UDR Inc (UDR) 2017 Q4 法說會逐字稿

Greetings, and welcome to UDR's Fourth Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you, Mr. Van Ens, you may begin.

Welcome to UDR's fourth quarter financial results conference call. Our fourth 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. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. (Operator Instructions) With that, I'll now turn it over to UDR's Chairman, CEO and President, Tom Toomey.

Thank you, Chris, and good afternoon, everyone, and welcome to UDR's fourth quarter 2017 conference call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial 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.

I will address 3 topics today: first, a macro outlook for 2018 and beyond; second, how the UDR strategies' differentiating characteristics fit into this outlook; and finally, a quick review of 2017.

First, our high-level demand assumptions for 2018 include: a general economic outlook as measured by consensus GDP growth of 2.6%, the second-highest level over the past decade and creating a growing tailwind; the continuation of solid job growth and accelerating wage growth as full employment is upon us; regarding tax reform, the general view is that it creates a bias towards rentership as well as a positive impact on corporate earnings, and our residents' take-home pay will increase. We are taking a wait-and-see approach, therefore it is not explicitly factored into our guidance. And a slowing -- slowly improving single-family housing market, but with minimal changes to the overall homeownership.

Potential headwinds include elevated new supply and higher interest rates at both ends of the curve.

Taken together, these macro drivers should result in a relatively stable 2018 apartment environment, with our portfolio pricing power and occupancy expected to be similar to that of 2017. Beyond 2018, we are more optimistic on a macro outlook for our business as global and U.S. economies are enjoying broad-based growth after years of monetary and now tax stimulus. As multifamily demand typically echoes the broader economy, we should continue to see healthy demand coupled with 2019 apartment deliveries that are expected to decline. All in, a positive set of facts, but too early to call 2019, although UDR will benefit from an improving NOI contribution from our recent development completions, which total approximately $500 million in capital invested.

Moving on, we discontinued publishing our 2-year outlook given our stable outlook, a consistent strategic direction that we have executed well upon over the last 5 years, our ongoing best-in-class disclosure and both solicited and unsolicited feedback from our shareholder base. Moving forward, we will continue to openly discuss our strategic direction with market participants.

Next, the strategies we intend to employ throughout UDR's primary business areas in the years ahead look fairly similar to those employed since 2013 because they work and include: first, our best-in-class operations will continue to be driven by strong blocking-and-tackling and our innovative technology-driven initiatives that consistently boost our run rate results. We were at the top same-store growth performer in 2017 and expect to again be that in 2018. Second, we prudently allocated capital throughout 2017 and will continue to do so in 2018. Our Developer Capital Program is accretive to our bottom line, and we'll continue to look for opportunities while remaining disciplined in our underwriting. Our development pipeline will likely shrink in 2018 due to the difficulty of hitting return requirements on new projects. But we will continue to look for accretive opportunities to backfill our pipeline.

Third, while third-party forecasts call for interest rates to increase in 2018, we have minimal refinancing exposure due to the significant balance sheet activities we completed throughout 2017.

And last, our diversified portfolio by both geography and price point should continue to serve us well in 2018 and beyond.

Let me close by saying that as we look back on 2017, we executed our growth plan well, which resulted in 2 same-store and FFO guidance raises and a strong TSR for our shareholders. A special thanks to all our UDR associates for your strong blocking-and-tackling in operations, disciplined capital allocation and continued willingness to actively innovate across all aspects of our business.

With that, I will turn the call over to Jerry to address operations.

Thanks, Tom, and good afternoon, everyone. We're pleased to announce another quarter of strong operating results. Year-over-year, fourth quarter same-store revenue and NOI growth were 3.1%. After including pro rata same-store JV communities, which favor urban A+ product, revenue and NOI growth were 2.8%. Our quarterly results were driven by solid blended lease rate growth of 1.9%, a robust top line contribution from our long-lived operation -- operating initiatives, stable occupancy of 96.8%, annualized turnover that was 40 basis points lower year-over-year and a continued objective to drive down expense growth where possible. Full year 2017 same-store revenue and NOI growth were 3.7% and 3.8% respectively, driven by factors similar to those that contributed to our strong quarterly results. A special thank you to all of our associates in the field and the corporate office for continuing to maximize our top line growth while also limiting controllable expense growth under 2% in 2017.

Moving on, we saw minimal pressure from move-outs to home purchase or rent increase, at 14% and 5% of reasons for move-out during the fourth quarter. Likewise, net bad debt remains low, all are at levels consistent with previous quarters. Next, the primary 2018 macroeconomic assumptions that underpin our same-store guidance. First, national job growth of approximately 150,000 per month, with wage growth averaging 3% to 3.5%. These are set against elevated multifamily completions in many of our markets due to supply slipping from 2017 into 2018. Of note, further delivery slippage throughout 2018 due to construction labor shortages remains a wildcard.

2018 UDR-specific assumptions are as follows: overall, pricing power in the form of blended lease rate growth is expected to be relatively comparable to what we saw in 2017; occupancy is forecast to remain in the high 96% range; other income should continue to grow at an outsized rate versus rental rate growth but perhaps not as strongly as we saw in 2017; controllable expense growth will remain in check due to efficiency initiatives, but real estate taxes will continue to provide pressure given our 421 burn-offs in New York and higher valuations across assorted markets; B quality and suburban property should generally continue to outperform A quality and urban assets; and same-store community additions for the full year positively impact our revenue growth by 10 to 15 basis points, expenses by 15 to 20 basis points and NOI by 20 to 25 basis points. Taken together, we are expecting same-store revenue, expense and NOI growth to each be 2.5% to 3.5% in 2018. Holistically, we anticipate that our 2018 operating strategy will continue to favor occupancy over rate growth as apartment fundamentals are expected to bump along the trough. These aren't improving nor meaningfully worsening throughout the year. Importantly, we anticipate blended year-over-year lease rate growth to cross over versus last year some time in the first quarter.

Regarding our markets, those expected to grow same-store revenue at a rate above the high end of our 2.5% to 3.5% portfolio growth include Seattle, Los Angeles, the Florida markets and Monterey. These markets represent 26% of forecast 2018 NOI. Washington D.C., Orange County, San Francisco, Boston, Nashville, Dallas and other small markets that represent approximately 63% of forecast NOI are expected to be in line with the range. And New York and Austin, which represent approximately 11% of forecast NOI are expected to generate growth below the low end of the range.

Moving on, our development pipeline in aggregate continues to generate lease rates and leasing velocities in line with original expectations. In our $350 million Pacific City development in Huntington Beach, what we have delivered and leased is achieving strong rental rates, but past construction delays continue to negatively impact our velocity given the project's high-end clientele. Pac City will be a game-changing asset in Orange County once complete, but will be a drag on our 2018 results versus previous expectations.

At 345 Harrison, our $367 million project in Boston, we recently opened our leasing office and are around 6% pre-leased. 345 and our JV developments remain largely on budget and on schedule, with the notable positive exception of Vitruvian West. This community is leased up at a much quicker pace than underwritten and has raised rents 3 times to date. Community-specific quarter-end lease-up statistics are available on Attachment 9 of our supplement.

Last, I would like to again thank all of our associates in the field and at corporate for making 2017 another successful year for the company on to a successful 2018. With that, I will turn it over to Joe.

Thanks, Jerry. The topics I will cover today include: our fourth quarter results and forward guidance; a transactions update; and a balance sheet and capital markets update.

Our fourth quarter and full year earnings results came in at the midpoints of our previously provided guidance ranges. FFO as adjusted and AFFO per share were $0.48 and $0.42 for the quarter and $1.87 and $1.72 for the full year. 2017 AFFO was up $0.09 or 5.5% versus 2016, driven by our strong operating platform, which produced robust NOI growth as well as our disciplined capital deployment decisions.

Next, I will provide several high-level comments related to our 2018 guidance, the details of which can be found on Attachment 15 of our supplement. Full year 2018 FFO as adjusted per share guidance is $1.91 to $1.95 and AFFO is $1.76 to $1.80 respectively. The primary drivers of the $0.06 of growth between our 2017 FFO as adjusted of $1.87 and our 2018 $1.93 midpoint include: a positive impact of approximately $0.07 from same-store JV and commercial operations; flat G&A year-over-year; a neutral impact from development and Developer Capital Program investments after accounting for funding cost; and a negative impact of approximately $0.01 from higher LIBOR and other noncore items. Additionally, the difference between our 2018 FFO as adjusted midpoint of $1.93 and the $1.95 we've provided in last year's 2-year strategic outlook is driven by the following: a positive impact of approximately $0.02 from Developer Capital Program investments; high-cost debt prepayment activity and lower G&A; offset by a negative impact of approximately $0.02 from lower forecasted 2018 same-store and JV growth; and a negative impact of approximately $0.02 from development delays. Moving on, as Jerry indicated in his prepared remarks, our full year 2018 same-store revenue, expense and NOI growth guidance ranges are each 2.5% to 3.5%, with forecasted occupancy of 96.7% to 96.9%. Regarding sources and uses, we have a de minimis amount of refinancing that needs to be completed in 2018 and continue to focus on dispositions to fund our development and Developer Capital Program. For the first quarter, our guidance ranges are $0.46 to $0.48 for FFO as adjusted and $0.44 to $0.46 for AFFO.

Next, transactions. During the quarter, we sold 2 wholly owned communities, Vista Del Ray and Villas at Carlsbad, located in Orange County and suburban San Diego for $69 million at a weighted average nominal cap rate of 5.4%. The communities were 50 years old on average. Subsequent to quarter end, we entered into a contract to sell Pacific Shores, a 264-home community in Orange County for $90.5 million, subject to customary closing conditions. As we look into 2018 and beyond, we continue to favor investment in our wholly owned development pipeline and Developer Capital Program, which had a quarter-end investment balance of $159 million and an effective yield in the mid-7% range. However, given the difficulty of finding economical land in many of our markets, it is likely the size of our development pipeline will continue to shrink for the foreseeable future. While it is our desire to add more land to the balance sheet to restock our pipeline over time, we will remain disciplined as we underwrite prospective deals.

Next, moving on to balance sheet and capital markets. During the quarter, we issued $300 million of 10-year unsecured debt at a coupon of 3.5%. In conjunction with the issuance, we redeemed $300 million of 4.25% debt originally due June 1, 2018. At quarter end, our liquidity as measured by cash and credit facility capacity, net of the commercial paper balance, was $855 million. Our financial leverage was 33.2% on underappreciated book value, 24.3% on enterprise value and 28.9%, inclusive of joint ventures. Our net debt-to-EBITDA was 5.3x and inclusive of joint ventures, was 6.4x.

Looking ahead, we remain comfortable with our credit metrics and don't plan to actively lever up or down, although you will likely see our revolver balance drift lower throughout the year. With regard to the profile of our balance sheet, similar to our 2017 activity, we will continue to look for NPV-positive opportunities to improve our duration and increase the size of our unencumbered NOI pool.

Finally, we declared a quarterly common dividend of $0.31 in the fourth quarter or $1.24 per share when annualized. And in conjunction with our release, we raised our 2018 annualized dividend to $1.29 per share, representing a 4% year-over-year increase and a yield of approximately 3.7%.

With that, I will open it up for Q&A. Operator?

(Operator Instructions) Our first question comes from the line of Austin Wurschmidt with KeyBanc.

Jerry, you mentioned that you expect blended lease rates to turn a little bit positive early in the year. Just curious what markets are predominantly driving that reacceleration.

When you really look at January of this year compared to January of last year, it did cross over. We were at a negative 0.3% in January of '18. That compares to a negative 0.7% when you look at January of '17. And roughly half of the markets are doing a little bit better on this blended -- on this new lease rate than they did last year, including Boston, D.C., Seattle, San Francisco, the 2 Florida markets as well as Salinas. And then there's several markets that are fairly close, and there are some, like New York, that are down year-over-year. And then I think when you look at renewal growth, renewal growth in the month of January was up, on an effective basis, 4.9%, and that's down just 20 basis points from January of last year when it was 5.1%. So on a blended basis, we're probably right at that crossover in January and February. We do think that it kind of bottomed. And we're not forecasting at this point a hockey stick where you start seeing current year blended rate growth significantly higher than it was last year. But as you looked at last year, it was consistently less than it was the prior year. So as we really look at 2018, we think blended rate growth is probably going to be comparable to what it was in 2017, and that was in the mid-2s. When you look at the earn-in of embedded rents coming into this year, it was about 1.1%. That's about 30 to 40 bps lower than what it was coming into 2017.

That's helpful. And then you mentioned turnover was down. I think you said 40 basis points in 2017. I'm just curious how that stacks up historically with turnover. And what are you assuming going forward from a turnover perspective?

We thought, last year, we had a lot of success in turnover. Again, it was down 40 bps in the fourth quarter at 41% full year, was just under 50%. It was 110 basis points lower than last year. I would remind you that we started these short-term furnished rentals last year, which had a negative effect on turnover. So the numbers would have been even better if we hadn't had those 200 or so move-outs related to those short-term rentals. But as we look into 2018, we continued to listen to our customers. We continue to not be excessively aggressive on renewal rate increases. And today, we would be forecasting turnover to be roughly flat with what it was in 2017.

Our next question comes from the line of Juan Sanabria with Bank of America.

Just thinking about supply, what's the level of conviction in any sense of what the decline may be from '18 into '19 that you guys are expecting at this point?

Hey, Juan, it's Joe. As we forecast out to '19, we use a couple different data points to help triangulate as we think about it. But when we look at starts and permit activity that took place in 2017, obviously, those were down around 10%. So I think that gives you a good lead time when you think about typical construction time lines, that we'd expect 2019 to come down by about that much. Also, I obviously talked to our groups on the ground, trying to get a sense for what they see taking place and what they see as competitive supply going forward. And then at conferences, such as [NYMTC] and others, obviously having conversations with the private market participants, the merchant builders, and they continue to have difficulty given the construction financing environment out there to really get new starts going and get their capital lined up. So I think we have a decent amount of conviction that it is going to trend down from '18 levels. What will remain in the question is how much of '18 slips into '19, but we feel pretty good it will be coming down.

Great. And then just on the same-store revenues, what's the main driver between the variance from the bottom end to the high end, and what do you guys factor in with regards to concessions? And if you could just give us an update on what you're seeing on the concessionary front?

Sure, Juan. This is Jerry. I guess, to start with, concessions are on more of a historical basis. Our fourth quarter concessions were down 35% year-over-year. And if you factor in gift cards, which show up down in our marketing costs, those were down 71%. So we've been utilizing concessions as well as gift cards less than we did a year prior. We see concession levels continuing to come down a bit in 2018 as we've modeled out the year. You asked about how do you get to the high end and low end of our guidance, and our guidance runs from 2.5% to 3.5%, with the midpoint of 3%. I guess, first, I'm going to walk you from our 3.7% that we reported in 2017 and how we get down to the 3%. First, we don't expect any addition to revenue growth from occupancy. We forecasted occupancy to be stable at the high 96s range. So you don't have 20 bps of growth like we did in 2017. Second, as I stated earlier, those embedded rents that we entered the year with were about 40 bps lower than what they were last year. So you don't have that. That takes you down another 40 bps. And then other income, which was a major contributing factor to our outperformance in 2017, while we think it will continue and contribute significantly, we're not counting on it being quite as much of a benefit in 2018 as it was in '17. So that's probably 10 basis points less. So again, you go from the 3.7%, you don't get the 20 bps of occupancy, you don't have the 40 bps of embedded rents, and you lose 10 basis points compared to the prior year of other income growth, and that gets you to the 3%. Another way of looking at it, to get to that midpoint, is our blended rate growth, both last year and this year, we expect to be in that mid-2% range. And then when you look at the contribution that we expect outsized from other income, we think it's going to be somewhere in that 40 to 70 basis points, and that gets you to the 3%. So depending on how you like to come from it, that's how you get to the midpoint. What gets us to the top end would really be outsized job growth that helps us push rents, outsized wage growth, which right now looks like it's going to be at about 3% for this year. And if we have more success on other income items, such as the short-term furnished rentals as well as parking, above what we have in our plan. That would get us to the high end. What gets us to the low end, 2.5% would be lower job growth than we expect, irrational pricing from some of this new supply that we're going to be competing with and if we're less successful on our other income initiatives.

Our next question comes from the line of Drew Babin with Robert W. Baird.

A question on 2 of your larger markets, D.C. and Orange County, obviously, last year, I think demand growth, maybe disappointed in Southern California overall, coupled with some new supply. It seems like the new supply is maybe kind of burning off to some degree, at least in Orange County, by the end of '18. I was hoping you could talk about demand growth in Orange County, what you're seeing there. And then, I guess, while you're on it, let's talk about D.C. and what you're seeing kind of in terms of private sector employment.

Yes, Drew. This is Jerry. You're right. Orange County, last year, we felt some effects from supply, especially in locations like Huntington Beach and job growth that was probably the biggest culprit to our disappointment. We only had 13,000 jobs in 2017 down in OC compared to about 25,000 in '16. Current projections that we're getting from Moody's is job growth in '18 should be back up to about 28,000. You're seeing a reduction in manufacturing jobs but an increase in white-collar jobs in Orange County. So again, we're expecting job growth to be about double what it was last year in Orange County. Supply is currently expected to be a hair higher than it was last year. This year -- or in 2017, it was about 5,000 to 6,000 units. '18 is projected to be closer to 7,000. So Orange County, if the jobs come, should do comparable to what it did this year. We are currently forecasting revenue, as you look at Orange County, to be in the low 3s. When you get over to D.C., the year started out with sluggish job growth, and it picked up measurably as the year progressed. What we feel like hurt us more in D.C. this past year was new supply down in the ballpark area as well as the Southwest Waterfront. A little bit of supply also in NoMa. And even though we don't have properties directly in those submarkets, we felt it most acutely in our Logan Circle, U Street area, where during the fourth quarter, we actually had revenue growth that was negative 1.5%. So within the district, that even when you're in different neighborhoods, it is drawing out some of our resident base.

That's helpful. And then just quickly on the dispositions you made in the fourth quarter and under contract from 1Q '18 in Southern California. Can you talk about the sale cap rates on those? And I suppose like some of these were -- are all like CapEx opportunities. I mean, I assume 50 years old kind of limits what you can do there. I was just hoping for some color there.

Yes, hi, Drew. This is Harry. The sale cap rates were around the 5. There's a Prop 13 effect, so the buyers are actually having much lower cap rates. You're right. These are 50-year-old assets and sort of our analysis included the theory that capital flows into value-added product are extraordinary, which, from our perspective, resulted in very good pricing, or in effect, we thought we were being paid for any potential value-add that we could have put into the properties. I mean, if you just look at price per units, which I think are sort of a more enduring and consistent metric than cap rates, these assets all traded for well over $300,000 per unit. I mean, just by way of comparison, we just built a brand-new property in Irvine at $335,000 a unit, which is very comparable to the price per unit that we received on these old 50-year-old assets.

Very helpful. And I guess one follow-up on that, it seems like private equity and other investors are obviously very interested in kind of a suburban value-add play. Are there any kind of just warning shots or transactions that you're seeing that are evidence of maybe more interest in CBD core-type product? Or does supply kind of need to work its way through before you think that interest comes?

Well, we're starting to hear and see some evidence that capital is flowing back to core CBD, as you mentioned. Again, there's just an abundance of capital that's chasing multifamily today. And at some point, that capital needs to find a home. And so where value-add continues to be sort of oversubscribed from a capital demand standpoint, you're going to see capital reallocate and try to find that home in core, and we're starting to see that a little bit.

Our next question comes from the line of Rich Hightower with Evercore.

Jerry, going back to your prepared comments on the different markets and where they stack up relative to the same-store range, can you give us a sense of which markets might potentially diverge most widely from your current forecast and what the drivers might be in those specific markets?

Yes, sure. I think one that everybody always has concern about is Seattle. Right now, we have Seattle as one of our top 4 to 5 markets, with revenue growth north of 4%. Currently, Seattle's come out of the gates a bit sluggish, similar to what it did last year, and then it turned around. I would tell you this, even though it feels a little bit sluggish versus our original plan, when I look at new lease rate growth in the month of January, in Seattle, it was positive 0.5%. Last January, it was negative 1.5%. So while it doesn't feel great versus our original plan, it feels stronger than it did last year and it accelerated. We're cognizant in Seattle that you've got new supply that's going to hit predominantly in the CBD as well as up in the U district. We only have 2 same-store properties in those markets, and it's 2 small deals up in the U. A lot of the new supply that hit Bellevue last year has been absorbed, and job growth is occurring out there, whether it's from Salesforce or Amazon or REI consolidating their campus. So Bellevue, where we have a large concentration, we still are doing well. Fourth quarter, we had revenue growth north of 6%. We also have some B assets either down in the southern suburbs of Renton as well as the northern of Everett that continued to perform well above our average. So while we're -- we recognize that Amazon's come out and said they're going to take their future hiring level from the 70,000, that they've previously talked about, to 50,000, there are other tech companies that are starting up facilities, whether it's in South Lake Union or over at Bellevue, whether it's Facebook, Google, Salesforce that are bringing in more of a diversified workforce beyond Amazon. So Seattle is one that I think could go either way. They could surprise in the upside as it has in the last 2 years, as everybody had concern. Or supply really could hit it. So that's one that we are watching quite a bit right now. And then the other one that started out the year a bit better than original expectations has been San Francisco. You've had good job growth, especially down in that Rincon Hill area, the Financial District, where Salesforce has just started occupying their building as well as the new offices that are opening up down in Mission Bay. But right now, San Francisco is continuing to do pretty well. And then the last one that's really taken off has been Orlando. Very strong early results there, it's not a major market for us, but I think the influx of people from Puerto Rico has driven the population up, and they're getting jobs and they're renting apartments. So those would be more of the positives.

Okay. And then anything on the negative side?

Right now, I think Boston has started out a bit sluggish. Again, that can happen in the winter months there. We obviously had a disappointing fourth quarter in Boston, where our revenue growth was under 2% after being north of 5%, and that was really related predominantly to pricing pressure within the CBD, mainly in our Back Bay property as well as there's a lease-up that's competing against us in our Seaport area property. But Boston's one that I think most people feel, even though supply is there, the job growth is going to be very strong, but it's one that's starting off on our stabilized deals. It's been a bit weak. But when we look at the success we've had on our 345 Harrison deal, we've leased over 40 units there in the last month, and we don't even open for occupancy for a couple more months. So kind of we're watching that one too, but we've historically seen, in Boston, that once March comes around, you tend to see a significant acceleration in traffic patterns.

Okay. That's helpful, Jerry. Thanks for the color. Secondly, it's more of a, I guess, a housekeeping question, but as you mentioned, the contribution to the same-store revenue and NOI from property being newly included in the same-store pool this year, can you give us a sense of which properties are being included in that number, at least among the major ones, just so we know what the changes are composed of?

Sure. Actually, if you guys out there want to look in on Page 11 of our supplement, we do detail out in the middle of that page what quarter properties come into the same-store pool. So you'll see the additions to the first quarter of '18 are the ones that would affect the full year same-stores. And it's, predominantly, I think it's 4 properties -- 3 properties in -- 3 or 4 properties, excuse me, in the Seattle market. Eight 80 Newport Beach, which is the old Coronados down in Newport Beach, and then Edgewater, which is in the Mission Bay area of San Francisco, and it's about 2,200 doors.

Our next question comes from the line of Rich Hill with Morgan Stanley.

We spent a little bit of time on some of your bigger markets, but I also wanted to spend maybe a little bit of time just talking about some of your smaller markets and how much that diversity is helping your revenue growth in the year ahead. And maybe as you answer that question, I'd love to maybe get a little bit more color on what you're seeing in job growth outside of some of the major markets and how that relates to supply. So big question, but I'll leave it up to you.

I guess I would start with probably one of the strong -- 3 of the strongest markets we've had over the last 2 years have been our 2 Florida property -- markets, Orlando and Tampa, where not only have those markets done well, but we've done exceptionally well within those markets versus our peers. But when you look at Orlando and Tampa, our expectation in 2018 would be a slight deceleration from this year, but still revenue growth in the 4% to 5% range. Harry spoke to the influx from Puerto Rico that's affecting Orlando. But even prior to that, Orlando was enjoying very strong job growth. And in 2018, job growth in Orlando is expected to be about 2.8% compared to about 1.3% nationally. Tampa is coming in at about 2.7%, so it's also coming in very strong. And other than certain submarkets, there's not a ton of new supply. Our properties in those 2 markets also tend to be in the B, maybe B- range, so we don't compete nearly as much against new supply. Another market that has probably been our leader in the last couple of years, it's not really significant, but it's our Monterey portfolio, which has had double-digit growth and then high single digit last year in revenue growth. This next year, it should once again be our top market at right around 6% revenue growth. Employment growth is going to be stagnant at about 1.1%, so slightly below national average. It's predominantly an agricultural community. What really benefits that market is there's been no new supply probably in the last 4 to 5 years as job growth has continued to do well. And then the 2 markets that have been a little sluggish for us and we think will be in that middling range for us this year, would be Baltimore and Richmond. Baltimore is, this next year's kind of job growth, fairly similar -- close to national average at 1.3%. Richmond is going to be at about 1.5%. So they will kind of be in the middle, not big contributors or detractors.

Got it. And just one follow-up question. Are you seeing any sort of population migration trends away from San Francisco, Seattle, D.C., Boston to some of these, I don't know, secondary markets that you can identify at this point? Or is it maybe too early to put a finger on that?

It's probably a bit too early. If you're talking -- are you talking about related to tax reform or...

No, no. No, just generally speaking. We keep hearing that population migration is down over the past 5, 10, 20 years. But we're starting to see some population migration trends to cities that are maybe a little bit more affordable and still dynamic as well. So now you obviously have a diversified portfolio, and I was wondering if you're seeing any evidence of that.

Yes. You're seeing a bit. I mean, we've seen population growth come into places like Denver, Portland. I think Seattle has gotten some influx out of Northern California. Within the state of California, you're seeing people move, especially for tech jobs, from the Bay Area down into Playa Vista, down in Southern California. But I wouldn't say anything of significance other than those.

Great. Rich, this is Joe. Just maybe one follow-up on that. We do pay attention to migration trends and population growth. And given the diversified portfolio, clearly, while we have some markets that will experience out-migration at times, we're most likely to benefit in other places. But traditionally, the Sun Belt's going to be where we see greater population employment growth, but probably a little bit less on income growth. And if you go over to the bicoastals, it's typically where we see greater changes in income growth and wage growth. And that's been pretty similar over the last year. If you look at our biggest wage growth growers there, it's Northern California, it's Seattle, it's some of those. So we focus on the composition of both, not just immigration population, but income growth and the ability to drive rented income ratios over time.

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

I just wanted to follow up on Rich's question on your Sun Belt exposure. It's been going down steadily over the last few years. It's down to 17% of your NOI, and 4 years ago, it was 27%. Do you see potentially reallocating to the Sun Belt based on your findings of tax reform?

Hey, John, it's Joe. So first, a comment before tax reform took place. If you look at what we've done over the last 12 months, I think you've seen us consistently say kind of the markets we want to increase exposure to, which was a number of those kind of Sun Belt-type of markets such as Austin, Nashville, Denver and Portland, what you've seen is through DCP and other investments, we've been able to increase exposure to, I think, all the Austin within those 4 that we had targeted at this point. So you do see us trying to target those markets relative to our bicoastal. In addition, you've seen disposition activity in 4Q as well as our 1Q subsequent activity. As Harry talked about, the Orange County and the Southern California dispositions, really more of a byproduct of our overweight to Orange County and the fact that we have Pac City coming on here this year, which will increase NOI exposure. As it relates to tax reform and the impact of that, I'd say it's still early days. And I don't expect to see a necessarily a year 1 or year 2 impact from it. But it is a good longer-term question. When we ran through the numbers related to it, what we found, by pulling down the IRS database and segmenting by income, by ZIP Code and by market, was that, overall, our consumer base has an after-tax increase of about $1,700 or 3%. When you go to the bicoastals, you're really more like a, call it, 1% increase in New York, 2% in California, 2.5% in Boston, and then all our other markets are kind of 3% to 3.5% increases. So I'd say not nearly as draconian as perhaps the headlines would have implied in terms of potential migration trends, but it's something that we're evaluating and will continue to think about.

And do you think the peak leasing season will give you an indication of this, or will it take a couple of years potentially to realize the full impact?

In terms of migration trends within MSAs, it's going to take longer than a couple of months of bottom line impact on the consumer pockets before we see an impact. The whole bit is, of course, as everyone has more dollars in their pockets that as you go through leasing season, maybe you see some additional strength.

Okay. And then my second question is on the MetLife and KFH JVs. I know you don't really provide same-store guidance for this portfolio. But in the fourth quarter and that minus 1% same-store NOI, and I'm wondering if you project that organic growth turn positive in '18.

Yes, we do. When we look at our MetLife portfolio, and it's about 9% to 10% of the total company on a pro rata basis, we see revenues next year coming in probably in the mid-1s. That compares to, again, same-stores coming in at around 3. Expenses, probably be in the mid- to high 3s because tax issues in 2018, and that would bring you an NOI in the low 1s. I would remind you, there's a heavy percentage of that MetLife portfolio that's really comprised of 3 or 4 assets that are in the very high supply markets. And these are not just A properties, these are A+-pluses. One would be Columbus Square up in New York, one would be Ashton Austin in Austin, one is in Downtown Denver, which is inundated with heavy new supply. And then you've got another one in, right, downtown Los Angeles. So it's understandable, in our opinion, to see how revenues are going to be 150 bps below what our same-store pool is.

Our next question comes from the line of Dennis McGill with Zelman & Associates.

First question just on the expense side. The guidance in the last couple of years I think ended up coming out pretty close to the high end, may be slightly above the high end. As you set that outlook this year, how much of that factor into it and how much variability do you think -- what would drive the variability, I guess, to the high end versus the mid- or low end?

Sure. Yes, again, our guidance this year is 2.5% to 3.5%. Pressure point is going to be on real estate taxes, which once again are going to come in high single digits. We have some impact from 421s, which will drive total expenses up almost 40 to 50 basis points alone. The other pressure points we're feeling are personnel, and while we see wage pressures probably pushing us up about 3 -- 2.5%, 3%, we've come up over the last year with some efficiencies within our workforce, whether it's on the sales side, the administrative side or the maintenance side, that I think will be able to compress the impact of that down. Probably, I want to push us to the high end of guidance, would be if we get some unforeseen tax bad guys or don't have as many appeal wins as we've typically had. We really don't budget for those significantly. But that could affect us on the tax side. On the personnel side, it really just depends on labor markets. Last year, we were surprised up in San Francisco as well as Seattle when wage pressures took our personnel cost up between 5% and 7%. We feel like in certain markets, we've addressed wage scale issues, but that's something that could kick in this year. Joe was talking about both the benefit from tax reform, but also, we're seeing wage increase on a national basis go up 3%. Now if we see wage pressures, we would hope that with some outsized rent growth that would accompany that. So if it pushes us to the high end there, we would think there will be a corresponding push to the high end ideally on the revenue side. But our other expense categories, whether it's repairs and maintenance or marketing cost, we've continued to work to create a more efficient way for our residents to deal with this, and we think we can get both of those categories very close to flat to negative. In fact, currently, we've got about 33% of our on-site tours, are booked through appointments online, so we've been able to cut out some of the personnel burden there as well as over the last year, 1.5 years, we've installed package lockers into over 100 of our properties, which has made our people much more efficient.

That's really helpful, Jerry. And then if you look at February last year, the upside or to the midpoint or the higher, coming at the higher end, was that more driven by property taxes or personnel relative to your initial midpoint guideline?

It was more personnel.

Okay. And then -- okay. Perfect. And then separate question, just entirely, on the land site, I think you made a big comment earlier, you just -- the land market just seems to be stubborn as far as adjusting and making it difficult on underwriting new development deals. What do you think breaks that? What has broken that in the past?

Hey, Dennis, it's Joe. So we have been talking about that for the last 6 or 12 months, which is why I think you've seen our pipeline, obviously, continue to dwindle down with new net additions to the land pipeline being effectively 0 at this point. What we've continued to say is that while rents have kind of plateaued at long-term levels and cost inflation has continued to creep up above that level, the release valve continues to be land pricing. So I don't think what we have to see change is really anything other than that, and that either rents have to reaccelerate and outpace inflation or land pricing has to reprice, which while we've seen at least one example of that on a deal we're focused on, I wouldn't say it's widespread yet at this point.

And are there any markets where you feel like one of those 2 things has happened to be the catalyst? Which is -- which do you think is going to be the more likely catalyst, rents or repricing?

This is Harry. I think land prices tend to be fairly sticky because you're dealing with individuals with their own sort of emotional analysis, in some cases, that's not always entirely rational. And so the land sellers tend to be slow to adjust their expectations, unless there's some particular event that could be negative if they don't respond. Rents are purely cyclical. So I think that rents and development costs are the other variable that Joe didn't mention, and again, as construction activity declines, typically, one would expect construction cost to decline. I don't think it's necessarily a market basis that we can speak to, but it's -- each market's going to have its own set of facts.

Hey, Dennis, not to wear the subject out too much, this is Toomey. What I think is land reprices when the merchant builders are heavy on inventory of it and the financing market dries up. And will we see that anytime soon? I'm not certain. But that's usually the characteristics that starts to push more dirt into the hands of other people.

Our next question comes from the line of Nick Yulico with UBS.

A couple of questions. First on the multifamily transaction market, with debt cost having gone up over the last 6 months, are you seeing signs of cap rates going higher? And even if not yet, do you think it's reasonable to assume cap rates go up by a certain level given the rise in interest rates?

This is Harry. I think there's sort of 3 factors that go into cap rates. One is interest rates, one is NOI growth, and the other, and perhaps the most important, is capital flows. Today, at least in the near-term, capital flows are extraordinarily high, and therefore, there's no reason to expect that the cap rates are going to move. And we have not seen any evidence that cap rates are going to move. If in the future, depending on what happens with interest rates, clearly, if interest rates continue to climb over time, there tends to be some loose correlation between cap rates and interest rates, but again, it depends on how those other 2 factors move. So I wouldn't be surprised to see cap rates move a little bit over the next year or so, but we have not seen any evidence of that today.

Okay. And so I guess if pricing is still strong in the transaction market, Tom, I'm wondering how you and the board are thinking about share buybacks or special dividends. Your stock, like most of the multifamily REITs, is trading at a meaningful discount to NAV. So at what point do you stop investing in the Developer Capital Program, stop doing acquisitions and instead focus on buying back your stock and selling more assets if the transaction market pricing is still so strong and there's risk of maybe cap rates going higher?

Hey, Nick, it's Joe. Yes, maybe I'll set it up and just give you a couple of parameters around how we're thinking about it and then if anyone wants to come over the top. But it's a relatively new phenomenon, obviously with the selloff that's taken place in the last 30 to 45 days. But the way we kind of think about it is where do you trade versus NAV, what's the leverage profile, what are your committed uses, what are the alternative uses that, that could compete for, and then, call it, corporate factors. So as you kind of tick through those, you have clearly a discount to NAV in place today, so we'd agree on that front. From a leverage profile standpoint, we like where we're at from a maturity profile, a line utilization standpoint and solid BBB+ credit. But we have no intent to lever up, especially for share buybacks. So you can kind of take that source off the table, which reduces your sources back to just dispositions of cash flow. And so then, you come over to kind of committed uses, and when you look through our supp between development and DCP, we still have $200 million-plus of committed uses at this point in time. In addition, we continue to take a look at DCP and development. And while it's not necessarily on balance sheet yet, we do have potential land parcels that we have been working on for quite a long period of time that could hit. So when we're thinking about shadow uses, that's going to factor in the math. But ultimately, you get to a point where you do have available capital. And similar to how our DCP and development program compete against each other for that amount of capital, you're going to have one more competitor in the ring, which is share buybacks. So we'll compete those 3 against each other when we have the capacity. The other piece of it, being corporate factors, which I think everyone is aware of, is REIT from a tax gain capacity standpoint. We can only sell a certain amount of assets each and every year. And right now, our dispositions are really allocated towards those pre-existing uses at this point in time. But I think as the year moves on, we'll take a look at where the discount is and what the alternative uses are and make the best decision at that point.

Dilly dilly.

Okay. I guess just following up, and I appreciate a lot of detail there, but at what point do you -- I understand you have existing uses, but how do you, as a company, I think like a lot of REITs are facing this issue right now, how do you think about continuing to invest in development at this point in the cycle based on how the stock price is doing, based on the fact that your FFO growth this year is 3%, which is matching your same-store growth. I mean, at what point does the -- do you start rethinking the value of investing and doing development versus again just maybe buying back your stock?

It's a fair question, I think. We're going to continue to look at those IRRs on development, which are in that low- to mid-teens range, and whereas DCP is let's call it, (inaudible) in acquisition and development. You end up with a stock buyback. On an unlevered basis, if your unlevered assets are 7s, you get a, call it, 10% unlevered asset value buyback and you're getting a 7.5% to 8% type of IRR. So IRRs are still arguably more compelling. Now clearly, there's more risk associated with it. But that's going to be the discussion, is when we get there and as we look at each development, if we can get compensated and get through the next 150 to 200 basis point over range that we target, can we get to the upper end of that and account for the increased risk and overcompensate for buyback. At the end of the day, we're never dependent on equity issuance, and we're looking at basically cash flow and dispositions to fund that development. And so the value-creation margin still exists, the IRRs still exist. But we're obviously cognizant of the fact that we have another use of capital that we could potentially look at. As it relates to your second point there, you made a comment on same-store growth and FFO growth being one and the same this year, which we provided a little bit of a walk in the earnings release as well as in my commentary. But I think it's probably important to expand on that a little bit because it does relate to the development pipeline. We've mentioned that development in DCP overall are a net neutral contributor this year to earnings, which we got a couple of follow-up questions overnight on that. What's really going on is that you do have a net positive contribution from Developer Capital Program. And then you have a net negative contribution coming from development. And can I hit you with a punchline first, which is, basically, you have a timing issue related to Pac City and 345 Harrison, what we have is, call it, $700 million-plus of development in those 2 assets, which, this year, we're going to end up with an FFO yield of about 2.5% coming off of that $700 million. As you guys know, that's really just 4% cap interest disappearing on those developments, taking on an expense structure which results in negative cash flow initially and then ramping up as lease-up comes on. Eventually, you go from a 2.5% FFO yield to stabilizing those assets out over a couple-of-year period into the high 5s. So you have basically $600 million that's already been paid for on that $700 million that has all NOI coming to us over the next couple of years with a little bit of funding left in the form of dispositions. So you're correct that this year, a net 0 contribution, but we would expect that to ramp up as we hit 2019.

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

Speaking of dilly dilly, one of the reasons your stock is in the top-performance pit of misery, I guess, is the issue of supply. And Joe, you mentioned the land being difficult to make sense. Is that -- I mean, I look at that as a good thing. I mean, okay, maybe you won't be able to do as much development, but the reason why multifamily stocks have had a tough time this year, in part, and I can mention a lot of things, but partly because of supply. So don't you look at that as a good read-through generally? And I guess that question goes to everybody or anybody.

Yes, that clearly goes to a positive in terms of the on-the-ground fundamentals if supply comes down. So for 90%-plus of our business, that's a positive if development is more difficult to pencil. For the other side, a little bit on the transaction side, yes, you may see the pipeline ramp down a little bit, which results in less earnings contribution near-term, but yes, in theory, you make it up on the same-store NOI side over time.

Yes. It sounds like a good ratio. I'll give up 10% for my 90% any day. So in terms of how you're looking at land, just the market, in general, away from you, do you still see -- it sounds like you're still seeing deals happen. So if these kind of stupid land trades are still going on, if not from UDR but from other players, that could it potentially lead to stupid new development projects also? Or do you feel like it's starting to slow down even outside of you guys?

Well, I hope that most deals are done -- are rational as opposed to stupid, particularly the ones we do. Rich, I think it clearly, and we've seen it, we've both talked about it for the last couple of quarters or more, it's getting harder for these deals to get financed, and fewer of these deals will pencil. But that doesn't mean none of the deals will pencil and that capital isn't going to be available to continue seeing new development deals, and that UDR, even while maintaining sort of our consistent, disciplined underwriting approach won't be able to backfill our pipeline. We all expect that to happen over time. But it does mean that you have to look at a lot more deals before you find one that pencils in it, and it means that it's likely that construction starts will continue at below the levels of the last 3 or 4 years.

Right. So hopefully, you guys, you and the REITs, are kind of leaders by example, and we'll see how it plays out. The last question I have is, Joe, you mentioned the development pipeline kind of staying at the lower end because of all these factors. Do you see that, and what's at least within the DCP effort? Do you see that as sort of the same 6 projects will be around for a little while? Or do you think there will be some trades, but you'll kind of net out to the same number over the course of the year?

I think there's potential to net out to the same number over time, right? We're sitting at, call it, $160 million or so today of exposure there. Over the first quarter, you'll see DTLA, which is coming up through its option period. So we'll work through those kind of buy-hold-sell analysis on that one. But we do have another $60 million of funding left on some of the other deals. So we'll be at $180 million or so of exposure. And we've talked in the past about kind of our earnings and cap on the program that we impose on ourselves, but we think we still have another $100 million of capacity. The difficulty is going to be if we see development overall coming down, you can expect that there's fewer developers, therefore, looking for that type of capital. So there may be fewer opportunities. But we think we probably got a shot at maybe a couple of them throughout the year that could continue to backfill that pipeline.

It's Toomey. I'd add to that a little bit. I think you've been around long enough and look towards the future. And you got to realize if we're in a rising interest rate environment, absent the NOI impact, the question is going to be loan proceeds and availability of lending in that environment, and will that bring more assets to the market as construction loans start maturing. And we're down 2, 3 years down the road, but past experience always points to people wanting to get out ahead of that and start selling the assets. And so I think you're going to see a lot more transactional volume over the next couple of years, and inside of that is always the opportunity to recap deals, buy deals. So I think we're just entering what I would call the natural progression of this cycle. And it will start with decreasing supply aspect, improving NOI trend, but at a higher interest rate environment and creates a more transaction-driven market. And I think we're ready for that.

Our next question comes from the line of Nick Joseph with Citigroup.

I appreciate the detailed market commentary, but from a regional perspective, and I guess just thinking about your largest 3 regions, how would you rank the West, Mid-Atlantic and Northeast in terms of 2018 same-store revenue growth?

You said the West, the Mid-Atlantic and the Northeast?

Exactly.

I would definitely say the West will be the top, followed probably by the Mid-Atlantic and then the Northeast. You've got the Northeast being heavily weighted by New York. New York, we -- our expectation right now would be revenue growth in that 1% range. So it's going to weigh us down. Probably, if you went to the other regions, that Southeastern region, I think, is going to compete with the Western region to be the top.

And then just your commentary on 2019 deliveries, and obviously, there could be some slippage, but are there any markets that you're either expecting meaningful decreases or meaningful increases kind of just versus the average?

Hey, Nick, it's Joe. I think it's a little bit too early to tell at this point. The markets that we've seen supply come down and permit -- I'm sorry, permit starts to come down a little bit more in 2017. It was a little bit more Sun Belt-biased. So if you run through the regressions there, it would imply maybe a little bit more coming down in the Sun Belt. And overall, it's fairly similar across the space.

Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Just 2 quick ones for you. The first, you guys have about 20% exposure in D.C., your biggest market. Just given that market's propensity to produce a tremendous amount of supply in contrast to the job growth, do you guys foresee that market, just paring that back in the next year or 2 to maybe rightsize it relative to some of the other markets?

Hey, Alex, it's Joe. I think you could probably expect that similar to what we're doing in Orange County, which is another market that we view as overweight versus our long-term average. We've kind of gotten to the point now that we can start to source capital from some of the more bicoastal and overweight markets, given that we're comfortable with the 20 markets we're in and the diversified platforms. So I think you'll probably see us lighten up a little bit over the next 2 or 3 years, whether through our, right, dispositions or just lack of new investment while we invest elsewhere. So I think your thesis is correct.

Okay. And then the second question is you guys, and this has been a sort of a recurring theme, you guys produce better-than-average same-store NOI, and yet, when we look at where companies are expecting guidance for 2018 versus 2017, ex items, your FFO growth is basically in line with peers. So one, what are some of the offsets that's causing the offset to the same-store NOI, especially because you said that the MetLife JV should actually improve? And then two, when do you think, on a more consistent basis, we'll see the outperformance on the same-store lead to outperformance on the FFO?

Hey, Alex. Probably a couple of factors here. One, you mentioned MetLife, and while it does improve, it's still at a run rate lower than our same-store. So when you blend the 2, you do have a, call it, pro forma combined same-store that's below our 3% guide. So when you lever that, that obviously impacts the earnings growth. When you go to the development pipeline, there's really 2 pieces to speak to. One, if you look at the development pipeline that's winding down from, say, $1 billion to $0.5 billion, if you look at our interest expense guidance, we're up about $15 million year-over-year. About half that's really due to just cap interest coming off. So it's really a development pipeline issue related to cap interest coming off and causing interest expense to go up a little bit more than perhaps what I think a couple of models factored in when we looked at them. The other piece goes over to Nick Yulico's question and kind of my response there as to the $700 million related to Pac City and 345 Harrison. And when you're earning 2.5% on $700 million of deployed capital, but you funded that capital with, call it, 5, 5.5 dispositions as well as some debt, you end up with a fairly dilutive impact in the year that you go through lease-up. As we fast-forward, call it, a year or 2, and you go from a 2.5% up to, let's say, a 5.75 to 6 over time, you basically have 3% on that $700 million that is effectively pure accretion outside of that $100 million that we still have left to fund. So while 2018 has a, call it, a negative impact from those 2 assets, we think we more than make up for it when we get into '19 and '20. So I think you'll see development start to be much more additive as we fast-forward.

There are no further questions in queue. I'd like to hand the call back to Tom Toomey for closing comments.

Let me have a brief closing given the time element. First, I thank you for your time and interest in UDR. And second, if it doesn't come across, I want to make sure we state it, we feel very good about our strategies, about our continued execution and how this year is already starting out very strong for us. So with that, we look forward to talking to you more in the future.

This does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.