UDR Inc (UDR) 2018 Q3 法說會逐字稿

Greetings, and welcome to UDR's Third Quarter 2018 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 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 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)

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

Thank you, Chris, and welcome to UDR's Third 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 the results; as well as senior officers, Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call.

There are three key points I'd like to make about our business and the macroeconomic environment. First, we again produced very good results across all aspects of our business during the quarter. These results and the positive outlook drove our second guidance increase this year in earnings per share and same-store growth ranges. Jerry and Joe will discuss these in detail in their prepared remarks.

Second, the underlying macroeconomic backdrop for the apartment industry remains positive. This, when combined with solid fundamentals, will continue to support future NOI growth. As such, we expect the apartments will remain a consistent short-term and long-term performer in a very volatile global economic landscape.

Third and turning to 2019, we are optimistic about our prospects. We remain confident in our innovative platform and the expected earn-in from it and as well as the improved bottom line contribution from our lease-up communities versus 2018. From a capital allocation standpoint, we remain flexible, and we'll continue to invest in uses that provide the best risk-adjusted return. We will provide details of 2019 guidance on our fourth quarter earnings call.

Last, to all my fellow associates in the field and corporate offices, we thank you for producing another quarter of strong results.

With that, I will turn it over to Jerry.

Thanks, Tom, and good afternoon, everyone. We're pleased to announce another quarter of strong operating results. Third quarter year-over-year revenue and NOI growth for our same-store pool, which represents approximately 83% of total NOI, were 3.8% and 3.9%, respectively. Please note that excluding the impending sale of our Circle Towers community located in the Washington, D.C. market and its commensurate move to held-for-sale, quarterly same-store revenue growth would have been 3.7% in the quarter. We're at the top end of the range we provided in early September.

Moving on, as Tom indicated, business is strong. Seven points I would like to highlight from the quarter are as follows. First, year-over-year same-store revenue growth of 3.8% exhibited continued acceleration versus the 3% and 3.4% growth rates we produced in the first and second quarters.

Secondly, market rents accelerated through the end of August before retreating slightly in September. As such, 2018 has exhibited more typical seasonality than any of the prior 3 years. While we had anticipated this coming into 2018, the durability of the market rent growth throughout the prime leasing season was welcomed. We are definitely benefiting from stronger job growth in our markets thus far in 2018, which has been 40 basis points better than initial estimates, and solid last 12-month wage growth that has averaged 3.2%. Combined, our markets have outpaced national total income growth by 90 basis points over the trailing 12 months.

Third, year-over-year blended lease rate growth for the quarter was 60 basis points higher than during the same period last year. This was 40 basis points wider than what was realized during the first half of 2018. We expect this gap to continue to widen in the fourth quarter.

Fourth, other income grew by nearly 14% in the quarter, well above expectations. Our operating initiatives continue to grow at rates many multiples of rent growth, and remain a primary contributor to our sector-leading 2018 same-store revenue guidance.

Fifth, turnover continues to compare favorably versus 2017. Year-to-date, annualized turnover was down 100 basis points through 9 months. This is especially impressive, given that our short-term leasing initiative should result in higher turnover.

Sixth, same-store expense growth came in at 3.5%. Real estate tax has remained under pressure, increasing by 9% year-over-year. But our controllable expenses grew by only 0.2%, as we continue to find efficiencies throughout our operating platform as evidenced by our year-to-date personnel expense growth of negative 2.8%. We see a long runway for constraining future expense growth via technological initiatives and process enhancements.

And last, we saw minimal pressure from move outs to home purchase or rent increase remain stable at 12% and 6% reasons for move out during the third quarter. Likewise, bad debt remains in check. These encouraging prospects, when combined with our near 97% occupancy, set us up well entering 2019.

Next, a quick overview of our markets. 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 in the face of new supply pressures. Regarding New York, we continue to forecast positive top line growth for the market in 2018, despite a slightly negative year-to-date result.

Last, our development pipeline, in aggregate, continues to generate lease rates and leasing velocities in line with to slightly ahead of original expectations. At 345 Harrison, our 585-home, $363 million project in Boston, which opened in late May, we ended the quarter at 74% leased, well ahead of initial forecast. This, when combined with rental rates that are in line with original underwriting expectations, keeps us enthused by 345's anticipated contribution to 2019.

At our $353 million, 516-home Pacific City development in Huntington Beach, we ended the quarter at 81% leased. We continue to see this property gaining traction.

Our 2 JV developments totaling $93 million on pro rata spend remain on budget and on schedule. Our suburban mid-rise 383-home community located in Addison, Texas, Vitruvian West, ended the quarter at 96% leased, with rents well in excess of underwriting expectations after opening the doors just back in February.

Our 150-home Vision on Wilshire community located in Los Angeles is a very high price point community and is performing well, ending the quarter at 75% leased after having first move-ins just five months earlier in April. Quarter-end lease-up statistics are available on Attachment 9 of our supplement.

I would 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 third quarter results and forward guidance, a transactions update and a balance sheet update.

Our third quarter earnings results came in at the midpoint of our previously provided guidance ranges. FFO as adjusted and AFFO per share were $0.49 and $0.44. Third quarter FFOA was up $0.02 or 4.3% year-over-year, driven by strong same-store performance, lease-up performance and accretive capital deployment.

I would now like to direct you to Attachment 15 of our supplement, which details our second guidance raise of 2018 and our latest expectations. In summary, we increased full year 2018 FFOA per share to $1.95 to $1.96 and AFFO per share to $1.79 to $1.80. Primary drivers of the increases include upside from our same-store portfolio, an improved contribution from our lease-up properties and accretion from additional DCP deployment. Full year 2018 same-store revenue, expense and NOI growth guidance ranges were each increased by 25 basis points at the low end to 3.25% to 3.5%, driven by strong blended lease rate and other income growth offset somewhat by higher real estate taxes. For the fourth quarter, our guidance ranges are $0.49 to $0.50 for FFOA and $0.45 to $0.46 for AFFO.

Next, transactions. During the quarter, we entered into a contract to sell Circle Towers, a 46-year-old, 604-home community, located in the Fairfax County submarket of Washington, D.C. for $160 million. The sale temporarily decreases our D.C. exposure ahead of potential new development intensification opportunities in the market over the coming years. The transaction is expected to close during the fourth quarter, subject to customary closing conditions.

Regarding development, we continue to work towards stabilizing our development pipeline in the $400 million to $600 million range and have a path forward to do so over the next several years depending on our opportunity set. Most of these starts are expected to come from legacy land intensification opportunities as we remain disciplined in our underwriting and sourcing economical land remains challenging, given the disparity between construction cost increases and rent growth in most markets.

Similar to last quarter, we've remained constructive on our forecasted 2019 earn-in from our $809 million of completed on-balance sheet and JV development.

On the Developer Capital Program front, we are seeing more opportunities and closed on new 3 new deals totaling $73 million in commitments during the third quarter, bringing our total commitments to $270 million, 74% of which has been funded.

The investments are located in Santa Monica, Philadelphia and Orlando represent 867 apartment homes in aggregate and have a weighted average yield of 10%. Within the program, we currently have incremental capacity of $50 to $100 million. Please see Attachment 12b for further details.

Big picture, we remain flexible with our capital deployment, and we'll continue to pivot to take advantage of the best available risk-adjusted return, as long as the opportunities meet our hurdles and fall within our forward sources and uses plan.

Next, capital markets and balance sheet. During the quarter, we amended our $1.1 billion revolving credit facility and $350 million term loan to extend both maturities out to 2023 and reduce our spreads over LIBOR by 7.5 basis points and 5 basis points, respectively.

Subsequent to quarter-end, we issued $300 million of 10-year unsecured debt at a coupon of 4.4% and effective coupon of 4.27% after hedging. Proceeds will be used to prepay $196 million of 5.28% secured debt originally scheduled to mature in October and December of 2019 and for general corporate purposes, leaving minimal debt maturities in 2019. At quarter end, our liquidity, as measured by cash and credit facility capacity, net of the commercial paper balance, was $710 million. Our financial leverage was 34% on an underappreciated book value, 24% on enterprise value and 29% 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 4.9-year duration and increase the size of our unencumbered NOI pool.

Finally, we declared a quarterly common dividend of $0.3225 in the third quarter or $1.29 per share when annualized, representing a yield of approximately 3.2% 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 Nick Joseph with Citigroup.

For the development lease ups, given the progress you've continued to make, what's the earning on development in 2019 versus the expected impact on 2018 results?

Nick, it's Joe. As we talked about previously, this year we're producing about a mid-2s FFO yield coming off of the $700-plus million of consolidated development. That equates to about $0.01 of dilution this year relative to run rate. Next year, we think that's probably about a $0.02 contribution as those assets continue to move towards stabilization, which will fully occur once we get out to 2020.

Thanks. When you did the DCP deal in Philadelphia, is that a market you want to add exposure to?

Yes. So we already have one asset there within our existing joint venture. So it is a market we've operated on and tracked over time. But as we talked about a little bit more and more, we do have these predictive analytics models that show Philadelphia is screening relatively well over the next 4 to 10 years. So the addition of medical jobs, technology jobs, educational jobs, all continue to contribute to macro factors and industry-specific demand factors that screen pretty well to us. So this was a good way to enter the market through that $50-plus million DCP deal, obviously get a pref upfront as well as back-end participation. So it's something we continue to look at, but a good way for us to get a little bit more exposure to a good market.

Are there any other markets you're underwriting deals in that you currently don't own in?

There is no other markets. And as I said, we do own in that market already, but there's no other markets that we're considering. And just as a quick reminder, too, from a modeling standpoint, while we do have $73 million that we announced that we committed to this quarter within DCP, just want to remind everyone that those do fund over time similar to a typical development. So you typically see about a 4-quarter funding profile with those, meaning equity goes in first followed by our commitment, followed by construction loan. So just from a modeling standpoint, that $73 million of commitment comes in over time and earnings. So keep that in mind as you think out to 2019.

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

Just hoping you could give your latest thoughts on supply and expectations for '19 deliveries versus '18 updates on slippage? And which markets do you think are going to see meaningful declines or pickup in deliveries year-over-year?

Juan, it's Joe. So expectations for 2019 really haven't changed at this point. We've been talking about flat to down 10% in our markets overall. Just a reminder on that process that we go through, we utilize a combination of third-party data, our permit-based regression models and then intelligence from the field. So when you roll all those up, that flat to down 10% still feels appropriate at this point in time. I think that's further supported by looking at starts and permit activity that started typically around 10% to 15% down on a national basis and that trend typically holds within our markets as well when we look across that. When you drop down to the MSA level, the markets that we probably see the larger increases in would be up on the West Coast, Inland Empire, L.A., Seattle and then up in Nor Cal, really from Oakland and then on the East Coast, you have D.C. that probably takes up for us. And then in terms of markets that come down, the major bicoastal markets, New York City, Boston and Orange County, all looked to be coming down as well as a number of the Sun Belt markets with Denver, Nashville and Tampa coming down as well.

And then in the other income line item, is that contributing to certain markets more than others? I know you guys are being more programmatic about your parking. Just thoughts on '19 and the ability to sustain that going forward, the growth profile?

Juan, this is Jerry. It definitely contributes more than it would in some markets. Washington, D.C. got a heavy dose of it this quarter, it's up about -- other income was up about 15%, so a bit higher than the average, but the two biggest markets are Seattle, where other income was up 22%, and Boston where it was up 24%. The largest offers do tend to be in those bicoastal markets, where you get out significant contribution not only from parking, but also from our full and partial rental.

Our next question comes from the line of Trent Trujillo with Scotiabank.

So it looks like new lease growth was higher than renewals in a handful of your markets, such as San Francisco, Monterey and Orlando. Do you see this occurrence as a short-term situation? Or is it perhaps more indicative of the strength of the multi-family market as we head into 2019?

You know it's probably more short term. You do tend to see, as you've noted, renewal rate growth tends to be higher and you're going to see seasonality kick-in as you go into the fourth quarter. And during the fourth quarter as well as the first quarter, you see renewals stay pretty static with where they are today, but you see the fluctuations occur more on the new side. So I would expect that to come down. But I will tell you the markets have been performing well overall. We've seen an extended leasing period, where market rents continue to grow through August before subsiding somewhat in September. The prior two years market rents peaked in May for us, so this is more of a normalized year. So yes, we do see the rent side of the equation going into '19 being a bit stronger than it was a year ago.

And Jerry, as a follow-up, on recent calls, you've highlighted the occupancy benefit you've had from short-term rentals, but cautioned at seasonal reasons. It could potentially drop, call it 20 to 25 basis points. Occupancy in the third quarter was at the high-end of your guidance, stayed pretty high. So have you seen any evidence of these short-term renters moving out? Are they just continuing to stay longer? Maybe how should we think about this potential occupancy headwind from here?

They do move out. There's definitely seasonality. We're probably running today with about half the level we had in the middle of summer and on it. So -- but occupancy today is still just under 97%. So we've kind of reloaded those people with 12 months renters. So I wouldn't expect to see a drop in occupancy. But I will point out, you did see our turnover pop a bit this quarter. It was higher than it was last year's third quarter by 40 basis points. And if you take out the effective short-term rentals in both periods, turnover would have actually been down 60 basis points. So it does have an impact on that, but we are able, as I just said, to maintain that higher occupancy level throughout the slower season.

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

So look, you guys have put up consistently great results quarter-after-quarter. And I'm wondering what could make you even more bullish from here or maybe more bearish? I'm thinking sort of about it on a micro market-by-market basis. We've seen some of your peers start to diversify away from some markets, maybe New York City. So I'm curious if there is any markets where you're more bullish on and what markets you might less bearish -- less bullish on than maybe previously?

I'll start. Then either Harry or Joe can jump in or Tom. We see, as you go into 2019, one of the markets that have performed well this year probably continue near the top end of our revenue growth, whether it's Florida, Seattle, Monterey Peninsula. The weak markets, I think, probably stay weakish. But we see New York is getting a little more stable as evidenced by our results this quarter. It will still be one of our worst performing markets next year as the new supply that delivers this year and early next year gets absorbed. I think, Baltimore and Boston both continue to be weakish next year. But I don't know if any of those are indications that we would either add to or exit markets based on short-term factors. If you guys have anything to add?

I'd just say from the broader business standpoint perhaps, Rich, that covers the markets. In terms of what we're excited about on the transaction side, you've seen us continue to deploy capital into Developer Capital Program. I think over the coming quarters, you'll hopefully see us harvest some gains out of the Wolff joint venture through several options that we have coming up there. I think we're going to see increasing options for traditional redevelopment, unit additions and things of that nature as well as we continue to try to find a way to stabilize out the development pipeline, while maintaining discipline around the required returns. So today, we're still pretty excited on the capital deployment front and, of course, sourcing that capital through dispositions and free cash flow. The only thing that would be somewhat worrisome that impacts all of us is, of course, rates going higher. So if you watch fed funds rate, obviously with floating rate exposure and refinancing activity that does eat into growth over time, but I think we've done a good job of managing the debt maturity profile and getting ahead of that to a great degree. So it's kind of positive and negatives just from the broader business front.

Got it. And so, Joe, maybe just one quick follow-up on the development capital program. Look, we've seen lenders continue to pullback. I am wondering if you're seeing any pullback from maybe even the GSEs that's leading you to have a bigger competitive advantage. And are you maybe more cautious on the development capital program that you were a year ago? Or are you more positive just given more opportunity?

No. I think there's definitely more opportunity out there to be had for us, despite the fact that you see permits and starts activity coming down. What we've talked about in past quarters is, the fact that the funnel has widened to a degree, as we've been out there pretty consistently for a couple of years now at this point. So the fact that we've been able to execute, we've been a good partner to a number of these developers, I think we are seeing more opportunities, which allows you to pick and choose your points. In terms of your comments on the, call it, the senior piece of the stack on the construction financing side or the perm piece of GSEs, construction financing really hasn't moved much since last quarter where we talked about it, taken up a little bit in terms of loan to cost and seen spreads compress a little bit, but nothing meaningful and definitely not offsetting the increase in LIBOR that we've seen over the last couple of years. And on the GSE front, they continue to be very active. I think they're on pace to again do $70 billion each. They're definitely the most competitive on the perm side when you go out to 10-year lower levered financing. If you're going on the short end side, the pension money, the bank money, it's probably a little bit more competitive. But we're typically looking out to a longer duration when we are doing the fixed-rate financing on the secured side.

Rich, this is Toomey. A couple of things to add about the Developer Capital Program. I mean, Harry has done a good job of having a number of relationships there. And as you know, after you close the deal the first time with someone, it's a lot easier the second time around. And so we've got a pretty good net there to go fishing with. And I think there would be plenty of opportunities down the road should we want to expand that program and we love to.

And just to kind of close it out, this is Harry. Remember equity capital has also come down. Joe talked a lot about debt capital coming down, which sort of creates the position to capital stack for this type of investment. So we continue to see opportunities going forward. And as Joe mentioned, a couple of the Wolff options are coming up, so you'll see kind of capital advance needing repayments a little over $40 million over the next few months, which does give us ample capacity to go back out and reload and do new deals next year.

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

Quick one on market exposure. You talked about the D.C. lightning upsurge there being temporary. You've mentioned Philly being interesting. I think you've talked about Downtown L.A. over time. So just curious what markets maybe you feel like you're a little overextended in today or even looking to exit that could be sources of capital as you re-up or enter some of these other markets?

Hey, Austin, it's Joe. In terms of market exposures, I'd say that -- and the way we look at it is really where we're going to deploy capital into and where we're going to focus the resources. From a disposition standpoint, we're only going to source $200 million or $300 million a year, so 1 or 2 assets per year. So there's oftentimes more asset-specific reasons as opposed to MSA-specific reasons, like in the case of D.C., that we may choose to exit an asset. In terms of the D.C. exposure overall, we are overweight relative to the peer index. I think we have the most exposure there to that market, but we continue to like having that exposure, given forward expectations for the market as well as kind of long-term stability that it provides. Philly is another one we are looking at. And I think if you look across some of our other DCP deals that we did in the quarter, we did one out in Santa Monica and L.A. That continues to be a market that we'd like to try to add a little bit more to. We did a deal in Orlando, which screens well to us as well. So I think if you kind of follow our activity here over the next year or so, you will probably see us deploying our resources and our capital into markets that we see as appealing. But there's really no markets that we're necessarily looking to exit today or do any wholesale portfolio shift.

And then sticking maybe with D.C. and then thinking little more broadly, but you mentioned densification opportunity there. Just curious across the portfolio or one where specifically in D.C. are the opportunities today? And then how big of an opportunity is that across the portfolio? And how do those returns stack up versus newly sourced land that you've said you've cited it being much more difficult?

Rich, this is Harry. I think we've got a couple of opportunities in D.C. And I think it's probably easier to talk about those once they become reality, as you can imagine each of those, much like any development, require some level of approval at the city level. I think across the portfolio, we have several hundred units of opportunity. It doesn't mean that they're all going to hit, but just the size of it, it's that type of thing. And just in terms of understanding the economics, typically, if land is, call it, 15% to 25% of your total development cost, land in lease is somewhere between 0 or in the case of some of these densification opportunities, we may have to tear down some buildings, but we'll get a very, very high ratio of new units to units torn down. So the effective land basis will be quite low. So the overall return should be meaningfully higher. I mean, if you figure your overall cost is 15% to 20% lower, that's 75 to 100 basis point premium over sort of traditional ground up development.

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

A lot -- we've covered a lot of ground on the call already, but I'm just throwing this out to the group to see if you can riff on some of the trends and move out for home purchases. And I know Jerry, you gave out some stats on that earlier, but just -- have you noticed any changes maybe across markets or between suburban and urban and maybe in light of mortgage rates going up and then changes from last year's tax law changes, anything that we should be paying attention to?

You know honestly, no. Move outs to town purchase are pretty flat over the last year at about 12% of the reasons for move out. And when you look at the markets where you have a higher percentage for move out, it's the ones you would expect, which is typically a Sun Belt suburban, and the ones with the lease to move outs to home purchase tends to be the urban coastals. So no real changes.

Okay, that's helpful. And then just with respect to personnel expense being down year-over-year in the year-to-date period, how long can you kind of continue that runway, given labor tightness? And how much -- how are you offsetting that in terms of efficiencies? Maybe just a little more detail around the puts and takes there?

Sure. Yes, I mean first thing I'd say is, we did give our employees typical performance raises last year in that 3% range. So if we hadn't been able to find efficiency, you would have seen that number growing by at least 3%, I guess I'd start with that. What we've really done is analyze the benefits at times of either outsourcing or automating some functions in a way that it doesn't impact our resident base, but I think when you look at our revenue growth and the satisfaction our residents are showing us by renewing at a high rate, there is no impact on them. But I think by finding those deltas of ways to make our teams more efficient and on natural attrition being able to, at times, outsource, it's been helpful. The other thing we've been able to do is create opportunities for our higher level operating team members to manage multiple properties, so it creates opportunity for them. So I think, we're still in the early stages of working on this. We started last year looking hard at it. We've continued to look this year, but, I think, the automated platform that we've introduced years ago, where our residents have shown us that they prefer self-service, has benefited us, I think, as we move into our future. So there's going to be some more opportunities. So I don't think it's just this year. I think we'll be able to consistently find some ways to continually create efficiency.

And Rich, a lot of what Jerry is reaping the benefits of today was really launched about 4 years ago when he did a time motion study for most of the workforce, and really determined what standards were for all the functions we perform. And now you go through all of that analytics and you really come back with what's the right operating model for the future. And with the right technology, self-serve template on top of it, you're going to see this continue to take over our business. And people, as you can imagine, are of a high variable with a high cost structure associated with them, and we're going to find ways to make everybody more efficient.

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

Quick follow up on Pacific City. You talked about occupancy kind of trending in line with where you expect it to be, but didn't talk as much about rate. And I was just curious where rate is relative to initial expectations? And then quickly just on both 345 Harrison Street and Pacific City, should we think of these projects as stabilizing kind of by the end of next year or maybe at a date sooner?

Yes. The current rates on Pacific City are, call it $365,000 to $370,000, so just a hair under what we had trended out original underwriting but not much. And I would say on stabilization, I think, you're going to see both of the deals either stabilize closer to the first quarter. When you think about 345 Harrison, one thing I would point out, while we were at 74% leased at the end of the quarter, 10% of that property has affordable units that were still going through the lottery process with the city, and we should have that 10% moved in early in the first quarter. So that property has done exceedingly well, has rents in the 540-or-so range. So Pacific City, we're continuing to lease well, but we're over a year into the lease up on this. So you're having to backfill for some move-outs at the same time. But we would expect that one to also stabilize give or take year-end.

Jerry, this is Joe. Just to clarify on that in terms of giving you a little bit more color on the actual yields. So in 1Q '20, which Jerry was referring to on the stabilization quarter, we think the overall pipeline stabilizing out in the high 5s. So you have 345 Harrison in, call it, the 6.25 quarter range, Pacific City in the 5.5 range, and then our 2 assets in the joint venture are also stabilizing out with Vitruvian in the mid-6s and Vision in the mid-5s. So overall, when you look at it somewhere in the high 5s stabilization out in 2020.

Okay, very helpful. And last question here just on the MetLife JV. Can you talk at all about kind of whether you saw some sequential -- year-over-year improvement in leasing trends as you did in the consolidated portfolio kind of 2Q and 3Q? Are you seeing blended lease rates trending better than they were at this time last year within the JVs?

Yes, they are up a bit, not as pronounced as in the same stores. I don't have the data in front of me on a property-by-property basis, but you can see in the 3Q versus 3Q last year on Attachment 12a that revenue popped up to growing by 1.6%, which while still not at the level of our same-store, it's quite an improvement from last quarter. You've still got certain properties in that portfolio, whether it's Columbus Square in the Upper West Side, which is almost 20% of the JV. That one is coming in slightly negative and then you've got few other properties that are combating new supplies. So they don't have as much pricing power. And those are deals in Downtown Denver, the East Village in San Diego as well as some of our Addison properties in Dallas.

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

Jerry, first question is, it's been a trend, you commented on turnover being lower, if you adjust for the expirations in the quarter, and certainly been an industry trend. But on the other hand, you hear about endless amount of companies trying to find employees and unable to find workers. So how do we rationalize the fact there seems to be a lot of companies that are looking for workers and yet turnover in the apartments is down. I would think that if companies are competing that workers would be moving around, and we'd see turnover increase, but that's not what we're seeing. What are you guys seeing at the property level for residents? Are they not job hopping or what do you guys think is driving that?

I think you're still seeing job hopping that I see frequently. There's so much demand for employees in pretty much all of our markets. They're not really having to leave the cities they live in to find new jobs.

Okay. And combine it, with a, you have an older renter base, 37 years old, they tend not to hop as much. Two, mass transportation and infrastructure is making it a lot easier to get from one side of the city to another. So I think there's a number of contributing factors, and it's a pain in the a** to move.

Yes, it is a pain. So I think there's a few things to keep turnover down. I think one is, I think we're all addressing resident needs more providing better customer service, but I think the other thing is in a lot of our markets, you're not seeing this irrational pricing that came to -- came into our face in 2017 and 2016, where people were offered 2 months free. That will lure people out, even if it is a pain in the a** to move. So I think, with the 1 month free, that normalized pricing methodology, if you're keeping your residents happy, they're going to stick with you longer.

Okay. And then second question is, on New York you mentioned it was still one of your weaker markets. And just a bit curious, now that you've had a few of your peers sell some 421-a and you can see what pricing is, do you think that you may consider selling some of your 421-a assets and maybe lightening your exposure to New York? Or your view of your holdings in New York is unchanged?

Hey, Alex this is Joe. I'll just start with the comment that the buy-sell decision on a market is going to be independent of the 421 aspect. Any buyer is going to account for that within their underwriting and, therefore, the pricing that we receive. So it's not going to be a 421-driven decision. But New York, as a whole, you mentioned, it's a been a little bit sluggish in the years of late. But when we look at the macro drivers and the fundamental-specific drivers for New York, we do think we're getting on to a period now where rent growth is not necessarily correlated well with the improvement in the market overall. And so I think you will see a period going forward, not necessarily next year, but over the next four years or so, where New York starts to lift from a underperformer to potentially an outperformer. So given that, I don't think you'll see us lighten up on New York. That also say -- as we talk about, we're looking at redevelopment opportunities, New York is included in the basket. So hopefully, we can find something to make sense of out there in New York and get some additional capital deployed. The last piece, of course, is the qualitative factors of what's taking place with New York Senate and whether or not that flips to more left-leaning and, therefore, more focused on the affordable or the rent-stabilized piece of the business. It's part of our discussions, but at this point, it's still up in the air. So we're waiting to see what takes place in the next week or so.

Yes. I mean, the rent control thing is, obviously, I think it's underappreciated, but it's potentially a big issue. So I appreciate your comments, Joe.

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

Jerry, you're beating the peers pretty handily in Seattle in terms of same-store revenue growth, other than, of course, just being better operators. Is this an other income thing, is it a B versus A thing, a sub market thing or something else?

All the above.

I'd say it's all the above. I think a lot of it is we're more east side than west side and a lot of supplies hit the west side. But I do think this other income is a significant factor. It probably added 200 basis points to our growth this year. So I think that's a fairly sizable. And I would tell you, we have an exceptional operating team that's been together for a long time in Seattle. So I think that local regional team is the best in the sector.

Okay. And then Joe or Harry, on your land summary page, you've got another project in Boston that you could do, one in Dublin and then it looks like all the other land is in Addison in and out the MetLife JV. At current construction costs, any of these projects currently meet desired return thresholds? And then I guess, given that you just completed 383 units of Vitruvian, how are you thinking about that market and the number of units that you want to bring online over there over the next couple of years, given the levels of supply in the greater market?

Rob, it's Harry. So just looking at the land site, so Dublin land, we've been working on for a long time. Our hope is that we can get to economics that would compel a construction start here in the relatively near future, but we're still working on that. Vitruvian, remember the 383 units, we leased that in about 6 months, so we were leasing that at about 60 units per month. So we're actively working on the next 2 phases there with an expectation that we could start construction on those sometime next year assuming the economics work. But remember, we leased it up very quickly at rents that we increased 3x of 4x through the lease-up period. So it -- that one leased up very well, which speaks to the demand that exists in that submarket at that price point, which is a relatively affordable price point, significantly below the other three projects that we built there and significantly below, for example, uptown rents.

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

On your DCP program, can you just remind us what percentage of the investment you make, do you underwrite to potentially own?

So, John, that's one of the parameters every time we go into a Developer Capital Program, is that we're going to underwrite it as if we are the ultimate owner. We want to make sure we're investing in real estate submarkets and markets that we do want to own. In terms of our actual hit rate, over time, we've had a couple of successes coming out of the Denver deal here in terms of Steele Creek. We also had several others that we've been able to execute on, and we mentioned a couple upcoming within Wolff that we think we'll be able to execute on and -- where the market value is greater than the option price. When you go down to the DCP other section, down on 12b, those other 7 investments, none of those have explicit options that we're able to exercise on. You do have two of them that have back-end participation. So we do have participation in those economics above and beyond the fixed rate that we receive. But we think we do get a seat at the table by seeing the operating trends being in a position in the capital stack and having the existing relationship with the equity. So hopefully we have an opportunity over time to get into some of those assets, but the maturity profile on those is still 3, 4, 5 years away. So we got some time on those.

And Jerry, you mentioned technology initiatives that have contributed to your lower personnel costs. And I'm just wondering if you could provide any color on other discussions you're having with proptech companies that may impact your business over the next few years?

Yes. I think over the next couple of years, you're going to see us probably start to implement more smart home technology into our units. I think the good thing about that, it's something residents want to pay for because it does make their life much more convenient, it's also something that makes our workforce much more efficient. And I guess lastly, I think it's going to tie in as we start to explore more self-guided touring, which we believe a large majority of our residents would prefer to do. It's going to make it easier for them to get around our community. So I think you're going to see advances in all of those aspects.

Our next question comes from the line of John Guinee with Stifel.

Just a curiosity question. You invested about $8.8 million in Santa Monica 66-unit property. I thought it was very, very, very, if not impossible, to develop in Santa Monica. So I am just curious about the sort of the history of that deal? And why you would be able to attain a 12% return for four years on that deal, which seems like pretty rich returns?

John, this is Harry. So the history, the developer we're working with on that one has developed probably half a dozen deals in the city of Santa Monica. So he has a long history of success in finding land sites, getting land sites entitled. They're working them through the very lengthy entitlement process, getting to a point where he can actually pull a permit and begin construction. So that's sort of the developer background. In terms of the returns, remember this is a fixed return. We actually took a position in the capital stack in this one that was relatively lower than in most of our other deals, whereas typically we go up to 85% of cost. In this one, just given that the returns are going to be relatively lower, given high cost, even in a high-rent market, we capped that out at about 79%. So even with that 12% coupon over 3 to 4 years, we have sufficient cushion in order to make this a viable investment.

And then any thoughts on what the total development cost per unit is for that particular development?

It's close to $1 million a unit.

Our next question comes from the line of Tayo Okusanya with Jefferies.

A couple of quick ones from me. First of all, the outlook for New York in 2019, I'm just going to, given some of the industry data, talking about deliveries will be much less in '19 versus '18, how are you thinking about New York instead of being a drag as it is right now maybe being more of a positive contributor in '19?

Tayo, this is Jerry. I mean, you're right. We see the same slowdown in deliveries that the units that have delivered this year as well as the ones that will next year still have to get absorbed. Heavy percentage of those are in Brooklyn as well as Long Island City, as you know. And they're going to compete more directly against our lower-priced Manhattan product down in the Financial District as well as Murray Hill. So we do see New York continuing to be one of our lower revenue producers next year. This year we're going to come in slightly positive. I think it's probably going to improve a bit next year. But as Joe said earlier, we like the long-term prospects for New York, but I don't think it really comes to play in 2019 by a great measure.

That's helpful. And then I may have missed this, but did you make any comments earlier about kind of Prop 10, given the vote's just around the corner?

Tayo, it's Joe. We did not comment on it. As you mentioned, it is right around the corner, so like next week we'll either have a lot more to talk about or significantly less at NAREIT. But we are happy with the polling that we've seen that you've seen and been on top of. So we're happy to see that the messaging by the coalition seems to be taking hold. And we don't think the solution to the affordability issue or the housing issue in California is one of rent control and one that drives less future supply. So we'll see where it takes us in in the next 7 days. Hopefully, we'll have less to talk about next week.

Got you. And then just indulge me one more. Joe, just your comment earlier on about risk rewards and attractive risk rewards. Are you thinking about each of your different business lines on a risk reward-adjusted basis? Could you just help me kind of rank what you're finding most attractive right now, whether it's redevs or what have you or what you're finding least attractive?

Yes. So we kind of look at it in terms of total return relative to risk opportunity, but also total dollar size. So if you go into the big dollar ticket items, mainly in acquisitions, development, DCP, acquisitions would rate lowest on the opportunity set aside from the 2 upcoming options that we think are in the money with Wolff. Next up would be development where we continue to have desire to deploy capital. And Harry mentioned a couple opportunities on balance sheet as well as densification opportunities that we think we have line of sight on, and we'll continue to work through the cost process there and make sure they hit our return hurdles. Then DCP, you've seen throughout the years, we've taken down development and land acquisition expectations and rotated those dollars over to DCP. That kind of gives you a sense where we think the best risk-adjusted return is. On the smaller ticket items, meaning redev, unit additions, revenue enhancing, we saw plenty of opportunities there. There's not as big of dollars. So we still have more work to do there and hopefully more to announce in the next 12 months.

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

Sorry to keep things going, just a couple of questions. Joe, when you mentioned as much as down 10% next year on supply, was that factoring in some sort of slippage assumption?

Yes. Correct, Rich. Similar to how we thought about it this year, we look at all the supply and permitting activity and local expectations, apply some slippage factor, approximately 10%-or-so within our markets. So the resident downturn has slippage in there as well as an assumption that we would still see some slippage from the last couple of months of this year into next year.

Okay. So parlaying that into next year down, holding everything else constant, slower -- lower supply market would be good fundamentally speaking. The other variable, of course, is on the demand side. Is there anything about 2019 coming up where you have sort of line of sight into some disruption on demand side, whether it's millennials be getting older and perhaps being more inclined to start families? Or do you feel when you're net it all out that '19 starts to look like an incrementally better year than '18?

I don't think on your comment about millennials getting older or changes in life of preferences, I don't believe there is anything on the horizon on that front, given that you've seen home price appreciation over the last 3, 4 years average 5% to 6% relative to rents in the 2% to 3% range. You've seen 30-year mortgage rates go up about 100 basis points or 20%. So the relative affordability trade between housing and multi-family housing, obviously, tilts to our side. So I think demand side on that front remains steady. And then on the overall job growth, wage growth front, I think, you're running up against tougher comps on full employment. So job growth may come down, but I think what we have seen is wage growth continue to outpace and offset that. So you probably have an overall demand of total income growth, that mix kind of that slightly down supply, you probably have total income slightly down from this year and stay in kind of this phase of equilibrium, so longer-term kind of inflationary growth.

Okay. And last question. Have you guys ever done any sort of correlation between how changes in supply impact changes in same-store revenue growth over your long history as a public company? And if you can't, could you just whip up a quick algorithm for us right now, I'm sure you could do that on your...

It's clearly one of the factors that we consider when we think about both near-term and intermediate-term demand and supply and prospects for rent growth. But we haven't done it through correlation of supply, relative to rent growth. We're bringing a number of other factors too. So it's not a stand-alone factor any more.

Rich, this is Toomey. I don't have an algorithm, I do have 30-plus years of doing this. And what I would tell you is, striking for me is the amount of data that's available on starts and financing. And that transparency has made the market more efficient and more responsive. And so the eras in the '70s and '80s where we would overbuild a market and then suffer through occupancy drops of 15%, 20%, seem to be something of the past. And the market is much more responsive, anticipatory, if you will, towards supply equations. So I don't see it derailing us. And even if you look at this last couple of years, where supply peaked a few markets, we very seldom ever went negative on rents. So I don't see it as the same dynamic threat that it has been in the past. And we'll just keep diligently digging for opportunities.

Likewise, your ability to grow rents on an annual basis perhaps is more of a CPI-plus type of business rather than ever testing double digits, again. Will you agree with that as well?

Well, I think that's a little bit different because you look at markets like Seattle, where new dynamic companies and cities were almost regenerated. So there's going to be a lot more differentiation around the future around where capital is formed, what companies, what their hiring pattern are. And I think we have going for us the most is demographics. I mean, this wave of millennials right behind it is the wave of similar size and scope that's coming through and probably going to even have a higher acceptance of renting for longer periods. So when we look at this, we kind of look and say, boy, I used to think all the millennials are going to age out and go out and get 3-bedroom, 2-bath homes in the suburbs. There's going to be a wide group of people refilling those slots, if that does come to fruition. So it looks for us like a long-inning game, maybe not 18, like we just saw last week, but it will be a long-running game.

Ladies and gentlemen, there are no further questions left in the queue. So I'd like to hand the call back over to Chairman, CEO and President, Mr. Toomey, for closing remarks.

Well, thank you, and first, thanks, all of you, for your time and interest in UDR today. As I started out the call, business is very good. And we are certainly grateful for all our associates and the teamwork that they have put in this year, and look forward to closing out the year and getting to a strong '19. And we look forward to seeing many of you in San Francisco next week. And with that, take care.

This does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.