UDR, Inc. (UDR) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to UDR's First 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 first quarter financial results conference call. Our first quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. [Operator Instructions]. I will now turn the call over to UDR's Chairman, CEO and President, Tom Toomey.

Thank you, Chris, and welcome to UDR's First Quarter 2018 Conference Call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers, Warren Troupe; and Harry Alcock, who will be available during the Q&A portion of the call. Our strong first quarter results reaffirm the 2018 macroeconomic outlook we provided back in February, in which we anticipated solid job growth and accelerating wage growth with a bias towards tax reform being a net positive. These factors, when weighed against elevated new apartment supply, contribute to our ongoing view that 2018's pricing power and occupancy will be relatively similar to 2017 levels. Taken altogether, a strong backdrop for apartments. Moving on, the UDR team is optimistic on our prospects. Why? First, our operating platform continues to produce steady results in a volatile world. While it is still early in the year, occupancy is near 97%, and we are set up well entering the peak leasing season. Jerry will further highlight our success during his prepared remarks. Second, our $811 million of development in lease-up is 90% funded, with aggregate rental rates and velocities in line with expectations. Strong pre-leasing at 345 Harrison and a pickup in leasing velocity at Pacific City, our 2 large developments in Boston and Huntington Beach, reaffirm our view that 2019 development earn-in will improve materially versus 2018. Jerry, again, will provide some color on these communities. Third, our balance sheet remains liquid and safe. Disciplined use of capital during the quarter included $20 million of share repurchases and the funding of a new Developer Capital Program deal. We continue to underwrite a variety of opportunities in the market with a focus on additional DCP investments. Joe will provide more details in his prepared remarks. Last, a special thanks to all our UDR associates for your continued hard work to produce another solid quarter of results. With that, I will turn the call over to Jerry.

Thanks, Tom. Good afternoon, everyone. We're pleased to announce another quarter of strong operating results. First quarter year-over-year revenue and NOI growth for our same-store pool, which now represents 85% of total NOI, were 3% and 2.7%, respectively. After including pro rata same-store JV communities, which are heavily weighted towards urban, A+ product and is battling new supply, revenue and NOI growth were 2.7% and 2.5%, respectively. These results were primarily driven by solid blended lease rate growth of 2.7% and a robust top line contribution from our long-lived operating and technology initiatives. While it is still early in the year, we're encouraged by what we are seeing on a number of fronts as we approach the prime leasing season. First, our year-over-year blended lease rate growth for the quarter was 20 basis points higher than during the same period last year. This crossover is the first positive spread we have seen since the first quarter of 2016. Second, other income grew by 9% in the quarter. As in past quarters, this was driven by our revenue-generating initiatives, specifically parking, which increased by 19%; and our shorter-term leasing program, which has grown nicely since its rollout in early 2017. Third, year-over-year turnover declined by 120 basis points. This is especially impressive given that our shorter-term leasing initiative should result in higher turnover. Fourth, while our quarterly overall expense growth was elevated at 3.6% due to real estate tax pressures, our controllable expenses declined by 0.4% year-over-year. Of particular note, our personnel cost declined by 2.8% due to our continuing focus on achieving efficiencies throughout our business. We remain comfortable with our same-store expense growth guidance of 2.5% to 3.5%. And fifth, rent concessions during the quarter were 22% lower than last year, and gift card expense was down 48%. Both of these indicate a more rational pricing environment for lease-ups. These factors, when combined with our 96.9% occupancy, set us up well for the prime leasing season. Next, a rundown of markets. The vast majority of our markets are performing in line with expectations with a few exceptions. To date, Orlando has meaningfully outperformed our original forecast, while Austin has struggled as the result of new supply pressures. As a reminder, these are both relatively small markets for UDR. Regarding New York City. Year-over-year same-store revenue and NOI growth turned negative during the first quarter. This is more so the result of positive one-timers realized in the first quarter of 2017 than a change in market dynamics. We continue to forecast slightly positive growth in New York during 2018. Moving on. We saw minimal pressure from move-outs to home purchase or rent increase at 12% and 6% of reasons for move-out during the first quarter. Likewise, net bad debt remains low at 0.1% of rents. All are at levels consistent with previous quarters. Last, our development pipeline, in aggregate, continues to generate lease rates and leasing velocities in line with original expectations. In our $350 million Pacific City development in Huntington Beach, leasing velocity increased significantly during the first quarter as construction was completed. We ended the quarter at 51% leased and sit at 56% today, all with rent rates in line with our underwriting expectations. At 345 Harrison, our $367 million project in Boston, we ended the quarter at 35% pre-leased and are 39% today, with rental rates in line with underwriting expectations. We deliver our first homes in early May and are enthused by the communities' reception to date. Our two JV developments remain on budget and on schedule. Similar to last quarter, our Vitruvian West community, located in Addison, Texas, continues to perform well in excess of underwriting expectations. Our vision on Wilshire community, located in Los Angeles, recently opened its doors and is performing in line with expectations. Community-specific, quarter-end lease-up statistics are available on Attachment 9 of our supplement. Finally, 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 first quarter results and forward guidance, a transactions and investments update and a capital markets and balance sheet update. Our first quarter earnings results came in at the midpoints of our previously provided guidance ranges. FFO as adjusted, and AFFO per share were $0.47 and $0.45. First quarter AFFO was up $0.02 or 5% year-over-year, driven by our strong operating results and disciplined capital allocation decisions. I would now like to direct you to Attachment 15 of our supplement, which details our latest guidance expectations. We have reaffirmed our previously provided full year 2018 FFO as adjusted, AFFO and same-store growth guidance ranges. For the second quarter, our guidance ranges are $0.47 to $0.49 for FFO as adjusted and $0.43 to $0.45 for AFFO. Next, transactions and investments. As previously announced during the quarter, we sold Pacific Shores, a 264-home wholly owned community in Orange County, for $90.5 million at a low 5% yield. Regarding development. Our desire to add land to the balance sheet to restock our pipeline over time continues to be a goal. However, given the difficulty in sourcing economical land in many of our markets, our pipeline will continue to shrink for the foreseeable future. Still, there are opportunities that satisfy our disciplined underwriting approach. With this in mind, we entered into a contract to purchase a $13.2 million land parcel located in Denver during the quarter. The acquisition is expected to close in the fourth quarter of 2018, subject to customary closing conditions. In our Developer Capital Program, we invested $20 million into a 220-home development located in Alameda, California at a current return of 12%. In addition, all of DTLA, a 293-home West Coast development joint venture community located in Los Angeles, transitioned to a longer-term hold as the option period for purchase lapsed during the quarter. At quarter-end, our DCP investment balance was $159 million with an effective yield at the mid-7% range and maturities that take place over the next 4.5 years. We continue to favor further investment in our DCP program assuming new opportunities satisfy our parameters. Next, capital markets and balance sheet. During the quarter, we repurchased $20 million of common shares at an average price of $33.69, a strong use of capital given our prevailing discount to NAV and the inherent risk-adjusted return in our stock. At quarter-end, our liquidity, as measured by cash and credit facility capacity net of the commercial paper balance, was $843 million. Our financial leverage was 33.1% on undepreciated book value, 25.8% on enterprise value and 30.7%, inclusive of joint ventures. Our consolidated net debt-to-EBITDA was 5.8x and inclusive of joint ventures, it was 6.4x. We remain comfortable with our credit metrics and don't plan to actively lever up or down, although you will likely see lower commercial paper balances later in 2018, depending on the size of our forward capital commitments. With regard to the profile of our balance sheet, we continue to look for NPV-positive opportunities to improve our 5.1-year duration and increase the size of our unencumbered NOI pool. Finally, we declared an annualized common dividend of $1.29 in the first quarter for a dividend yield of approximately 3.6% at 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.

I wonder if you can walk through your decision to transition to West Coast JV asset to long-term hold versus selling or anything else that you contemplated.

Nick, this is Harry. I'd tell you, we like the asset long term, but realize there's some short-term headwinds in downtown L.A. with supply. Therefore, we didn't want to be a buyer due to the short term nor seller due to the long term. Wolff, our partner, agreed that we ended up with a hold where our return is based on our below-market value, volume and price.

And the only thing I'd add to that, this is Joe, is just in terms if you look at our guidance how we moved around the uses. The fact that we did not execute a buy on DTLA, we were actually able to pivot some of those planned uses over into a stock buyback of about $20 million. So we effectively traded a low 4s cap for a midsize on our stock.

And then you mentioned the crossover in terms of blended lease rate growth in the first quarter with 1Q '18 being higher than 1Q '17. Does guidance assume that the positive spread is maintained throughout 2018?

Nick, this is Jerry. Right now, the guidance really assumes it's going to be about even with last year, so maybe slightly ahead. And as we look into the month of April, we're continuing to see it being right on top of where we were in 2017. Our expectation is it may broaden a little bit, depending on how the leasing season goes. But yes, when you look at the blended rate growth for the full year, we think it's probably going to be in the mid- to high 2s, which would be up right about where it was last year.

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

Just on the same-store revenue guidance. What's the upside and downside risk from here relative to the midpoint? And could you give us a sense of any second quarter trends you're seeing today, either on new or renewal trends?

Sure, Juan. This is Jerry. Right now, as we look at the second quarter, we're seeing for the rents, we're seeing April come in slightly higher, as I just said to Nick, than it did last April. But it's modest. But it's the typical seasonal progression, as you would expect. In the first quarter, we had blended -- or we had first quarter new lease rate growth of 0.4%. But when you look at the components of that, it went from a negative 0.3% in January to a negative 0.3% in February, and then it jumped up to 1.5%, which, again, is kind of normal seasonality. Right now, April, for new, is looking like it's going to be low 2s. So continuing to increase as we would expect throughout the summer. On renewals, those stay pretty static throughout the year. We came in right around the 5 in the first quarter, and that's about where April is looking to come in. And that's what we would expect for the second quarter. When you look at revenue growth or the progression, we had a 3% revenue growth in the first quarter. We expect that to increase slightly in the second quarter. And then when you get beyond second quarter, it's heavily dependent on the strength of leasing season. But as we look at leasing season, the position we're in today, with the occupancy of 96.9%, concession levels being a bit lower than they were last year and not as much of a reliance on gift cards, we feel pretty good going into the middle of the year in this prime leasing season. When you say how do you get to the top and bottom of our revenue guidance, and again, to remind you, our guidance is 2.5 to 3.5. So we're right on top of the midpoint of the first quarter. It's probably going to be difficult to get to the bottom half unless there's really a downturn in rent levels later in this year. But when you look at the upside, what it really takes is a continuation of the contribution from other income, which is putting in about 60 basis points of additional revenue growth as well as a pickup in rate that, ideally, we would get with a seasonal uptick.

Great. And then just one more question for me, just on supply. What's the level of conviction that '19 supply deliveries will, in fact, be down across your markets? And any thoughts on the volatile, but stubbornly high permit levels and just general comments on access to construction financing?

Juan, this is Joe. So I don't think our overall view on supply in '19 has really changed from last quarter when we spoke to kind of a flat to down 10% type of number. That was predicated on what we saw throughout '17, which was permits and starts activity, both coming down about 10% from 2016 levels. Obviously, the outlook is a little bit more fuzzy with the starting permit activity that we see in the start of the year that's ticked back up a little bit. But when we look at the '17 activity, when we look at our permit-based regression model, and then when we take into account all the qualitative factors, meaning the difficulty in finding land, the difficulty on the construction financing side, continuing to see hard cost exceed rent growth, and therefore, difficulty hitting return requirements. I think you still have a difficult environment and see supply ramp up meaningfully. But overall, we think we're probably flat to down 10% in '19, with -- market-wise, markets are down more in our view would be Orange County, Orlando, Nashville and Austin. And those that probably might see a little bit more flat to maybe even up would be D.C., L.A. and Northern California.

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

I wanted to maybe just dig in a little bit to the Southwest portfolio and specifically, Austin and Dallas. We hear about some increasing demand in the state of Texas, but it seems like it's becoming a much more nuanced market between cities and even micro areas within cities. So maybe the Southwest was a little bit weaker than we were expecting. So I'm just curious about what you're seeing, maybe focus on Dallas. Would you consider the Houston market? How are you thinking about the Texas market at this point?

I guess, I'll start first about what we're seeing in those 2 markets, and then maybe Tom or Harry can jump in on the markets we're not currently in. But you look in Dallas, and it definitely was a slowdown from the results we put up last year as far as revenue growth. And while job growth in Dallas continues to be strong at about 69,000 new jobs expected in '18 or about 2.6%, you're seeing, especially in our portfolio, heavy new supply coming into that North Dallas area of Plano, Frisco. We've got 1,000-unit property that's in the legacy village retail area. And new supply has been able, currently, to offset the positive impacts of jobs from Toyota, Liberty Mutual, JPMorgan into there over the last 6 months and what we would expect for the next couple of months. We've -- down in our Addison area, we've got some B properties down there. And when there's not new supply, they're doing extremely well, with revenue growth of about 7%. But also, we're doing the fourth project in our Vitruvian Park assemblage. And that property is doing extremely well. We're getting a little bit more than pro forma rents. But in the -- for 3 months since we've opened there, we've gotten leased occupancy up to about 56%. So it is a submarket-by-submarket issue. So that Addison area is tending to do well. B product is doing extremely well. Uptown, where we have just one property, it's very difficult down there. But right now, what's affecting our same-store numbers predominantly is that Plano area. Then when you jump over to Austin, same story. Job growth is strong there, but heavy new -- and job growth is about 3.5%. But heavy supply of about 8,000 homes coming in 2018 is really putting a lid on where rent growth can go. What's interesting, though, is our MetLife joint venture product, which is A+ downtown product, is doing really well. It came in with stronger revenue growth than we've seen in the last couple of years. It was at 2.6%. And now it's even higher than some of our B product up in the Cedar Park area. So it's pocket by pocket. Downtown Austin is starting to loosen up a bit and allow us to get some growth, but it's moved down to other submarkets and price points.

Got it. And are you seeing anything -- any opportunities in Houston? Or you're sticking to your knitting in Austin and Dallas at this point?

I think we're very comfortable -- this is Tom -- with respect to our Dallas and Austin exposure, and we'll continue to look for opportunities in those 2 markets. Houston is not particularly attractive to us at this time.

Okay. And Joe, maybe one -- just one quick question for you. On the DCP program, it looks like it's maybe a little bit lower than where it's trended recently. You think you can get that back up to $300 million, maybe even a little bit higher?

Rich, our goal, our soft ceiling that we've placed on it is around $300 million, really driven by we want to be an asset to markets that we would want to own long term. And then obviously, the earnings accretion that comes from it is nice. But at a point in time when construction financing may come back in the future, we don't want to get squeezed out and have an earnings cliff despite the fact that we do have pretty long duration on these assets. So we have about another $50 million, call it, of funding related to the DCP other assets that are down in the bottom of 12b. So that will take us to just over $200 million. And I said Harry and his team are still hard at work trying to find additional assets to backfill any future roll-off or try to get to that $300 million. I think we'll hopefully have some success at some point this year on that front, but nothing's been taken into account within guidance at this point.

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

First one, Jerry, you mentioned rent concessions and gift cards have abated pretty significantly year-over-year, and I'm just curious what markets are you seeing the biggest declines? And any markets that are increasing, I guess, on the flip side? And what are you expecting for that? How do you expect that to trend as the year progresses?

I think as you compare to last year, I wouldn't expect concessions to go up. They'll probably stay fairly stable to down modestly. Seen a little bit more concessionary pressures in New York. I wouldn't say it's significant. Markets that are down most significantly. Our Bellevue properties are feeling less new supply. That could perk up a little bit later this year when another 600 to 1,000 units get delivered. We went through new supply last year and right now, it's fairly stable. And then our San Francisco, specifically SoMa area, properties are down. So most of the decline is in those markets.

And maybe sticking with San Fran a bit. It's been a market -- you said on the last call, I think, that it started out the year better than expected. Blended lease rates were up sequentially and year-over-year, yet revenue growth decelerated a bit. Is that just timing related to when those leases hit? Or was there something in the other income component that was a bit of a headwind? Can you just provide a little bit of color there?

It's really not other income. That's still doing well. I think San Francisco should continue to accelerate as far as revenue growth throughout the rest of the year. You're still playing off -- when you look at revenue, it's a buildup of, as you know, what you've done over the prior 4 quarters. So we are encouraged by the strength of blended rate growth right now in San Francisco. And while the first quarter came in roughly where we expected it to, I think some of the rents we've been putting into place over the last 60 days or so should help it to outperform, unless there's a slowdown that comes. But we're looking -- we're really seeing a bit of a strength -- I won't say strength, but stabilization that's happening in that downtown area. A lot of jobs have come into Financial District, the Salesforce building that opened. You're seeing new job creation down in Mission Bay. And we did feel some weakness, though, in this quarter in the Peninsula.

Austin, this is Harry. Just real quick, one other point. Jerry mentioned the jobs, but it's pretty remarkable if you look at the sort of volume of office leasing activity that's taking place both in downtown and at Mission Bay, where Salesforce is taking 700,000 square feet. Dropbox is taking 500,000 square feet down in Mission Bay. Uber is taking 500,000 square feet. There's sort of a rumored single-tenant lease of 700,000 square feet to come in the future at -- near our 399 Fremont project. And these are going to tend to be high-paying jobs. It really is pretty remarkable.

Appreciate the additional color. What was your revenue assumption for San Fran this year?

Oh, gosh. I want to say it was in the high end of our guidance range. We typically...

He got cut off.

Let's move on.

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

So I want to start on the labor expense success during the quarter. It's pretty impressive compared to other trends that we've seen. Can you -- Jerry, can you maybe a little bit more color as to what was driving the same-store reduction? Was it reductions in FTEs or something related to staffing models? Or just what was some of the detail there?

Sure, Rich. It was predominantly what you just brought up. Our personnel was down 2.8%. We give raises at the beginning of each year, and I can tell you, the raises that we gave were between 2.5% and 3%. So we are continuing to increase people's compensation. But late last year -- middle to late of last year, we started looking at finding ways to create a more efficient workforce, either through technology or just reductions in staff cut several percent of our workforce out in the field. The second thing, though, is in the first quarter, we probably -- it was an open decision, but waited longer than we would want to because of the lack of available labor. So a little bit of it was purposeful staffing reductions. A smaller portion of it was holding positions open a little bit longer as we look to find the right people. Our expectation, as you get through the full year, would be that personnel expense would be slightly negative to maybe flat. So I wouldn't expect it to be down 2.5% to 3% for the remainder of the year, but I still think we're going to have good control over it.

All right. That's helpful. And then one quick follow-up there. Are you noticing a divergence between B assets and A assets or different markets where maybe supply has been more of an issue that might lead to more labor tightening as you think about where expenses might grow across the portfolio and where you're seeing those reductions that you just described?

Yes. I think the reductions that we found predominantly were on B garden assets as we really looked at it hard. I think pricing or wage pressure, you're finding being more prevalent in the A assets, specifically in urban locations where there's heavy competition from the lease-ups for people.

All right. That's very helpful. My next question here is probably for Joe. Just in terms of the share repurchase activity for the quarter, is there a message to communicate there to the market in terms of the predictability of those sorts of investments? Or is it just opportunistic as you're able to sell assets and sort of recycle that capital in a way that realizes that positive cap rates spread that was mentioned earlier? How should we think about that in terms of the predictability of the volume, the pace, et cetera?

Yes. I think, Rich, one of the words to use there is opportunistic is probably the most appropriate. When you look at the parameters we laid out in the past around discounts to NAV sources and uses, leveraging, et cetera. The only one that really changed within the quarter was the discount to NAV from last time we spoke. So we got down to a fairly substantial discount. Was able to purchase shares at 5.6%. And what you saw was we didn't actually shift our sources of capital, meaning, we didn't go out there and try to ramp up dispositions to fund it. We simply pivoted from additional development and additional acquisitions. So I think we'll take it week by week, month by month and evaluate when we get to a certain level of discount if we have additional capacity available to us. And like the risk return on buybacks versus some other alternative investments, we'll look to pick away. But we definitely aren't committed to a certain dollar size. We're not going to come out and communicate that. But overall, we like what we're able to execute even if it was a little bit small.

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

First one just has to do with the short-term lease program that you talked about and the success that you're having. Can you just maybe help frame a little bit how, what percentage of leases today are on that short-term basis? And then any characteristics of the residents that are choosing short term? And any thoughts on why that's been gaining traction?

Sure. I would tell you, even though it's had a significant impact to -- or fairly significant impact to our other income growth, we think it's going to contribute, call it, $3.5 million to $4 million this year to our bottom line. So the number of leases at any given time rarely get above 100 throughout the portfolio as some of those being in our MetLife portfolio, some being in the same-stores. So it's a fairly small percentage of our total occupancy. We try to put a limit at most properties of no more than 1% to 2% of the unit count so we don't get overly exposed. So not a huge risk there. And when you look at who's coming in, it's really a split between 50-50 roughly between business. So it's corporate relocations, short-term assignments of people wanting to come in. And they need to come in for 31 days plus, although our average stay is up in the 70s, and it's much more affordable than a hotel. And then the other half is more on a personal basis, I sold my house. I need somewhere to live for a little while. I have some sort of a medical issue or I need to be near a hospital, things like that. But it's about 50-50 between personal and business.

Okay. That's helpful. And just to clarify, that would only be on new leases. You're not offering that on renewals?

Yes. These would be -- I don't know if we would -- probably if somebody really wanted to, we would look at it. But I think everything we've done to date has been on new.

Okay. Perfect. And then separately, can you maybe just offer thoughts on Seattle and what you're seeing in that market seems to be transitioning maybe a little quicker than some of the other markets or not necessarily your portfolio, but industry-wide and curious on your perspective of what you're seeing?

Yes. I think Seattle, as you know, has heavy new supply currently. I know in the first quarter, we had revenue growth of 5.2%. We're -- we have really no wholly owned assets in the downtown area. We have one MetLife joint venture that is combating new supply. So it's a bit of a challenge downtown. We have 2 properties up, University District has new supply. But a lot of the new supply sitting today is downtown. The majority of our portfolio is over on the east side, with a heavy segment in Bellevue. And as I stated earlier on the call, Bellevue went through a bout of a new supply coming throughout last year. We expect some new supply to come at it later this year too. But right now, Bellevue remains strong. It had revenue growth in the first quarter of 5.9%. So it's strong. Interestingly, when you look at office vacancy rates in Bellevue, it's down to 2%, so it's full. We've had a lot of large tech firms and other types of companies create campuses over there. REI just consolidated 4 or 5 of their facilities to form a campus. Salesforce has rented out a building over there. Amazon jumped across, like, Washington, and they have a foothold there too. Facebook is over there. So Bellevue is doing very well. And then we've got some B product also that continues to put up very strong numbers. I think when you look at the supply that's coming at Seattle, a lot of it has been focused downtown. So it does affect the entire market. It probably affects us a little bit less than most because of our heavier weighting over on the east side. A lot of people are concerned about the HQ2 diverting some of the jobs away from Downtown Seattle. I can tell you, it seems like it's being supplemented as those Amazon job projections go down a bit. You've got an influx of people into both Bellevue as well as the South Lake Union area from Apple, Facebook, Google. So job growth continues to feel good. Wage growth in Seattle is over 3%. But supply, I think, is going to be a headwind throughout this year, maybe early next year. But it's going to be predominantly focused in the downtown area.

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

Jerry, D.C. and Orange County were in your sort of 2.5% to 3.5% same-store revenue growth bucket when you gave guidance a few months ago. Anything operationally you're seeing after 4 months give you more optimism on D.C.? And then on Orange County, given that they did 4.1% in the first quarter, are you expecting any deterioration in same-store revenue growth there? Or is it on track to outperform initial expectations?

Yes. I'll start with the Orange County, Rob. Orange County had a good first quarter. Like you said, 4.1%, a little bit higher than our full year. It's kind of pacing where we would expect it to. I think you're going to see new supply, especially in the Irvine as well as Huntington Beach area put a little pressure on us. So I still think, at this point, we're comfortable that it's going to probably come back down a little bit. Ideally, we'll find a way to beat that range. But right now, I don't think there's a big change. You're seeing decent job growth, but new supply of 5,000 homes is putting some pressure on us. D.C., we had an uptick on revenue growth from where it was in 4Q. It was 1.9%. In 4Q, it's 2.3%. There's heavy new supply, as I stated in prior calls, still coming at us in the Southwest Waterfront, Ballpark, NoMa areas. Our B portfolio is doing well. Our A assets inside the city are continuing to feel pressures, especially our U Street product -- our 14th Street rather up around U is getting hit pretty hard. We're seeing a spread between the As and Bs in D.C. where As are currently at about 200 basis points lower growth than Bs. So last year, that had kind of compressed. Now it's expanded again as new supplies come in downtown. But we do believe that we'll end up at least in that range of 2.5% to 3.5%, as we had said early in the year. Nothing really negative at this time. Job growth is starting to come into the city. And while there's still some heavy concessionary pressures, again, in those certain submarkets within the district, it doesn't feel like it's having as much of an impact as it did in the second half of last year.

Okay. And then from -- given your comments about capital allocation, from that perspective, where does redevelopment rank today? And what's the redevelopment opportunity, both in terms of the more general kitchen and bath and other small-scale refreshes versus the larger-scale construction projects in the -- available to you in the portfolio today?

Thanks, Robert. It's Joe. You mentioned two different pieces there. One, being our traditional revenue-enhancing program, which we guided to $40 million to $45 million. So slightly down from last year, but still seeing a good opportunity set in terms of the ability to get mid- to high-teens cash on cash, getting IRRs that are 150 basis points above what we have for our WACC. So still seeing good opportunity set there. I'd say about, call it, 35%, 40% of those are K&Bs with the rest being more amenity-based projects. From a redevelopment standpoint, we continue to look at it, whether it's densification, larger-scale opportunities, taking down a building off-line and that's fine, saying take 30 units off and put 100 up. There's a number of opportunities that are being evaluated given the fact that overall, we feel pretty good about the fundamental profile going forward in most of our markets. So it ranks up there. It's a priority that the group's working on, but I think today that we put into the pipeline.

And I would add, Rob, there's probably, I don't know, 5 to 10 properties that would screen towards potential redevs as we look at them. When I look at the markets they're located in, there's probably a couple in Seattle, a couple in Boston, a handful in D.C. that would probably screen towards that at this point. But it's not a super deep bench, but there are some opportunities. And I think we'll be looking at those as we get into the summer to determine if there's any we would want to start and have in process next year.

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

On the Denver land acquisition, can you just provide some color on the submarket where you purchased the land and the potential timing of construction? And then I think in the past, you talked about Denver being a market with supply pressures. I'm just wondering what makes you comfortable building in this market.

Sure. John, this is Harry. First, it's in a justifying area, right up above Mile High Stadium. It's near transit. It's an area, we believe, will benefit significantly from continued densification in and around the site Denver Broncos have a major plan, which is right across the street. Elix Garden's redevelopment is also right across the highway. Continued Sloan's Lake development, et cetera. We wouldn't start construction until the first half of next year, meaning, this is really a late '20 or early '21-type lease-up, which is one of the variables that gives us comfort in terms of a supply. We're really looking at 2.5 or more likely 3 years out. And just in general, as it relates to development, we continue to look for sites given, as you know, we like development and all of its benefits long term. We continue to be disciplined. As you can see our pipeline at $800 million or so, which 90% is funded. Most of our existing pipeline will be completed by early next year, and this is just the site that conserved the backfill of our pipeline in ordinary course.

Yes. I would add, John, just 1 or 2 things about that site. It's -- Harry told you about the location. It's very walkable to the light rail. When you look at the price point he's going to be able to build that, the rents are going to be significantly below what downtown product is renting for. And similar to what we did at our CityLine property up in Seattle, where you get that kind of a divergence in price from that core to a slight travel in, I think it really has the opportunity to do extremely well. And I do think the retail in that area is going to build up along with the nightlife. So -- but the big thing Harry said that you keep in mind, it's several years out. The supply pressures that we're feeling right now should easily get absorbed by the significant population and job growth that's coming today and should come for the next several years.

Okay. And then the 9% increase you had in real estate taxes, how much of that was related to 421-a in New York versus other markets? And are there any opportunities to appeal tax in other markets?

John, it's Joe. So I'll briefly touch on just the 421, and then Jerry can maybe take you through appeal opportunity. So if you actually look on Attachment 6 in our supp, you can see that down there in the bottom, we do still provide detail related to 421 down in Footnote 2. So you could see in the quarter, about 366,000 or basically 1.4% increase to real estate tax. If you look at our full year expectations, we think it's going to be about $1.3 million, which is again about a 1.4% increase to real estate tax. Obviously, a much lower percentage impact when you go to total expenses and really only about a 15 to 20 basis point impact in NOI overall. So fairly minimal, but we do expect kind of a similar impact going forward for the next several years.

And I would just add on total real estate taxes. We appeal everything. I think there's a few out there that we would expect to win that aren't in our forecast, but I don't think it's going to be a hugely significant amount. As we stated earlier this year, when we gave out guidance on expenses, we knew the real estate taxes were going to be high single digits. We still believe that's probably going to be true. And we're working hard to offset it with controllable expenses being kept in check. This past quarter, they were basically flat, if not down slightly. But in addition to New York, as Joe said, you're looking at valuations going up in places like Seattle, Florida, Texas that are driving a lot of this real estate tax growth, too. So you got a look at the other side of it, while your taxes are going up, so are the values of the properties that are having to pay these higher taxes.

And can you remind us, is the 421-a burn-off a onetime issue predominantly this year? Or is that going to be an issue going forward?

No. It's going to remain an issue for the next several years for us. It peaks out in 2020, not much above these levels and then dwindles from there.

Our next question comes from the line of Daniel Santos with Sandler O'Neill.

Just quickly, just wanted to know if you guys can comment on your general ability to shelter gains from asset sales to fund buybacks?

Daniel, it's Joe. So we do have restrictions as regards to share in terms of payout of income and gain capacity relative to our taxable income and our dividend. Today, I'd say we have about $100 million of gain capacity in the system, which dependent on the efficiency of the asset, i.e., the embedded gain that exists, can give you anywhere from, say, $100 million to $200 million, if not more, to be able to sell in a given year. Those sales are typically allocated to fund normal course business, meaning our development program, our DCP program, et cetera. So to go beyond that and sell additional assets, you do have certain levers that you can pull, meaning pulling forward dividends and things of that nature. But those are really kind of onetime in nature that may set you up on a go-forward basis and a less advantageous position. So at this point, we don't feel the discount is compelling enough to start to pull forward dividend and gain capacity, but we do have that lever to pull in the future to the extent that we have a much larger discount.

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

I'm a little new to this, but it looks like you did a $20 million land loan in Alameda with a 1-year maturity. It almost seems not worth the effort for only a year maturity. Is there more to it than that?

John, this is Harry Alcock. Yes, the expectation is that once the developer has a completed development plan and begins construction that we would grow that in actually increase it into sort of a normal Developer Capital Program/preferred equity-type investment. And in fact, in the document, we have a right to provide that, providing the ultimate economics makes sense to us. Our expectation is this is going to roll into a much longer-term investment.

Great. Okay. And then sort of a big-picture question. It seems to me that depending on whose numbers you look at, we're delivering about 350,000 units annually in this country. And that probably equates to at least 2,000 projects. And it appears to me that most of these projects are delivering except in the most aggressive areas, that a 6 yield on cost. Why is it that UDR has chosen to not play that game? This supply is going to come whether UDR or the public REITs build a project or 2 or not?

John. Maybe I'll just take a little bit of it. One, I think you got to start with cost of capital. You look at where we're at today at a discount to NAV, which doesn't necessarily give you a strong signal to go and be aggressive on external growth. So if you look at alternative uses, we do have other opportunities out there. So we are not just purely a developer. We can pivot at any given point in time, which we've shown with DCP and buybacks. And then lastly, we are participating. We just remained incredibly disciplined around it, which has been shown through the shrinking pipeline over the last couple years. But now that we are starting to find some opportunities such as this Denver deal, that still meets our 150, 200 basis points spread requirement and gets us up into the 6-plus type of yield. So it's not that we're not going to participate. It's not that we don't want to. It's simply that there's a discipline and alternatives around it that we can go to.

Our next question comes from the line of John Pawlowski with Green Street Advisors.

Going back to the property tax conversation. Outside of the typical catch-up from assessed values to market values, are you guys seeing any inflection points from perhaps fiscally strained cities or states that are reaching more aggressively for property taxes, which could persist for a couple years now?

This is Jerry. The only one I've heard or seen that occurring maybe is in the Seattle market with either King or Snohomish County, but I haven't seen it anywhere else.

The only thing I would add, I think your research has pointed it out. I mean, this is primarily driven by the fact that the asset values continue to go up, and operations trends continue to improve. So I mean, our earlier remarks, we continue to believe that the real estate and tax environment is going to be challenging, but reflective, it makes rational sense if operations are improving and values are improving. How states fund themselves, I think there's a wide range of outcomes on that topic. And I'm waiting to see some more research from people when they start looking at deficits and how cities are planning to fund their education for the future.

Exactly. That's why I asked, trying to catch early glimpses of the next Chicago to overuse a case study. Harry, how would you characterize the competitiveness of the preferred lending space versus last year? Is this tranche of financing becoming cheaper or more expensive for the developers you guys usually work with?

I think it's remained fairly consistent. There continue to be opportunities. The senior sort of lending environment has not changed, meaning, proceeds have not ticked up. Developers are still typically limited to 50% to 55%, maybe 60% loan to cost. In some circumstances, equity is still available, but not in the same levels that it was two years ago. So I think that tranche has remained fairly consistent over the past 12 months or so in terms of both opportunity set and in terms of pricing levels.

John, this is Toomey. I'd add a couple of points that are interesting to me when I look at it. The spread on construction loan, L plus 200 a year ago, 2 years ago, is now an L plus 350, 400. When you combine that at a 55% proceed 60, there's probably more opportunity coming our way. What's intriguing to me is the construction loans rolling over to perms, and you're realizing people that have 10-year are basically borrowing at 4.25 at 70%. So I'm intrigued to see how all this construction activity gets refi-ed. Will it be done quicker to try to get off of that burden of those construction loans. And what we do know is Fannie is a little bit behind in its book of business this year. So you're probably going to see a lot of people trying to stabilize and push, get off those construction loans. So it's an overall topic we're discussing, looking at it and asking ourselves where's the opportunity set moving to.

Our next question comes from the line of Jim Sullivan with BTIG.

A couple of questions about the New York market, just to follow on some of the commentary earlier about 421-a. When I take a look at the expense growth in that market on a same-store basis, really going to '16, the expense growth was at 7% at '16, 11.5% last year, just about 7% here in Q1. And tying that together with the comments that were made earlier about 421-a, should we be expecting that the -- or do you expect the same-store expense growth to kind of stay at that level until the 421-a burns off, number one? And kind of number two, you've referred to concessions generally, and I know they've been a factor in New York. To what extent is that at play here in these numbers?

This is Jerry. First, I do think you should expect to see New York expense levels remain elevated until that period. Joe was talking about when the 421s burn off. The rest of our expense load there had been well controlled. So yes, I think you're going to see that until at least 2021 till it moderates somewhat. Concessions, they're in contra revenue accounts, so they're not impacting the expense line at all.

Okay. So if we look at the revenue line back in '16, you had better than 4% growth in the top line, and that delivered a little over 3% same-store. And of course, that has been weakening since that time, '17 and so far, in '18. And given your view as to the amount of supply that's coming and how much is coming in the markets that you're sensitive to, when do you expect -- or thinking about it out through the next several quarters, do you foresee that top line getting back to kind of a 4% number within that period of time? And I guess, if not, to what extent do you think about monetizing some of the value that, that would create in New York?

Yes. I'll start with the growth. We had a weak quarter. It was negative 0.4% really related to 2 or 3 things. One-- the primary one, very tough comp to last year, where our utility reimbursements, which are a revenue line item for us, were at kind of an elevated level compared to this year just because utility expenses were much higher. In addition, concessions were a bit higher this year than last year. But yes, right now, New York is very competitive with new supply. We have predominantly a B portfolio. Two of our assets are in the Financial District. One's in Murray Hill. And those properties, while we're losing people over to the new lease-ups in Long Island city or Brooklyn, I do think that first-time renters that typically would have started out with us there are seeing other opportunities in LIC and Brooklyn. So it's really putting kind of, again, a ceiling on where our rent growth could be. So while we've had exceptional really industry-leading revenue growth in New York for the last 3 or 4 years, I think right now, because the competition from some of these inferior boroughs that have new product, they're putting more pressure on our lower price point Manhattan properties. When is it going to get back up to 4%? I don't see that happening until probably at the earliest, I don't know, 2020. I think 2019 is going to continue to be difficult, and I think job growth in New York has picked up. Wage growth is north of 3%. So I think on the demand side, you're seeing some strength. But we just have to get through these 25,000-or-so new apartment homes that are being built. Now it as far as monetizing, Tom or Harry, want to jump on that one?

Sure. This is Harry. We would consider that in the context of sort of ordinary capital allocation decision processes where we look at overall sources of uses, opportunities to redeploy capital, gain capacity, long-term fundamentals of the market or individual properties, that type of things. So we don't have any immediate plans to talk about. But New York, we consider in the context of these other opportunities.

But it sounds like if the same-property NOI growth is going to trail the portfolio averages for a while, it should certainly be kind of high in the list of candidates to monetize?

Yes, maybe. I think you've got to look at long-term perspective. It's -- we're not looking at 1 or 2 years out. We're looking at the long-term fundamentals of New York, and I don't think we want to make a snap decision for what's going to be happening over the next year or two.

And if you think about it, just to sort of pile on that a little bit, as tax abatement burns off, therefore, your sort of NOI flattens out, each sort of year where that tax abatement burns off, in theory, the cap rate on the underlying asset decreases because again, the long-term NOI growth increases as you look out 10 years or whatever in the ordinary buyer would. So in theory, the value of the asset is going to be fairly priced in the market, and that would be reflected if we were to sell the asset.

Next question comes from Wes Golladay with RBC Capital Markets.

Just going back to the Alameda, the 4% yield is quite nice. Is that just a function of the shorter duration a little bit early in the process of the development? Or is there not just not a lot of skin in the game for the developer at the moment?

This is Harry. And again, as you've seen our Developer Capital Program, we've priced these in a number of different ways, anywhere from 6.5% to with a 50% participation all the way up to this one and a couple of others at a straight 12% coupon with no participation and a couple of that are in between. But it's really just a function of a negotiation with the developer between the sort of allocation between current coupon and participation. So there's nothing unusual about this one.

There was just in terms of skin in the game, this is not a legacy land parcel that we're giving appraised value to. This was new cash coming into purchase a land parcel. So we're up to about 80% of cost on this one. So we have sufficient cushion behind us.

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

Well, thank all of you for your time and interest in UDR today. We started off this call with a statement that it was a strong first quarter. And clearly, from the prospects that we have for the second and the tone of this call, you can see that we're in pretty darned good shape headed into Q2. I want to reiterate that continued focus on our execution, and we have a lot of opportunities with a backdrop of an improving market. So I'm very optimistic as well as the rest of the management team that 2018 is off to a good start and looks to be a good year for us and excited to see you at NAREIT in the future. With that, take care.

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