UDR Inc (UDR) 2018 Q2 法說會逐字稿

Greetings, and welcome to UDR's Second Quarter 2018 Earnings Call. As a reminder, this conference call 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 quarterly financial results conference call. Our quarterly 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've 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)

I will now turn the call over to UDR's Chairman, CEO and President, Tom Toomey.

Thank you, Chris, and welcome to UDR's Second Quarter 2018 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.

We again reported strong results during the second quarter and feel good about our business for the balance of 2018. Therefore, we raised full year 2018 same-store revenue and NOI growth guidance expectations as well as FFO, FFO as adjusted and AFFO per share guidance ranges. The drivers of these increases will be discussed by Jerry and Joe in detail in their prepared remarks.

But in summary, through the first half of the year, blended lease rates have trended above original guidance. Our lease-up communities have produced results ahead of initial expectations, and our investment in accretive Developer Capital Program is producing the returns we underwritten. With the prime leasing season now more than half over, we are confident in our ability to continue to produce steady results throughout the remainder of 2018.

Looking into 2019, we are optimistic at our prospects, given the increased probability for better year-over-year revenue earn-in and the anticipated improvement in bottom line contribution from development activities. From a capital allocation standpoint, we remain flexible, and we'll continue to invest in uses that provide the best risk-adjusted return within the confines of our annual sources and uses plan.

Last, a special thanks to all our UDR associates for their continued hard work to produce another solid quarter of results. We look forward to the same for the remainder of 2018.

And with that, I will turn the call over to Jerry.

Thanks, Tom, and good afternoon, everyone. We're pleased to announce another quarter of strong operating results. Second quarter year-over-year revenue and NOI growth for our same-store pool, which represents approximately 85% of total NOI, were up 3.4% and 3.5%, respectively. During the quarter, we posted solid blended lease rate growth of 3.8%, a robust top line contribution from our long-lived operating and technology initiatives and continue to reign in controllable expense growth.

First, year-over-year blended lease rate growth for the quarter was 20 basis points higher than during the same period last year. While this positive spread did not widen versus what was realized during the first quarter, market rents exhibited typical seasonality during June and July by continuing to accelerate, something we did not see during 2017 when market rents for our same-store portfolio peaked in late May. Second, our other income grew by 11% in the quarter. As in past quarters, this was driven by revenue-generating initiatives, specifically parking, which increased by 22% and our shorter-term leasing program, which continues to outpace initial expectations. This focus on monetizing our real estate in innovative ways is a recurring differentiator and a meaningful driver of incremental growth. Third, year-over-year turnover continues to decline. Year-to-date, annualized turnover is down 160 basis points, an acceleration from the first quarter's 120 basis point decline. This is especially impressive given that our short-term leasing initiative should result in higher turnover. Fourth, while we feel pressure from real estate tax increases for at least the next couple of years, our focus on driving efficiencies throughout our expense stack continues to yield strong results. During the quarter, controllable expense growth declined 0.2% year-over-year, as we have been able to find efficiencies in site level staffing, benefit from reduced resident turnover, invest in energy-saving capital expenditures and drive down marketing cost, while still growing occupancy 30 basis points year-over-year. We see a long runway for future expense growth mitigation via technological initiatives and process enhancements. And fifth, rent concessions during the quarter were 29% lower than last year and gift card expense was down 54%. Throughout the first half of 2018, the pricing environment for lease-ups remains more rational than during 2016 or 2017.

These encouraging signs for the prospects of our business, when combined with our 97% occupancy, set us up well for the remainder of 2018 and gave us the confidence to raise the bottom end of our full year same-store guidance ranges. Our year-to-date revenue and NOI growth through 6 months was 3.2% and 3.1%, respectively, just below our upwardly revised midpoints of 3.25%. For 2019, we are optimistic that if current leasing trends hold, our year-end operating earn-in will compare favorably to that of 2018.

Next, a quick overview of our markets. Similar to the first quarter, the majority of our markets are performing in line with expectations with a few exceptions. The Florida markets, San Francisco and Boston, have outperformed versus original forecast, while Austin and New York continue to struggle as a result of new supply pressures. Regarding New York, we continue to forecast slightly positive top line growth for the market in 2018, despite a negative year-to-date result.

Moving on, we saw minimal pressure from move-outs to home purchase or rent increase at 12% and 7% of reasons for move-out during the second quarter. Likewise, net bad debt, which is write-offs offset by collections, was 0 for the quarter. All are at levels consistent with previous quarters.

Last, our development pipeline, in aggregate, continues to generate lease rates and leasing velocity in line with to slightly ahead of original expectations. At 345 Harrison, our 585-home $367 million project in Boston, we ended the quarter at 59% leased and are 64% leased today, after only being open for 11 weeks. This, when combined with rental rates that are in line with original underwriting expectations, is a phenomenal result. We remain enthused by 345's progress and its anticipated contribution to 2019.

At our $350 million, 516-home Pacific City development in Huntington Beach, velocity averaged 34 leases per month during the quarter. We ended the quarter at 68% leased and sit at 70% today.

Our 2 JV developments totaling $94 million and pro rata spend remain on budget and on schedule. Our suburban mid-rise community located in Addison, Texas, Vitruvian West, continues to be a home run, performing well in excess of underwriting expectations in terms of rents and especially, leasing velocity. Our vision on Wilshire community, located in Los Angeles, is a higher price point community and is performing in line with forecast. Quarter-end lease-up statistics are available on Attachment 9 of our supplement.

Finally, I'd like to again thank all of our associates in the field and at corporate for another strong quarter.

With that, I'll turn it over to Joe.

Thanks, Jerry. The topics I will cover today include our second quarter results and guidance, a development and investments update and a balance sheet update.

Our second quarter earnings results came in at the high end of our previously provided guidance ranges. FFO as adjusted and AFFO per share were $0.49 and $0.45, respectively. Second quarter AFFO was up $0.02 or 5% year-over-year, driven by strong same-store performance, lease-up performance and accretive investments into our Developer Capital Program.

I would now like to direct you to Attachment 15 of our supplement, which details our latest guidance assumptions. We have increased full year 2018 FFOA per share to $1.93 to $1.96 and AFFO per share to $1.78 to $1.81. Primary drivers of the increases include upside from our same-store portfolio and improved contribution from our lease-up properties and additional accretion from expanded DCP deployment. Full year 2018 same-store revenue, expense and NOI growth guidance ranges were each increased by 25 basis points at the midpoint to 3% to 3.5%. Year-to-date blended lease rate growth outperformance drove the upside to top line guidance, while non-controllable expense pressures increased our expense growth guidance. For the third quarter, our guidance ranges are $0.48 to $0.50 per FFOA and $0.43 to $0.45 for AFFO.

Next, development and investments. We continue to work towards stabilizing our development pipeline around $400 million to $600 million. But as we have indicated in past quarters, sourcing economical land remains difficult given the disparity between construction cost increases and rent growth in most markets. As a result of our unwillingness to lower required return thresholds, we reduced our development and land acquisition spend guidance on Attachment 15 while increasing our DCP spend, where we see more opportunities. Big picture, we will continue to pivot our capital allocation strategy to take advantage of the best risk-adjusted returns as long as those opportunities continue to meet our hurdles within the context of our annual sources and uses plan.

Regarding development contribution to earnings. In 2018, $716 million of wholly-owned projects are in lease up. At an AFFO yield, they will average in the mid-2s. In 2019 and 2020, we anticipate this yield will improve towards stabilization.

Next, capital markets and balance sheet. At quarter-end, our liquidity, as measured by cash and credit facility capacity, net of the commercial paper balance, was $771 million. Our financial leverage was 33.4% on an undepreciated book value, 25.2% on enterprise value and 30% inclusive of joint ventures. Our consolidated net debt-to-EBITDAre was 5.7x and inclusive of joint ventures, it was 6.3x. We remain comfortable with our credit metrics and don't plan to actively lever up or down.

With regard to the profile of our balance sheet, we will continue to look for NPV positive opportunities to improve our 4.8-year duration and increase the size of our unencumbered NOI pool.

Finally, we declared a quarterly common dividend of $32.25 in the second quarter or $1.29 per share when annualized, representing a yield of approximately 3.4% as of quarter-end.

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

(Operator Instructions) Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch.

Just thought you could give us your latest thoughts on supply. There has clearly been some slippage as years past. But if you could give us a sense of what you're seeing in terms of '19 versus '18 deliveries and any major movements across markets that you could highlight would be fantastic.

Juan, this is Joe. So I would say, overall, our expectations really haven't changed at this point from the last couple of quarters. We've been factoring in an expectation of slippage throughout the year. So when we have talked -- been talking about 2019 being flat to down 10%, that's already incorporated that number. And so through a combination of looking at third-party data, looking at our internal regression models, then, of course, talking to our people in the field and getting their sense of where it's at, I still think flat to down 10% works. When you think about the markets that are going to increase and decrease potentially, the increases for us look like probably the Bay Area and D.C., whereas, the decreases are going to be our 2 Florida markets, our 2 Texas markets as well as New York City and Orange County.

Great. And then just on the revenues that you guys talked about '19 improving based on the earn-in at the end of the year or the start of '19. Could you just give us a sense of kind of -- from an earn-in perspective where you are today? And kind of what guidance implies to end the year out versus where you ended last year at?

Yes, Juan, this is Jerry. I don't have that number of what the earn-in is as of today. But one thing I would want to point out and why we said that we expect the earn-in to probably be higher as you get to the end of '18 and '17. So when you look at the market rent growth, and I had this in my prepared remarks, but market rents peaked last year as well as 2016 in the month of May. We saw acceleration from May to June, and then we're just now closing our July books, but we're seeing continuing acceleration. So we're getting back to this seasonality that was more typical throughout the early 2010 to 2015 level when market rents just continuingly went up through July or August then started to slide back down in the back 3 or 4 months of the year, last year being an aberration. So when you look at the earn-in to next year, a lot of that is built throughout prime leasing season, which we're roughly halfway through right now. So that's why we feel better as we lead into next year. Our expectation given what we're sending out for renewals and what we see for available rents going forward is that you're going to see a continuation of what that normal seasonality rather than the 2016, '17 scenarios were.

Great. And do you mind sharing the July stats for the new and renewals?

Sure. July is in the mid-2s for new, and it's in the high-4s for renewals.

Our next question comes from Nick Joseph with Citi.

On development, can you talk about what you're seeing in your desire to backfill the pipeline? And in the event you don't add any new starts, how do you reallocate or adjust resources from an organizational standpoint?

Nick, it's Joe. I'll kick it off, and then toss it over to Harry. I think if you take a look in the supplemental on Attachment 15, you'll see, once again, just like last quarter, we did take down our development funding expectation slightly and reallocated that over to the Developer Capital Program. So I think that gives you a little bit of sense for how we're thinking about the opportunity set on both those as well as the risk-adjusted returns. So we do continue to have a decent amount of capacity on DCP. We continue to see opportunities there, and we'll continue to focus on that area, and think we'll probably have a couple of things hit here in the next 6, 12, 18 months. On the development side, you saw in my prepared remarks, we think by later in 2019, we'll probably stabilize out in that $400 million to $600 million range. And as a reminder, we're going from $800 million today, which is 96% or so funded down to 0 relatively quickly. So backfilling with a number of deals, and I'll let Harry kind of take it over in terms of what those deals are and kind of the opportunity set moving forward.

Yes, Nick, I mean, you know, you hear from everyone else, the market's difficult right now, market prices are increasing faster than rents, so it -- which tends to stress development yield somewhat. Within our existing land set, we have a property in Dublin that we expect to start. We've got next phase of Vitruvian. We've got a property in Denver that we've talked about that's tied up and a couple others that we're working on that gives us comfort or confidence that we'll be back up into that $400 million to $600 million range throughout '19. I'll tell you that we continue -- we haven't changed our underwriting program. We underwrite each asset and it's all merits using revenue cost, rent growth assumptions that we believe are appropriate, while maintaining our target 150 to 200 basis point spread.

With the shift more maybe to DCP, is there still a soft target about $300 million for that? Or could you see that moving up as well?

Yes, I think it's really going to depend on the opportunity set moving forward. So we have $180 million today. We have an additional funding of $30 million with a pre-existing pipeline. So at least $100 million to get to that soft target. But as we have talked about, there is a number of other factors that go into it. So as those deals come in and we think about our sources and uses, the alternative uses that we have out there or opportunities, yes, you could see it draft higher, you could see it not get to that $300 million level. But we'll take it deal by deal and then talk about with you guys as they come in.

And just maybe quickly on occupancy. It looks like 2Q same-store occupancy at 97% is maybe an all-time high, first half was almost 97%. But you maintained occupancy guidance for the year, which would imply slightly lower in the back half of the year. Is there something specific that you are doing or expecting that would result in that lower occupancy? Or is just an assumption that these high levels can't be maintained?

I think the high levels, again, you've pointed out, we've carried it for the last several months, I would point out a couple of things. Occupancy gets propped up a bit by our short-term furnished rental program, which adds probably 20 to 25 basis points to that occupancy level. And those types of rentals have a bit of seasonality, so I would expect as the year continues it to drift a bit. The other thing is when we're looking at our revenue for the year, we're cognizant, as Joe said earlier, that I think that the back half of 2018 is going to have more deliveries than the first half. So we're just a little cautious as we look at the back half of the year how directly we're going to be affected by those deliveries. But right now, occupancy today sits still at 96.9% or so, so it's holding up very well.

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

You've talked about some of the challenges you've faced in New York City due to supply, and we've seen some peers of yours opportunistically reduce their exposure or evaluate reducing their exposure to Manhattan. I guess, I'm just curious if that's something that you guys would consider?

Yes, Austin, it's Joe. We would definitely consider reducing it. However, when you look at where we think the market's going over time, we've actually seen New York jobs relative to our initial expectations surprise to the upside this year. And then if you look at supply, I think, everyone's well aware that supply expectations in 2019 should start to come down fairly dramatically. And so while the market is still relatively weaker within our markets today and could still be next year, we think we do have a little bit of an acceleration story over the next 2 to 3 years there. But it is a market that if we didn't like the prospects longer-term, we would absolutely take a look at reducing it, but I think maintaining capital market weight exposure relative to peers today makes sense.

Appreciate the thoughts there. And then separately, in the context of prior conversations around entrance into new markets, we talked a little bit about Philadelphia as maybe an opportunity. So I'm just curious if you could provide an update on that front? And some detail as to your thoughts on how you would enter a new market? And maybe what kind of exposure you would take longer-term?

Yes, yes. So overarching kind of the portfolio strategy is, of course, the view that we're going to maintain diversification across plus or minus 20 markets, et cetera. And so you mentioned Philly there which we have been taking a look at, and I do want to remind everyone that's not necessarily a new market. We have a pre-existing asset there within a joint venture. And so we've been active in the market. We have boots on the ground. We are looking at a potential Developer Capital Program transaction within that market. It's a market that from a job perspective, whether you look at medical or educational, it screens positively there. If you look at technology opportunities, it is starting to gain more of its fair share of tech jobs. Obviously, job growth and kind of rent growth over the long term relatively stable and lower volatility, relative to some of the other coastal markets. So we like it on that aspect. And then within our predictive analytics models, it does actually screen okay. So there is a number of factors that are positive there, but again, we're thinking about it more in the DCP context as we look to potentially expand a little bit in that market.

Our next question comes from Richard Hill with Morgan Stanley.

I wanted to circle back to the development pipeline. I noticed that you mentioned that all your development pipeline was in lease up. How are you thinking about your development pipeline going forward? And look, if development was to shut off today entirely, is it your view that you can continue to grow at this trajectory that we've seen over the past couple of quarters?

Richard, I think, going back to the prepared remarks and then a couple of comments that we had a few minutes ago, we really don't expect it to go all the way to 0. Well, it may temporarily go there for a quarter or 2. As Harry mentioned, between the Dublin parcel we have, the Denver parcel we have under contract, Vitruvian parcels that we have within the joint venture as well as visibility on a couple of other items we're working on, we do expect that to ramp back up to that kind of $400 million, $500 million, $600 million range. Admittedly, that is approximately half of where we've been running most of this cycle. And so again, the discipline that we've exercised around the required returns has allowed that development pipeline to shrink. But we do want to continue to have a development pipeline, maintain that team and keep creating value off of that piece of the platform.

Our next question comes from Rob Stevenson with Janney Montgomery Scott.

Jerry, sitting here in -- essentially August 1, what markets have outperformed and underperformed your expectations from the beginning of the year by the widest margins thus far? And what sort of magnitude are we talking about?

I wouldn't say anything's significantly off from original expectations. Probably the 3 markets that have surprised for the upside would be the 2 Florida markets, Orlando and Tampa, both have done very well for us and are a couple of our best markets. But I'd say, there may be 50 basis points ahead of plan. The next one is San Francisco, where I think the first couple of quarters did slightly better. But what we're saying as we head into the back half of the year, we're encouraged by the level of new and renewal rent growth we're getting today, that should continue. But we are cognizant again that new supply is going to come into the Bay Area a little heavier in the second half. So I'd say those 3 are the positive outliers. Really, there is 2 negatives, one is Austin, where supply outside of the CBD has been hitting us at 3 of our mature B asset-quality properties. And then probably the biggest disappointment's been New York City. New York year-to-date is at negative, I think, 0.4%. Going into the year, we thought it was going to be, call it, a positive 0.5% to positive 1%. And a couple things have really affected us there. One is the outsized new supply in Brooklyn and Long Island City, I think, is having more of an effect on B assets in the Financial District than we originally projected. Second, we lost a corporate tenant in the Financial District during the quarter that had been with us for about 5 years. And when we -- we recovered occupancy very quickly on that one, but we did take a rent drop because those people had been there 5 years taking good renewal. So the reset of rents was about 6%, and that affected us. And then the third one, that was -- it was built into our plan, but just to let you know, part of the reason our growth is subpar, is we did a central system building upgrade at one of our properties in the second -- in early 2017 and that drove down both utilities expense and also utility reimbursements. And we show utility reimbursements as a revenue component. The benefit to NOI was positive, but this change in the system resulted in a reduction of our second quarter revenue growth in New York of 40 basis points. So if you excluded that, we would have been very slightly negative.

Okay. And then I think it was Joe's comments earlier on supply in a number of markets, you guys expecting to see accelerate in the back half of the year. How much operating traction are you seeing today in the D.C. market? And how much of a slippage are you expecting as we head into the back half and early part of '19 from that supply?

We did see the supply, I think, as long as -- we're watching concession levels. But D.C. has been holding up very well, and actually, I don't have the exact number, but I think blended rate growth in the month of July was good. I think occupancy still stands in the mid-97s in D.C., and we're optimistic. A lot of the new supply that's coming is over in the ballpark area and well, we don't -- and NoMa. And while we don't have any specific assets there, it is affecting most of our properties within the district. Our weakest submarket in D.C. right now is right along 14th Street. But as you know, about half of our portfolio is of B quality, and our properties outside the Beltway are performing extremely well. So right now, we would not expect a significant drop off in D.C. We're running strong right now. But last year, as you went from like June through October, when supply started to hit, you saw 2 months free rent enter the marketplace that suppressed our ability to push rent. So we have our eye out for that, but it really hasn't occurred yet this year.

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

Jerry, you just talked about the some of the disappointing markets. But I'm wondering if you would include the MetLife joint venture as part of that conversation, the disparity between the performance of your joint venture and your consolidate assets continues to widen. And I'm just wondering what was driving that?

Yes. I think it's a couple things. One, I think, a lot of you've seen our MetLife assets. They are top of the market, A+ s, really in predominantly urban locations that are combating new supply. So I think that's the main component. But when I really look at the MetLife assets, which are significantly lower than our same stores, really 6 properties that are current -- during the quarter had negative revenue growth that are fighting new supply. And these 6 properties make up about 40% of the revenue within the portfolio. And those properties are in the upper West side of the New York, the East Village of San Diego, we've got probably the premier property in downtown Seattle, that's fighting new supply. We've got a property in downtown Denver, that's included in this group, and then we also have one in the Baltimore market. So I think when you're in those pockets of heavy new supply where concession levels are high, you're going to see this. I think longer term, the MetLife properties are going to do exceptionally well, but that's the main thing you're seeing right now.

Can I ask a question about other income? You have parking growing at 22%. And I'm wondering if you could provide some color on how much runway is left? In other words, how much -- how many properties are you charging for parking? What is the opportunity going forward? And in relation to the joint ventures, do you have the same other income levers on your joint ventures that you do on your consolidated portfolio?

That's a good question. Sometimes we do and sometimes we don't. In parking, we've always been very good at charging for parking in urban areas, where you have garages and parking is at a minimum. So while a lot of the MetLife deals are in those urban areas, there is less opportunity to drive outsized rate or parking fee growth at the MetLife deals. I'd say, in rest of the portfolio, we've turned parking on throughout the entire UDR platform. Two years ago, we started charging just to existing -- or to new incoming residents. Over the last year or so, we've started assessing that on renewing residents. This year, we're looking -- and next year, we're looking more at reserved-type parking spaces, where people can select where they want to park as well as finding opportunities in some locations to allow nonresidents to park in our communities, that's been a good driver up in Seattle, for example. But I think you're going to continue to see outsized growth. Again, this year it was about 20%, last year it was about 20%. I'm reluctant to say, it can keep going in that pace. But I'm confident to say it's going to continue to grow well in excess and multiples of what rents on our apartments grow. So I do think other income, whether it's from parking or these short-term furnished rentals, are going to continue to have outsized growth and be a difference maker in our earnings model going forward. There is a few things that we're -- we started this year that I think are going to have -- are going to grow incrementally over the next few years too, such as renting out common area spaces such as conference rooms, rooftops, resident lounges to nonresidents. This year, it's going to be a minimal impact, maybe $0.5 million. But we're still learning that system, and I think it's going to continue to grow too.

Can you give a baseball analogy as far what inning you think we're in on the other income bucket?

Gosh. I'd say, we're in the first half of the game, third, fourth inning.

Our next question comes from Drew Babin with Robert W. Baird & Company.

Wanted to touch on Orange County as well as Los Angeles. But starting on Orange County, do you feel like the Pacific City development is maybe cannibalizing some of your same-store performance? The market's still growing decently in terms of your revenue growth, but accelerating some. And I guess, could you just talk about that as well as kind of the general supply and demand dynamics in the market that would help?

Sure. Drew, this is Jerry. Pacific City, again, it's in lease-up right now, it's a little over 70% leased. We do have 3 other properties in Huntington Beach. One is probably a mile away from Pacific City, and I would tell you, yes, I do believe that property is being negatively affected by the Pacific City. And I think the other 2 assets, one is older and at a much different price point. So I don't think it's been affected at all. And then our Bella Terra community, which we built 4 or 5 years ago is not really located on the beach, it's right up on the 405 freeway. It's probably being somewhat affected, but not as materially. But I would tell you that Huntington Beach is one of our, if not, the weakest submarket that we have in Orange County right now. When you look at supply and demand within Orange County, we've got about 1,700 units that are in -- being delivered this year that are within a mile of our communities. So about 500 of those would be Pacific City, but we also have competition in other areas. But I think when you look at it, really the job growth has been a little bit less than we would have hoped for this year. Current projections are about 21,000 jobs in Orange County. And when you look outside of just the proximity to our properties, you're going to have about 5,000 units delivered. But Orange County is slightly weaker than we had anticipated. But we're optimistic as you get into next year that you're going to see supply come down a bit and some stability reemerge.

Okay. And then a smaller piece of the puzzle, but I was hoping to ask about the Marina del Rey portfolio. Looks like turnover was up a little bit. Is there any supply kind of directly impacting that this year and just kind of where are the local dynamics at this time?

Yes, there's really -- there's about 600 units of new supply that's coming into play up in the Marina area. Yes, MDR, I mean, it's -- I think turnover when you look at that, and again, our turnover is down about 200 basis points, a lot of things can impact that. Probably, the largest impact is when you have a lot of new supply with the rational pricing coming directly at it. And I would say, last year, we were pretty stable. This year, it's up 400 or 360 basis points, but it is still roughly about the UDR average. So I don't think there is really a story there in LA other than it's a smallish portfolio, so it doesn't take many new move-outs to affect it. But in addition to new competition in the area that can drive turnover up, the other things tend to be how many leases do you have expiring in a certain time period. And then how much attention are you placing on customer service. And I will tell you, we as well as all of my peers, I think, do a much better job listening to our residents and addressing issues. And give a lot of credit especially to our West Coast team, who had turnover go down over 500 basis points year-over-year to focusing on that customer service side of the business.

Great. And one more for Joe, just on the DCP opportunities. Is there any read through there in terms of maybe a pullback in traditional development lending, or anything, kind of industry-wide that would causing the opportunity set to widen for you? Or is it just maybe more coincidence or kind of -- more time kind of out of the gates with the DCP program talking to folks?

Yes. I think your last comment there, Drew, was really what's driving it for us specifically, meaning, the fact that we have been out there for a while, have been consistent in the space, I think, the funnel just continues to widen a little bit. You see more and more opportunities coming our way, which means better ability to hold to the pricing that we expect and the yields that we are underwriting to and better ability to hold to the terms that maybe other market participants may not be able to because you have seen a lot of these debt funds out there raising capital, more competitors in this space. But thankfully, given the size of the funnel, we're not necessarily seeing pressures from that.

Our next question comes from Rich Hightower with Evercore ISI.

I wanted to touch on the same-store revenue guidance really quickly. So we've had 2 quarters of better-than-expected results. In each case, the midpoint of the range has come up to high end, however, it has been left unchanged. And Jerry maybe you answered this question earlier on the topic of supply in the back half. But is that the risk that's embedded within the guidance as it currently is in terms of not raising the high end? Is it supply driven? Or is there anything else going on there?

And I think it's supply driven. I think, we're more likely to be in the middle to upper end than the bottom, but we are cognizant that -- you do have supply coming into several of our markets a little more heavily in the back half of the year that we're just watching out for. But there is -- we feel like we're doing a very good job, we have industry-leading revenue growth. And I think that top end of it grew 5, that's strong numbers. And when you look at the components, which include the occupancy growth of 30 basis points and contribution from other income of about 60 to 80 bps and the rest coming from rents, we're happy with where it's coming in, but we're always watching out for indicators of concern, and while we're currently not seeing anything coming out as -- that gives us pause other than in New York City for the most part on the new supply side, we see the same stats as everybody else. And I think as long as pricing again stays rational and you don't see a lot of people coming out with 2 months free, we feel good about where we'll end up this year.

Okay. That's helpful, Jerry. And then second question, can we dive in on Boston a little bit and just -- there seems to have been an inflection point of sorts in the market over the last quarter or 2 and then you described your experience with the very strong lease-up at 345 Harrison. Just walk us through what's going on in the market there? Has anything structurally changed in the last 3 or 6 months that we should be aware of, to the positive that is?

Yes, I think you had a time period that we're still in, where competition especially downtown against new supply kind of subsided. In our Seaport area, you had the [Berkshire] deal that, I think, achieved stability. So we were able to get a little pricing power at our Pier 4 community. Our 2 properties up in the North Shore did extremely well. They had revenue growth of over 5% -- or about 5%. When you look at the combination of how Pier 4 as well as our Back Bay property did, they were coming in at around 3%. And then the South Shore, where we have some A communities has been a bit weaker, but still coming in at 2%. But I would say, you have a continuation of a strong economy in Boston, and I think you've had a slowdown of deliveries. When we look at our portfolio, you only have 800 units this year delivering within a mile of our property. And I think that's allowed us, at least for the time being, to push. Again, there is some new supply that's starting to deliver right now that we're watching. But I think the other thing is, Boston has a heavy seasonality every year, where you come out of the gates in the first quarter with concern because of the weather patterns. And then once you get to March, over the last 2 to 3 years, it seems like we've been able to hit the accelerator and takeoff, and this year proved to be no different.

Our next question comes from Rich Anderson with Mizuho Securities.

It's ironic that parking is a driver of growth -- I felt I had to say that. But Jerry, I'm curious about this parking strategy. Are you leading the market? Or -- meaning, is your competition charging? Or are you following the market? And the question being are -- and tenants potentially going to be dismayed by the fact that they have to pay for parking in certain spaces where they hadn't in the past?

I think we're leading, especially in suburban areas throughout the country. I don't think a lot of our peers yet are really following. And what I would tell you is it's a rather de minimus amount. You're talking $5 to $10 typically for an unreserved parking space at a garden community, and when your average rents in those type of garden communities are, say $1,500 to $1,700, the UDR average is over $2,000, that includes the urban high rise. It's just not a material amount. And I think when you can offer someone a specific spot that theirs when they get home at 10:00 at night, I think it's been beneficial and I think especially when you look at some of our older properties where parking is at the minimum, because they were built in, just call it, the 1960s, 1970s, I think people want to be assured that they have a space. So I think better policing of the parking lots makes it a benefit to the residents. But we have not seen or heard an uprise from our residents. We haven't seen turnover go up, obviously, as we look at our numbers. And I think, it's something that they're willingly accepting.

Okay. I guess the good numbers kind of put in perspective too in terms of relative to the rents they're paying, so I appreciate that color. Second question is a little bit broader picture. I asked on the Avalon call about just the nature of this economy and job growth and the stimulus that's come from the tax reform and all that. Do you guys have a sense that this is maybe perhaps a short-lived economic improvement that could wither a bit maybe a year or 2 from now? And if that is the case the way you're seeing it, how is this sort of, call it, an inflection point change your behaviors as a the company relative to what we've seen more typically in previous cycle shifts?

Rich, it's Toomey. We talk a great deal about where we think markets are and where we think we are in the economy and the rest of the business. Our conversations always come down to about 3 topics, which is on a national basis, where do we think the industry is. And I would say that the economy is showing amazing resilience and particularly, when you look at GDP in our business, usually is an echo of that, that drives us to an optimistic view of the economy. Demographics, hell after talking about it for 15 years, you're actually seeing the delivery of it. And then for us on a national basis, we just continue to talk about supply and what would accelerate it, what would kill it off and how we've weathered the storm on the supply cycle. And the second thing we talk about is where our value-creation opportunities are. And you're hearing it in the operational side, and Jerry didn't mention many of it, but a lot of it is, I think, the multifamily space has been low to adopt technology solutions, and we've been more of an industry that's followed instead of led, and I think there's a lot of opportunity inside of that, that will carry beyond and more significant than the other income attributes that we've been going through recently. And the last topic is we talked through markets and where we think those opportunities and where we are in the cycle of individual markets. And with 20 of them, there is always some that float to the top where we think things are going positive and others will be probably a little bit more defensive in nature in our investment. So the combination of the 3 always leads to where is the offensive game plan, how can we take advantage of it, how can we allocate our capital and our resources of people to get better numbers, better results. And I think that nice dialogue that we have here and the full breadth of the experience in the room is weighing to just what you saw, a very good quarter and prospects for the balance of the year to be good. And we're -- frankly, we're very focused on '19, and where we think we can be positioned. So that's kind of our attitude. And I know other people try to draw too big of a blanket over the topic, but the truth is, the company is focused on figuring out how to march forward with all the cards in front of us and don't feel like we're doing anything, but the responsible thing.

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

Joe, I just was wondering if you could talk a bit about capitalized interest. If -- you guys said that you're having $800 million in development now that's going to go down to 0 for maybe a quarter or 2 before ramping back up to that $400 million to $600 million. So it would sound like as we think about our 2019 numbers, interest expense would go up materially as capitalization comes off. Is that a fair way to think about it? Or there are some offsets there?

Well, I think you may have jumped to me by one year on that one. Really in 2018, if you look at our guidance for interest expense relative to last year, we're up about $14 million on interest expense, half of that is really driven by the decrease in cap interest that we saw from '17 to '18. So that number came down from, I think, around $17 million, $18 million down to around $11 million midpoint this year. The predominance of that was really felt kind of -- the first half with higher cap interest driven by 345 and Pac City, and the second half, we're going to have relatively minimal cap interest. We'll probably end up second half somewhere around $2.5 million to $3 million, which tells you that the first part of next year will probably be around that run rate. And then as we take the development pipeline back up as we talked about, let's say, $0.5 billion by late '19, you'll start to see cap interest tick back up. But I think we're kind of leveling out here a little bit on cap interest given how much we've come down in the last year or 2.

Alex, let me just add one thing. As cap interest comes down, we expect NOI to go up, so in effect from a earning standpoint if that's how you're looking at it, FFO will more than offset the reduction. I mean, NOI increase will more than offset the cap interest reduction.

That's a great point. Just to remind you, Alex, that $716 million between the 2 big developments, that's what's yielding in the mid-2s this year between FFO and NOI combined. Next year, we think that'll move closer towards stabilization in '19 and '20. So you do have a nice pick up going forward from a earnings standpoint off of those 2 developments.

Okay. I appreciate that. It often seems like there is a mismatch in the impact of cap interest coming off is sometimes greater than the ramp up in the NOI, but I appreciate that. The second question is on the developer program book. You guys said, obviously, there is -- it sounds like there is more opportunity for you, but I imagine there is still more competition. So as interest rates have risen and as construction cost has gone up, have you guys able been able to maintain your same targeted returns on that program and investing in the same part of the capital structure, meaning the price per door, LTV, however, you want to look at it, you've been able to maintain that? Or have you had to go sort of with less subordination or lower returns to make the deals pencil?

Alex, this is Harry. I'll answer that. The -- I mean, first in terms of risk, our position to capital stack, it's unchanged. We have not increased the risk profile at all in order to continue to deploy this capital. And secondly, and it's really a function of the market with the reduction of both availability debt capital and equity capital, there has been a natural gap in capital stack that's been created, and so there is actually more demand for this product. So our risk has stayed the same, and actually, our returns have floated up. So the first cycle deals we did in '13 to '15 $230 million-or-so, we were sort of underwriting 10% to 11% type IRRs. Today, that number is more like 12% to 13%. So no change in risk, and actually, an increase in expected returns on this product.

Our next question comes from John Guinee with Stifel. John Guinee, your line is now live. Our next question comes from the line of John Pawlowski with Green Street Advisors.

Jerry, a follow-on to the MetLife question from earlier. And I know we've talked about it for better part of 4 years as supply being an issue. As it continues to lag, is there any incremental concern that the absolute level of rents from that portfolio are too high and just the propensity to push rents over the next 3 to 5 years will continue to be impaired?

I don't think so. I think, again, once you have that stabilization of the development deliveries in their submarkets, I think things will be fine. I'll give you an example. A year ago, there was a bit of a slowdown in the submarket in Seattle, where our Class A plus property is and we had 4%, 4.5% revenue growth for a couple of quarters at that one property. So I think it's a cyclical dependent on these deliveries, but I think we've got extremely well located, timelessly built assets that have great floor plans that, I think, are going to do very well. And I think a lot of these assets too have larger floor plans. So I think as these millennials age and they want to continue to live in a city, and they may be not able to move out to the suburbs and buy a home, I think it's going to be a good renting option. And then the other part, I also believe that this asset type and the product that we have, as baby boomers continue to age and sell their big houses out in the suburbs and move into the city, I think this portfolio caters well to them. So I think is just timing and it has been an extended timing, so I'll give you that. But I think over the -- in a couple of years, I think, they're going to perform at least as well as our same stores.

Okay. And Harry, on the competitive development front, is it your sense that sponsors that are competing for you guys and intent, is it a sense that they're ratcheting up leverage and doing some financial engineering? Or are they just punching in irrational growth rates to justify the IRR?

I don't think -- I mean, I guess, I'd answer it this way. I don't think leverage has changed meaningfully. I mean, there's -- debt capital has increased moderately, recently in terms of lowering the cost on available construction financing, but that hasn't changed it meaningfully. I think what has happened to some extent is that equity capital has become moderately more aggressive as they look to deploy in effect their dry powder. So I think when you have a situation where equity is pushing the merchant builder to deploy capital, you have a situation where I think at times underwriting becomes a little bit more aggressive.

John, this is Toomey. I'd add to that. I mean, as you talk to global capital players, the asset class of multifamily is growing in prominence with respect to their share of the pie. And it seems to be just gaining favor across so many different networks, either pensions, foreign capital that haven't been here for a decade, and they're shying away and pulling away from the unknowns of retail, they're pulling away from office. And so I think we're just getting a bigger piece of the capital pie.

Tom, in those conversations, we scratch our heads too, they keep putting money to work in the private market, but you and your peers share prices -- at a discount. How are you changing your pitch to investors to look at public REITs as a proxy for real estate? And are you making any inroads? Do you have any hope that the foreign, Swiss and the pension funds will look to the REIT market increasingly with private market pricing being pretty damn aggressive?

Yes. What I would say, I think, the team at NAREIT's doing a fabulous job of outreach across the broad spectrum. You're seeing more and more speakers at conferences talk about the asset class in their particular market gaining favor. And so my suspicions are is that the local investor will pump capital into their local markets, take that of Berlin, the Nordics, as examples, and many Eastern bloc countries. And as they see that performance elevate then they'll expand more to, what I would call, the publicly traded share model. But there is -- it's just going to take time. What I'd say is, is it took us 10 years to get up off the floor. We're now into the ring. My suspicions are is that if we keep putting up numbers like this on a risk-adjusted basis, eventually, they will find the public space.

(Operator Instructions) There are no further questions in the queue. I'd like to hand the call back over to the Chairman, CEO and President, Mr. Toomey, for closing comments.

Just a quick closing guys. Thanks for your time today. I thought we had a great conversation. Again, to remind you, we feel good about our business for the balance of '18. And looking into 2019, we're optimistic on our prospects, and we wish all of you to have a good summer. Take care.

This concludes today's conference. You may now disconnect. Have a nice day.