UDR, Inc. (UDR) Q2 2017 Earnings Report, Transcript and Summary

Welcome to UDR's Second Quarter Financial Results conference call. Our second quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with our Reg G requirements. I would like to note that statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in 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 our President and Chief Executive Officer, Tom Toomey.

Welcome to UDR's Second Quarter Financial Results Conference Call. Our second quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with the Reg G requirements. I would like to note that statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in 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 our President and CEO, Tom Toomey.

Thank you, Chris and good afternoon, everyone. Welcome to UDR's Second Quarter 2017 Conference Call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers Warren Troupe, Harry Alcock, who will be available during the Q&A portion of the call. My comments today will be brief, highlighted by an update on apartment fundamentals and a broader overview of our business performance. First, macro apartment fundamentals. At the outset of the year, we anticipated relatively stable apartment demand in 2017. That is the continuation of 150,000 to 200,000 national job additions each month and wage growth in the 2.5% to 3% range. Year-to-date, both metrics are in line of these initial forecasts, with monthly job creation averaging 180,000 and wage growth of 2.6%. Additional key drivers such as household formation, propensity to rent and demographics also remain supportive of our businesses. In short, apartment demand drivers are performing as expected. Moving on to supply. We began 2017 expecting apartment deliveries to peak around the middle of the year and then steadily decline through the end of 2018. While the aggregate 2017-'18 new apartment supply picture remains intact, our latest third-party data in conversations with large merchant builders indicate that 2017 deliveries continue to slip into 2018 due to tight construction labor market which is contributing to an average delay of 3 to 6 months. This trend will likely continue, resulting in 2018 deliveries more on par with those of 2017. While these are national numbers, we operate in individual markets which Jerry will address further in his prepared remarks. Moving forward, we still expect that apartment starts will begin to decline given ongoing cost increases, labor shortages and construction financing limitations. The latter of which continues to create opportunities to accretively invest through our Developer Capital Program. Next, with this positive backdrop in mind, our team, again, produced solid results in the second quarter. Driven by our diversified portfolio and long-lived, high-margin operating initiatives that continue to boost revenues and constrain expense growth. Importantly, these initiatives are sustainable and will contribute significantly to our NOI growth for years to come. In total, 2017 feels decidedly better than 2016 did at this point in the year. Putting this altogether, we raised our full year of 2017 same-store and earnings guidance. The drivers of which were strong operations, accretive financing activities and continued investment in our Developer Capital Program. Longer term, we remain confident that we have the right portfolio, platform and team in place to continue to effectively execute our strategic outlook and generate strong earnings, NAV and dividend per share growth over the full cycle. With that, I will turn it over to Jerry to address operations.

Thanks, Tom and good afternoon, everyone. We're pleased to announce another quarter of strong operating results. Year-over-year, second quarter same-store revenue and NOI growth were 3.9% and 4.2%, respectively. After including pro rata same-store JV communities which are heavily weighted towards urban A+ product, revenue and NOI growth was 3.6% and 4.2%, respectively. In total, 2017 is progressing a little better than expected. During the quarter, our operating strategy focused on, one, pivoting to capture an increased number of higher rate growth renewals; two, maintain portfolio occupancy in the high 96% range; and three, continuing to capitalize on our long-lived broad-based operating initiatives. We were successful in these endeavors as demonstrated by the following. Quarterly renewal growth remained strong at 5% and our corporate level renewals team, coupled with improved reputation management, helped to drive quarterly and year-to-date annualized turnover, down by 180 and 130 basis points, respectively. Second quarter same-store occupancy of 96.8% increased by 10 basis points on a sequential basis and by 40 basis points year-over-year and our operating initiatives contributed significantly to our year-over-year quarterly same-store NOI growth. Other income which makes up almost 10% of our total revenue, grew by 9% in the quarter, fueled primarily by our parking and shorter term furnished rental initiatives. These two multiyear initiatives contributed over half of our other income growth and should continue to grow at rates in excess of our unexpected rent growth for the next couple of years. These continued successes allowed us to modestly increase full year 2017 same-store revenue and NOI growth guidance despite recent market rent growth flattening out a bit earlier than initially forecast. Importantly, overall leasing trends in 2017 have stabilized versus 2016, as evidenced by a 25% year-over-year decline in our concession and gift cards spend during the quarter. Moving forward, we expect that our results will continue to compare favorably versus the market and peers. Next, similar to years passed, we see minimal pressure from move-outs to home purchase or affordability which totaled 13% and 6%, respectively, during second quarter. Likewise, net bad debt remains low and at levels consistent with previous quarters. On to expenses. We continue to feel pressure from real estate tax increases and personnel costs. You may remember that we were impacted by a large upward adjustment in taxes paid at our channel at Mission Bay property in San Francisco during the second quarter of 2016, a portion of which reversed in the third quarter of 2016. This drove the relatively low 4% year-over-year growth in real estate tax as we realized during the second quarter of this year. We continue to expect that full year real estate taxes will grow by high single digits. On the personnel front, wage pressures continue to intensify, as does demand for our people. We're actively combating the impact of these forces by additional technological and corporate level solutions that yield greater productivity at our communities. On to a brief market update. First, Seattle, San Francisco and the Monterey Peninsula continue to outperform versus initial 2017 expectations. Most of these markets will feel the impact of new supply throughout 2017 and potentially into 2018, but demand remains resilient. Next, Washington, D.C. and Orange County are generating results marginally below initial expectations, although still within original ranges. Weaker job growth and concentrated apartment deliveries are restraining new lease rates to a degree. Our 2017 revenue growth in these markets is still forecast to be good, but not quite as strong as what we had forecast coming into the year. Our remaining markets are generally in line with expectations. Next, our development lease-ups continue to perform well as the concessionary environment has rationalized somewhat in 2017. In aggregate, our pipeline is generating lease rates and leasing velocities above original expectations. Community-specific quarter end lease-up statistics are available on Attachment 9 of our supplement. Last, summing it up, second quarter was a good quarter as our operating platform and diversified portfolio continued to drive strong results in our modest increase in same-store guidance. We remain highly confident in our ability to execute through the remainder of 2017. With that, I'll turn it over to Jim.

Thanks, Jerry. The [indiscernible] that I will cover today include our second quarter results and forward guidance, a transactions update and a balance sheet and capital markets update. Our second quarter earnings results came in at the mid- to high end of our previously provided guidance ranges. FFO per share was $0.45, FFO as adjusted per share was $0.47 and AFFO per share was $0.43. On a year-over-year basis, AFFO was up $0.02 or 5%, driven by $0.02 from same-store performance, $0.02 from developments and acquisitions and offset by $0.02 of disposition-related dilution and corporate activities. I would now like to direct you to Attachment 15 of our supplement which details our latest guidance expectations. Full year 2017 FFO per share guidance was reaffirmed at $1.83 to $1.87. FFO as adjusted and AFFO per share were increased to $1.84 to $1.88 and $1.69 to $1.73, respectively. Primary drivers of the increases include better-than-expected operational growth, increased investment in our Developer Capital Program and accretive capital markets transactions. Our full year same store revenue growth guidance was raised to 3.25% to 4%, expense growth was reaffirmed at 2.5% to 3.5% and NOI growth was increased to 3.5% to 4.25%. Average 2017 forecasted occupancy was reaffirmed at 96.7%. For the third quarter, our guidance ranges are $0.46 to $0.47 for FFO and FFO as adjusted and $0.42 to $0.43 for AFFO. Next, transactions. As a reminder, the overall goal of our Developer Capital Program is to take advantage of the opportunity provided us by the ongoing disruption in the construction lending market. We do this by investing in third-party development project that give us direct or indirect access to the real estate through a buy, hold or sell, while also generating risk-adjusted returns that slide in between a stabilized acquisition and an on-balance sheet development. During the quarter, we added 3 investments to our Developer Capital Program with an initial capital outlay of $33 million and a total funding commitment of $79 million. This increased the size of the program to $261 million at quarter end which is at the upper end of our targeted range. As we have previously communicated, we exposed 3 DCP assets to the market during the second quarter and expected a variety of outcomes depending on where market pricing came in. For the 2 West Coast JV communities, it is likely that we'd sell one and hold the other with our partner. Steele Creek is still in the market and its future will be decided once we see final pricing in the third quarter. As it relates to future options on West Coast development joint venture communities, we will evaluate the economics of each of the investments during their relevant option windows. Holistically, you can expect it as we harvest accretive capital from DCP sales, a portion of the proceeds will be reinvested into similar types of value-accretive structures as you saw this quarter. Please see attachments 12B and 13 of our supplement for further details. Next, balance sheet and capital markets. As we entered 2017, we identified several improvements to our balance sheet that we could execute on. These included further on encumbering our asset pool, decreasing our outstanding floating rate debt and reducing 2018 maturity risk. The combination of our $300 million, 3.5% 10-year unsecured debt issuance during the second quarter and our proactive debt prepayments throughout the first half of 2017 achieve these goals. And importantly, we're MPV and cash flow positive. Prepayment cost on the $177 million of debt we retired during 2Q totaled $4.3 million. On the JV front, we refinanced 399 Fremont's construction loan into a $197 million, 3.5% secured fixed-rate loan with a 10-year term and we refinanced $135 million of 4.6% pooled debt, securing 2 UDR/MetLife communities and a 2 separate 7-year secured loans with 3.25% rates. With regard to our $500 million commercial paper facility, $240 million was outstanding as of the end of the second quarter at a weighted average rate of 1.49% or LIBOR plus 27 basis points. We remain pleased with the pricing and liquidity of this facility. At quarter end, our liquidity, as measured by cash and credit facility capacity net of the commercial paper balance, was $896 million. Our financial leverage was 33.3% on an undepreciated book value, 23.9% on enterprise value and 28.5% inclusive of joint ventures. Our net debt-to-EBITDA was 5.3x and inclusive of joint ventures, was 6.4x. Timing will drive some variability in our quarterly credit metrics, but in total, they are tracking in line with our strategic outlook. Finally, we declared a quarterly common dividend of $0.31 in the second quarter or $1.24 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 is from Nick Joseph of Citigroup.

I appreciate the color on the supply commentary for 2017 and 2018. Just wondering if you think that part of the outperformance year-to-date in terms of same-store revenue in the guidance raise maybe comes at the expense of 2018 same-store revenue, at least relative to what you put into the 2-year plan.

Nick, this is Jerry. I'll take that up. When you look at the 2-year plan, none of the drivers in our assumptions for the cumulative 2-year period have really changed. And I would say just right now, it's probably too early to talk about 2018.

And then just -- sorry, go ahead.

I was going to say the slippage, we definitely need to see a little bit of slippage from first half into second half. As we entered the year, we saw about 55% of deliveries were going to be first half and today, it looks like it was about 44%. Now take into account there's typical slippage at all times, so you could see a little bit of that slippage slide a little bit, as you stated, from the back half of '17 and to early '18.

And then just for New York specifically, it looks like same-store revenue decreased from the first quarter which is one of just 2 markets along with Austin. So just wondering if you could provide some color on what you're seeing in New York and then how much of an impact are you feeling from the lease-up with the Copper building next to View 34.

Sure. A big part of that was, when you look at it, rents, obviously, each of the successive quarters that build up your revenue growth has been going down in New York. So it's a drop-off that we expected to see, somewhat was on the fee side. We continue to have good occupancy in New York, as you can see in the supplement. But it is down a bit from first quarter. We were running very hot in the first quarter of '17 at 98% and the second quarter's 97.3%, so we lost about 70 basis points there. The rest of it was pretty much on, again, the buildup of the rents. Our expectation, we've said this in the first quarter, that we didn't expect to see New York continue to put up 4% revenue growth as it did in the first quarter. That's an easier comp. Our expectation was it would be somewhere in the 2% to 3% range. We're still comfortable with that as the -- for the full year. And as talking about the Copper building which is right next to View 34, it is in lease-up. They've begun leasing some of the higher floored units which are more expensive. And when I talk to my team in the field, they continue to say they're not feeling much of an impact from the Copper building right now just because the average price per unit for the rents is quite a bit higher. I'm sorry, the floor plan, Nick, is very different. Copper building has quite a few smaller units. Our building has predominantly larger units that are more conducive to multiple roommates.

And when you think about competition with it, from a net effective rate perspective, are they offering concessions? And how does that compare to where View 34 is?

Yes. View 34 is offering modest concessions right now. And when I look at the Copper building, I think right now, they're just offering about a month free. So it's not too excessive right now.

The next question is from Austin Wurschmidt of KeyBanc Capital Markets.

Just curious, with kind of the first half of the year baked and you're tracking above the high end of the range on same-store revenue guidance and probably some visibility into July and August, what would it really take for you to hit that low end of the revenue guidance range at this point?

The low end, I guess, is the potential scenario, but we think it's very unlikely. Right now, when you think about how do you get to the midpoint just to start with. Midpoint would assume the second half would come in at about a 3. We don't expect to have an occupancy pickup in the second half of the year. During the first half of the year, we had occupancy contribution of about 40 to 50 basis points. With some of that shift of supply that we were just talking about going from the first half to the second half, if you start to see some of the irrational pricing, similar to what we saw last year in places like San Francisco, New York and L.A, it could put significant pricing pressure potentially on us. We don't see that happening right now, but if it did, we think that, that could push us down pretty close to that midpoint. As I look at concession levels today, though, in most of my major markets, whether it's New York, D.C., Seattle, San Francisco or Southern California, there's very few markets today that we're seeing concessions levels up around 2 months. The only ones we see today, a little bit in Brooklyn where we're not directly competing, but we get a little ancillary competition, the ballpark area of D.C. has seen anywhere from 1 to 2 months free. Then really the only other 2 places we're seeing get up to 2 months in some locations is Santa Clara. There's a couple lease-ups there providing that large of a concession as well as that platinum triangle area of Anaheim.

And then just -- you touched on the ballpark in some of the concessions you're seeing there and DC has been a market you flagged as modestly underperforming your initial expectations. As you look out with job growth kind of slowing a bit here recently, are you concerned that, that market could backtrack as some of the additional supply within the ballpark and the Wharf area start to come online?

I have to go backtrack, we're still comfortable at the beginning of the year, we thought it was going to be high 3s. Today, we'd see it down closer to 3-ish, may be a plus or minus. So it's sliding a bit. Some of that is because of the heavy supply that's hit in 2Q and 3Q. There's a couple of submarkets that are getting hit. Predominantly the ballpark, we're feeling a little bit not much out in Tyson's Corner. But yes, when we look at which markets have probably come in a little worse than we anticipated this year, you have DC as well as Orange County. We have discussed that back in NAREIT. But I would tell you, overall, this year's coming in right about where we expected, maybe a little bit better because you get those offset by Northern California and Seattle and then the remainder of the markets are pretty much coming in as expected. So yes, D.C. is one that we're feeling a little bit of pressure in right now predominantly because of the supply, a little bit because of the jobs, but we think it's more supply. And we're hopeful it's a little concentrated right now. But we're still not seeing really crazy levels of concessions like we saw in some places last year.

The next question is from Rich Hightower of Evercore.

So I was looking through the new and renewal page in the supplemental, you can't help but notice renewals were pretty strong, at least in the aggregate and turnover went down pretty significantly year-over-year. Just curious what you guys think the lower limit on that turnover metric is. And can you tell us if it sort of ebbs and flows with the volume of supply deliveries in any given quarter, just how we should think about it?

I can tell you there's -- you have external factors that affect supply which you described. When you have heavy new development in your submarkets and they're offering 2 months free, that's enough to entice those people to move. And when you look at the comparison to last year, the 3 or 4 markets that we see the most marked decline, if you will and turnover are San Francisco, Los Angeles and New York City which were the ones where we saw the most irrational pricing last year. So yes, if you do see heavy new supply come at you and you have heavy concessions, that's typically enough to make people jump. That shift heavy supply with 1 month free which is what typically people are offering. The burden of moving typically doesn't get you there. But I would tell you, there's two other things that I think we focused on to help drive down that turnover. One, we're paying a lot of attention to call it reputation management and resident polling of any issues they're having and then we're taking action to remedy the solution. So I think we're doing a good job there. Secondly, we implemented an inside renewal team here in our office about eight months ago and to date this year, we feel like we've saved an incremental 200 move-outs that would have occurred if we didn't have this team and that's helped buoy up our occupancy and helped drive down some of this turnover.

All right, that's helpful, Jerry. And maybe one follow-up to some of the comments on the concession environment this year versus last year. What do you think is driving that if it's anything beyond just the volume of supply deliveries? Is there something else that's causing the market to be a little more rational this time around? Is it just the experience of last year sort of chastening behavior, in that sense or something else?

I think part of it last year, I think people were very concerned with significant interest rate increases and they're trying to lock in their financing. I think that you've seen a little bit more of an elongation of the delivery period so much at one time. So while it's putting some pricing pressure on most of the stabilized new leases, it's not extensive to the degree it was last year. So I think it's a little bit less of both of those things.

The next question is from John Pawlowski of Green Street Advisors.

Jerry, thanks for your comments on the other income growth. Could you just quantify the basis points lift to full year '17 revenue growth that ancillary income's thrown off?

I don't have that number on me. It's -- I think when I looked at it a while back, it was in probably the 60 to 90 basis points. And I'll tell you this too, it's not a onetime thing. We're a company of innovation. We're consistently coming off of that next new thing that will continue to drive outsized other income growth. So I don't want anyone to think that it -- this year and then it drops off. I think we've got things in the works today, whether it's increasing the penetration on a lot of these things we rolled out this year or it's on new things we'll roll out next year that make this a sustainable driver of our income.

Okay. Is it a sense that '18 is in line with that 60, 90 bps lift or less or more?

It's probably early to give a number on that. I think it's still going to be a significant portion that's going to grow that line item, if you will. Other income which grew at about 9% this quarter, I think it was up about 12% in the first quarter. Compare that to where rents are growing and call it within somewhere in the 3% to 4% range on a blended basis. Now I'm comfortable to say that other income is going to continue to grow at a much higher rate than rents.

Okay, great. And one last one for me, on the capital allocation front, on the margin, are there any changes to your view on the attractiveness of the risk-adjusted returns for on balance sheet development versus other uses given what's happening with construction cost, land costs, supply not seeming to abate?

John, this is Joe. No, there really hasn't been -- I think commensurate with commentary last quarter and what you've heard from peers, the development front, the fact that construction costs have continued to increase, labor has been difficult, construction financing market's difficult and land hasn't certainly reprised at this point. So that our underwriting has adjusted to that reality. I think it's still a little bit difficult to make things penciled. We still have a desire to maintain the development pipeline and to go out there and find land parcels, but it's not as easy as it sounds perhaps. So there's still a desire in the capital allocation front to find parcels, keep the development pipeline where it is, although it's naturally going to drift down, if you look at our completion schedule. And similarly, on the DCP, you can see we had some good success there in the quarter of deploying additional capital into that program, both with Wolff on the West Coast development JV as well as a couple of new structures with other partners. So we still have interest there, still taking a look at additional investments on that front. So there really hasn't been much of a shift at this point in time on capital allocation.

The next question is from Rob Stevenson of Janney.

Jerry, when you think about the submarkets around D.C., the RBC, Alexandria, Tyson's, suburban Maryland, the district proper, I mean, any material differentiation operating performance lies between that? Or is it just basically whack-a-mole with wherever the new supply is coming?

It's fairly consistent, Rob. You got some markets are doing a little bit better. I will tell you, our -- two of our larger concentrated markets, one is that Logan Circle, U Street area, we had revenue growth there of 2.6%. It was a little below average but when you go over to Columbia Pike out in Arlington, you've got revenue growth that was 6.5%. So that was by far our strongest. I think that was predominantly, it was going off an easy comp last year when it was hit with new supply. You got a couple of submarkets for us of that are suffering. It's Silver Spring is being affected by new supply right now. When you get out further into areas like Dallas. There's some new supply. But I guess, we had to say where's the area that's the most impacted right now, whether it's because it's in the same exact submarket or not, Washington, D.C. is doing worse than Virginia. And then I would say our Maryland properties which are either up in College Park or mostly in Silver Spring are doing worse than D.C. right now.

Okay. And then within the portfolio today, what are you guys seeing as the opportunity for redevelopment, both on a widespread basis as well as the more or less simple sort of kitchen and bath with a limited scope? What's those 2 subset of opportunity within the portfolio today, you think?

Yes. I'll tell you, Rob, for the last couple of years and we've stated this. We've been spending about $40 million a year consistently on those smaller scope items. Those are either kitchen and baths, smaller amenity upgrades, things like that. And that $40 million this year, we're actually realizing a cash-on-cash return of about 21% and the IRRs are coming in at about 12%, so well above our whack. About 40% of those are kitchen and bath and the rest of them are either inside the units, things like flooring or just appliance replacements or it's things like converting old theater rooms into conference rooms, making rooftops more inviting, creating dog parks or throwing amenities into courtyards. So there's stuff like that, but we think for the next several years, there's the opportunity to continue to spend about $40 million. We don't want to ever get to the point where we make it too big of a program. We like the consistency. When you get to the larger renovations, the larger renovations, just to let you know, we typically underwrite those that are cash on cash, something a little between 8% and 9% return. You're looking for under, I guess, assets that you are -- B assets, things like that in A locations that you can do some improvement to. And we've got a few. We do not have an extensive inventory of properties to go these -- do these renovations on, but we probably got a couple in D.C. that when the time is right, we can take a look at. We may have one up in Boston. We have a couple out in California. Maybe 1 or 2 in Seattle. But it's a handful. It's not a super extensive list and I'll tell you, we're not going to go spend the money unless we can get the return and we're not going to go do it unless it's a location that we think there's at least a potential for some cap rate movement.

Do those become more attractive in the aggregate if, as Joe said, you guys can't find over the next year enough land to replace the ground-up development pipeline? Do those get elevated on the priority scale? Or is that regardless you've got enough capital to do both if you really wanted to?

I think if you had good investment opportunities, you would find a way to, I guess, allocate the capital appropriately. And I will tell you this, we're not -- just like we were not going to aggressively underwrite development, we're not going to aggressively underwrite for a redevelopment just to find a place to go spend some capital. If we don't believe in the project, I don't see us spending the money on it.

And then just lastly on that same thing. If it's not -- if it's a B -- if the B asset and A location and it doesn't deserve CapEx dollars to do a renovation, does that immediately put it on the candidates for sale at the right price?

No, I think you're right. We look at assets like that if we can't pencil a renovation. And it's a B asset in an A location or especially more frequently the B in the B that you can underwrite and if it's not just viable to spend the CapEx, then yes, I think it can work its way onto our disposition list.

The next question is from Jeffrey Pehl of Goldman Sachs.

Just wanted to go back to the same-store revenue growth guidance. Looks like year-to-date, it's about 4.2% and you were 3.9% in 2Q. Just want to see what your expectations are for third quarter, if it be similar to 3Q or 2Q or if you have a deceleration from there.

I think we really don't give quarterly same-store guidance, but I think, again, if you were going to just do the basic math of how do you get to the midpoint, it would probably infer that it's going to come down from the 3.9%.

The next question is from Rich Anderson of Mizuho Securities.

So are you guys seeing -- despite the specifics of supply slippage that you're seeing, is there a movement away from the urban core into the suburbs? And do you expect maybe some of your more outlying assets outside of the downtown to do worse in the coming years?

I think we've had the assumption for a while that, that's going to happen. We're seeing a little bit of it, but still today, Rich, when you look at where we're feeling the biggest impact of new supply, it's typically in those reports, whether it's a place. But sometimes, you'll have the outskirt locations, I'll give you an example, Dallas. Uptown is still extremely being hit by new supply, but so is that Frisco Legacy Village. We're feeling it up there, too. So it can move a bit. But today, it still feels like it's more urban. So I don't think it's fully gotten in and hitting the suburban product. But yes, I think our expectation, I'll throw it over to Harry to see if he's looking at land and talking to guys if he think it's moving out, but our expectation would be that probably will be the next step.

Rich, it's Harry. On the investments side, I wouldn't be surprised. I mean, we're actively looking at -- in a number of our traditional sort of large East Coast and West Coast markets. But in addition, we've expanded sort of our investment reach to include other markets that we currently operate in, including Portland, Austin, Nashville and Denver. Some of those will be suburban-type assets as we look to deploy capital, either in the Developer Capital Program. And in fact, a couple of the deals that we closed this quarter were in more suburban locations, if you look at Portland in particular. But also as we look for land sites to back fill our development pipeline, we're looking in sort of those first-ring suburbs outside of the urban core just simply because with relative -- with continued rising construction costs and relatively flat revenue growth for the next year in the urban core given the amount of new supply, the suburban-ish type markets may pencil better for us.

It may pencil better now, but if it takes 2 or 3 years to bring product to market, are you kind of putting yourself in danger zone in the sense that if Jerry's right in terms of the decision about the future of urban versus suburban, maybe you shouldn't be doing that?

We look at -- just like anyone else underwriting deals, we look at in-place plus an expectation as to how revenue growth is going to trend. So we take all that into account as we look at these investment activities.

I'd ask a little bigger picture question. I imagine from a stock market perspective, this sort of concept of supply slipping forward is probably less good than bad in a sense that you don't take your medicine now, but you've kind of just hangs with you for the next several quarters. But then I'm thinking about it, I wonder if the slippage and tell me if I'm right or wrong. If the slippage almost like in sync with the slippage of demand. By that, I mean, the Trump administration hasn't really produced the type of economic activity in the time period that they suggested. And so maybe as the supply slips and we get more sort of tax reform and whatnot from this administration, yet economy starts to heat up a little bit more, do you think this is actually sort of an in-sync type of scenario supply slipping and maybe demand picking up about at the same sort of pace? Is that a fair way of looking at it?

Rich, it's Joe. Maybe a couple of things on that. If you go back to when we first put out the outlook and talked about our job expectations, while we were positively biased on what Trump may or may not accomplish, we did not actually factor that in. So when we're talking about demand slippage, I think it's demand slippage versus perhaps lofty expectations but not expectations that we had worked into our forecast. In fact, if we look at what we're seeing in terms of demand today, job growth and wage growth for us and UDR markets across the board are coming in well above national averages. The quality of jobs continues to improve. When you look at kind of changes overall. It's a mixed bag, but generally, we've had a few markets coming better, a few coming worst. But overall, a little bit better than our initial expectations. So I wouldn't say that we've seen job slippage versus our original expectations. To your point though, I can see where you're going with that. But yes, if, in fact, we do eventually get some type of tax reform or deregulation, it is probably only incremental to the demand picture. But at this point, we're not underwriting it. We didn't factor that into our initial 1 or 2-year forecast. So it's kind of gravy on top of that if, in fact, it comes to fruition.

The next questions is from Drew Babin of Robert W. Baird.

Quick question on Seattle. It looks like sequentially on a year-over-year basis, Seattle decelerate a little bit from 1Q to 2Q. I'm just wondering if there's anything behind that or is it just kind of a blip? Is there jumpy supply deliveries? Is demand slowing a little bit? Is there anything kind of unique going on there?

I don't think so. I think Seattle has the ability to have starts and stops. When you looked at the first quarter, I know our blended rate growth was a bit on the low side then it accelerated. Today, when you look at what we put out in the second quarter, we have blended rate growth of 6.3%. So sometimes it's just the comp versus the prior year, but we did start the year very good. But I don't think it's anything to be overly concerned about. A lot of our product is in the Bellevue area and Bellevue is getting a little bit of supply coming out today but nothing extraordinary that's being absorbed well. Our Bellevue properties had revenue growth of 6%, 6.5% I believe during the quarter and you got a lot of job growth that continues to either come into Bellevue, come into downtown, job growth kind of happening now in Redmond. So I'm still not overly concerned, but you do have to keep an eye on the levels of supply that continue to come at Seattle. And for the last 3 years or so, it's been heavy, but it's been absorbed well. Today, I'm not concerned. But as you know, we keep our eyes on anything that's showing that much supply coming.

That's helpful. And one last question on the JV guidance increase for the JV FFO, was that something that just occurred during the second quarter and was passed on for the year? Or I guess, I'm just questioning the Verve, Mountain View asset, is that stabilizing maybe quicker than you'd expected? Was it JV or refinancing? What's kind of driving that upside there?

Drew, so the increase that we saw in JV really have a couple of things taking place there. One has to do with the assets that we've talked about that were in the market and the timing of those potential dispositions or acquisitions as they remain in equity and earnings. So 8th & R, Katella, Steele Creek and the timing of those, maybe a little bit later this quarter than originally expected. The other piece of it, if you look in our guidance page, you can see that our Developer Capital Program in terms of the deployment of capital there, that range of $50 million to $100 million now factors in the 3 additional deals that we saw in the second quarter, so a little bit more capital deployment on that front which is going to flow through the JV side. And then I'll kick it to Harry, who can just comment quickly on kind of where Verve yield is.

Yes. Verve is -- we're 80-plus percent leased at this point. We expect the yield deal to come in at about 6.1% return on cost. Properties right on the El Camino, it suits up very well and that's in the JV with MetLife.

The next question is from Rich Hill of Morgan Stanley.

I want to follow up just a little bit on the supply picture in your commentary about supply being pushed out a little bit. I apologize if this has been asked, but are there any specific markets you can point to where supply is being pushed out? And maybe, I think you discussed some of the markets where you're seeing higher but maybe where you're seeing it specifically pushed out.

Rich, this is Joe. So [indiscernible] is coming earlier just in terms of seeing the slippage, both within first half to second half and then probably second half into 2018 as well. So when we look at the slippage overall, more weighted towards the second half today, but that could change if we do see more slippage in the 2018. But I think when you kind of look at the themes, all markets by and large are seeing some slippage due to contract labor. But the ones where we're seeing it most pronounced got to go through the West Coast primarily. It's Orange County, it's L.A., San Francisco, Seattle and probably the only other market that received a meaningful slippage is going to come in Nashville. So it is more of a West Coast theme overall in terms of that slippage that's taking place.

Got it. And maybe the same question on the job growth side. Are there any markets where you're seeing better or worse job growth? I know in your prepared remarks, you talked about Orange County. Any other markets where you would point to as outliers, either on the upside or downside?

Yes. You mentioned one of them already. So Orange County in L.A. probably a little bit weaker than our original forecast on the demand front. I would want Austin in San Jose in there as well. To the positive, so a number of positives. Austin doing better. Nashville orlando, Seattle, even New York City is doing a little bit better than our original forecast. So we've got some ticks and ties in there. But overall, as I mentioned earlier, job growth doing a little bit better than expected and continue to see job growth and wage growth in our markets doing much better than the national average.

Got it. And then one final question, I promise. Same-store revenue, how did that sort of trend throughout 2Q, if you could? And how does that look going into July? Any sort of guidance or insights there would be helpful.

I'm assuming instead of same-store revenue, you're talking more about new lease rates?

Well, yes. Either or, but yes.

All right. I'll give you the rent trends on the new site because renewals has stayed fairly static, call it in that 4.9% to 5% range for the last several months and we expect that to continue, at least into the near term. You look at 2Q, new lease rates on an effective basis were up 2.2%. That's what's in the supplement and it progressed up from 2% in April and it was 2.3% in both May and June. At this time and July is not fully done, we would expect to July to come in the mid- to high 1s. I would tell you, when we look back 4 of the past 5 years, new lease rate growth has experienced a similar seasonal decline from 2Q to 3Q. In fact, when you look back 6 of the last 7 years, we've actually seen July come in a bit lower than June. So what we're seeing today is fairly typical. This year, the slowdown appears to be coming a little bit earlier, but that's kind of where they stand right now.

The next question is from Jeff Spector of Bank of America.

Not sure if this was asked already, but I heard comments about New York City stronger than expected. Can you talk a little bit more about the New York City market and maybe some of the submarkets where you have exposure?

I don't know if I said New York was necessarily stronger than expected. New York is one of the markets that's coming in about as expected. In our first quarter, we had very strong growth at 4% that decelerated to a more normalized growth rate for right now. It was 2.2%. Our expectation is it's going to continue to be in the -- somewhere in the 2s. But when you look at the submarkets we're in, we're really in about 3 or 4 submarkets. The Financial District during the quarter have revenue growth of about 2.4%, Chelsea came in at about 2.7%. Murray Hill property came in just below 2% and then the one property that's not in our same store is our Met JV property. It's on the Upper West Side and that one came in at slightly negative because it's competing most directly against the new supply of Midtown West.

Okay, great. And then I'm not sure if you had mentioned this already, but did you say occupancy today, we were curious on that verse. Let's think about a comparison to the second half of '16 same-store results? We're just trying to get a feel for that.

Yes. Occupancy, today, is 96.7% or so in our expectation. Last year, we ran the second half high 96s, call it, 96.7% to 96.8%, but it's going to be -- right now, what we're looking at is probably no uptick in occupancy compared to last year. Whereas in the first half of the year because of -- we ran the first half of 2016 in the mid-96s, we ran the first half of this year high 96s, we had an uplift this year on the occupancy side in the first half. And just one thing I was going to add. Even though occupancy's going be there, the one thing we do see happening as the year progresses is that blended lease rate growth will compress to a comparable level to what it was at the same time last year. So it has continued to get closer each of the subsequent 3 quarters or so. We continue to see that happening throughout the year.

Okay. That's helpful. And then just last question, just -- I know that you hear this throughout all the tours we take about cosigners and parents guaranteeing young renters today. I mean, is this higher than what you've seen in the past? You guys even track this? Is this something that we should even be paying attention to?

I'd say I don't specifically track it. It's not one of the main metrics I'm looking at. I can tell you I would look at cosigners more intently if I was looking at bad debt, but bad debt is stable over the last couple of years at roughly 0.1% of potential rents. But I couldn't tell you right now it's increased or decreased.

The next question is from Dennis McGill of Zelman & Associates.

This is Pete Peikidis here with Dennis. First question we had is if we look at the second half revenue growth guidance, if we look at the third quarter versus the fourth quarter, how do you see that trending?

Yes. We're not really giving that kind of guidance right now. I would say [indiscernible] going.

Great. And the next question, I just want to clarify your earlier comment that was made. So it would take -- where it would take pressure from irrational activity on lease-ups to raise the midpoint of the full year revenue growth guidance. And is that safe to assume then, without that, you could reach the high end?

I think the high end is definitely reachable. I think if you see the lack of pressure on new lease rates which right now, we would say is most likely to come from that types of irrational pricing, there's the potential definitely that you could get there. But things have to break right in a multitude of ways. But right now, we're comfortable with the midpoint maybe for the...

The next question is from Daniel Santos of Sandler O'Neill.

Just one quick question going back to the Developer Capital Program. What's your comfort level with any expansion of the program moving forward? And as you think of new projects, are you looking to have exclusive relationships with developers in certain markets? Or does every deal stand alone?

This is Harry. I'll answer that. So just to sort of recap it, we recently did 6 deals, 5 in the West Coast JV plus Steele Creek out of the total investment of $233 million. This year so far, we've added 4 deals with a total capital commitment of $94 million. We bought CityLine which is one of the West Coast JV deals, so that went out of the program, $20 million and then we had 3 projects that are stabilized today that are all or one of which is 8th & Republican in Seattle. That's in the market and tied up for sale. So that'll come out of the program. Katella, in all likelihood, given that there's a Phase 2, that it comes online next year and in all likelihood, we're just going hold that for the time being and nonetheless, that just becomes a JV. So in effect, that comes out of the program and then Steele Creek, as we talked about earlier, is in the market for sale and that we'll see where pricing comes in. But either way, in all likelihood, that comes out of the program. So in effect, we've gone from $233 million to roughly $150 million today. That whole first group of assets has done very well in line with our expectations, sort of low double-digit type unlevered IRRs and we're actively looking to backfill that program with additional opportunities to get it back to prior levels in that $200 million to $300 million range. In terms of the second part of the program, we do not have exclusive deals with developers. However, you've seen us do 7 deals with Wolff in the West Coast JV. So it's not exclusive. It clearly is a program that's working out well for both parties. From our perspective, we get a 6.5% coupon on the invested capital, plus in effect, we get a 50% upside in value creation of the assets relative to our buy-in price. And importantly, we have a fixed-price option on those assets that we believe could be valuable in certain cases, as you saw with CityLine 1, where we had an option price of roughly $100 million -- or $90 million and we had the value of the asset when we declared it was something over $100 million. Did I answer all of your questions?

At this time, I would like to turn the conference back over to our President and Chief Executive Officer, Tom Toomey, for closing remarks.

Well, thank you, all of you, for your time today. We do appreciate it and certainly, your interest in UDR. We started out the call by saying it was a very good quarter. You can see that things are going very well for us, leading to an increase in guidance across the board in earnings and same-store results. And we're very focused on the third quarter and the balance of the year and think things are going to work out for us on both of those. So we're enjoying a very good swing in it, guys and we look forward to seeing you soon. Take care.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.