-quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the investor relations section of our website, ir.UDR.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. I would like to note that statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met.

A discussion of risks and risk factors are detailed in yesterday's press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit questions and follow-ups. 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. Welcome to UDR's first-quarter conference call. On the call with me today are Tom Herzog, Chief Financial Officer; and Jerry Davis, Chief Operating Officer, who will discuss our results as well as senior officers Warren Troupe and Harry Alcock who will be available for the Q&A portion of the call. The first quarter of 2016 was another great quarter for UDR with strong same-store results and development lease ups continuing to perform well. As you have come to expect from UDR, we remain focused on executing on our previously communicated two-year strategic plan, which is still the right plan given the long-term strength of the apartment business.

From a big picture point of view, we are now in our sixth year of achieving 5% plus NOI growth. Over the past few years, most our markets have seen accelerating growth trends due to supply demand imbalance, and while our overall 2016 same-store operating trends continue to improve year over year, in a few markets as anticipated, we have started to feel the impact of concentrated new supply. We believe apartment growth is sustainable and supply can be absorbed with steady job growth and household formations. Deliveries of new apartment homes are projected to peak in the cycle in 2016 at around 380,000 units and will subsequently drop in 2017 to 300,000 units, while job growth is forecast to be in the 2 million to 2.5 million range in both years.

In this environment, market mix and price points will be key, and this plays well to our overall strategy that centers around our diverse portfolio mix of 20 markets with A and B quality communities in urban and suburban locations, which over the long term, we expect to continue to perform well through the cycles and provide consistent cash flow growth. Our two-year strategic plan issued in February showed strong expected 2016 revenue and NOI growth of 5.75% and 6.75% at the midpoints, and we spoke to an anticipated solid but slightly decelerating 2017 operating environment with revenue and NOI growth of 5% and 5.5% at the midpoints. Since then, there have been a number of publications speaking to slowing revenue trends in certain markets and as such, I've asked Jerry to provide an update on our market expectations for the balance of 2016 and how we currently see 2017 stacking up.

I hope you find this useful and that you reach the same conclusion that the UDR team. It's a great time to be in the apartment business, and therefore we are reaffirming our full-year guidance provided in the initial outlook and we'll provide an update during the second-quarter earnings call. Also, let me take a moment to mention that we were pleased that in early March we were added to the S&P 500 index, which is a grant to our investors and the entire UDR team who made this possible. With that, I'll turn the call over to Tom.

Thanks, Tom. The topics I will cover today include our first-quarter results, our balance sheet and capital markets update, a casualty loss update, a development and transactions update, and our second-quarter and full-year guidance. Our first-quarter earnings results were in line with our previously provided guidance. FFO, FFO as adjusted, and AFFO per share were $0.43, $0.43, and $0.41 respectively. First-quarter same-store revenue, expense, and NOI growth remains strong at 6.4%, 2.7%, and 8.0% respectively. Next, the balance sheet. At year end, our liquidity as measured by cash and credit facility capacity, was $1.1 billion. Our financial leverage on an undepreciated cost basis was 33%. Based on today's market cap, it was 23.8%, and inclusive of JVs, it was 28.2%.

Our net debt to EBITDA was 5.4 times and inclusive of JVs was 6.5 times. All balance sheet metric improvements were ahead of plan. During the quarter, we issued $174 million of common equity at a net price of $34.73 per share in conjunction with our inclusion in the S&P 500. In addition, in January, we repaid $83.3 million of 5.25% medium term notes. On to casualty losses. In conjunction with the previously announced damage to our 151-home, 717 Olympic community located in Los Angeles, we recorded a casualty loss of $1.1 million during the quarter attributable to business interruption and temporary housing for our residents. This resulted in a charge of approximately $0.05 to FFO, but was added back to FFO as adjusted. We expect to recover a significant portion of this charge from the insurance providers and any subsequent recoveries will be included in FFO but deducted from FFO as adjusted.

As a reminder, 717 Olympic is owned by the MetLife II JV. It was no impact on our same-store results. As of today, all damage has been fixed, the community is fully operational, and we are over 88% leased. Turning to development. We commenced construction on our 585-home, $367 million, 345 Harrison Street development in Boston South End, which we intend to fund with non-core asset sales. We've identified a number of assets that we will be marketing to satisfy our funding needs for the year with a significant portion of these sales coming from the Mid Atlantic markets. At the end of the first quarter, the Company had an under construction development pipeline for its pro-rata share totaled $1 billion.

The development pipeline is currently expected to produce a weighted average spread between estimated stabilized yields and current market cap rates above the upper end of the Company's 150 to 200 basis point targeted range. Next, transactions completed in the quarter. During the first quarter, we sold our 95% ownership interest in two land parcels located in Santa Monica, California, for $24 million. This resulted in a gain to FFO of $1.7 million, which was backed out of FFO as adjusted. On to the second-quarter and full-year 2016 guidance. Second-quarter 2016 FFO, FFO as adjusted, and AFFO per share guidance is $0.43 to $0.45, $0.43 to $0.45, and $0.39 to $0.41 respectively. At this time, we are maintaining our full-year guidance ranges for both earnings and same-store metrics.

Full-year 2016 AFFO, FFO as adjusted, and AFFO per is 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 guidance remains unchanged with revenue growth of 5.5% to 6%, expense 3% to 3.5%, and NOI 6.5% to 7%. Average 2016 occupancy remains forecasted at 96.6%. Due to the $174 million equity issuance in the quarter, we no longer anticipate a bond issuance later this year and are updating our full-year interest expense guidance to $121 million to $125 million from $128 million to $132 million. Other primary full-year guidance assumptions can be found on attachment 15 or page 26 of our supplement.

Finally, we declared a quarterly common dividend of $0.295 in the first quarter or $1.18 per share when annualized, 6% above 2015's level and represented a yield of approximately 3.3%. With that, I'll turn the call over to Jerry.

Thanks, Tom. Good afternoon, everyone. In my remarks, I'll cover the following topics. First, our first-quarter portfolio metrics, leasing trends in the rental rate growth we realized this quarter, and early results for the second quarter. Second, how our primary markets performed during the quarter with a high level update for 2016 and 2017, and last, a brief update on our development lease-ups. We are pleased to announce another strong quarter of operating results. In the first quarter, same-store net operating income grew 8%, our highest growth rate since the first quarter of 2012. These results were driven by a very strong 6.4% year-over-year increase in revenue against a 2.7% increase in expenses.

Our same-store revenue per occupied home increased by 6.7% year over year to $1,897 per month, while same-store occupancy of 96.5% was down 20 basis points versus the prior-year period. Total portfolio revenue per occupied home was $1,995 per month including pro rata JVs. Stable job growth, limited impact from new multi-family supply, renter preference from both new millennial households, empty nesters, and everyone in between are all driving this continued growth. Turning to new and renewal lease rate growth, which is detailed on attachment 8(E) of our supplement. We grew new lease rates by 3.7% in the first quarter, 50 basis points below the first quarter of 2015. Renewal growth remained robust at 6.9% in the first quarter while 120 basis points ahead of last year.

On a blended rate basis, we averaged 5.3% during the first quarter, an improvement of 40 basis points versus the same period in 2015. In April, these trends continued with new lease and renewal rate growth of 4.2% and 6.8% respectively, and our current physical occupancy is 96.5%. Our leasing success and stable occupancy gives us confidence that demand is more than sufficient to continue pushing rate higher throughout the upcoming prime leasing season in the majority of our markets. Next, move-outs to home purchase were flat year over year at 13% in line with our long-term average. Even with our strong renewal increases in the first quarter, less than 9% of our move-outs gave rent increases the reason for leaving.

Before I move on to the quarterly performance in our primary markets, I'd like to give a general update on our entire portfolio. First, third-party data indicates that in every one of our markets, we expect supply to peak this year with the exception being New York City. Second, job growth remains robust and we continue to have strong pricing power in the majority of our markets. The overall economic environment we see today is very similar to what we provided in our two-year outlook. Now moving on to the quarterly performance in our primary markets, which represent 70% of our same-store NOI and 75% of total NOI. Metro DC, which represents 18% of our total NOI, posted year-over-year same-store revenue growth of 2.1% compared to 1.9% in the first quarter of 2015.

We are forecasting the market to generate top-line growth in 2016 between 2% and 3% as we will continue to benefit from our diverse 50/50 mix of A and B assets located both inside and outside the beltway. In the first quarter, our As and Bs had very similar growth rates. Apartment supply in 2016 is expected to increase by 13,600 homes and then fall to 9,000 homes in 2017, while job growth in 2017 is expected to increase by 1.9%, up from 1.6% in 2016. Our current forecast is that DC will have modestly accelerating revenue growth in 2017 compared to 2016. Orange County and Los Angeles combined represent 16% of our total NOI. Orange County posted year-over-year revenue growth of 8.4%.

We continue to remain very optimistic on Orange County as the market is only expected to see 5,000 units of new supply and nearly 35,000 jobs implying a 7 to 1 ratio, which is roughly twice the long-term historical average. Revenue growth in LA was 8.8% during the quarter, a continuation of very strong results in the back half of 2015 due to job growth and supply absorption in our Marina del Rey concentrated submarket. Lease-up pressure from almost 2,000 recently delivered apartment homes in the neighboring Playa Vista market began negatively impacting our pricing power in the middle of the first quarter, and we think this competition will continue to affect us through the end of the third quarter. Fortunately, tech-related jobs continue to come to this part of Silicon Beach.

Overall, LA will see over 12,000 apartment homes delivered in 2016 or about 1% of supply and the market is projected to create 88,000 new jobs. Again, a 7 to 1 ratio. 2017 and 2018 are each projected currently to see deliveries slow to 7,000 to 8,000 homes per year with job growth only slowing slightly. LA looks thus to be a strong market over the next several years, and after we get past the short-term lease-up pressures in our Marina del Rey/Playa Vista submarket, we will get back on track to above average growth. We still anticipate full-year 2016 revenue growth in LA to be in the 6% range and would expect 2017 to also be in that range.

New York City represents 12% of our total NOI and posted 5.8% revenue growth in the quarter. While our same-store properties are not directly affected by any new developments, we are beginning to feel the impact from the new supply in the Manhattan market. New Yorkers who typically have been loyal to their preferred neighborhoods are beginning to be enticed by pricing incentives in places like Midtown West. 2016 deliveries of 25,000 apartment homes are adding 1% to existing supply. 2017 is expected to have deliveries even higher at 30,000 apartment homes, but still right around 1% of existing supply. The higher deliveries in these years are directly related to the expiring 421 tax abatement program.

Once we get through these multi-year elevated supply levels, new developments should decrease significantly. Job growth in 2016 and 2017 is expected to be right around 1.3% each year. For full-year 2016, we've revised our revenue growth expectations down to about 5% in our New York portfolio, which is 50 to 60 basis points below our original business plan. Because of the continuing pressures of the new supply, we currently would project 2017 revenue growth in New York to be modestly lower than it will be in 2016. San Francisco, which represents 11% of our total NOI, is feeling the effects of new supply in several submarkets including south of Market. However, we still expect the Bay Area to be one of our best performing markets this year with revenue growth of 7% to 8%.

Same-store revenue growth in the first quarter was 9.6% due to the extremely strong blended rent growth we achieved in the second and third quarters of 2015. The good news is that 2016 will be the peak of deliveries this cycle at 12,600 apartments or roughly 3% of existing stock. And the number gets cut roughly in half to 6,800 homes in 2017 representing approximately 1.6% of existing stock. Annual job growth in 2016 and 2017 is expected to average about 2.5% each year. Although the Bay Area is slowing, we still expect it to be an above average market this year and next. Boston, which represents 7% of our total NOI, produced a strong 6% revenue growth during the first quarter.

A one same-store property in the Back Bay neighborhood had revenue growth of 5%. Our suburban assets in the North Shore were our strongest performers with growth of 7.5%. The Seaport District, home to our 2015 completion 100 Pier 4, continues to see more growth with additional office tenants in the submarket including the first quarter announcement that GE will be relocating to the seaport about one-half mile from our property. We started an additional project this quarter in Boston South End, the 585-home, $367 million project, 345 Harrison Street. New supply in Boston is projected at 6,100 homes in 2016 with slight deceleration in 2017 to 5,500 homes. Both years represent less than 1.5% of existing stock. Job growth is currently forecast to be about 1.5% both years. We expect revenue growth in 2017 to be comparable to this year.

Seattle, which represents 6% of our total NOI and posted 8.4% revenue growth, continued to benefit from the strong growth inherent in our suburban B assets which are located in submarkets that are less exposed to new supply. Long term, we continue to like the downtown Seattle submarket and believe that the ongoing creation of new jobs by companies such as Amazon, Google, Facebook, and Expedia will continue to drive demand in Seattle's urban core. The Bellevue submarket is in the midst of fairly heavy new multi-family development that has not yet put up significant pressure on our portfolio as evidenced by our 7.7% revenue growth in Bellevue this quarter. Deliveries in metro Seattle are expected to peak in 2016 at 9,800 apartment homes before falling to 6,200 homes in 2017, while job growth continues at more than 2%. We expect revenue growth in 2017 to be comparable to this year.

Last, Dallas, which represents just over 4.5% of our NOI, posted 5.8% year-over-year same-store revenue growth in the first quarter. Our B properties have revenue growth that was 400 basis points higher than our As as heavy new supply in uptown and along the tollway is impacting rent growth in those submarkets. New supply in Dallas is projected to peak in 2016 at 18,000 new units and then drop to 12, 700 in 2017. Job growth in the Dallas market should remain strong both years, above 2.4%. Outside of our primary markets, such as Portland, Monterey Peninsula, the sun belt, Nashville, and Austin, which comprise roughly 20% of our portfolio, we are above our initial expectations provided in our two-year outlook as we continue to have strong pricing power due to limited amounts of new supply and robust job growth.

Our expectation is that these markets have a long runway of growth due to favorable economics. April results came in in line with our plan and as we look ahead in the next two months, we see improving pricing power along with stable occupancy. Our 50/50 A/B portfolio located throughout 20 markets has enabled outperformance in our sun belt markets, Orange County, Portland and Monterey Peninsula, to offset markets that are being impacted by new supply in San Francisco, New York, and LA. On a national basis and within our core markets, apartment deliveries are expected to peak in 2016. Current projections from Axiom Metrics have 2017 deliveries coming down over 25%. New York is the only market that we operate in that will experience a higher number of deliveries in 2017 than it had in 2016.

Remember that earlier this year in our two-year outlook, we indicated a 75 basis point deceleration in 2017 with a revenue growth guidance mid-point of 5%. Our overall view has not changed. I'll turn now to our four in lease-up developments, which you can find on attachment 9(A) and B or pages 19 and 20 of our supplement. Our share of these four properties represent $316 million or roughly 23% of our pipeline inclusive of the West Coast development JV. In total, these properties are performing ahead of plan. 399 Fremont, our 447-home $318 million lease-up in San Francisco, California, took first move-ins in mid-March and was 26% leased and 15% occupied at quarter end. Today, we are 29% leased and 24% occupied with rents exceeding pro forma.

We are currently offering a month concession as planned at this community, noting that we will see increased competition for other lease-ups in the submarket in the near future. Katella Grand I, our 399-home $138 million lease-up in Anaheim, California, in the West Coast development JV, was 37% leased and 29% occupied at quarter end and as of today is 47% leased and 37% occupied. We are currently offering less than one month of concessions at this community and leasing has been very strong in April with 41 applications. CityLine, our 244-home $80 million lease-up in the Columbia City submarket of Seattle, was 47% leased and 34% occupied at quarter end. Today the property is 66% leased and 52% physically occupied.

8th & Republican, our 211-home $97 million lease-up in the South Lake Union submarket of Seattle, was 8% leased and 0% occupied at quarter end, and today it is 16% leased and 6% occupied. First units were available for move-in in Mid April. All-in, we had a great first quarter and we remain very positive on the outlook for multi-family fundamentals and our ability to execute during the peak leasing season and throughout the remainder of 2016. With that, I'll turn the call back to Tom.

Thank you, Jerry, and before I open it up to Q&A, I want to take a moment to sum up our prepared remarks. We still feel very good about multi-family fundamentals and our NFAs in the cycle where market mix and price points of a portfolio are critical. As Jerry mentioned, due to changes in conditions, some of our markets are underperforming and some are outperforming our original expectations; however, on balance our outlook for the portfolio is unchanged.

This is a testament to our overall strategy and market mix, which is less volatile and more predictable on average throughout the cycles. We feel good about 2016 and 2017 and remain on target. UDR has the right plan with the right team in place to execute, and we feel confident about our future opportunities. With that, I will open it up to Q&A. Operator?

(Operator Instructions)

We'll go first to Jordan Sadler with KeyBanc Capital Markets.

Hi, good morning. It's Austin Wurschmidt here with Jordan. Just wanted to touch a little bit on the non-core asset sales. I was curious if you guys were looking to do a portfolio sale, what's the potential timing, and will you exit any additional markets. I know you mentioned a concentration in the Mid-Atlantic.

Jordan, this is Toomey. With regard to that, we're going to expose probably $300 plus million to the market on individual asset basis and we'll see what the pricing comes in on those and we feel like it's a good strong market to expose assets, and we'll get good pricing on them.

And how should we be thinking about pricing, what's sort of your cap rate expectations at this point?

This is Harry. It depends a little bit on the product mix. I can tell you in general in the marketplace, Class As are trading at coastal Class As, and main to main locations are trading at four, sub four. The Bs that would likely comprise most of what we sell are going to trade between 5%, 5.5% cap rates, again depending on location and specific asset type. And there continues to be a strong bid for these assets particularly in the B space, but A and C continues to be readily available. Fannie and Freddie both expect to meet or actually exceed 2016 volume versus 2015, so it's a good time to sell assets right now.

Thanks for the detail there and just touching a little bit on DC, you continue to get a little bit of traction on new and renewal lease rates there, and I was just curious how that acceleration stacks up versus your expectation and any detail you could provide on submarket trends and what you're seeing subsequent to quarter end.

Sure, Austin. This is Jerry. DC again, we continue to think it bottomed about a year and a half ago, late 2014, but we continue to see supply pressures in various submarkets throughout the metro DC area, such as Arlington and Alexandria. What's interesting is we've seen the compression between what As and Bs are doing occur. Currently, it's probably less than 100 basis points. Our properties in that 14th and U Street neighborhood including Capital View, View 14, Andover Place and Thomas Circle, those deals are all putting up probably about 3% revenue growth. And then a couple of the places off Columbia Pike and Arlington are negative revenue growth right now. Then when you get outside the beltway, even though outside tends to do a little bit better than inside the beltway, we'll have a couple of properties out there in Woodbridge that are flat to slightly negative.

So the A/B mix has benefited us in the past where Bs significantly outperformed but we are seeing neighborhoods in DC where supply has subsided react very well and starting to see good rent growth. All-in, DC is performing about where we expected. I'll touch on the home portfolio that we bought back in October. It's performing pretty much with in plan in accordance with the plan that we had. We found a few opportunities to drive expenses down. We're in the process of spending coming close to $20 million on some initial capital expenditures, some on unit interior, some on the exteriors in the properties, but as we chug through that, we're seeing occupancy which when we bought the portfolio was down around 92%.

Today occupancy in that portfolio has risen to between 95% and 96%. So DC I would tell you is going according to plan. Our expectation this year, like I said in my prepared remarks, is that revenue will be between 2% and 3% and then our expectation going further out is supply continues to be absorbed that 2017 is better than 2016.

Great. Thanks for the color and I'll yield the floor.

Thank you.

We'll go next to John Kim with BMO Capital Markets.

Thank you. I just wanted to clarify your reduced outlook on New York. So it seems like you have 6% renewal growth this quarter and unusually low turnover of 20%, but do you see revenue declining in 2017? So I just wanted to ask if that's purely due to increased vacancy or do you see rate coming down as well.

I think it's going to be more rate. I think occupancy there will stay in the 97%, 98% range. Today, it's in the high 96%s. The reason turnover was down really in the first quarter is we moved more of our expirations into the seasonally high demand second and third quarter, so it wasn't purely that we were retaining more people. It was more that we had fewer expirations in the first quarter, but we are definitely feeling the effects of the supply pressures whether it's midtown, west to Brooklyn. They are starting to have an effect on our financial district properties, and if you really stratify what we did in the City in the first quarter, our two down in the financial district popped revenue growth of about 4.5%, and our Chelsea, Murray Hill properties came in north of 7%.

So we're feeling it a little bit more in the financial district, and then if you go up to our MetLife JV property in the upper west side, Columbus Square, that one is definitely feeling the effects of new supply in the upper west side and it had revenue growth of about 1%, 1.5%. I don't think you'll see us -- the slowdown that I talked about in 2017 I think is going to be more rate driven than occupancy.

How comfortable do you feel in your 2016 outlook in New York given, as you mentioned, we're heading into the busy leasing season?

Yes, New York actually, it's doing about as well in April as it did in the first quarter. I mean I would have hoped it would have accelerated but it hasn't yet, but new lease rate growth in April is about 2.5%, 2.6%, but renewal rate growth has jumped up to 6.7%. I think we did a good job pushing those into the stronger periods but we feel good about where I expect now. I think I said on the prepared remarks that we've revised our expectations there from being high 5%s to low 5%s. I guess there's the possibility if we continue to encounter more significant supply pressures that could come a bit lower but right now pretty comfortable in that 5% range.

Thanks, Jerry.

Sure.

We'll go next to rich Hightower with Evercore ISI.

Good afternoon, guys.

Hi, Rich.

Just a quick question on the schedule of new and renewal rates in the press release, really appreciate the detail there. As it relates to the different markets with different factors sort of offsetting one another, is there a way for you to peg the likes hitting above the midpoint of the same-store range that didn't really change the several puts and takes during the quarter in that sense?

I guess I would say this. Overall, and hopefully this will answer your question, overall first quarter came in where we thought it would. So far in April, we're right on track also. You're always going to have some markets that perform a little bit better than expectations, some that are below and obviously the three that we spoke to in the prepared remarks that are currently under are San Francisco, New York, and Los Angeles, and the reason for this underperformance really is the effects of new supply. We've talked for years that continuing to get 10% revenue growth in San Francisco wasn't long term sustainable, and I guess the developers and city officials also took notice of this and this previously undersupplied market is getting a slug of new supply right now.

Fortunately for us, it's going to peak this year and then start to decelerate next year. But what we noticed too and I had this in our remarks, is the success of new lease-up properties that are putting some of this pressure on us, but our 399 Fremont lease-up is well ahead of leasing velocity. We're getting rental rates that are above pro-forma rents which were $6 a foot, and we're giving away one month free. So what it really shows us is there is demand and there is traffic for apartments, but we have a lease-up property that's basically getting discounted down 8% because one month free. You're going to find it harder to push rate on same-store properties but yes, we do have the three underperformers.

We also as I stated earlier, we've got about a third of the Company that is exceeding expectations, and those are Orange County, which is I won't say significantly but it's ahead of where we expect it. Our two markets in Florida, Orlando and Tampa, are significantly ahead of what we would have expected when we did our business plan, as is Nashville, Portland, and Monterey. I think the big difference between the ones that are underperforming and those that are outperforming, it's which ones are being affected by new supply. Those I just said that are outperforming tend to be B product which doesn't compete as much against new supply, and they are in markets that really are not getting heavy doses of those supply.

That's very helpful, and maybe as one quick follow-up there as it relates to the A/B strategy and Bs outperforming on account of new supply. Is it entirely a function of less supply with the B assets versus A, or is there also an element of trading down or anything else on the demand side of the equation that might be leading to outperformance there in general?

I think it's predominantly lack of new supply. There could be some situations of trading down. We've seen the reason for move-out being a rent increase grow to about 9%; that's stable with where it was about a year ago. We've got two markets that are above 20%, and those are San Francisco and Los Angeles. And even though you could sit there and think maybe it's because they are getting priced out of the market, when we really see forwarding addresses on where these people move to, they are frequently moving to that brand new supply down the street that's offering the one month free, or in the case of Marina Del Rey, a month and a half to two months free, that prices them similar to what we were asking them to pay. They were able to trade up, if you will, into a brand new community but it's at the same rate so I don't think it's price fatigue. There's probably a little bit of that business inching in there but I think it's predominantly supply.

Great. Thanks, Jerry.

Sure.

We'll go next to Nick Joseph with Citi.

Can you give us an update on the West Coast Development JV, and it looks like a few of the assets are now in lease-up, and what you're seeing in those markets?

Sure. I'll start and then Jerry can jump in. Two of the assets are in lease-up, CityLine in Seattle and Katella I in Anaheim, and as Jerry mentioned in his prepared remarks, they are both leasing up very well. We just started leasing 8th & Republican in South Lake Union near Amazon, and we've leased 10% or so of the units, 16% of the units at this point. The next ones are going to be downtown LA asset that will begin leasing in the third quarter and then the second phase of the Katella project which would begin leasing early next year.

But Nick, I'll give you a little more color on how well those lease-ups are doing. As Harry said, they are all at or above what we expected. Katella Grand has probably been my biggest surprise. It's up in the platinum triangle, and we're getting rents that we anticipated and call it the 225 to 230 a foot range, been able to drive that thing up to 47% leased and 36 occupied using typically less than a month free. So that one's been a bit surprising to me how strong it was but I think it is a special project. CityLine up in the Columbia City location, that one got off the ground a little bit slow and we cut rate a bit to get velocity going in the first quarter, but we caught back up to our budgeted occupancy level and today that property is 66% leased, 52 physical, and we've gotten rents back above market rate and we brought concessions in at about a month free now.

And the third one that is doing real well right now is 8th & Republican, and we opened the doors to that one about two weeks ago, and as Harry or as I stated a minute ago, we're about 16% leased and 6% physical. One extra benefit that we found out a month or two ago, we thought we were getting dropped right in between Amazon land, Google announced recently that they are going to be putting a few offices up within several blocks of this property, too, and they will be out a couple years.

This is Herzog, too, Nick. I'll add one other thing. Keep in mind with the West Coast Development JV that we do get a 6.5% pref until such time as the assets are stabilized as defined and they observe any operating losses during that time period so in the meantime, while these are stabilizing we're earning a 6.5% on our investment.

Thanks, and then just on the new development in Boston, can you talk about the desirability of that project and expectations in terms of the spread over existing cap rates that you expect to achieve?

Sure, Nick. This is Harry. I'll talk about this for a couple minutes. First, we're building a project in a location that will appeal to a broad range of renters. I'll talk about the neighborhood first and then the economics. This is a new location within the South End, which is one of Boston's most desirable neighborhoods. It's primarily a residential district with old 19th Century brownstones but this particular location is only a 10 minute walk to the financial district, the Back Bay, and GE's new headquarters that will bring 800 new employees to Boston. There's tons of restaurants, bars, galleries, and boutiques along Tremont Street.

Our site is located directly across the street from a new Whole Foods market that opened last year. There's been recently built apartment projects, ink block in the Troy totaling more than 800 units that are nearly fully leased up. The first condo building across the street sold out and prior to completion at more than $1,000 a foot. They just started construction on a second condo building. Related companies purchased a site kitty corner from ours and is into the city for approval of 175 apartments and 100 condos. In terms of economics, the yield based on today's rents is about 5.5%. If we get 3% revenue and expense growth for 3 plus years, the yield will grow to above 6% or more than 200 basis points above today's cap rates. Rents today are more than $400 below our Pier 4 deal that leased up in seven months last year. When you're comparing similar unit types, and like similar assets in Boston, the cap rate for this asset would be very low, likely sub 4% cap rate.

We believe in fact that this location could outperform Boston overall, which according to Axial averages nearly 4% per annum through 2019. In addition to Whole Foods and the retail and residential construction, our units and our 40,000 square feet of retail will help complete the transition of this new location within a very established and desirable overall neighborhood. Downtown Boston expects to average less than 1,500 unit deliveries per year through 2020, so we also believe supply is manageable.

Thanks.

We'll go next to Rich Anderson with Mizuho Securities.

Thanks. Good morning out there. So if you're doing 8% same-store NOI growth the first quarter and sounds like you're going to have a good second quarter and your guidance is 6.75% still, should we be assuming that you're expecting a supply induced meaningful deceleration in the second half of the year? Is that how we should read this at this point?

Rich, I'll start that. This is Jerry. Really, when you think about what makes up your revenue growth, it's really the -- it's any change in your occupancy year over year and then it's really the weighted blended average of increases for renewals and new leases over the preceding 12th period. So when you really look at how the revenue growth will decelerate over the years, you're really having to look for example in second quarter, what did we do in second quarter last year on blended growth and what do we expect to do this year in second quarter on blended growth. And because last year, the second and third quarter were extremely strong and as we go into this year's second and third quarter, the rate growth is going to be less than it was last year.

You have a natural deceleration. Now I guess you could say accurately that it is primarily coming from new supply deceleration that is predominantly occurring in those three markets I talked about earlier because they have a heavier weighting on our total revenue growth. But I guess long story short, I think you kind of hit it on the head but I just wanted to make sure people really understand what the components are that really drive the rate growth and for example, in first quarter of this year, what we achieved in the third quarter of 2015 had more of an impact on first quarter revenue growth than what we achieved as far as rate growth in the first quarter.

Let me add to that. One of the things I'd have you keep in mind is we obviously had a good start to 2016 from a same-store perspective, and as we look at guidance for the balance of the year, it's still too early to make any modifications in our view. We want to get more into peak leasing season, but we do feel good about where we are at and we'll revisit again next quarter.

I appreciate that. Thanks, Tom. And then one of the little tidbits I find interesting is that your development pipeline is at the top end of your kind of range of incremental yields, so close to 200 basis points, and yet you're worried about supply all around you. I mean, why do you suppose that those two opposite sort of things are happening right now? I would think maybe with elevated levels of supply, your own development pipeline would be at least underperforming a little bit in that environment. Can you just walk through that?

Rich, this is Toomey. I think one, it's a testament to Harry and his team. They found very good sites. They've done a good job of reading where the market opportunity is and providing a hell of a good product. And I think you're seeing that both last year with Boston and this year with San Francisco, so I think it's a little bit of that aspect of it, if you will.

I think it's a fair question. We'll probably noodle on it a little bit more and try to come up with reasons. We're really focusing on the forward aspect of the business and want to stay disciplined about allocating our capital and sustaining that type of gap or accretion, if you will, and normally people wander into the subject of would you expand it, and I don't think we would. I think we're going to stay very disciplined about our development, and we'll keep going forward.

Sounds good, thank you.

We'll go next to Nick Yulico with UBS.

I was hoping you could shed a little bit more light on why the joint venture assets are underperforming so much on a same-store growth basis. They did 1% same-store NOI growth versus 8% for the rest of the portfolio. You talked about it in New York but what else is going on there?

Nick, this is Jerry. When you really look at it, and I think we stated this earlier, A and especially A plus product beats more against new supply than B. We've stated before that this spread between As and Bs in our same-store pool is probably about 100 basis points. But when you do look at the MetLife assets, and again there's 24 assets I believe in the same-store pool of MetLife. There's five of them that are in urban cores where heavy new supply is hitting and it's definitely hitting A plus product.

One of those is in downtown Seattle. One is in Washington, DC. One is Columbus Square up in the upper west side. One is in uptown Dallas, and then the last one is in downtown Austin. Those five properties make up 41% of the total NOI of the MetLife JV, and they had revenue growth of 0.6%. So under 1% because they are going head-to-head against so much new supply. And when you look at the expense side, you have situations where I believe last year in the first quarter we had pretty good real estate tax reappraisals that benefited us but it's predominantly because of the five properties that are in the urban core of heavy new supply urban locations.

Okay, that's helpful. I guess my follow-up on that was, if I go through your proxy and I look at some of the short-term compensation metrics for executives, one piece is that same-store revenue growth in markets versus your peer group, and then I'm wondering why then it makes sense to be carving out -- I think that calculation carves out the MetLife JV assets, which seems like it would actually be then beneficial if you're thinking about how your portfolio is being comped versus your peers, which often have less JVs or don't have as much exposure with the JV in a market like in New York or Boston.

Nick, this is Toomey. It's a good question. First, when we manage and set forth budgets with Met, we have them as a partner in the room and they weigh in on how they want the asset run and we weigh in on it, and we usually somewhere in the middle of that arrive at how we're going to manage the asset. I think second, we saw the pressure that Jerry alluded to with ultra A assets, and we really have that conversation run those assets in that manner and we have since day one disclosed it transparently. With respect to the comp point on the issue, we're very comfortable after deliberation with the Board internally that we've got the right comp plan and rewards the right action which is to win our markets and I think we do that pretty darn consistently and I think it's a testament to Jerry and his operating team and the innovation that they drive. We're comfortable with our plan and how we've treated the Met JVs and disclosed them.

Okay. Thanks, Tom.

We'll go next to Drew Babin with Robert W. Baird.

Good afternoon. Thanks for taking the question. First question, just going back to Nick's question on MetLife, the expense growth was relatively high in that JV and to your point about working with MetLife to control the expenses, is there anything in that you might do differently if you were in 100% in control of the property, or is there anything that can be done on the expense side or is that kind of just an outsized impact from 421 in New York?

You know, some of it's outsized impact. Some of it also is just real estate tax, timing of real estate tax refunds last year versus this year. You really need to see a full year and not judge it purely on a quarter, but you will find also in some of these locations where there's heavy new supply, things like personnel growth because in places where there's heavy new supply you're in constant competition to get the best employees to work for you so that can drive that number up, too. But I can tell you this, we typically attempt on any initiatives that we're rolling out for expense reductions, whatever we do for UDR, we typically do UDR wholly-owned, we typically do with the MetLife portfolio also.

Makes sense. Secondly, just looking at private equity appetite for real estate assets, obviously there's been a very strong bid for theoretically more stable suburban properties with Home Properties and Associated Estates being bought, Starwood buying QR's portfolio, et cetera. What are you seeing in these A markets in CBDs in terms of who's looking at assets? Are you receiving any interest externally from any of the larger private equity players or is their appetite more geared towards stable -- more stable assets with theoretically higher yield?

This is Harry. I think on the -- you have sort of by and large a bifurcated buyer class between the main and main Class A assets, which are going to be pension funds, sovereign wealth funds, and we're starting to see an influx of [deal] investment from Canada, from the Middle East and Asia, and perhaps to a lesser degree, the private equity firms typically have slightly higher IRR hurdles than these others. And therefore while they do have buckets of money that would lend itself to buying A properties, they tend to buy kind of A minus and B properties primarily. At least that's what you've seen historically. That's what we're seeing now that there's both asset classes, we're seeing very deep buyer pools which is obviously positively impacted asset pricing. In terms of others sort of reaching out to us, that's something that happens routinely, whether it's from private equity firms or sovereign wealth firms, or other buyers and that happens routinely at really all points in the cycle.

Nick and Drew, if Nick you're still on the call. I wanted to loop back on the Met thing. A couple points occurred to me and I was just looking at my notes. Just a reminder, Met is 10% of our NOI. We've consistently treated it and sometimes it's better and sometimes it's worse than the wholly-owned portfolio, but what I look at and we go over every year with our Board, our IRRs, and our returns on our investments from beginning to the end, and it's a good thorough review and I'm just looking at the Met coming up on its sixth year that we've been co-investing with them in this JV, and the IRRs are now at better than 15.5%. So I think its been a very good investment, a very good relationship and one that we look forward to continuing in the future.

That's helpful. Thank you.

We'll go next to John Pawlowski with Green Street Advisors.

Jerry, thanks for the operating update for April in New York. Could you share a new lease and renewal growth trends for April in San Francisco, and what you're seeing heading into May?

Sure. I don't have May on me right now but in April, San Francisco's new was 2.8% and renewals were fairly stable with where they were in the first quarter at 7.5%.

Thanks and lastly, what drove the decision to sell the two land parcels in California?

This is Harry. The two projects are in Santa Monica. They both have sort of retail type operating assets on the parcels, and as we pursued the re-entitlement of those sites over the past several years, it became obvious to us that the city was not going to sort of cooperate and allow a rezoning of those assets and so we sold them to retail units.

Okay, great. Thank you.

We'll go next to Jana Galan with Bank of America Merrill Lynch.

Thank you. Jerry, I really appreciate the market outlook for supply and job growth. Do you think that we also need to see wage growth accelerate to continue the success you've had in your renewal increases?

You know, I don't think it would hurt obviously. I still think even with the wage growth that we've been having over the last several years, we've seen and with going on with the rent growth we've had, we still have rent to income level that's pretty consistent with where it has been at about 23%, and we haven't seen a huge spike in turnover, so we're not driving many more people out because of rate growth, but I think any time you can see some wage growth improvement, it's helpful. I'd say a couple things that have helped somewhat is for our suburban especially B renters, lower gas prices have kind of supplemented their wage growth, and I think when you look at the more urban dwellers, I don't think again it's so much wage growth that's affecting us there.

It's their ability to jump to a new lease-up, but I'm never going to argue against wage growth. When you see indications that whether it's California or different cities in California or as Seattle has done raising the minimum wage to $15, even though it will put a little bit of expense pressure maybe on operators like us because it will drive, even though we don't have many people that make below $15 an hour for an unskilled job, when you have skills that will drive that gap up. But I think overall, I think wage growth like that is going to be good for our sector and would help us to continue to drive rate.

Thank you. That's it for me.

We'll go next to Rob Stevenson with Janney.

Thanks. Jerry, in Tampa and Orlando, at this rate, how well do you expect to be able to keep this up and is it a situation where you worry about now that you're at $1,200 a month rent for largely Class B product that you're getting into the point where people can afford townhouses and condos in those markets and you could start seeing some move-outs accelerate?

I mean, you always worry about that and you have worried about that in the past. Today, about 15%, a little over 15% of our move-outs in Tampa are to purchase homes, so it's not huge. The people that qualify for the homes want to have to own a home and but do I think down in that market you continue to see high-single digit new and renewal growth for a prolonged period of time. No I don't think it's going to last forever. Its been a very good multi-year run. I think it continues to run for another year or two because we're not being affected by new supply. Job growth has been better than in the past. It's been higher quality biotech and medical jobs that have been coming to places like Orlando but no, do I think it can continue at the levels it's at today for multiple years? I don't think so but I don't think it decelerates rapidly in 2017, either.

On a lighter note, I think Jerry's going to give all our existing residents a Netflix account and send them the Big Short movie.

Harry, in terms of land, how aggressive are you guys being these days and is there anything reasonably priced in your core markets or is it now sort of going to condo developers and other bidders at higher levels than you guys are comfortable buying land for future development?

A couple things, one, we're continuing to look at land sites in markets where we historically have built on the coast. In addition, we're continuing to work through the MetLife Land Bank and we've got projects in Seattle and LA and the East Bay, and I expect that we will continue to grind through those and expect to start some of those over the next couple years. Really as you think about it, the sites that we're looking at, these are going to be sort of late 2017 into 2018 starts and so when we're looking at the fundamentals of these markets where we have declining supply really in 2017 and 2018, these are going to be 2019 and 2020 deliveries. But to answer your question specifically, it is somewhat more challenging.

Clearly, the number of percentage of the projects that pencil today is much lower than it had been historically, but we expect to continue to find enough projects both externally and within our MetLife JV using consistent underwriting standards without any type of aggressive rent growth assumptions that will continue to maintain similar development pipeline as we have historically and fit within our $900 million to $1.4 billion type target.

Does this force you to do more Santa Monica type of things where you have to buy stuff on the anticipation that you could try to get it rezoned and take that sort of risk out there these days in order to find sites?

Not necessarily. That doesn't mean that we won't do a little bit of that. Again, we try to manage the amount of sort of preconstruction risk we take. But for example, if you look at a market like Boston where we just started a project in there for would expect to start the next project sometime in two or three years. Clearly, if we found an adequate site that it's conceivable that we would take some entitlement risk but we don't necessarily think that's something that we're going to have to do a lot of.

Thanks guys.

We'll go next to Michael Lewis with SunTrust.

Hi, thank you. You talked quite a bit about supply peaking everywhere but New York in 2016, and I was just wondering how comfortable you are that 2016 will be the peak supply year because as long as you have strong fundamentals, high occupancy, positive rent growth, low cap rates, it may entice more people to build. It's working for you, right, so it might work for others, so just curious what your thoughts are on that.

Michael, this is Toomey. A very good question, and one thing that we alluded to a couple years ago when we saw the banking industry becoming further and further consolidated and regulated is we realized the impact would be if the feds would have the ability to choke off construction loans, and what we're currently seeing in the marketplace and if you talk to private developers is securing a loan for new development in the multi-family space is getting very, very difficult, and you're going to see them do less in deals because it's going to require more equity, there's going to be less proceeds out of construction, and tougher underwriting.

I think that combined with the transparency of operating environments and cities' difficulty around zoning and entitlement processes is going to slow it down a great deal, and I didn't hear any development in the last three months talking with a lot of private guys that said, hey, we think we're going to do more business in 2017 than we're doing right now. Everybody looks at it and says we're pulling back, we being forced to pull back, and we have to relook at our numbers and come up with more equity, so I think that's the biggest choke point about new supply. It's certainly not the demand side of the equation. It is certainly there and will persist for many more years. It's the supply that's going to get choked down.

Thanks, Tom. Your answer is a good lead in into my second question, which is you have an outlook out there through 2017. Do you think by the time we get to the end of that outlook, this dynamic between the suburbs outperforming center city and Bs doing better than As, do you think that dynamic will have started to shift by the end of 2017 or do you think we'll still be in an environment like that?

Well you're asking a very broad question and it's hard to draw a blanket over the whole US. We can take individual markets and probably take it offline and go through those, but my view on the long term is is that a lot of developers are moving out to the suburbs where they are building an A minus product to a price point sensitive customer and they are going to be able to put up a lot more doors quicker in that type of environment and the suburbs by the time 2017 arrives will be probably turning over. I think they are going to be a good spot for 2016 and 2017, but after that I would suspect that they are going to start seeing the same supply pressures that we're seeing in some of the urban markets today, and so they will probably start turning over then.

Great, thank you.

We'll go next to Alexander Goldfarb with Sandler O'Neill.

Oh, hi. Thank you and sorry, I hopped on late. Just busy earnings day, so if you answered this, I apologize but on the Santa Monica land, did you guys say how long you owned that land for?

Alex, we bought it in the second half of 2012 so about three and a half years.

Okay, and just given that you guys know the coastal markets well, was it just something did -- was the pushback on the entitlement change much -- was it much different than you originally thought or you always thought it would be a difficult one to get done and you were just willing to buy it and see if you could get it done?

Well, Alex, at the time that we acquired it, there was a -- Santa Monica was granting these sort of rezoning types of projects that would allow for a certain density in a lot of these sites. Shortly after we acquired it, the city basically shut down and I remember in the year 2014, they issued something like 50 total building permits. And so basically over the three years, it became obvious to us that we were not going to get these sites rezoned anytime soon. Given that they had existing retail uses and we had a retail buyers available, we decided to get rid of them.

Okay, and do you have any other in the rest of the portfolio in any of your other land positions, anything that's sort of comparable?

No.

Okay, thank you.

Alex, I should add one thing.

Sure.

Just keep in mind on those two small land assets that had a little bit of retail on top of them. We did ultimately sell them both at gains, so for what it's worth, they weren't big gains, but they weren't small gains.

Gains are good. Thank you.

We'll go next to Jordan Sadler with KeyBanc Capital Markets.

Hi, guys. It's Austin here again. Just one quick follow-up. Jerry, I was wondering if you could give a little color, your thoughts on some of the rental rate moratorium and other regulations that we've seen in Northern California, particularly with regard to the vintage of your Northern California portfolio.

You know, there have been a few things that have come up. There was some meetings last week or the week before in San Mateo that talked about properties built I think before was it 1980 or it's 20 to 30 year old product but it seemed like it got shot down pretty quickly, but I can tell you this. Our two deals in San Mateo are older than that, so if it passed those potentially would be affected. The other ones that we've heard about but we are not directly affected are think it was a 90 day restriction on renewal growth in Oakland.

I'm not positive if that passed or if it was just talked about since it didn't directly affect us, and then the other one that was getting talked about I believe was in San Jose putting a -- moving the cap on renewals on rent control buildings. I think it was going from 8% to 5%. Ours is not a rent control building, so I don't think it would have any effect on us in San Jose and our asset there is a little bit newer. So at this point, I think the only one that potentially in the future could affect us if it did get passed, but again it seems like it got shot down pretty quickly by City Council, would be in San Mateo.

Great. Thanks for the detail.

At this time, there are no other questions in queue. I'll turn it back to Tom Toomey for any closing remarks.

Well, thank you all of you for being on this call today. I know it was a long call but I thought it was very fruitful to have a good dialogue and go through the markets in detail. A reminder to you as I listen to the questions and reading the call notes. A lot of you on right now focus on the short term and really, we're focused on the long-term aspects of the business which do not remain anything but positive. The demographics are on our side. The supply/demand curve is on our side to be able to execute our strategy, deliver solid growing cash flow and paying dividends, and so I think the construct of the business is great where we are from a strategic standpoint of being in the markets we're in, the mix of portfolios, and the management team to execute on that, and so we think the future is very bright.

We think just as we've always tried to be very transparent about the operations of the business but when you back up and you look at the end results of the cash flow growth, the prospects for the balance of the year in 2017 as well, we're very excited about those prospects and eager to just keep working on those. And so with that, I'll close and we thank you and look forward to seeing many of you in the next conferences over the next couple months. Take care.

And that does conclude today's conference call. We appreciate your participation.