UDR, Inc. (UDR) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the UDR's Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you, Mr. Van Ens. You may begin.

Welcome to UDR's quarterly financial results conference call. Our quarterly press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our Web site, ir.udr.com. In the supplement, we've reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to UDR's Chairman, CEO, and President, Tom Toomey.

Thank you, Chris, and welcome to UDR's third quarter 2018 conference call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers, Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call. There are three key points I'd like to make about our business and the macroeconomic environment. First, we again produced very good results across all aspects of our business during the quarter. These results and the positive outlook drove our second guidance increase this year, in earnings per share and same-store growth ranges. Jerry and Joe will discuss these in detail in their prepared remarks. Second, the underlying macroeconomic backdrop for the apartment industry remains positive. This when combined with solid fundamentals will continue to support future growth. As such, we expect the apartments will remain a consistent short-term and long-term performer in a very volatile global economic landscape. Third, and turning to 2019, we are optimistic about our prospects. We remain confident in our innovative platform and the expected earnings from it, as well as the improved bottom line contribution from our lease-up communities first [ph] 2018. From a capital allocation standpoint, we remain flexible, and we'll continue to invest in uses that provide the best risk adjusted return. We'll provide details at 2019 guidance on our fourth quarter earnings call. Last, to all my fellow associates in the field and corporate offices, we thank you for producing another quarter strong results. With that I will turn it over to Jerry.

Thanks, Tom, and good afternoon everyone. We're pleased to announce another quarter's strong operator results. Third quarter year-over-year revenue and NOI growth for our same-store pool, which represents approximately 83% of total NOI were 3.8% and 3.9% respectively. Please note that excluding the impending sale of our Circle Towers community located in the Washington D.C. market and this commensurate move to held for sale, quarterly same-store revenue growth would have been 3.7% in the quarter, we're the top-end of the range we've provided in early September. Maybe none, as Tom indicated, business is strong, seven points I would like to highlight from the quarter are as follows: first, every year same-store revenue growth of 3.8% exhibited continued acceleration versus the 3% and 3.4% growth rates we produced in the first and second quarters. Secondly, market rents accelerated through the end of August before retreating slightly in September. As such, 2018 has exhibited more typical seasonality than any of the prior three years. Well, we had anticipated this coming into 2018, the durability of the market rent growth throughout the prime leasing season was welcomed. We are definitely benefiting from stronger job growth in our markets thus far in 2018, which has been 40 basis points better than an initial estimates and solid last 12 month wage growth that is average 3.2%. Combined, our markets have outpaced national total income growth by 90 basis points over the trailing 12 months. Third, every year blended lease rate growth for the quarter was 60 basis points higher than during the same period last year. This is 40 basis points wider and what was realized during the first half of 2018. We expect this gap to continue to widen in the fourth quarter. Fourth, other income grew by nearly 14 % in the quarter, well above our expectations. Our operating initiatives continue to grow at rates many multiples of rent growth and remain a primary contributor to our sector leading 2018 same-store revenue guidance. Fifth, turnover continues to compare favorably versus 2017. Year-to-date, annualized turnover was down 100 basis points through nine months. This is especially impressive given that our short-term leasing initiative should result in higher turnover. Sixth, same store expense growth came in at 3.5%. Real estate taxes remain under pressure increasing by 9% year over year but our controllable expenses grew by only 0.2% as we continue to find efficiencies throughout our operating platform as evidenced by our year to date personnel expense growth of negative 2.8%. We see a long runway for constraining future expense growth by technological initiatives and process enhancements. And last, we saw minimal pressure from move-out to home purchase or rent increase remains stable at a 12% and 6% reasons for move-out during the quarter. Likewise, bad debt remains in check. These encouraging prospects when combined with our neared 97% occupancy set us up well entering 2019. Next a quick overview of our markets, the majority of our markets are performing in line with expectations with a few exceptions. The Florida markets, San Francisco and Boston have outperformed versus original forecast of Austin and New York continue to struggle in the face of new supply pressures. Regarding New York, we continue to forecast positive top line growth for the market in 2018 despite a slightly negative year to date results. Last, our development pipeline in aggregate continues to generate lease rates and leasing velocities in line with - to ahead of its original expectations. At 345 Harrison, our 585-home, $363 million project in Boston, which opened in late May, we ended the quarter at 74% leased, well ahead of initial forecast. This, when combined with rental rates that are in line with original underwriting expectations, keeps us enthused by 345's anticipated contribution to 2019. At our $353 million, 516-home Pacific City development in Huntington Beach, we ended the quarter at 81% leased. We continue to see this property gaining traction. Our two JV developments, totaling $93 million in pro rata spend remain on budget and on schedule. Our suburban mid-rise 383-home community located in Addison, Texas, Vitruvian West, ended the quarter at 96% leased, which runs well in excess of underwriting expectations, after opening the doors, just back in February. Our 150-home Vision on Wilshire community, located in Los Angeles, is a very high price point community and is performing well ending the quarter at 75%, after having first move in just five months earlier in April. Quarter-end lease-up statistics are available on Attachment 9 of our supplement. I would like to again thank all of our associates in the field and at corporate for another strong quarter. With that, I'll turn it over to Joe.

Thanks, Jerry. The topics I will cover today include our third quarter results and forward fourth guidance, a transaction's update, and a balance sheet update. Our third quarter earnings results came in at the midpoints of our previously provided guidance ranges FFO as adjusted and AFFO per share were $0.49 and $0.44. Third quarter FFOA was up $0.02 or 4.3% year-over-year, driven by strong same-store performance, lease-up performance, and accretive capital deployment. I would now like to direct you to Attachment 15 of our supplement, which details our second guidance ranges of 2018 and our latest expectations. In summary, we increased full year 2018 FFOA per share to $1.95 to $1.96 and AFFO per share to $1.79 to $1.80. Primary drivers of the increases include, upside from our same-store portfolio, an improved contribution from our lease-up properties, an additional accretion from additional DCP deployment. Full-year 2018 same-store revenue, expense and NOI growth guidance ranges were each increased by 25 basis points at the low end to 3.25% to 3.5% driven by strong blended lease rate and other income growth offset somewhat by higher real estate taxes. For the fourth quarter, our guidance ranges are $0.49 to $0.50 for FFOA and $0.45 to $0.45 for AFFO. Next, transaction; during the quarter, we entered into a contract to sell Circle Towers, a 46-year-old, 604-home community located in the Fairfax County submarket of Washington D.C. for $160 million. The sale temporarily decreases our DC exposure ahead of potential new development and densification opportunities in the market over the coming years. The transaction is expected to close during the fourth quarter, subject to customary closing conditions. Regarding development, we continue to work towards stabilizing our development pipeline in the $400 million to $600 million range and have a path forward to do so over the next several years depending on our opportunities. Most of these stars are expected to come from legacy land and densification opportunities as we remain disciplined in our underwriting and sourcing economical land remains challenging, given the disparity between construction cost increases and rent growth in most markets. Similar to last quarter, we remain constructive on our forecasted 2019 earnings from our $809 million of completed on balance sheet and JV development. On the developer capital program front, we are seeing more opportunities and closed on three new deals, settling $73 million and commitments during the third quarter, bringing our total commitments to $270 million, 74% of which has been funded. The investments are located in Santa Monica, Philadelphia and Orlando represents 867 apartment homes in aggregate and have a weighted average yield of 10%. Within the program, we currently have incremental capacity of $50 to $100 million. Please see attachment 12-B for further details. Big picture, we remain flexible with our capital deployment and we'll continue to pivot to take advantage of the best available risk adjusted return. As long as the opportunities meet our hurdles and fall within our forward sources and uses plan. Next, capital markets and balance sheet, during the quarter we amended our $1.1 billion revolving credit facility and $350 million term loan to extend both maturities out to 2023 and reduce our spreads over LIBOR by 7.5 basis points and 5 basis points respectively. Subsequent to quarter end, we issued $300 million dollars of 10-year unsecured debt at a coupon a 4.4% and effective coupon of 4.27% after hedging. Proceeds will be used to prepay $196 million, a 5.28% secured debt originally scheduled to mature in October and December of 2019 and for general corporate purposes, leaving minimal debt maturities in 2019. At quarter end, our liquidity as measured by cash and credit facility capacity, net of the commercial paper balance was $710 million. Our financial leverage was 34% on an un-depreciated book value, 24% on the enterprise value and 29% inclusive of joint ventures. Our consolidated net debt to EBITDA was 5.7 times and an inclusive of joint ventures, it was 6.3 times. We remain comfortable with our credit metrics and don't plan to actively lever up or down. With regard to the profile of our balance sheet, we will continue to look for NPV positive opportunities to improve our 4.9 year duration and increase the size of our unencumbered NOI pool. Finally, we declared a quarterly common dividend of $0.3225 in the third quarter or $1.29 per share when annualized representing a yield of approximately 3.2% as of quarter end. With that, I will open it up for Q&A. Operator?

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Thanks. With the development lease-ups, given the progress you continue to make, what's the earning on development in 2019 versus we expected impacts on 2018 results?

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

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

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

Thanks. Are there any other markets you are underwriting deals and you currently don't own it?

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

Thanks. Operator: Our next question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.

Hi guys. I'm just hoping you could give your latest thoughts on supply and expectations for '19 deliveries versus '18 updates on slippage, in which you think you think are going to see meaningful declines your pickups and deliver year-over-year?

Hey, Juan, it's Joe. Good morning. So expectations for 2019 really haven't changed at this point. We've been talking about flat to down 10% in our markets overall. And just to remind on that process that we go through, we utilize the combination of third-party data, our permit base regression models, and then intelligence from the field. So when you roll those up, that flat 10% still feels appropriate at this point in time. I think that's further supported by looking at starts and permit activity, that is typically around 10% to 15% down on a national basis and that trend typically holds within our markets as well when we look across that. When you drop down to the MSA level, the markets that we probably see the larger increases in would be out on the West Coast, Inland Empire, L.A., Seattle, and then up in Nortel away from Oakland, and then on the East Coast you have D.C. that probably ticks up for us. And then in terms of markets that come down, the major by coastal markets New York City Boston and Orange County look to be coming down as well as a number of the Sunbelt markets with Denver, Nashville and Tampa coming down as well.

Great. Thank you. And then in the other income line item, is that contributing to certain markets more than others? I know you guys would be more problematic about your parking and just thoughts on 2019 and the ability to sustain that going forward, the growth profile?

Yes, Juan, this is Jerry. It definitely contributes more towards some markets, Washington D.C. get a heavy dose of it this quarter, was up about -- other income was about 15%, so a bit higher than the average. But the two biggest markets are Seattle where other income was up 22% and Boston with about 24%. The largest growth tend to be in those by coastal markets where you get a significant contribution not only from parking but also from our short-term furnished rentals.

Thank you.

Our next question comes from the line of [indiscernible] with Deutsche Bank. Please proceed with your question.

Good afternoon. Thanks for taking the time and the questions. So it looks like new lease growth was higher than renewals in a handful of your markets, such as San Francisco, Monterey, Orlando, do you see this occurrence as a short-term situation or is it perhaps more indicative of the strength of the multifamily market as we had in the 2019?

It's probably more short term. You do tend to see as you've noted renewal rate growth tends to be higher and you're going to see seasonality kick in as you go into the fourth quarter. And during the fourth quarter as well as the first quarter you'll see renewal stay pretty static with where they are today but you'll see the fluctuations occur more on the new site. So I would expect that to come down. But I will tell you the markets have been performing well. Overall, we've seen an extended leasing period you know where market rents continue to grow through August, before subsiding somewhat in September. The prior two years market rents peaked in May for us so this is more of a normalized year. So yes we do see the rent side of the equation going into 2019 being a bit stronger than it was a year ago.

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

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

All right. Thank you very much. Appreciate it.

You are welcome.

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

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

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

No. I'd just say from the broader business standpoint perhaps Rich that covers the markets. In terms of what we're excited about on the transaction side, you've seen us continue to deploy capital and to develop our capital program; I think over the coming quarters, you'll hopefully see us harvest some gains out of the Wolff joint venture through several options that we have coming up there. I think we're going to see increasing options for traditional redevelopments, unit additions and things of that nature as well as we continue to try to find a way to stabilize out the development pipeline while maintaining discipline around the required returns so they were still pretty excited on the capital deployment front and of course sourcing net capital through dispositions and free cash flow. The only thing that would be somewhat worrisome that impacts all of us is of course rates going higher. So if you watch Fed funds rate, obviously with there's floating rate exposure and refinancing activity that doesn't eat - hit into growth over time, but I think we've done a good job of managing the debt maturity profile and getting ahead -- out of that to a great degree. So it's kind of the positive and negative just from the broader business front.

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

There could be definitely more opportunity out there to be had for us despite the fact that you see permits and starts activity coming down. What we talked about in past quarters, as the fact that the funnel is widened to a degree, as we've been out there pretty consistently for a couple of years now at this point, so the fact that we've been able to execute, we've been a good partner to a number of these developers and we are seeing more opportunities which allows you to pick and choose your points. In terms of your comments on the call the senior piece of the stack on the construction financing side or the perm piece of GSEs, construction financing really hasn't moved much since last quarter, where we talked about it, taken up a little bit, in terms of the loan to cost and seen spreads compress a little bit, but nothing meaningful and definitely not offsetting the increase in LIBOR that we've seen over the last couple of years. And on the GSE front, they continue to be very active. I think they're on Phase 2 to again do $70 billion each. They're definitely the most competitive on the perm side. When you go out to a 10-year lower levered financing, you know, if you're going on the short-end side, the pension money, the bank money is probably a little bit more competitive, but we're typically looking out to longer duration when we're doing the fixed rate financing on the security side.

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

Yes. Got it.

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

Got it. Thank you, guys. I appreciate it.

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

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

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

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

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

Great. Thanks for the detail, Harry.

Yes.

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

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

Honestly, no. Move-outs to home prices are pretty flat over the last year at about 12% of the reasons for move-outs. And when you look at the markets where you have a higher percentage for move-out, it's the ones you would expect which is typically a Sunbelt Suburban and the ones with the least move outs to home purchase tend to be the urban coastals, so no real changes.

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

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

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

Got it. Thanks for the color, guys.

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

Very good morning. A quick follow-up on Pacific City, you talked about occupancy kind of trending in line with where you expected to be, but didn't talk as much about rate. I was just curious where rate is relative to initial expectations. And then quickly just on both 345 Harrison Street and Pacific City, should we think of these projects as stabilizing kind of by the end of next year or maybe the dates there?

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

Drew, this is Joe. Just to clarify on that in terms of giving you a little bit more color on the actual yields. So in 1Q 2020 which Jerry was referring to on the stabilization quarter, we think the overall pipeline stabilize in the high-fives. So you have a 345 Harrison and probably six in a quarter range; Pac City in the 5.5 range; and then our two assets on the joint venture [technical difficulty] also stabilize now which will be in - in the mid-sixes and Vision in the mid-fives, so, overall when you look at it somewhere in the high-five stabilization out in 2002 - stabilization out in 2020.

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

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

Okay, great. That's all from me. Thank you.

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

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

I think you're still seeing job hopping but I see frequently because there's so much demand for employees in pretty much all of our markets. We're not really having pretty much all of our markets, do not really have in the lean the cities they live in to find new jobs.

Okay. With -- you have an older rental base, there's 37 years old, they tend not to hop as much. Two, mass transportation infrastructure is making it lot easier to get from one side of a city to another, so I think there's a number of contributing factors, and it's a paid and it has to move.

Yes.

It is a pay I'm excited.

Yes. So I think there's a few things to keep turnover down. I think one is I think we're all addressing each more and providing better customer service, but I think the other thing is in a lot of our markets you're not seeing this a rationale pricing that came into our phase in 2017 and 2016 where people are offered two month freight, that will lower people out even if there is payment we estimated. So, I think with the one month free that normalize pricing methodology, if you're keeping your residents happy, they're going to stick with you longer.

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

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

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

Our next question comes from the line of Rob Steven with Janney Montgomery Scott. Please proceed with your question.

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

All the above.

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

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

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

Okay. Thanks, guys.

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

Good morning. On your DCP program, can you just remind us what percentage of the investments you make you underwrite to potentially own

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

Thank you for that. And Jerry, you mentioned technology in that initiative that has contributed to your personnel cost and I'm just wondering if you could provide any color on other discussions you're having with companies that may impact your business over the next few years?

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

Thank you.

Sure.

Our next question comes the line of John Guinee with Stifel. Please proceed with your question.

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

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

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

It's close to a $1 million a unit.

Ouch. Okay. Thanks.

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

Yes, good afternoon. A couple of quick ones for me, first of all the outlook for New York in 2019, and just kind of given some of the industry data talking about deliveries will be much less than 2019 versus 2018, how are you thinking about in New York instead of being a drag as it is right now maybe being more of a positive contributor in 2019?

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

Okay. That's helpful. And then I may have missed it, but did you make any commentary earlier about kind of profit and given the vote just around the corner?

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

Got you. And then just indulge me one more, Joe just your comment -- as you earned about in risk reward, attractive risk rewards, as you think about it will be a difference in this line, on a risk reward adjusted basis. So just help me kind of rank what you're finding most attractive right now or that's re-debts or what have, or what you're finding lease attractive?

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

All right. Thanks. Thank you.

Yes.

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

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

Yes, correct, Rich. It's similar to how we thought about it this year. We are looking at -- supply and permitting activity and our local expectations apply some slippage factor, approximately 10% or so within our markets that led to the [ph] down 10 has slippage in there.

Okay.

As well as an assumption that we [technical difficulty] some slippage from the last couple of months of this year into next year.

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

No. I don't think -- about millennials getting older or changes in life preferences. I don't believe there's anything on the horizon on that front given that you've seen home price appreciation over the last three or four years, average 5% to 6% relative to rents in the 2% to 3% range and you've seen 30-year mortgage rates go up about 100 basis points, they are 20%. So, the relative affordability trade between housing and multi-family housing obviously tilts to our side. So, I think demand side on that front remains steady. And then on the overall job growth, wage growth front, I think you're running up against tougher comps on full employment. So job growth may come down. But I think what we've seen is wage growth continued to outpace and offset that. So you probably have a overall demand or total income growth, the next kind of that slightly down supply, you probably have total income slightly down from this year and staying kind of this phase of equilibrium, so longer term kind of inflation…

Okay. And last question, if you guys ever done any sort of correlation between how changes in supply impact changes in same-store revenue growth over your long history as a public company? And if you can, can you just whip up a quick hour of them for us right now, I'm sure you can do that on your -- I thought you would…

It's clearly one of the factors that we consider when we think about both the near-term -- near-term demand and supply and prospects of rent growth but we haven't done a true correlation of supply relative to rent growth, we bring it on too. So it's not a standalone factor, to be subtle.

Yes. Okay. Fair enough.

Yes. I'm sure he will. I don't have an algorithm. I do have 30-plus years of doing this. And what I would tell you is striking for me is the amount of data that's available on starts and financing and that transparency has made the market more efficient and more responsive. And so the eras in the 1970s and 1980s where we would overbuild a market and then suffer through occupancy drops of 15%, 20% seem to be something of the past. And the market's much more responsive, anticipatory, if you will, towards supply equation. So I don't see it's derailing us. And even if you look at this last couple of years where supply peaked up few markets, to be very seldom ever went negative on rents. So, I don't see the same dynamic threat that it has been in the past. And you know we'll just keep diligently gin in for opportunities.

But likewise your ability to grow rents on annual basis perhaps is more of a C type -- CPI plus type of business rather than ever casting double-digits again. Would you agree with that as well?

So I think that's a little bit different because you look at markets like Seattle where new dynamic companies and cities were almost regenerated. So, there is going to be a lot more differentiation around the future around where capital is formed, what companies, what their hiring patterns are and I think we have going for us the most is demographics. I mean, this wave of millennials right behind it is a wave of similar size and scope that's coming through and probably going to even have a higher acceptance of renting for longer periods? So, when we look at this we kind of look and say boy, I used to think all the millennials are going to age out and go out and get three bedroom, two bath homes in the suburbs. There's going to be a wide group of people refilling those slots if that does come to fruition. So, it looks for us like a long inning game maybe not 2018 like we just saw last week, but it will be a long running game.

All right. Sounds good. Thanks guys.

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

Well. Thank you. And first, thanks all of you for your time and interest in UDR today. As I started out the call business is very good and we are certainly grateful for all our associates and the teamwork that they have put in this year and look forward to closing out the year and get into a strong 2019. And we look forward to seeing many of you in San Francisco, next week. And with that, take care.

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