UDR Inc (UDR) 2016 Q2 法說會逐字稿

Good day and welcome to UDR's 2Q 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 second-quarter 2016 financial results conference call. Our second 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 statement.

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-up. Management will be available after the call for your questions that did not get answered.

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

Thank you, Shelby, and good afternoon, everyone, and welcome to UDR's second quarter conference call. On the call with me today are Shawn Johnston, Interim Principal Financial Officer, and Jerry Davis, Chief Operating Officer, who will discuss our results, as well as senior officers Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call.

The second quarter of 2016 was another great quarter for UDR, with 8% AFFO growth driven by strong revenue growth of 5.7% and continued leasing strength in the $400 million developments in lease-up. This is a direct reflection of the continued execution of our strategic plan.

At the core of our strategic plan are four elements. First, a focus on cash flow growth for our shareholders through operational excellence, which Jerry will touch on later. Second, an accretive development pipeline that can be fully self-funded. Third, our diverse portfolio mix of 20 markets with A and B communities in urban and suburban locations. And lastly, a safe, low levered balance sheet. Combined, these four elements are designed to provide the greatest predictability of cash flow growth through a variety of economic cycles. This is reflected in our updated guidance range for the full year, with a midpoint resulting in an 8% AFFO growth per share, which Shawn will touch on in his remarks.

Before I turn the call over to Shawn, I wanted to add a couple comments on the recent departure of Tom Herzog, our former CFO. While Tom was an exceptional CFO, he left UDR with an impressive bench and I feel confident in the skills of those in the finance and accounting team to be more than adequate to handle his absence. At this time, Shawn Johnston, our Chief Accounting Officer, is serving as our Interim Principal Financial Officer while we evaluate both internal and external candidates. Shawn is an exceptional candidate for the role and we're glad to have him serving in an interim capacity now. With that, I will turn the call over to Shawn for additional comments on the quarter.

Thank you, Tom. The topics I will cover today include our second quarter results, a balance sheet update, and our third quarter and full-year guidance update.

Our second quarter earnings results were at the top end of our previously provided guidance. FFO, FFO as adjusted, and AFFO per share were $0.44, $0.45, and $0.41, respectively. Second quarter same-store revenue, expense, and NOI growth were 5.7%, 5.5%, and 5.7%, respectively.

Second quarter expense growth was elevated due to a higher than expected property tax assessment on our 2014 development completion in San Francisco. Historically, San Francisco has valued developments for tax purposes by using a mix of cost to construct and income capitalization. While we budgeted for a mix that was weighted more towards the income method than precedent would indicate, 100% of the valuation was eventually based on income capitalization.

This unexpected assessment resulted in a charge of $2.2 million during the quarter. $1.1 million of this was attributable to the period that the community was included in our same-store population and was recognized as additional same-store expense during the quarter. The remaining portion of the charge is for real estate taxes while the community was in lease-up, which can be found in Attachment 5. Excluding this negative tax variance, quarterly same-store expense growth for the portfolio and the San Francisco Bay area would have been 3.4% and 9.9%, respectively, versus the 5.5% and 33.1% realized.

Next, the balance sheet. At quarter end, our liquidity as measured by cash and credit facility capacity was $876 million. Our financial leverage on an undepreciated cost basis was 33.2%. Based on quarter end market cap, it was 23.6%, and inclusive of JVs, it was 28.1%. Our net debt to EBITDA was 5.3 times and inclusive of JVs was 6.3 times. All balance sheet metric improvements were ahead of our strategic plan.

I would like to point out a few changes to our supplemental package. First, you'll note that we have provided additional GAAP metrics in both our release and supplement in response to the recent SEC interpretation regarding GAAP and non-GAAP metrics. I'd also like to direct you to Attachment 15, or page 28 of our supplement, where we have updated our full-year guidance. We are now providing both our previous and updated guidance for ease of comparison.

With that, we have tightened our full-year 2016 FFO per share guidance range from $1.76 to $1.80 and tightened and increased our FFO as adjusted and AFFO per share guidance ranges to $1.77 to $1.80 and $1.61 to $1.64, respectively.

A few key items have impacted our original guidance. First, our same-store portfolio is performing in line with original guidance, but our MetLife properties, which are primarily urban A, have underperformed our expectations. This underperformance has been offset by the outperformance of our development lease-ups.

Second, the S&P 500 inclusion trade resulted in some dilution; however, this issuance gave us the flexibility to change the timing of other planned 2016 capital events to offset the majority of the dilution and ultimately resulted in an improved balance sheet. Lastly, we expect a reduction in our full-year incentive compensation, which is partially offset by higher than expected healthcare costs, resulting in a net reduction to G&A expense of $2 million at the midpoint.

A few other specifics from the page. We increased our sources guidance by $75 million at the midpoint, to a range of $650 million to $750 million for the year. This is due to an increase in planned dispositions, which we now anticipate being approximately $400 million for the year.

In addition to the $400 million of sales, we have issued $174 million of common equity, with the remainder of our sources coming from secured debt refinancings. We do not anticipate any additional equity issuances through the remainder of the year. Our debt maturities increased by $60 million, as we have accelerated the accretive prepayment on some existing secured debt to the earliest possible date without penalty.

Additionally, we reduced our development, redevelopment and land acquisition guidance by $50 million at the midpoint, due to timing of spend, and we increased our acquisition guidance by $100 million in order to satisfy some Section 1031 exchanges that we would like to complete this year.

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 growth of 6.5% to 7%. Average 2016 occupancy remains forecasted at 96.6%. Third quarter 2016 FFO, FFO as adjusted, and AFFO per share guidance is $0.44 to $0.46, $0.44 to $0.46, and $0.39 to $0.41, respectively.

Finally, we declared a quarterly common dividend of $0.295 in the second quarter, or $1.18 per share when annualized, 6% above 2015's level, which represents a yield of approximately 3.2%. With that, I'll turn the call over to Jerry.

Thanks, Shawn, and good afternoon. In my remarks, I will cover the following topics. First, our second quarter portfolio metrics, leasing trends, and the rental rate growth we realized this quarter and early results for the third quarter; second, how our primary markets performed during the quarter; and last, a brief update on our development lease-ups.

We're pleased to announce another strong quarter of operating results. In the second quarter, same-store net operating income grew 5.7%. These results were driven by a 5.7% year-over-year increase in revenue against a 5.5% increase in expenses. Year-to-date through June 30, we have achieved NOI growth of 6.8% behind revenue growth of 6% and expense growth of 4.1%. Our same-store revenue per occupied home increased 6% year-over-year, to $1,921 per month, while same-store occupancy of 96.6% was down 30 basis points versus the prior year period.

Total portfolio revenue per occupied home was $2,027 per month, including pro rata JVs. Although we are feeling the impact of new supply in a few of our core markets, namely San Francisco and New York, the positives we see continue to outweigh the negatives, stable job growth, new household formations that are delaying home purchase and choosing to rent as well as empty nester baby boomers moving to an urban setting with a live, work, play atmosphere. Our portfolio mix benefits from each of these scenarios.

Turning to new and renewal lease rate growth, which is detailed on Attachment 8-G of our supplement. We grew our new lease rates by 4.4% in the second quarter, 330 basis points below the second quarter of 2015. Renewal growth remained robust at 6.3% in the second quarter, or 70 basis points behind last year. On a blended rate basis, we averaged 5.3% during the second quarter, a reduction of 210 basis points versus the same period last year. If you look at the 76% of the same-store portfolio not located in New York and San Francisco, our decline in blended rate growth was only 100 basis points.

I'd like to point out the exceptional growth we achieved in 2015 was an anomaly. We are now back to a normal operating environment. Typically, renewal rate growth outpaces new lease rate growth by at least 100 basis points. Because we were able to drive occupancy in late 2014 to the 96.5% to 97% level, we were able to push new lease rate growth in the peak leasing season in 2015 higher than that of renewal leases. 2016 is proving to be a more normalized year, with renewal growth outpacing new lease rate growth. While we wish every year could be as strong as 2015, we are very happy with the strength seen in 2016 thus far, especially given that we are currently dealing with peak deliveries in the majority of our markets.

Next, move-outs to home purchase were up 150 basis points year-over-year, at 14.1%. And even with our strong renewal increases in the second quarter, less than 9% of our move-outs gave rent increase as the reason for leaving.

Now moving on to the quarterly performance in our primary markets, which represent 70% of our same-store NOI and 75% of our total NOI. Metro DC, which represents 19% of our total NOI and 14% of our same-store NOI, posted year-over-year same-store revenue growth of 1.8%, a slight deceleration from first quarter, due primarily to very strong bad debt collections in the second quarter of 2015.

We are forecasting the market to generate top line growth in 2016 of 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. Our B product outperformed our As during the quarter by 170 basis points, as sporadic supply issues continued to make for choppy results in some in-fill locations.

Orange County and Los Angeles combined represent 16% of our total NOI and about 17% of our same-store NOI. Orange County posted year-over-year revenue growth of 8.9%, with both our As and Bs performing well above 8%, and all submarkets remaining very strong as we face very little new supply. Revenue growth in Angeles was 5.2% during the quarter. Our same-store portfolio is primarily concentrated within the Marina del Rey submarket and is currently facing over 2,000 units of new supply, which we expect will be fully absorbed by year end. We continue to see good job growth and the supply picture improving in 2017 for our same-store LA portfolio.

New York City, which represents 12% of our total NOI and 13% of same-store NOI, posted 4.6% revenue growth for the quarter. While our same-store properties are not directly affected by any new developments, we are feeling the impact from new supply in the Manhattan market, as new lease growth during the quarter was 1.9%. New Yorkers, who typically have been loyal to their preferred neighborhoods, are being enticed by pricing incentives in places like Midtown West. For full year 2016, we expect New York to have revenue growth in the low 4% range, below our original estimates of approximately 5.5%.

San Francisco, which represents about 11% of both our total and same-store NOI, is continuing to feel 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 between 6% and 7%. Same-store revenue growth in the second quarter was 6.3%, due to the extremely strong blended rent growth we achieved in the third quarter of 2015. We currently see our portfolio being affected by lease-up pressures through the middle of 2017.

Boston, which represents 7% of our total NOI and about 5% of same-store NOI, produced a strong 6.1% revenue growth during the second quarter. Our suburban assets in the North Shore were our strongest performers, with growth over 7.5%. Even with new supply downtown, our one same-store asset in the Back Bay posted revenue growth of 4% for the quarter. The Seaport district, home to our 2015 completion, 100 Pier 4, and the South End district, home to our under construction community, 345 Harrison, continued to see more growth with additional office and retail tenants in the submarket.

Seattle, which represents 6% of our total and same-store NOI, posted strong revenue growth of 8.5% for the quarter. 16% of our portfolio is B product, which posted revenue growth of 12.3%, while our A quality communities produced 6.6% growth. We continue to benefit from the strong growth inherent in these suburban B assets, which are located in submarkets that are less exposed to new supply. Even with new supply pressure, our Bellevue assets posted revenue growth of 6.8% in the quarter. Our revenue growth in downtown Seattle was essentially flat.

Last, Dallas, which represents just over 4% of our total and same-store NOI, posted 5% year-over-year same-store growth in the second quarter. Our B properties had revenue growth that was 500 basis points higher than our As, as heavy new supply in uptown and along the tollway is impacting rent growth in those submarkets. While new supply remains elevated, we expect deliveries to decline after this year and are confident they will be absorbed by the strength in the diversified job market in Dallas.

Our secondary markets, such as Portland, Monterey Peninsula, Florida, Nashville and Austin, which comprise roughly 20% of our portfolio, 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.

July results came in in line with our plan. As we look ahead to the next two months, we see stable pricing power and occupancy. Our 50/50 AB portfolio located throughout 20 markets has enabled outperformance in our Sunbelt market, Orange County, Seattle, Boston, Portland and Monterey, to offset markets that are being impacted by new supply, namely, San Francisco, New York and Los Angeles.

I'll turn now to our four in lease-up developments, which you can find on Attachments 9-A and 9-B, or pages 21 and 22 of our supplement. Our pro rata share of these four properties represents over $400 million, or roughly 30% of our pipeline, inclusive of the West Coast development joint venture. In total, these properties are performing ahead of plan.

First, 399 Fremont, our 447-home, $318 million, 50/50 MetLife JV lease-up in San Francisco, was 50% leased and 43% occupied at quarter end. Today, we are 57% leased and 48% occupied, with rents exceeding pro forma. We are currently offering six weeks concession, as we have begun to see increased competition from other lease-ups in the submarket. Over the last month, we have taken over 30 leases.

The following three communities are all part of the West Coast development joint venture. Katella Grand 1, our 399-home, $138 million lease-up in Anaheim, California was 65% leased and 58% occupied at quarter end, and as of today, it's 72% leased and 64% occupied. We are currently offering less than one month of concessions at this community and leasing remains very strong, with about 30 applications per month.

8th + Republican, our 211-home, $97 million lease-up in the South Lake Union submarket of Seattle, was 47% leased and 37% occupied at quarter end, and is currently 60% leased and 46% occupied, and we are averaging over one application per day.

CityLine, our 244-home, $80 million lease-up in the Columbia City submarket of Seattle was 87% leased and 84% occupied at quarter end. Today the property is 89% leased and 86% physically occupied.

All in, we had a very strong second quarter and we remain very positive on the outlook for multi-family fundamentals and our ability to execute throughout the remainder of 2016.

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

Thank you.

(Operator Instructions)

Nick Joseph, Citi.

Thank you. Jerry, just sticking with operations, you outlined A versus B performance across many of the markets. And with the 50/50 diversified portfolio, I think you have a unique perspective on this. So when do you expect that spread between As ands Bs to contract and when could As actually outperform Bs, given the current supply picture?

Good question. And I tell you, it varies market by market. But I think overall, and we stated this probably for the last two to three quarters, we would see As getting closer to Bs probably mid-year next year, maybe a little bit after that, and then as you get deeper into 2018, I think As probably start competing more head-to-head with Bs. But it's definitely market dependent.

For example, I would think in Washington, DC, we've seen that spread contract and expand multiple times. Last quarter, it was about 50 basis points, where Bs were outperforming. This quarter it re-expanded to 1.7.

But we do see a slowdown of new supply affecting our product in DC over the next year-and-a-half. So I do think As, because in they're typically better locations, by the second half of next year should start doing much better there.

When you look at a place like New York, it's probably a little more prolonged, call it maybe even 2019 or further, where we see Bs continuing to outperform. And in San Francisco, I think it's similar. You're going to see supply continue to affect the market in Sonoma and places like that at least through the middle of next year, and I think that will cause As to continue to have to go head-to-head against new supply well into 2018.

So I think San Francisco, New York, Dallas, Austin, it's probably pushed out a bit, but several of the other markets that saw new supply come a little bit earlier, it's shorter. But on average, I'm guessing it gets closer in late 2017 and probably pulls even in 2018.

Thank you. And then as part of the two-year outlook, you put out 2017 operating assumptions. You've maintained 2016 same-store revenue growth. I was wondering if there's any update to the 2017 estimate of 4.75% to 5.25%?

Yes, I can tell you, clearly we saw deceleration coming in 2017, and as you said, we put that in our two-year outlook. And the range was the 4.75% to 5.25%, which implied about a 75 basis point decline from 2016. And we're continuing to project a slowdown in 2017, based on a lower blended rate growth in 2016 compared to 2015.

But at this point, it's probably a little early to give guidance on where we think 2017's going to come in. We still don't have great visibility on pricing for September through the end of fourth quarter of this year. And we really haven't fine tuned our expectations yet for 2017.

So a little bit early, but it's probably leaning towards the lower end of that range.

Thank you. Then just quickly, on that range, did that contemplate the assets that are not in the same-store pool that you lay out on attachment 7-B that would have -- that will roll into the same-store pool in 2017?

Yes.

Great. Thank you.

Sure.

Jordan Sadler, KeyBanc Capital Markets.

Hello. It's Austin [Wurschmidt] here with Jordan. Just revisiting Nick's earlier question on Bs outperforming As in most of your markets. I was just curious what the price differential is between your As and Bs in the some of the similar submarkets.

It depends. The difference between an A and a B in Dallas is probably $250 to $300. When you get to New York, it's probably north of $1,000 differential. San Francisco, it's going to be $800 to $1,000.

So it can vary. But you're typically looking at it getting close to $1,000 in some of the high rise and urban markets on the Coast. And when you get into the Sunbelt, it can contract down to just a couple hundred dollars.

So fair to say around 20% to 25% in some of your larger markets?

Yes, that sounds right.

Okay. And then just thinking about guidance, what are you assuming in terms of blended lease rate growth in the second half of the year?

Second half of the year, the blend, we're looking at it being low [4%s], probably you're going to see in the second half -- I can tell you this -- renewals for July are coming in on an effective basis at about 5.9%. And as you look out the next month or two, it's probably going to stay in that 5.7%, 5.8% range, but then in the fourth quarter it will come down probably mid-5%. And then we're seeing new lease rate growth in July is currently at about 3.2%.

And our expectation would be it will just come down a hair over the last three months. We really -- we saw pricing last year in the fourth quarter come down a bit, so we're not anniversarying off such high prices. But yes, second half, it's probably going to be low 4%s compared to the 5.3% that we had in the first half.

Great. Thanks for the detail.

Sure.

Alexander Goldfarb, Sandler O'Neill.

Good morning out there. Just a few quick questions. Jerry, on the operations, on the first quarter call you guys were early in the year, you guys were asked about the high guidance and actually Herzog explained how the high same-store NOI guidance, what the leakages was, that it wasn't necessarily translating to FFO growth.

But now this quarter, where we see some of your peers dialing back their expectations for the year, what are some of the things that cause you guys to be able to maintain such a high guidance range? Is it that the amount of Bs that you have or just the fact that in your portfolio mix you still have markets like Dallas and Norfolk and other markets that aren't represented in some your other bicoastal peers?

I'll start. First, I'd remind you, we got out of Norfolk in the fourth quarter of last year, so it's gone.

Sorry, sorry. Okay.

That's okay. Yes, I think a big part of it that you have to consider is we really drove rate very strongly in the second half of last year, and that has paid benefits this year. And when you look at the -- we anticipated there would be a deceleration in rate growth this year and that has happened. And while I'll say directionally and in total, that reduction was pretty close, we missed on a market by market basis.

For example, 29% of our portfolio which is made up of New York, San Francisco and Los Angeles, we're missing our numbers. We came into the year thinking San Francisco would be an 8%. Now we think it's probably going to end up at a 6.5%.

We thought New York was going to be high 5%s. Now we think it's going to be low 4%s. And Los Angeles, we came in thinking it was going to be, call it, a 7%, and now we think it's going to be mid-5%s.

What we have that a lot people don't is the diversified portfolio. We're in 20 markets, we've got the 50/50 split between A, Bs and urbans. And what's really helping us is that 42% of our portfolio is performing better than we'd expected coming into the year, so it's offsetting those three markets that are doing worse.

And those are markets like Seattle, which I think all of us are doing well in right now. Our Orange County portfolio, with 8.9% revenue growth in the second quarter, is doing exceptionally well. We're doing very well in Boston, where we have predominantly a suburban portfolio in our same-store pool.

We held up at about a 6%, a little north of a 6% revenue there. The two markets in Florida, both Orlando and Tampa, are doing better than we expected. Nashville is on fire right now, and again, we're very suburban B there.

So we're not being impacted at all by the new supply. And then you have our Monterey and Portland portfolios that are doing well. So the beauty of our portfolio with that diversification is we're not dependent on a couple of markets doing well or not doing well.

We realize that this diversified approach is going to continue to help us in the future, because all markets are going to go through their natural cycles. So we'll always have some that are doing better, some that are doing worse. So I think it's really more the portfolio diversification that's really helping us, compared with some other.

So historically, Toomey is stressing about the harvest markets, the markets that you would use to source capital to help fund the development. Based on what you're seeing this cycle, does the weakness in some of the coastal markets, especially at the high end, change your view and maybe some of the coastal markets are going to be seen for harvesting rather than some of the markets like Richmond, some of those others?

I think there's still a couple of markets that we probably are ready to exit a little more quickly than others. And I think Harry will talk, maybe as soon as I get off this, on which ones we're looking at in our disposition program this year. But markets that we've historically talked about that were in our warehouse and we've stopped talking about that, because we've really come to realize they're good, strong markets and they're going to perform well over the long term.

Places like Florida, again, Orlando, Nashville, Tampa, places like that, I think we're satisfied to stay there over the midterm and probably long term. There's no rush to exit. But we'll selectively sell assets and at times get out of markets to fund the development pipeline.

But maybe Harry can give you a little more input on what we're looking to sell this year.

Alex, in the short term, we're always looking at which assets to sell to fund our development pipeline. In particular this year, we've looked at, we intend to sell Baltimore or at least sell down our Baltimore portfolio, to some extent.

We have a group of assets in the market today. We're also going to sell a couple properties in Dallas for the balance of the year.

Harry, while you're on, can you just walk us through the ground lease deal that you did in LA and the economics and how this fits in within UDR's investment game plan?

Sure. Alex, as you know, we look at all these trades in the context of best risk adjusted return for the shareholders. La Jolla, the effective land price was over $400,000 per unit, which is a price that's unheard of in Los Angeles.

We were able to monetize most or all of our future development gain today and then convert this one-time gain into another structured deal where we received nearly 7% return on our capital. While it's different than Wolf and Steel Creek, it's another example of how we deploy capital into creative transactions.

Okay. Thanks a lot.

Nick Yulico, UBS.

Thank you. So just turning back to the guidance, specifically on same-store revenue growth where you've done 6% year-to-date and for the year, you're saying 5.5% to 6% is the range. How should we think about what level of conservatism is built into guidance? Because it doesn't seem to imply much of a deceleration in the back half of the year.

Yes, Nick, this is Jerry. I'd tell you right now, when we look at our model we're coming in right in the midpoint of guidance. There's a couple things that could push -- there's really one thing that could push us to the top end.

And that would be if we get a significant occupancy pick-up. And we have been pushing to drive occupancy a little bit higher over the last month or two. The thing that could drive us to the bottom is if we see a further deterioration in operating fundamentals.

And typically, those would probably have to come with more downside than we projected in, really, New York and San Francisco, since the other ones have been reacting kind of stable. There's a couple things, though, because I get what you're talking about, we've got a 6% or so in the first half of the year, which would imply second half would be a 5.5%. But there's a few things to keep in mind.

This year so far, we've had 6.3% rent per occupied home growth that's been offset by about a 30 basis point decline in occupancy. We had very difficult occupancy comps at the first half of last year. Our occupancy in the second half of last year decelerated about 20 or 30 bps.

Now it was still very high, at 96.6%, but it wasn't at 96.8%, 96.9%. Our expectation and what we're shooting for this year is to have a positive spread over last year's occupancy, so we're not going to be losing revenue growth because of an occupancy decline. We're hoping we get a little bit of a pick-up from that.

Then the second thing just that's interesting is our fee income is up almost 10% year-over-year and we would expect that to continue through the second half of the year. And that's really coming partially from lease break fees, people electing to move and relocate for jobs or to buy houses or things like that. But the second part is that we started working on an initiative in the second half of last year to drive higher revenues from our parking rent, which was an initiative we began working on, like I said, late last year, but we got the fruits of it this year, to find a way to increase this under optimized real estate.

So you've got 6% of your revenue stack coming from fee income that's growing at a much higher rate than my rents. And you know, how optimistic or pessimistic or conservative is our -- is that midpoint? Right now, we've factored in, like I said earlier, that we think blended rate growth for the second half of the year is going to be low 4%s.

So again, you're looking at renewal growth in the low 5%s and new lease rate growth maybe right around 3%. And that seems to us to be pretty sustainable right now.

Okay. That's helpful. And just one other follow-up on that.

You did talk about the second half blended lease growth of low 4%. But sounds like there's other items in your revenue that are helping, as you mentioned, fee income, et cetera. So the point is, we shouldn't really be using that low 4% lease rate growth as directionally where your same-store revenue growth is heading?

How should we think about that?

I'll tell you this. Your lease rate growth, or what we get from new rents or renewals, benefits you over the next 12 months.

So a portion of what we're realizing in the third quarter of this year is based on the very strong lease rate growth and renewal growth that we got at the end of last year. So it continues to pay benefits for the next 12 months. What I'm telling you that I'm going to do over the next six months has some benefit over the next six months, but it also has a benefit over the following six months.

So you can't just look at my current, what am I signing leases for, because that's only for the percentage of residents or expirations that are happening at that time.

Yes, right. I meant -- sorry, I meant that the second half blended lease growth of low 4%, whether that's indicator about where 2017 same-store revenue growth would be, not this year.

It does build. You're right, it does build into 2017. The other thing is, though, what are rents going to do next year.

And we're going to have some markets where you're probably going to see rate growth continue to go down, but we have other markets, for example, Los Angeles, where we're fighting heavy new supply right now that I expect that one to pick up quite a bit next year. So some of it's dependent on how we do next year. But you're right, we are building up part of our rent roll right now for 2017.

Okay. That's helpful. And just to clarify. When you talk about the fee income being strong, is any of that from actual lease termination, lease break fees of residents? Is that helping you at all or --?

That is, that's about half of it. We're getting a portion -- we'll probably pick up a little over $1 million, $1.2 million this year of additional revenue from parking. And that's just basically -- and it's predominantly in garden communities charging people for parking and determining which spaces are the most preferable and trying to monetize that.

But the other big mover is lease break fees, where somebody wants to cancel their lease ahead of the natural expiration day. They are contractually obligated to pay us to get out of the lease. So a portion of it is that.

Okay. Thanks, Jerry.

Sure.

Rob Stevenson, Janney.

Good afternoon, guys. Jerry, when you look at 2017 deliveries in the New York area, how much of that is concentrated in Manhattan and would be direct competition for you guys versus how much of that stuff is in Queens and Brooklyn where you don't have any assets?

I can tell you, most of it is not directly impacting us. When you look at proximate to our neighborhoods, we're really not going head to head with much. But we have been feeling the impact coming from, whether it's Midtown West, Brooklyn, you'll have people in Jersey, as well as Queens.

They're all kind of stealing some people away, if you can get nice, new product for a lower effective rate. I don't have the numbers off the top of my head about how much is in Manhattan versus Queens, though.

When does that property that's just north of View 34 that we saw at the property tour scheduled to start leasing?

I think it's late fourth quarter or first quarter. We think we'll probably feel some effect from that, but their rents are quite a bit higher than ours.

Okay. And then Harry, the guidance on the acquisition went from zero to $100 million to $100 million to $200 million. Is that third-party acquisitions or is that you guys buying in some of the Wolf stuff.

It's not the Wolf stuff. So it generally is going to be third-party acquisitions, and these are a couple 1031 trades that we're looking to execute in the fourth quarter.

Are you under contract currently?

No.

Okay. Thanks, guys.

Rich Hill, Morgan Stanley.

Hello, guys. Thank you for taking my call. Quick question. I think I remember you asking at the outset of this call that you were seeing a little bit more supply pressures in the LA market. That's maybe a little bit different than some of the commentary we've heard from peers. So I'm curious, how much of that is driven by Class A versus Class B? And are you actually starting to see more supply pick-up in maybe the Class B space versus the Class A?

That's a good question. Here's what the deal is. 90% of our same-store portfolio is located in Marina del Rey.

So it's three properties over in the marina. Marina's about a two-mile drive to Playa Vista, where all of the tech firms are relocating to the area called Silicon Beach. We've got two lease-ups occurring in Playa Vista right now. One's a 1,500-unit deal, the other one I think is 400 units.

But they're coming in offering concessions of one to two months free. And what it's really done, it's directly impacting my three properties in Los Angeles that make up 90% of my portfolio. So yes, I don't think any of my peers would be feeling the same thing, because they don't have as much concentration in one submarket in Los Angeles as I have.

That's helpful. Thank you.

Sure.

Richard Anderson, Mizuho Securities.

Mr. Anderson, we're unable to hear you. Please check your mute function.

Sorry. Can you hear me now? Hello. Okay.

We can hear you.

So we're a little lax on headphones here at Mizuho, I guess. Harry, you said something interesting earlier about how you're abandoning -- or maybe it was Jerry -- you're abandoning this warehousing concept and thinking about keeping some assets in some markets in the portfolio. And so I was wondering if you could talk about any other adjustments you're making to the strategy like that.

Because one of them, I recall when we spent some time together last year, the 50/50 Class A, Class B could actually morph into more like 60% or 70% Class A over time. Do you feel maybe there's an adjustment there that you'll make in the current environment, like how you're adjusting your warehousing concept?

Rich, this is Toomey. I think abandoning or changing is probably a little bit of an overstatement. I think what we're doing is constantly weighing our market mix and the price point and what we think cash flow' is going to grow at.

And so when we think we have a market, for example, where Baltimore has performed in the last five years averaging 3% growth, we look out the next five years and say, we don't think it's really going to change a whole lot, where else do we think we can redeploy that capital in the enterprise, most immediately in the development pipeline. So we're always revisiting our markets.

On the balance of 50/50, the As that we're putting in today ten years from now will be Bs. And so I think we'll probably hover around the 50/50. It might go 60/40.

But I don't see a long-term directional change in that allocation. I think what ultimately we're trying to build, and have done so far and will continue to refine, is building cash flow and where we see it can grow the best, and concentrated positions create concentrated risk. And so we're always going to have this diversification.

We think over time it works. Some markets having Bs work better than As. Other cases, where we look at jobs and where we think they're coming up and the price point, As are going to be better.

So I think that's the overriding doctrine that we're overall thinking about our capital allocation and decisions and markets from time to time, Florida as an example right now. Talking off the cuff, is going to enjoy another couple year run, but the supply will start coming at Florida in the near future, and then we'll look at how we feel about our assets positioned in that market and whether we should move more capital out of that and into other places where opportunities will become available.

Okay. And then as a follow-up. Was there anything about the QR print that caused you to at least take another look at your numbers and make sure you weren't missing anything?

There is one cynical view is that the rest of the group is going to have to revisit guidance, not this quarter maybe, but next quarter. Just curious if there was any level of reaction on your part from seeing that process take effect.

Rich, I'm not going to comment on [EQR] and their results and their outlook. What I am going to say is that Jerry and his team run a culture from the bottom up, focusing greatly on what's going on in the ground, reforecasting the business constantly, monitoring our traffic, our pricing power, and that feeds right up to us on a weekly basis and we discuss how does that fit in our outlook for the future.

And we're very comfortable with the guidance we've just given. We feel like a lot of the year is pretty much behind us. There's not a lot of leases to price in that fourth quarter window.

And we're trying to really focus on our 2017. And I think that's a credit to his team, to Shawn and his efforts in forecasting FP&L, that we have a pretty darn good handle on exactly where we're at, what are the levers that we can move and what's our range of outcomes.

And that's why we tightened guidance the way we did. But we feel very good about the guidance we've given, and it's a credit to Jerry and his operating team, but also the portfolio and the way it's positioned.

Great. Great quarter. Thanks very much for the color.

John Pawlowski, Green Street Advisors.

Thank you. Jerry, rent growth across a number of Sunbelt markets, namely Dallas, Tampa and Orlando, for example, seem to have decelerated throughout the quarter. Are you expecting a reacceleration in the back half of the year across some of these Sunbelt markets?

You know, Dallas, I think, is going to continue to be difficult. There's heavy new supply there. Our B product is continuing to do well, but we've got properties in Uptown, as well as Plano that are going up against new supply.

So I think you're going to continue to see a struggle in Dallas, but I don't think it's going to get any worse. I think when you look at the other Sunbelts, Orlando and Tampa, I think you're going to see Orlando turn back around. What happened in the quarter, second quarter, is we probably got a bit aggressive on renewal growth, where we were popping out 7.9%, and it opened the back door a little, put a little pressure on occupancy levels and we had to cut new lease rate growth to get occupancy back up.

Our occupancy in Orlando today is 97.1%. That compares to an average of 96.5% during the second quarter. And we've seen new lease rate growth in the month of July jump back up to 6.6%, compared to the 4.9% that we reported in 2Q.

So I think Orlando feels good. And then Tampa just feels stable. We've had a few lease-ups in a submarket of Tampa that's affected us, and I think they're starting to stabilize now and I think our numbers will, too.

Okay. Thanks. And then Harry, what timing can we expect on the roughly $400 million in dispositions and how is pricing shaping up versus expectation?

Pricing's coming in at or slightly above expectations. We expect these things to close mostly early in the fourth quarter.

Okay. Thank you.

Drew Babin, Robert W. Baird.

Hello. One follow-up question on the 1031 opportunity. Would you say that the opportunity on the disposition side is more compelling reason for the increase in your overall transaction activity for this year, or would you say that the opportunistic use of the capital on the acquisition side is a more exciting opportunity?

This is Harry. So I think there's a couple questions there. One, we sell a number of properties every year to fund, as a bucket of capital to fund various uses, including specifically, development.

We do have a 1031 opportunity that we're going to look at. The pricing on the acquisition, we think, is likely to be generally market. We'll look at markets such as DC, Boston, Southern California, Northern California, Seattle, to redeploy the capital.

We think that will be largely market. I think cap rates on these sales, typically our Baltimore assets are going to be -- are somewhere in the neighborhood of 6%. The cap rate on one of our Dallas acquisitions that's in the market today, called [Cert], which is a MetLife JV asset, should be somewhere in the neighborhood of 5.25%.

We've got one additional Dallas asset that will definitely be a component of the 1031 and we think that's probably a mid-5%s type trade.

Okay. And secondly, I was hoping to dig in on Manhattan a little bit. With View 34 being in the same-store pool this year, and obviously that's been a strong asset so far, can you talk at all about how the Manhattan portfolio is performing ex View 34, or conversely just provide how View 34 has done year-to-date?

View 34 actually added about 70 basis points to our numbers. Hold up one second. Let me get the details.

I think when I look at the Manhattan portfolio, View 34's revenue growth during the quarter was about 6.1% year-over-year.

Drew, this is Toomey. I'd add, that's what's reflective when you do a good job on a rehab of a B and you keep it in that B price point. And boy, I wish I could find more View 34s, is the answer.

Sure. Could you talk at all specifically about how downtown's performing?

Sure. Downtown is definitely our hardest hit submarket in Manhattan for same stores. But our two downtown properties had revenue growth during the quarter of just under 3%. Now when you get up to our One Met JV, which is in the Upper West Side, Columbus Square, that property had revenue growth of just under 1%.

So that's the one that is combating most head-to-head new supply. And then just to do a full lap through Manhattan, we only have one other deal and it's in Chelsea. And that property has continued to do extremely well and it had revenue growth in the mid-6%s.

Great. That's helpful. Thank you.

Sure.

Juan Sanabria, Bank of America.

Hello. Good afternoon. Thank you for the time. Just wondering if you could briefly run through what your expectations are across, let's say, your top five markets for new supply 2016 and then going into full year 2017.

Sure. When we look at DC in 2016, our expectation for new supply -- and I'll tell you, we get this data from Axiometrics -- so if you've got Axio data, it's going to be roughly the same, but DC 2016 is about 13,500 units and 2017 is projected to be about 9,000. New York is going from 25,000 this year to 30,000 next year. And that is the one market we see where supply in our major markets is going to be higher next year than this year.

San Francisco goes from 13,000 to about 7,000. Seattle goes from about 10,000 to 6,000. And I guess the last market I would highlight is we show Dallas going from about 18,000 units this year to about 13,000 next year.

A couple of your peers have commented that they maybe see numbers higher than what Axio uses. Is there any concern on your part that those numbers may be understated and your 2017 figures could be under more pressure than where the numbers may currently spit out to?

Juan, this is Tom. This is an interesting topic and I'm glad you got us there. What does the supply picture look like in the future? Because I think everybody's kind of throwing around different numbers.

I would tell you some anecdotal information that's critical to this conversation would be is what are banks lending on and what is the bank lending environment. And if you start digging into that with the bankers, you're realizing very rapidly that the terms on construction loans, the pricing on them and the availability is contracting at a rapid pace. And we've seen several large banks just red line and say, we're not doing multi-family loans any longer, period, or throwing out price terms that are prohibitive to make the deals work.

So I think you're going to start to see all those construction numbers start really coming down rapidly, as people start to get into their construction loan draws and trying to get their terms and their penciling work. I think it also creates an opportunity for UDR to look at Wolf and Steel-type Creek opportunities that might start becoming available in 2017, should this come to fruition.

So I would stay very focused on what the supply of money looks like, the terms of that, and watch how that ultimately unfolds. I know everybody's numbers are all over the map right now, but what I look at is what are the drivers.

And it's not the opportunities, not the fundamentals -- those are there. It's the question of capital and the price of that capital and will deals work. And stay focused on that, would be my recommendation for 2017.

Okay. Great. And then in your opening remarks, Tom, you talked about being focused on operational excellence. I think you've hit a little bit on the parking upside. Any other things you could point to that you're working on that maybe would see some margin upside and any target numbers you could talk to?

I'll let Jerry clean it up. But I'll start with this. One, we're a very operationally focused company and it comes a lot through innovation.

So there's always, as you can see from our prior road shows, we've always listed out initiatives that we're focused on. We have basically a biweekly meeting on innovation here and we're talking about the product, the initiatives that we have underway, what's working, what's not.

And we're always constantly pressing the next envelope for our customer. And we do a great job of listening to what they want and what they're willing to pay for. And it's Jerry and his team to filter through that innovation list and put it into practical terms.

This parking conversation that he alluded to earlier is really a conversation that started two years ago. And ultimately, we built systems out, convinced the field about the pricing schemes, and they've done a great job of executing it. And I can tell you that the last count, there were 57 initiatives on that schedule.

Some will not work. Many of them will. So we're going to continue to be innovative operationally. And that's how it makes the difference at the enterprise.

I'll give you a few examples. Tom spoke, you mentioned the parking. Another one, and they're not all revenue enhancing, some are expense reducing.

And some are capital expenditures that get us that return. But one is converting common area space lighting with LED lighting, which dramatically drops down both your electrical cost, as well as the maintenance time people have to spend replacing those light bulbs. And we've seen a reduction in our electric costs this year from doing that.

Secondly, package lockers. Some people believe in them. Some people don't.

I will tell you we do. We've installed well over 40 lockers. We've got another 35 that are being installed right now.

And we're doing it for two reasons. Dealing with package management is a huge time suck on our on-site teams. So it opens them up to do more work that makes money for us.

And secondly, it's a benefit that residents enjoy to have 24/7 access to pick up their own packages. So we get a little bit of a rent pop from doing that, too. And the package lockers have an IRR, when you really look at it, well over 25% to 30%.

So financially, it makes a lot of sense, but we always do things that the residents want and that typically is good for us. And what both of those things do, you heard me mention on the LED lights that it takes -- gives back some time to our maintenance teams. And you heard me on the package lockers say that we've been able to give some time back to our leasing agents.

This year, and if you look at our personnel numbers, personnel expense number, you'll see that it's roughly flat for the quarter. We've been able to reduce about 1.5% to 2% of our site headcount this year because of some of these efficiencies that we've been able to do. So those are just a couple of examples.

But like Toomey said, we're always looking. There are some that we'll spend a great deal of time on and they don't work, but we're always trying to stretch for the next thing that's going to expand our margins.

Thank you.

Sure.

Wes Golladay, RBC Capital Markets.

Hello, everyone. You mentioned that the supply in Marina del Rey would abate to the second half. Are you seeing any of your major markets where the supply could be back half loaded this year?

Back half loaded. Let me think. I think Bellevue.

Bellevue. Okay. Probably Bellevue, Washington.

So one -- and I'll get Harry in on this in a minute. Bellevue is one where there's a lot of cranes and there's a lot of supply coming. We're currently doing exceptionally well there, with 6.5%, 7% revenue growth this quarter on our same-store pool.

But our expectation was that we would be more affected by new supply there. And that's one of the reasons that our Seattle portfolio is outperforming. But Bellevue's probably one that I could see picking up later this year and maybe spreading into the first half of next year.

Can you think of any others, Harry?

New York obviously continues to -- second half of this year and into next year, you're going to see the heaviest supply in New York.

Okay.

And I will tell you another one that just will continue to get hit and we don't have any same-store properties there. But downtown LA has quite -- it's probably got 3,000 to 4,000 of new supply that's in some stage of lease-up or a pre lease-up right now. So Downtown LA is going to be interesting to operate there over the next year.

Okay. And real quick. You had mentioned the lenders were looking to cut back on multi-family lending. Was this more emphasis on the Coastal markets or is there broad base, including the Sunbelt, as well?

This is Toomey. We're seeing it across the template. And so when we talk to people about how they're sourcing their capital, they're having to go to other pools of money, foreign banks, local, regional banks, all of which do not have the capacity of our big national banks.

And so by virtue of just pricing and the size, we expect that will drive some of the geography of where supply's going to come. So it's going to start moving to the Sunbelt and it's start going moving suburban. And then ultimately, I think it's going to decrease that urban pressure. So that's the way we see the market shifting.

Okay. Thanks a lot.

(Operator Instructions)

Dennis McGill, Zelman & Associates.

Hello. Thanks for squeezing one more in. A couple quick ones. On the 4.4% new lease growth rate for the quarter, what would that look like if you split it by urban and suburban assets?

Urban and suburban. I don't have that number on me.

Okay. We can follow up. And then just separately, more bigger picture, it sounds like right now it's widely accepted that San Fran and New York are going through an adjustment phase.

But these are markets that I think most have said have come in below expectations and weaker than maybe even six months ago. But it doesn't sound like there's any assumption that other markets could follow that path. Is that right?

And then what gives you confidence that there's not another one uncertainty around the corner, especially with the urban portfolio? I understand the suburban protection. But in the urban environment, where supply is pretty pronounced virtually across the country.

Dennis, here's how I would think about it. First, New York and San Francisco are not really surprises to us. They're urban settings. When you see supply coming, you see it coming years in advance.

Second, we've had great job growth in both those markets and both of them have tapered off to more of the norm. And so that combination gives you what those markets are. As we look towards the future, we don't see the big supply pressures coming at the urban portfolios, but we do have a concern about job growth sustaining itself.

And I think everybody should. And we'll wait and see how the election turns out and how the economy turns out. But in both of those camps, that's the future will be what it's going to be.

So I'm not at all surprised about those two markets. We're not surprised about our LA exposure. We saw it coming.

What we see is this. These are supply driven numbers that are changing our pricing power. It is not the underlying fundamentals of demographics and/or job markets that are driving our business right now.

Those are still in very good shape. And so we're very focused on the supply pressure and think we have a very good handle on it, feel good about the way we're running the business to deal with that supply. When it abates, we think we're back to guns on pricing and we'll do very well in that environment.

And I would just add, even though we don't see any markets right now, if one does pop up for, let's say, there's job loss in a particular market or something like that, that goes back to the benefit of being in 20 markets and having that A, B portfolio. We've got other markets that can counter balance something like that.

Okay. That's helpful, guys. Thank you.

And at this time, it appears we have no further questions. I'd like to turn the conference back over to President and CEO, Tom Toomey for any additional or closing remark.

Great. Thank you again for all of your time. Again, I think we had a very solid quarter on all fronts.

Certainly, we remain focused on the strategic plan and the execution of it. A big part of that is just execution, and we're doing it right now.

What is the strategic plan focused on? Growing cash flow through all points in the cycle. We're going through one of those right now.

You can see from our results, we're still able to sustain and guide to a strong cash flow number. And I think that's a tribute to the team in the room, in particular Jerry and his operating team and their focus on adjusting their strategies by individual assets, by unit types, to meet the market and get ahead of it, if you will. And also, we're enjoying a very good, strong development pipeline that's leasing up very well and gives us confidence for the future.

So with that, we thank you again for your time and look forward to talking to you next quarter.

That does conclude today's conference call. We thank you all for your participation. You may now disconnect and have a nice day.