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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the UDR Second Quarter 2018 Earnings Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you, Mr. Van Ens. You may begin.
Welcome to UDR’s Quarterly Financial Results Conference Call. Our quarterly press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we 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. When we get to the question and answer portion, we ask you very 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 Second Quarter 2018 Conference Call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results, as well as senior officers, Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call.
We again reported strong results during the second quarter and feel good about our business for the balance of 2018. Therefore, we raised full year 2018 same-store revenue and NOI growth guidance expectations, as well as FFO, FFO as adjusted and AFFO per share guidance ranges. The drivers of these increases will be discussed by Jerry and Joe in detail in there prepared remarks. But in summary, through the first half of the year, blended lease rate have trended above original guidance. Our lease-up communities have produced results ahead of initial expectations and our investment in accretive developer capital program is producing the return we underwritten.
With the prime leasing season now more than half over, we are confident in our ability to continue to produce steady results throughout the remainder of 2018. Looking into 2019, we are optimistic in our prospects given the increased probability for better year-over-year revenue earnings and the anticipated improvement in bottom-line contribution from development activities. From a capital allocation standpoint, we remain flexible and will continue to invest in uses that provide the best risk-adjusted return within the confines of our annual sources and uses plan.
Last, a special thanks to all our UDR associates for their continued hard work to produce another solid quarter results. We look forward to the same for the remainder of 2018. And with that, I will turn the call over to Jerry.
Thanks, Tom, and good afternoon, everyone. We’re pleased to announce another quarter of strong operating results. Second quarter year-over-year revenue and NOI growth for our same-store pool, which represents approximately 85% of total NOI, were up 3.4% and 3.5%, respectively. During the quarter, we posted solid blended lease rate growth of 3.8%, a robust top-line contribution from our long-lived operating and technology initiatives and continued to rein and controllable expense growth. First, year-over-year blended lease rate growth for the quarter was 20 basis point higher than during the same period last year. While this positive spread did not widen versus what was realized during the first quarter, market rents exhibited typical seasonality during June and July by continuing to accelerate, something we did not see during 2017 when market rents from our same store portfolio peaked in late May. Second, our other income grew by 11% in the quarter. As in past quarters, this was driven by revenue-generating initiatives, specifically parking, which increased by 22%, and our shorter-term leasing program, which continues to outpace initial expectations. This focus on monetizing our real estate in innovative ways is a recurring differentiator and a meaningful driver of incremental growth.
Third, year-over-year turnover continues to decline. Year to-date, annualized turnover is down 160 basis points, and acceleration from the first quarter is 120 basis point decline. This is especially impressive given that our short-term leasing initiative should result in higher turnover.
Four, while we feel pressure from real estate tax increases for at least the next couple of years, our focus on driving efficiencies throughout our expense back continues to yield strong results. During the quarter, controllable expense growth declined 0.2% year-over-year as we have been able to find efficiencies insight-level staffing, benefit from reduced resident turnover, invest in energy-saving capital expenditures and drive down marketing cost while still growing occupancy 30 basis points year over year. We see a long runway for future expense growth mitigation via technological initiatives and process enhancements.
And fifth rent concessions during the quarter were 29% lower than last year and gift card expense was down 54%. Throughout the first half of 2018, the pricing environment for lease-ups remains more rational than during 2016 or 2017. These encouraging signs for the prospects of our business, when combined with our 97% occupancy, set us up well for the remainder of 2018 and gave us the confidence to raise the bottom end of our full year same store guidance ranges. A year-to-date revenue and NOI growth through six months was 3.2% and 3.1% respectively, just below our upwardly revised midpoint of 3.25%. For 2019, we are optimistic that if current leasing trends hold, our year-end operating earn in will compare favorably to that of 2018.
Next, a quick overview of our markets. Similar to the first quarter, majority of our markets are performing in line with expectations with a few exceptions. The Florida markets, San Francisco and Boston have outperformed versus original forecast, while Austin and New York continue to struggle as a result of new supply pressures. Regarding New York, we continue to forecast slightly positive top-line growth for the market in 2018, despite a negative year-to-date result.
Moving on, we saw minimal pressure from move-outs to home purchase or rent increase at 12% and 7% of reasons for move-out during the second quarter. Likewise, net bad debt, which is write-offs offset by collections, was 0 for the quarter. All are at levels consistent with previous quarters.
Last, our development pipeline in aggregate continues to generate lease rates and leasing velocities, in line with two slightly ahead of original expectations. At 345 Harrison, our 585-home $367 million project in Boston, we ended the quarter 59% leased and are 64% leased today, after only been open for 11 weeks. This when combined with rental rates that are in line with original underwriting expectations is a phenomenal result. We remain enthused by 345’s progress in its anticipated contribution to 2019.
At our $350 million 516-home Pacific City development in Huntington Beach, velocity averaged 34 leases per month during the quarter. We ended the quarter at 68% leased and sit at 70% today.
Our two JV developments totaling $94 million and pro rata spend remain on budget and on schedule. Our suburban midrise community located in Addison, Texas, at Vitruvian West continues to be a homerun, performing well in excess of underwriting expectations in terms of rents and especially leasing velocity. Our vision on Wilshire community located in Los Angeles is a higher price point community and is performing in line with forecast. Quarter-end lease-up statistics are available on Attachment 9 of our supplement.
Finally, I 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 second quarter results and guidance, a development and investments update and a balance sheet update. Our second quarter earnings results came in at the high end of our previously provided guidance ranges. FFO as adjusted and AFFO per share were $0.49 and $0.45, respectively. Second quarter AFFO was up $0.02 or 5% year-over-year, driven by strong same-store performance, lease-up performance and accretive investments into our developer capital program. I would now like to direct you to Attachment 15 of our supplement, which details our latest guidance assumptions. We have increased full year 2018 FFO per share to a $93 to a $96 and AFFO per share to a $78 to $81. Primary drivers of the increases included: upside from our store portfolio and improved contribution from our lease-up properties and additional accretion from expanded DCP deployment.
Full year 2018 same-store revenue expense and NOI growth guidance ranges were each increased by 25 basis points at the midpoint to 3% to 3.5%. Year to-date, blended lease rate growth outperformance probably upside to top-line guidance, or non-controllable expense pressures increased our expense growth guidance. For the third quarter our guidance ranges are $0.48 to $0.50 for FFO and $0.43 to $0.45 for AFFO.
Next, development and investments. We continue to work towards stabilizing our development pipeline from $400 million to $600 million. But we have indicated in past quarters, sourcing economical land remains difficult given the disparity between construction cost increases and rent growth in most markets. As a result of our unwillingness to lower required return thresholds, we reduced our development and land acquisition spend guidance on Attachment 15, while increasing our DCP spend, where we see more opportunities. Big picture, we will continue to pivot on our capital allocation strategy to take advantage of the best risk-adjusted returns as long as those opportunities continue to meet our hurdles within the context of our annual sources and uses plan.
Regarding redevelopment contribution to our earnings. In 2018, $716 million of wholly owned projects are in lease-up at an FFO yield that will average in the mid-2s. In 2019 and 2020, we anticipate this yield will improve toward stabilization.
Next capital markets and balance sheet. At quarter end, our liquidity as measured by cash and credit facility capacity, net of the commercial paper balance, was $771 million. Our financial leverage was 33.4% on an underappreciated book value, 25.2% on enterprise value and 30%, inclusive of joint ventures. Our consolidated net debt-to-EBITDA RE was 5.7 times, and 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 4.8-year duration and increase the size of our unencumbered NOI pool. Finally, we declared a quarterly common dividend of $0.3225 in the second quarter or $1.29 per share when annualized; representing a yield of approximately 3.4% as of quarter end.
With that, I’ll open it up for Q&A. Operator?
[Operator Instructions] Our first question comes from line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.
Just hoping you us your latest thoughts on supply. There have clearly been some slippages in years past, but if you can give us a sense of what you're seeing in terms of '19 versus '18 deliveries and any major movements across markets that you could highlight would be fantastic?
Juan, this is Joe. So I would say overall our expectations really haven't changed in this point from the last couple of quarters. We have factoring in an expectation of slippage throughout the year. So when we are talking, we talking about 2019 being flat to down 10%. That's already incorporated that number. So through a combination of working on third-party data, looking at our internal regression models, then of course talking to our people in the field and get a better sense for where is that, stepping flat to down 10% works. When you think about the markets that are going to increase and decrease potentially, the increases for us look like probably Bay area and DC, whereas the decreases are going to be our two Florida markets, our two Texas markets as well as New York City and Orange County.
Great. And then just on the revenues that you guys talked about ‘19 and improving based on the earn at the end of the year at the start of '19. Could you just give us a sense of kind of from an earning perspective where you are today and kind of what guidance applies to end of year out versus where you ended last year out?
Juan, this is Jerry, I don't have that number for the earn in as of today, but one thing I wouldn't want to put down and why we said that to be expecting our net to probably be higher as you get to the end of '18 and '17. So when you look at market rent growth, I had this in my prepared remarks, but the market rent peaked last year's well as 2016 in the month of May. We saw acceleration from May to June and then we’re just now closing our July books. We're seeing continuing acceleration. So we're getting back to this seasonality that was more typical throughout the early 2010 to 2015 level, when market rents just continually went up through July or August then started to slide back down in the back three or four months of the year, last year being an aberration. So when you look at the earning to next year, a lot of that is built throughout prime leasing seasons which we're roughly halfway through right now. So that's why we feel better as we lead into next year, our expectation given what we're sending out for renewals and what we seen for available rents going forward is that you're going to see a continuation of what that normal seasonality rather than the 2016-‘17 scenarios were.
Great. Do mind sharing the July stats for the new rent renewals?
July is in the mid-2s for new, and it's in the high fours force renewals.
Our next question comes from Nick Joseph with Citi. Please proceed with your question.
Thanks. On development key factor what you're seeing then you’re desired effect of the pipeline. One in the event you don't have any new starts, how do you reallocate or adjust resources from an organizational standpoint?
Hey, Nick. It's Joe. I'll kick it off and then pass it over to Harry. I think if you take a look in the supplemental on Attachment 15, you'll see once again just like last quarter, we did take down our development funding expectations slightly and reallocated that over to the developer capital program. So I think that gives you a little bit of sense for how we're thinking about the opportunity set on both those as well as the risk-adjusted returns. So we do continue to have a decent amount of capacity on DCP. We continue to see opportunities there and we'll continue to focus on that area and think we'll probably have a couple of things hit here in the next six, 12, 18 months.
On the development side you saw in my prepared remarks, we think by later in 2019 will probably stabilize out of that 400 to 600 range, and as a reminder we're going from 800 million today which is 96% or so funded down to zero relatively quickly. Do backfilling with a number of deals and I'll let Harry kind of take it over in terms of what those deals are and kind of opportunities there moving forward.
Yes, Nick, I mean you know you hear it from everyone else, the market's difficult right now, market prices are increasing faster than rent, so it -- which tends to stress development yield somewhat. Within our existing lands that we have a property in Dublin that we expect to start, we’ve got next place. We’ve got a property in Denver that we talked about that's tied up and a couple of others that we’re working on that gives us comforter confidence that will be back up into that $400 million to $600 million range throughout ’19. I will tell you that we continue to believe the change that our underwriting program. We underwrite each asset until merit using revenue cost, direct growth assumptions that we believe are appropriate, while maintaining our target 150 to 200 basis point spread.
Thanks. But to shift more maybe to DCP. Is there still soft target of about $300 million for that? Or could you see that moving up as well?
I think it’s really going to depend on the opportunities that moving forward. So we have a 180 million today, we have additional funding of 30 million with the pre-existing pipeline. So at least a 100 million to get to that soft target, but as we have talked about, there's a number of other factors that go into it. So as those deals come in and we think about our sources and uses, the alternative uses that we have out there are opportunities, you could see a drift higher, you could see it not get to that 309 million level, but we will take a deal by deal and then talk about with you guys as they come in.
Thanks, maybe quickly on occupancy. It looks like 2Q same-store occupancy at 97% maybe an all-time high. First half was almost 97%, you maintained the guidance for the year, which implies slightly lowered in the back half of the year. Is there something specific that you're doing or expecting that would result in that lower occupancy is just an assumption that these high levels can't be maintained?
I think the high levels -again, you’ve out this period for last several months, I would point out a couple of things. Occupancy gets prompt by our short-term furnished rental program, which adds probably 20 to 25 basis points to that occupancy level and those types of rentals have a bit of seasonality. So I would expect as that you continue with the drift a bit. The other thing is that when we’re looking at our revenue for the year, we’re cognizant as Joe said earlier that I think that the back half of 2018 is going to have more deliveries in first half. We’re just a little cautious as we look at the back half of the year how directly or getting be impact by those deliveries. Right now, occupancy to-date still at 96.9 or so. So it’s hold enough very well.
Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
You’ve talked our abound some of the challenges you’ve faced in New York City due to supply? We've seen some peers of yours opportunistically reduce their exposure evaluate reducing our exposure to Manhattan because I’m just curious if that's something that you guys would consider.
Austin, it’s Joe. We would definitely consider reducing it. However, when you look at where we think the market is going over time we’ve actually seen New York job relative to our initial expectations supplies to the upside this year. And then if you look at supply, I think everyone's well aware that supply expectations in 2019 should start to come down fairly dramatically. So while the market is still relatively weaker within our markets today, and could still be next year, we think we do have a little bit of an acceleration story over the next 2 to 3 years there. But it is a market that if we didn't like the prospects longer term, we would absolutely take a look at reducing thatbut maintaining cape market, with exposure relative to peers today make sense.
And then separately, in the context of prior conversations around entrance into new markets, we talked a little bit about Philadelphia as maybe an opportunity. So just curious if you could provide an update on that front and some details as to your thoughts on how you would enter a new market and maybe whatkind of exposure you would take longer term?
Yes, overarching kind of portfolio strategy is, of course, the view that we are going to maintain specification across plus or minus 20 markets, et cetera. So you mentioned Philadelphia there, which we have been taking a look at, and I do want to remind everyone that’s not necessarily a new market. We have a pre-existing asset there within the jointventure and so become active in the margins. We have boots on the ground. We are looking at potential develop our capital program transaction within that market. It’s a market that from a job perspective, whether you look at medical or educational, screens positively there. If you look at technology opportunities, it is starting to gain more of its fair share of tech jobs. Obviously, job growth and kind of rent growth over the longtermrelatively stable and volatility relative to some of the other coastal markets. So we like it on that aspect. And then within our predictive analytics models, it does actually screen okay. So there's a number of factors that are positive there. But again, we are thinking about kind of DCP context as we look to potentially expand a little bit in that market.
Our next question comes from Richard Hill with Morgan Stanley. Please proceed with your question.
I want to circle back to the development pipeline. I noticed that you mentioned that all you development pipeline was in lease up. How are you thinking about your development pipeline going forward? And look, if development was to shut off today entirely, in your view that you can continue to grow this trajectory that we have seen over the past couple of quarters?
As I go back to the prepared remarks and then a couple of comments that we had a few minutes ago, we really don't expect it to go all the way to zero or may temporarily go there for a quarter or two. As Harry mentioned between the double parcel we have, the Denver parcel we have under contract, the Vitruvian parcels that we have within the joint venture as well as visibility on a couple of other items we are working on. We do expect that to ramp back up to that kind of $400 million, $500 million range, $500 million Admittedly that is approximately half of where we've been running most of the cycle. So again, the discipline that we’re exercise around the required returns has allowed that development pipeline to shrink, but we do want to continue to have a development pipeline, maintain that team and keeps creating value that piece of the platform.
Our next question comes from Rob Stevenson with Janney Montgomery. Scott, please proceed with your question.
Jerry sitting here and essentially August 1st, what markets have outperformed and underperformed your expectations form the beginning of the year by the widest margins thus far? And what sort of magnitude that we are talking about?
I’d say anything significantly off from original expectations. Probably the three markets that have surprised to the upside would be the two Florida markets, Orlando and Tampa both done very well forced and a couple of our best markets. But I would say they’re maybe 50 basis points ahead of the plan. The next one is San Francisco, where I think the first couple of quarters did slightly better but what we're seeing as we head into the back half of the year we're encouraged by the level of new and renewal rate growth we're getting today that should continue, but we are cognizant again that new supply is going to come in to the Bay Area little heavier in the second half. So I would say those three are the positive outliers. Really there's two negatives, one is Austin where supply outside of the CBD has been hitting us at three of our mature B asset quality properties and then probably the biggest disappointment in New York City. New York year-to-date is at negative 0.4%. Going into the year we thought it was going to be called at positive 0.5 to positive 1%. And a couple of things have really affected us there. One is the outsized new supply in Brooklyn and Long Island City, I think seven more going to affect on our B assets in the financial district than we originally projected.
Second, we've lost a corporate tenant in the financial district during the quarter that had been with us for about 5 years. And when we recovered occupancy very quickly on that one, but we did take a rent drop because those people in their 5 years taking good renewals. So the reset of rents was about 6% and that affected us. And then the third one, it was built into our plan but just to let you know part of the reason our growth is subpar is we did a central system building upgrade at one of our properties in the second, in early 2017. And that drove down both utilities expense and also utility reimbursement. And we show utility reimbursement as a revenue component. The benefit to NOI was positive but this change in the system resulted in a reduction of our second-quarter revenue growth in New York by 40 basis points. So if you excluded that, we would have been just very slightly negative.
Okay. And then I think it was Joe's comments earlier on supply in a number of markets you guys expecting to see accelerate in the back half of the year. How much operating traction are you seeing today in the DC market? And how much of a slippage are you expecting as we head into the back half in early part of '19 from that supply.
No. We didn't see the supply, I think, as long as we're watching concession levels. But DC is holding up very well. And actually, I don't have the exact number, but I think blended rate growth in the month of July was good. I think occupancy still stands in the mid 97s in DC. And we're optimistic. A lot of the new supply that's coming is over in the Ballpark area and NoMa and while we don't have any specific assets there it is affecting most of our properties within the district our weakest submarket in DC right now is right along 14th Street. But as you know, about half of our portfolio is B quality and our properties outside the beltway are performing extremely well. So right now we would not expect a significant drop off in DC. We're running strong right now. But last year as you went from like June through October, when supply started to hit, you saw two months free rent enter the marketplace that suppressed our ability to push rents. So we have our eye out for that, but it really hasn't occurred yet this year.
Our next question comes from John Kim with BMO Capital Markets. Please proceed with your question.
Hey, Jerry, you just talked about some of the disappointing markets. But I’m wondering if you would include the MetLife joint ventures as part of that conversation, the disparity between the performances of your joint ventures in the consolidated assets continue to lighten. And I’m just wondering what was driving that.
I think it’s a couple of things. One I think a lot of you have on MetLife assets. They are top of the market A+s really in predominantly urban locations that are combating new supply. So I think that's the main component. But when I really look at the MetLife assets which are significantly lower than our same stores, 36 properties that are current and were in during the quarter had negative revenue growth that are finding new supply. And these six properties make up about 40% of the revenue within the portfolio. And those properties are in the upper west side of New York. The East Village in San Diego, we got, probably, the premier property in downtown Seattle. That’s finding new supply. We got a property in downtown Denver this included in this group. And then we also have one of the Baltimore market. So I think when you’re in those pockets of heavy new supply where concession levels are high, you’re going to see this, I think, longer-term the MetLife properties are going to do exceptionally well, but that’s the main thing we're seeing right now.
Can I ask question about other income? You have parking grown at 22%. And I’m wondering if you could provide some color on how much runway is left in other words, how much -- how many properties are you charging for parking with the opportunity going forward? And in relation to the joint venture do you have the same other income leverage on your joint venture that view on a consolidated portfolio?
That’s a good question. Sometimes we do and sometimes we don’t in parking. We’ve always been very good at charging for parking in urban areas where we have garages and parking is at minimum. So while a lot of the MetLife deals are in those urban areas there is less opportunity to drive outsized rate or parking fee growth at the MetLife deals. I would say for the rest of the portfolio we've turned parking on throughout the entire UDR platform. Two years ago, we started charging just to existing or to new incoming residents. Over the last year or so we started assessing that on new residents. This year we’re looking -- and next year we're looking more at reserved type parking spaces where people can select whether they want to park as well as finding opportunities in some locations to allow nonresidents to park in our communities that’s been a good driver up in Seattle, for example. But I think, we’re going to continue to see outsized growth again this year it was about 20%, last year it was about 20%. I’m reluctant to say you can keep go into that pace, but I just say it's going to continue to grow well in excess at multiple rents on our apartments grow. So I do think other income whether it's from parking or the short-term furnished rentals are going to continue to have outsized growth and be a difference maker in our earnings model going forward. There's a few things that were -- we started this year that I think they have again grow incrementally over the next few years to such as renting out common area spaces such as conference rooms, rooftops, resident lounges to nonresidents. This year it's going to be a minimal impact maybe $0.5 million, but we're still learning that system and I think it's going to continue to grow too.
Can you give a baseball analogy as far what inning you think we're in on the other income bucket?
I’d say, we're in the first half of the game.
Our next question comes from Drew Babin with Robert W. Baird & Co. Please proceed with your question.
I wanted touch on Orange County as well as our financials. But serving in Orange Country, do you feel like the Pacific City development is maybe cannibalizing some of your same-store performance? The market is still growing recently in terms of your revenue growth but accelerating some. And I guess if you could just talk about that as well as kind of the general supply demand dynamics in the market that would help?
Sure, Drew. This is Jerry. Pacific City, again, that's in the lease up right now, it's little over 70% leased. We do have three other properties in Huntington Beach. One is probably a mile away from Pacific City. And I’d tell you, yes, I do believe that property is being negatively affected by Pacific City. And I think the other two assets, one is older and at about much different price point. So I don’t think it's affected at all as in our military community, which we built four or five years ago is not really located on the beach. Its right up on the 4053 way, probably being somewhat affected but not as materially. But I’d tell you that Huntington Beach is one of our -- if not be, weakest submarket that we have in Orange County right now. When you look at supply and demand within Orange County, we have got about 1,700 units there and being delivered this year that are within a mile of our communities. So about 500 of those would be Pacific City, but we also have competition in other areas. But I think when you look at it, really the job growth has been a little bit less than we would have hope for this year. Current projections are about 21,000 jobs in the Orange County. And when you look outside of just the proximity to our properties, you're going to have about 5,000 units delivered. But Orange County is slightly weaker than we had anticipated. But we are optimistic as you get into the next year that you are going to see supply come down a bit and some stability reemerge.
Okay. And then small piece of the puzzle though I was hoping to ask about the Marina del Rey portfolio, the turnover was up a little bit. Was there any supply kind of directly impacting that this year and just kind of what are local dynamics to that?
Yes, it's really, it's about 600 units of new supply that’s coming into play up in that Marina area. Yes, NDR is, I mean, it's -- think turnover when you look at that, again, our turnover was down about 200 basis points, a lot of things could impact that. Probably the largest impact is when you have a lot of new supply with the rationale price income directly added. And I’d say last year we were pretty stable. This year it's up 400 or 360 basis points but still roughly about the UDR average. So I don’t think there is really a story there in LA other than the smallish portfolios. So it doesn’t take many new move-outs to affected. But in addition to new competition in the area that can drive turnover up. The other things tend to be how many leases do you have expiring in a certain period and then how much attention are you placing on customer service. And I will tell you -- we as well as all my peers, I think, do a much better job listening to our residents and addressing issues. And I give a lot of credit, especially to our West Coast team who had turnover go down over 500 basis points year-over-year to focusing on the customer service side of the business.
Great. Thanks for that. And one more for Joe just on the DCP opportunities. Is there any read through there in terms of maybe a pullback into the small development lending or anything ahead of industry wide that would be causing the opportunity set wide for you or is it just maybe more coincidental or kind of bit more time, kind of out of the gate with the DCP program talking to folks.
I think your last comment there Drew is really what's driving it for us, specifically meaning that the fact that we have been out there for a while. We've been consistent in the space. I think the funnel just continues to widen a little bit. You see more and more opportunities coming our way which means better ability to hold to the pricing that we expect and the yields that we are underwriting to and better ability to hold to the terms that maybe other market participants may not be able to. If you have seen a lot of these debt funds out there raising capital more competitors in the space, but thankfully given the size of the funnel we're not necessarily seeing pressures from that.
Our next question comes from Rich Hightower with Evercore ISI. Please proceed with your question.
I wanted to touch on the same store revenue guidance really quickly. So we've had two quarters of better than expected results in each case, the midpoint of the range has come up, the high end, however has been left unchanged. And Jerry maybe you answered this question earlier on the topic of supply in the back half. But is that the risk that's embedded within the guidance as it currently is in terms of not raising the high end? Is it supply-driven or is there anything else going on there?
I think it’s supply-driven. I think we're more likely to be in the middle to upper end than the bottom but we are cognizant that you do have supply come into several of our markets, little bit more heavily in the back half of the year that we're just watching out before. But there's we feel like we're doing a very good job. We have industry leading revenue growth. And I think that top end of five that's strong numbers. And when you look at the components, which include the occupancy growth of 30 basis points, contribution of other income of about 60 to 80 bips and the rest come in from rents. We're happy with where it's coming in. But we're always watching out for indicators of concern and while we’re currently not seeing anything coming out of that gives us pause other than in New York City for the most part on the new supply side. We see the same stats as everybody else. And I think as long as pricing again stays rational and you don’t see a lot of people coming out with two months free. We feel good about where we'll end up this year.
Okay, that's helpful Jerry. And then the second question, can we dive in on Boston a little bit and just there seems to have been an inflection point of sorts in the market over the last quarter or two and then you described your experience with the very strong lease up at 345 Terrace. And just walk us through what's going on in the market there? And has anything structurally changed in the last three or six months that we should be aware of to the positive that is?
Yes. I think we had a time period that we're still in where competition especially downtown against new supply kind of subsided in our Seaport area and the Boston that I think it achieve stability. So we are able to get a little pricing power at our Pier 4 community. Our two properties up in the North Shore did extremely well. They have revenue growth over 5% -- or about 5%. When you look at the combination of our Pier 4 as well as our Back Bay property did they were come in around 3%. And then you know the South Shore where we have some eight communities that's been a bit weaker but still coming in it too. But I would say you have a continuation of a strong economy in Boston and I think you've had a slowdown of deliveries when we look at our portfolio yielding at 800 units this year delivering within mile of our property. And I think that's allowed us at least for the time being to push again there is some new supply that starting to deliver right now that we’re watching. But I think the other thing is Boston has a heavy seasonality every year where you come out of the gates in first quarter with concern because of the weather patterns. And then once you get to March, over the last two to three years, it seems like we've been able to hit the accelerator take off and this year proved to be no different.
Our next question comes from Rich Anderson with Mizuho Securities. Please proceed you’re your question.
It's ironic that parking is a driver of growth if all I had to say that. But Jerry I’m curious about this parking strategy. Are you leaving the market or meaning is your competition charging or are you following the market. And the question being or intends potentially going to be dismayed by the fact they have to pay for parking in certain spaces when they had in the past.
I think we’re leaving especially in suburban areas throughout the country. I don't think a lot of our peers are really following. What I would tell you is its rather decenniums amount that you’re talking about $5 to $10 typically for an unreserved parking space in the garden community and one of your average rents in those types of garden communities are say 1,500 to 1,700 the UDR average it's over 2,000, it's urban high rise. It's just not material amount. And I think when you can offer someone these specific spot that payers want to get home at 10 o'clock at night, I think its beneficial and I think especially when you look at some of our older properties where parking is at the minimum. We just know they built in call it's in 1960s, 1970s. I think people want to be sure that they have a space. So I think that are policing in the parking lot makes it benefit to the residents that we have not seen or heard and a price from our residents. We haven't seen turnover go up, obviously, as you look at our numbers. And I think it's something that we will be accepting.
I guess the numbers kind of put in perspective to in terms of relative to the rents we’re paying. So I appreciate that color. Second question is a little bit broader picture. I asked on the Avalon call about just the nature of this economy and job growth and the stimulus that come from the tax reform and all that. Do you guys have a sense that this is maybe perhaps a short-lived economic improvement that could whether a bit maybe a year or two from now? And if that is the case the way you're seeing at, how is this sort of caught an inflection point change your behaviors the company relative to what we've seen more typically in previous cycle shifts?
Rich, it's Toomey. We talk a great deal about where we think markets are and where we think we are the economy and the rest of the business. Our conversations always come down to about three topics, which is on a national basis, where do we think the industry is. And I would say that the economy is showing amazing resilience. And particularly, when you look at GDP and our business usually as an echo of that that drives us to an optimistic view of the economy demographics, but hell after talking about it for 15 years you are actually seeing the delivery of it. And then for us on a national basis we just continue to talk about supply and what would accelerate it, what would kill it off and how we've weathered the storm on this supply cycle. And the second thing we talk about is where our value creation opportunities are. And so you are hearing it in the operational side. And Jerry didn't mention many of it, but a lot of it is, I think the multifamily space has been low to adopt technology solutions. And we've been more of an industry that's followed instead of led. And I think there's a lot of opportunity inside of that that will carry beyond and more significant than the other income attributes that we've been going through recently.
And the last topic is we talked through markets and where we think those opportunities where we are in the cycle of individual markets. And with 20 of them, there's always some that flow to the top where we think things are going positive and others where we are probably a little bit more defensive in nature in our investment. So the combination of the three always leads to where is the offense of game plan, how can we take advantage of it how can we allocate our capital and our resources of people to get better numbers, better results. And I think that nice dialogue that we have here in the full breadth of the experience in the room is weighing to just what you saw, a very good quarter and prospects for the balance of the year to be good. And more frankly we are very focused on '19 and where we think we can be positioned. So that's kind of our attitude and I know other people try to draw too big of a blanket over the topic. But the truth is the company is focused on figuring out how to march forward with all the cards in front of us and don't feel like we are doing anything but the responsible thing.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
I just was wondering if you could just talk a little bit about capitalized interest. You guys said that you are having $800 million of development now that’s going to go down to zero from maybe a quarter or two before ramping back up to that $4,600. So it sounds like as we think about our 2019 numbers, interest expense would go up materially as the capitalization comes off. Is that a fair way to think about it? Or there are some offsets there?
I think you may have jumped in by one year on that one. Really in 2018 if you look at our guidance for interest expense relative to last year, we are up about $14 million on interest expense, half of that is really driven by the decrease in cap interest that we saw from '17 to '18. So that number came down from, I think, around $17 million $18 million down to around $11 million midpoint this year. The predominate of that was really felt kind of - the first half we had higher cap interest, driven by 345 in Pac City, and the second half, we're going to have relatively minimal cap interest. We'll probably end up the second half somewhere around $2.5 million to $3 million, which tells you that the first part of next year will probably be around that run rate. Then as we take the development pipeline back up as we talked about, let's say $0.5 billion by late '19. You'll start to see cap interest pick back up. But I think we're kind of leveling out here a little bit on cap interest given how much we've come down last year or two.
Alex, let me just add one thing. As cap interest comes down, we expect NOI to go up. So in effect putting on an earnings standpoint of that's how you're looking at it, FFO will more than offset the reduction, I mean, NOI increase will more than offset the cap interest reduction.
That's a great point. Just to remind Alex that $716 million between the two big developments that's what yielding in the mid-2s this year between FFO and NOI combined. Next year, we think that'll move closer towards stabilization in '19 and '20. So you do have a nice pick up going forward from an earnings standpoint off of those two developments.
Appreciate that. But it often seems like there's a mismatch in the impact of cap interest coming off. It’s sometimes greater than the ramp up in the NOI but I appreciate that. The second question is on the DP, on the developer program book, you guys, you said, obviously, it sounds like there's more opportunity for you but imagine there's still more competition. So as interest rates have risen and as constructions cost has gone up, have you guys been able to maintain your same targeted returns on that program and investing in the same part of the capital structure meaning the price per door, your LTV, however you want to look at it, you'll be able to maintain that or if you had to go sort of with less subordination or lower returns to make the deals pencil?
Alex, this is Harry. I'll answer that, the -- first in terms of risk on our position to capital stack is unchanged. We have not increased the risk profile at all in order to continue to deploy this capital. And secondly and it's really a function of the market with the reduction of both available debt capital and equity capital. There's been a natural gap in the capital stack that's been created. And so there's actually more demand for this product. So our risk has stayed the same and actually our returns have floated up. The sort of first cycle deals we did in '13 to '15, $230 million or so. We were sort of underwriting 10% to 11% type IRRs today that number is more like '12 to '13. So no change in risk, and actually an increase in expected returns on this product.
Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.
Jerry, a follow-on to the MetLife question from earlier. And I know we talked about the better part full years as supply being an issue. As it continues to lag, is there any incremental concern that the absolute level of rents from that portfolio are too high and just propensity to push rents over the next 3 to 5 years will continue to be impaired?
I don't think so. I think again once you have that stabilization of the development deliveries and their submarkets, I think, things will be fine. I'll give you an example. Year ago there was a bit of a slowdown in the submarket in Seattle where our Class A+ property is and we have 4% or 4.5% revenue growth for a couple of quarters with that one property. So I think it's cyclical dependent on these deliveries. But I think we've got extremely well located timelessly built assets that have great floor plans that, I think, we’re going to do very well. And I think a lot of these assets too have larger floor plans. So I think as these millennial stages and they want to continue to live in a city or they maybe not painful to move out to suburbs and buy a home, I think it's going to be a good renting option. And then the other part I also believe that this asset tightness as far as we have as baby boomers continue to age and sell their big houses out in suburbs and move into the city. I think this portfolio cares well to them. So I think it's just timing and it has been an extended timing, so I'll give you that. But I think over the kind of couple of years, I think they are going to perform at least as well as our same stores.
Harry on competitive development front, I think, your expense that sponsors that are competing for you guys and attend. Is that the sense that they are retching up leverage and doing some financial engineering? Or they just function any rational growth rates to adjusted by the IRR?
I don’t think, I mean, I guess, I would answer this way. I don’t think leverage has changed meaningfully. I mean that there is debt capital has increased moderately recently in terms of the loan to cost on available construction financing, but the debt hasn’t changed meaningfully. I think what has happened to some extent is that equity capital has become moderately more aggressive as they look to deploy and affect their dry powder. So I think when you have a situation where equity is pushing the merchant builder to deploy capital, you've got a situation where I think at times underwriting becomes a little bit more aggressive.
John, this is Toomey. I'd add to that, I mean, as you talk to global capital players, the asset class of multifamily is growing in prominence with respect to their share of a pie. And it seems to be just getting favorable across so many different networks either pensions, foreign capital that haven't been here for a decade and they are shying away and pulling away from the unknowns of retail, they're pulling away from office. And so I think we're just getting a bigger piece of capital pie.
Tom in this conversation, we stretch our heads too. They keep putting money work in the private market but you and your peer share prices are at a discount. How are you changing your pitch for investors to look at public REIT as a proxy for real estate? And are you making any inroads? Do you have any hope that the foreign, Swiss and the pension funds will look to the REIT market increasingly with private market pricing have been pretty aggressive?
You know what I would say is that I think the team as REIT doing fabulous job of outreach across the broad spectrum. You’re seeing more and more speakers at conferences talk about asset class in their particular market gaining favor. And so my suspicions are is that the local investor will pump capital into the local markets take that to Berlin, the Nordics, as examples and many eastern block countries. As they see that performance elevate then they are like expand more to what I would call the publicly traded share model. But it's just going to take time. What I'd say is it took us 10 years to get up off the floor. We are now into the ring. My suspicions are is that if we keep putting up numbers like this on a risk-adjusted basis, eventually they will find the public space.
There are no further questions in the queue. I’d like to hand the call back over to Chairman, CEO and President, Mr. Toomey for closing comments.
Just a quick closing, guys. Thanks for your time today. I thought we had a great conversation. Again, to remind you, we feel good about our business for the balance of '18 and looking into 2019. We are optimistic on our prospects. And we wish all of you have a good summer. Take care.
This concludes today's conference. You may now disconnect. Have a nice day.