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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 fourth quarter 2017 earnings call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you, Mr. Van Ens, you may begin.
Welcome to UDR’s Fourth Quarter Financial Results Conference Call. Our fourth quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements.
Statements made during this call which are not historical may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements [Operator Instructions].
I will now turn the call over to UDR’s Chairman, CEO and President, Tom Toomey.
Thank you, Chris, and good afternoon, everyone, and welcome to UDR’s Fourth Quarter 2017 Conference Call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers, Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call.
I will address three topics today, first a macro outlook for 2018 and beyond, how do UDR strategies differentiating characteristics fits into this outlook and finally a quick review of 2017.
First, our high-level demand assumptions for 2018 include a general economic outlook as measured by consensus GDP growth of 2.6% the second highest level over the past decade and creating a growing tailwind. The continuation of solid job growth and accelerating wage growth as full employment is upon us.
Regarding tax reform, the general view is it create a bias towards vendor ship as well as a positive impact on corporate earnings and our residence take home pay will increase. We’re taking a wait and see approach, therefore is not explicitly factored into our guidance. And slowly improving single family housing market but with minimal changes to the overall home ownership.
Potential headwinds include elevated new supply and higher interest rates both into the curve. Taking together these macro drivers should results in a relatively stable 2018 apartment environment with our pricing power and occupancy expected to be similar to that up 2017.
Beyond 2018 we’re more optimistic on a macro outlook for our business as global and U.S. economies are enjoying board base growth after years of monitory and now tax. As multifamily demand typically eco’s for broader economy we should continue to see healthy demand coupled with 2019 apartment deliveries that are expected to decline. All in a positive set of facts but too early to call 2019, although UDR will benefit from an improving NOI contribution from our recent development completions which totaled approximately 500 million in capital invested.
Moving on, we just continued publishing our two-year outlook, given our stable outlook. A consistent strategic direction that we’ve executed well upon over the last five years, our ongoing best in class disclosure and both solicited and unsolicited feedback from our shareholder base. Moving forward we will continue to openly discuss our strategic direction with market participants.
Next the strategies we intent to employee throughout UDR primary business areas in the year ahead, look fairly similar to those employed since 2013, because they work and include first our best in class operations will continue to be driven by strong blocking and tackling and our innovative technology driven initiatives that are consistently boost our run rate results. We were at the top same store growth performer in 2017 and expect to again be bad in 2018.
Second, we prudently allocated capital throughout 2017 and will continue to do so in 2018. Our developer capital program is accretive to our bottom line and will continue to look for opportunities, while remaining disciplined in our underwriting.
Our development pipeline will likely shrink in 2018 due to the difficulty of hitting return requirements on new projects. But we will continue to look for accretive opportunities to back fill our pipeline.
While our third-party forecast called for interest rates to increase in 2018, we had minimal refinancing exposure due to the significant balance sheet activities we completed throughout 2017.
And last our diversified portfolio, by both geography and price point, should continue to serve us well in 2018 and beyond. Let me close by saying that as we look back on 2017, we executed our growth plan well, which resulted in two same-store and FFO guidance raises and ha farm TFR for our shareholders. A special thanks to all our UDR associates for your strong blocking and tackling in operations, disciplined capital allocation and continued willingness to actively innovate across all aspects of our business.
With that, I’ll turn the call over to Jerry to address operations.
Thanks, Tom, and good afternoon, everyone. I’m pleased to announce another quarter of strong operating results. Year-over-year, fourth quarter same-store revenue and NOI growth were 3.1%. After including pro rata same-store JV communities, which they were urban, A+ product, revenue and NOI growth were 2.8%.
Accordingly, results were driven by solid blended lease rate growth of 1.9%, a robust top line contribution from our long life to operating their initiatives, stable occupancy of 96.8%, annualized turn over that was 40 basis points lower year-over-year and a continued objective to drive down expense growth where impossible.
Full-year 2017 same-store revenue and NOI growth were 3.7% and 3.8% respectively and driven by factors similar to those that contributed to our strong quarterly results. A special thank you to all of our associates in the field and the corporate office for continuing to maximize our top line growth while also limiting controllable expense growth under 2% in 2017.
Moving on. We saw a minimal pressure for move-outs to home purchase or rent increase, at 14% and 5% of reasons for move-out during the fourth quarter. Likewise, net bad debt remains low, all our at levels consistent with previous quarters.
Next, the primary 2018 macroeconomic assumption that underpin our same-store guidance. First, national job growth of approximately 150,000 per month with wage growth averaging 3% to 3.5%. These are set against elevated to multifamily completion in many of our markets due to supply slipping from 2017 and to 2018. I would note further deliveries slippage throughout 2018 due to construction labor shortages remains a wild card.
2018 UDR specific assumptions are as follows. Overall, pricing power in the form of blended, lease rate growth is expected to be relatively comparable to what we saw in 2017. Occupancy is forecast to remain in the high 96% range. Other income should continue to grow at an outsized rate versus rental rate growth or perhaps not as strongly as we saw in 2017.
Controllable expense growth will remain in check due to efficiency initiatives but real-estate taxes will continue to provide pressure given our 421 burn-offs in New York and higher valuations across assorted markets. B quality and sub urban properties should generally continue to outperform A quality and urban assets, and same-store community addition for the full-year positively impact our revenue growth by 10 basis points to 15 basis points, expenses by 15 basis points to 20 basis points and NOI by 20 basis points to 25 basis points. Taken together we are expecting same-store revenue expense and NOI growth to each be 2.5% to 3.5% in 2018. Holistically we anticipate that our 2018 operating strategy will continue to favor occupancy over rate growth as apartment fundamentals are expected to bump along the trough. These are improving, nor meaningfully worsening throughout the year. Importantly we anticipate blended year-over-year lease rate growth to crossover versus last year sometime in the first quarter.
Regarding our markets, those expected to grow same-store revenue and rate above the high end of the of our 2.5% to 3.5% portfolio growth include Seattle Los Angeles, the Florida markets and Monterey. These markets represent 26% of forecast 2018 NOI. Washington DC Orange County San Francisco Boston Nashville Dallas and other small markets that represent approximately 63% of forecast NIO are expected to be in line with the range. And New York and Austin which represents approximately 11% of forecast NOI are expected to generate growth below the low end of the range.
Moving on our development pipeline in aggregate continues to generate lease rates and leasing velocities in line with original expectations. In our $350 million Pacific City development in Huntington Beach, what we have delivered and leased is achieving strong rental rates, but past construction delays continue to negatively impact our velocity given the projects high-end clientele. Pac City will be a game changing asset in Orange County once complete but will be a drag on our 2018 results versus previous expectations.
The 345 Harrison our $367 million project in Boston, we recently opened our leasing office and are around 6% preleased. 345 and our JV developments remain largely on budget and on schedule with a notable positive exception of [indiscernible] west. This community is leased up at a much quicker pace and underwritten and has raised rents three times to date. Community specific quarter end lease up statistics are available on attachment 9 on our supplement.
Last, I would like to again thank all of our associates in the field and at corporate for making 2017 another successful year for the company, onto a successful 2018.
With that I’ll turn it over to Joe.
Thanks, Jerry. The topics I will cover today include our fourth quarter results and forward guidance, a transactions update, and a balance sheet and capital markets update. Our fourth quarter and full year earnings results came in at the mid points of our previously provided guidance ranges. FFOs adjusted and AFFO per share were $0.48 and $0.42 for the quarter, and a $1.87 and $1.72 for the full year. 2017 AFFO was up $0.09 or 5.5% versus 2016, driven by our strong operating platform which produced robust NOI growth as well as our disciplined capital deployment decisions.
Next, I’ll provide several high-level comments related to our 2018 guidance, the details of which can be found on attachment 15 of our supplement.
Full-year 2018 FFO as adjusted per share guidance is $1.91to a $1.95 and AFFO is a $1.76 to a $1.80 respectively. Primary drivers of the $0.06 of growth between our 2017 FFO as adjusted of $1.87 and our 2018 $1.93 midpoint include a positive impact of approximately $0.07 from same-store, JV, and commercial operations, flat G&A year-over-year, a neutral impact from development and developer capital program investments after accounting for funding costs and the negative impact of approximately $0.01 from higher LIBOR and other non-core items.
Additionally, the difference between our 2018 FFO as adjusted midpoint of $1.93 and a $1.95 we provided in last year’s three-year strategic outlook is driven by the following. A positive impact of approximately $0.02 from developer capital program investments, high prepayment activity and lower G&A, offset by negative impact of approximately $0.02 from lower forecasted 2018 same-store and JV growth and a negative impact of approximately $0.02 from developmental delays.
Moving on as Jerry indicated in his prepared remarks, our full year 2018 same-store revenue, expense and NOI growth guidance ranges are each 2.5% to 3.5% with forecasted occupancy of 96.7 to 96.9. Regarding sources and uses, we have a de minimis amounts of pre-financing that needs to be completed in 2018 and continue to focus on dispositions to fund our development and developer capital program. For the first quarter our guidance ranges are $0.46 to $0.48 for FFO as adjusted and $0.44 to $0.46 for AFFO.
Next transactions, during the quarter we sold two fully owned communities Vista Del Ray and Villas at Carlsbad located in Orange County in Suburban San Diego for 69 million at a weighted average nominal cap rate of 5.4%. The communities were 50 years old on average. Subsequent to quarter end we entered into a contract to sell Pacific Shores, a 264-home community in Orange County for 90.5 million subject to customary closing conditions.
As we look into 2018 and beyond we continue to favor investment in our fully owned development pipeline and developer capital program which had a quarter end investment balance of 159 million and an effective yield in the mid 7% range. However, given the difficulty of finding economical land in many of our markets it is likely the size of our development pipeline will continue to shrink for the foreseeable future. While it is our desire to add more land to the balance sheet, to restock our pipeline over time, we will remain disciplined as we underwrite prospective deals.
Next, moving onto balance sheet and capital markets, during the quarter we issued $300 million of 10-year unsecured debt at a coupon of 3.5%. In conjunction with the issuance we redeemed 300 million or 4.25% debt originally due June 1, 2018. At quarter end our liquidity as measured by cash and credit facility capital, net off the commercial paper balance was $855 million, our financial leverage was 33.2% on un-depreciated book value, 24.3% on enterprise value and 28.9% inclusive of joint ventures. Our net debt to EBITDA was 5.3 times and inclusive of joint ventures was 6.4 times.
Looking ahead we remain comfortable to our credit metrics and don’t plan to actively lever up or down although you will likely see our revolver balance drift lower throughout the year.
With regard to the profile of our balance sheet, similar to our 2017 activity we will continue to look for MPV positive opportunities to improve our duration and increase the size of our unencumbered NOI pool.
Finally, we declared a quarterly common dividend of $0.31 in the fourth quarter or a $1.24 per share when annualized and in conjunction with our release we raised our 2018 annualized dividend to a $1.29 per share representing a 4% year over year increase and a yield of approximately 3.7%.
With that I will open it up for Q&A, operator.
[Operator Instructions] Our first question comes from the line of Austin Wurschmidt with KeyBanc. Please proceed with your question.
Hi, good morning Jerry you mentioned that you expect blended lease rates to turn a little bit positive early in the year, just curious what markets are predominantly driving that re-acceleration.
You know when you really look at January of this year compared to January of last year it did cross over, we were at a negative 0.3% in January of ‘18 that compares to a negative 0.7% when you look at January of ‘17 and roughly half of the markets are doing a little bit better on this blended -- on this new lease rate than it did last year including Boston, DC, Seattle, San Francisco, the two Florida markets as well as Salinas.
And then you know there’s several markets that are fairly close and there’re some like New York that are down year over year.
And then think when you look at renewal growth, renewal growth in the month of January was up on an effective basis 4.9% and that’s down just 20 basis points from January of last year when it was 5.1.
So, on a blended basis we’re probably right up that cross over in January and February, we do think that it kind of bottomed. And we’re not forecasting at this point a hockey stick where you start seeing current year blended rate growth significantly higher than it was last year but as you looked at last year it was consistently less than it was the prior year so we really look at 2018, we think blended rate growth is probably going to be comparable to what it was in 2017 and that was in the mid twos. You know when you look at the earning of embedded rents coming into this year it was about 1.1% that’s about 30 to 40 bps lower than what it was coming into 2017.
That’s helpful and then you mentioned turnover was done, I think you said 40 basis points in 2017, I’m just curious how that stacks up historically with turnover and what are you assuming going forward from a turnover perspective?
We thought last year we had a lot of success in turnover again it was down 40 bp in the fourth quarter at 41% full year was just under 50%, was 110 basis points, where in the last year I would remind you that we started this short-term furnished rental last year, which had a negative effect on turnover, so the numbers would have been even better if we had had those 200 or so move outs related to those short-term rentals but as we look into 2018, we continue to listen to our customers, we continue to not be excessively aggressive on renewal rate increases and today we would be forecasting turnover to be roughly flat with what it was in 2017.
Our next question comes from the line of Juan Sanabria with Bank of America. Please proceed with your question.
Just thinking about supply, what’s the level of conviction in any sense of what the decline may be from ‘18 into ‘19 that you guys are expecting at this point.
Juan, as we forecast out to ‘19, we had a couple of different data points to help triangulate as we think about it, but, when we look at start some permit activity that took place in 2017, obviously those were down around 10%. So, I think that gives you a good lead time when you think about typical construction timelines that we would expect 2019, to come about that launch.
Also, obviously talked our groups on the ground, try to get a sense for what they see taking place and what they see as competitive supply going forward. And its covers, such as [match] and other and other conversations with the brighter market participants and the merchant builders and they continue to have difficulty given the construction financing environment out there to really get new starts going in and get their capital lined up. So, I think we have a decent amount of conviction that it is going to trend down from ‘18 level, what will remain to the question is, how much of ‘18 into ‘19, but we feel pretty good they will be coming down.
Great and then just on the same store revenues, what’s the main driver between the variance from bottom end to high end and what do you guys factoring with regards to concessions and if you could just give us an update on what you seen on a concessionary front.
Sure, Juan this is Jerry, I guess to start with concessions on more of a historical basis. Our fourth quarter concessions were down 35% year-over-year and if you factoring gift card, which show up [ph] down our marketing cost those were down 71%. So, we’ve been utilizing concessions as well gift cards less than we did a year prior. We see concessions levels continuing to come down a bit in 2018 as we modeled out the year.
You asked how do you get to the high end and low end of our guidance and our guidance runs from 2.5% to 3.5% when a mid-point of 3%. I guess first I’m going to walk you from our 3.7 reported in 2017 and we get down to 3.
First, we don’t expect any addition to revenue growth from occupancy, we forecasted occupancy we stabled at high 96 range. So, you don’t have 20 bps of growth like we did in 2017.
Second as I stated earlier those embedded risk that we entered the year with were about 40 bps lower and what they were last year, so you don’t have that, that takes you down another 40 bps and then other income which was a major contributing factor to our outperformance of 2017 only I think it will continue and contribute significantly, we’re not counting on it being quite as much of a benefit in 2018 as it was in 2017 so that’s probably 10 basis points less.
So again, you go from the 37 you don’t get the 20 bps of occupancy, you don’t have the 40 bps of embedded rents and you lose 10 basis points compared to the prior year of other income growth, and it gets you to the three.
Another way of looking at it to get to that midpoint is our blended rate growth both last year and this year we expect to be in that mid two range and then when you look at the contribution that we expect outsized from other income we think it’s going to be somewhere in that 40 basis points to 70 basis points and that gets you to the 3%.
So depending on how you like to come from it that’s why this is a midpoint what gets us to the top end would really be outsized job growth that helps us push rents but outsized wage growth which right now look like it’s going to be about 3% for this year and if we have more success on other income items such as the short-term furnish rentals as well as parking above what we have in our plan not it get us to the high-end will get us to the low-end 2.5 would be lower job growth in the expect your rational pricing from some of this new supply that we are going to be competing with and if we are less successful on our other income initiatives.
Our next question comes from the line of Drew Babin with Robert W. Baird.
Question on community larger markets D.C and Orange County, obviously last year I think demand growth may be disappointed in Southern California overall coupled with some new supplies. It just seems like the new supplies maybe kind of burning off to some degree at least in Orange County by the end of ‘18. Something you talk about demand growth in Orange County what you are seeing there and then I guess while you are on it, let’s talk about D.C. and what you are seeing in terms of private sector employment.
Orange County last year we felt some effects from supplies specially in locations like Huntington Beach and job growth that was probably the biggest culprit to our disappointment. We only have 13,000 jobs in 2017 down in OC compared to about 25,000 in 2016. Current projections that were getting from Moody’s as job growth in ‘18 should be back up to about 28,000. You are seeing a reduction in manufacturing jobs but an increase in white collared jobs in Orange County, so again we’re expecting job growth to be about double what it was last year in Orange County.
Supply is currently expected to be a hair higher than it was last year, this year or in 2017 it was about 5,000 to 6,000 units and ‘18 is projected to be closer to 7,000. So, Orange County if the jobs comp should do comparable to what it did this year we are currently forecasting revenue as you look at Orange County to be in the below 3s.
When you get over to D.C. the year started out with a sluggish job growth and it picked-up measurably as the year progressed. What we feel like hurt us more in D.C. this past year was due supply down in the ballpark areas as well as on the southwest waterfront, little bit of supply also in Noma and even though we don’t have properties directly in those submarkets we felt that most acutely in our Logan circle U Street area where during the fourth quarter we actually had revenue growth, it was negative 1.5%. So, within a district when you have a different neighborhood it is drawing down some of our resident base.
And then just quickly on the dispositions you made in the fourth quarter and under contract in 1Q ‘18 in Southern California can you talk about the sale cap rates on those? I suppose like some of these weren’t ROI CapEx opportunities management [ph] 50 years old kind of limit to what you can do that, would you shed some color there?
Drew this is Harry. The sale cap rates were around the 5, there is a top 13 effects for the buyers who have much lower cap rates, you are right these are 50 year old assets in sort of our analysis included the theory that capital flows into value added product or extraordinary which from our perspective resulted in very good pricing more in the fact we thought we were being paid for any potential value add that we could have put into the property.
I mean if you just look at price per unit which I think are sort of a more enduring and consistent metric that cap rates of these assets all traded for well over 300,000 per unit. I mean just by way of comparison we just built a brand-new property in urban at 335 a unit which is very comparable to the price per unit that we received on these old 50-year-old assets.
I guess one follow up on that. Looking for private equity and other investors are obviously very interested in suburban value add play are there any kind of just warning shots or transaction that you are seeing that are evidence of maybe more interesting CBD core type product or is supply kind of needed there, need to work its way through before you think that.
We are starting to hear and see some evidence that capital is flowing back to core CBD as you mentioned. Again, there is just an abundance of capital that’s chasing multifamily today. And at some point, that capital needs to find a home. So, where value add continues to be oversubscribed from the capital demand standpoint you are going to see capital reallocate in trying to find that home and in core we are starting see that a little bit.
Our next question comes from the line of Rich Hightower with Evercore. Please proceed with your question.
Jerry going back to your prepared comments on the different markets and where they stack up relative to the same store range can you give us a sense of which market might potentially diverge most widely from your current forecast and what the drivers might in those specific markets?
Sure, I have been gone this and everybody always seems concerned about Seattle. Right now, we have Seattle just one of our top four five markets with our revenue growth north of four. Currently Seattle has come out of the gates a bit sluggish similar to what it did last year and then it turned over.
I will tell you this even though it feels a little bit sluggish versus our original plan when I look at new lease rate growth in the month of January in Seattle it was positive 0.5%, last January it was negative 1.5%. So, while it doesn’t feel great versus our original plan, it feels stronger than it did last year and accelerated. We are cognizant in Seattle that you have got new supply that’s going to hit predominantly in the CBD as well as up in the EU district.
We only have two same-store properties in those markets its two small deals up in the EU. A lot of the new supply that hit Bellevue last year has been absorbed and job growth is occurring out there whether it’s from Salesforce or Amazon or REI consolidating their campus.
So, Bellevue where we have a large concentration, we still are doing well, fourth quarter we have revenue growth north of 6%, we also have some B assets which are down in the southern suburbs of [indiscernible] as well as the Northern of [indiscernible] that continued to perform well above our average though.
While we recognize that Amazon has come out since they are going to take their future hiring level from the 70,000 that they talked about 50,000, there’re other tech companies that are starting up facilities whether it’s a Southlake Union or Bellevue or whether it’s Facebook, Google, Salesforce that are operating in more of a diversified workforce beyond Amazon.
So, Seattle is one that I think can go either way, it can surprisingly upside the last two years, as everybody had concern or supply really couldn’t hit it so that’s one that we are watching quite a bit right now. And then the [indiscernible] starting out the year a bit better than original expectations in San Francisco, you’ve had good job growth especially down in that [indiscernible] Hill area, the financial district where Salesforce has just started occupying their building as well as the new offices that are opening up down in Mission Bank, but right now San Francisco is continuing to do pretty well.
And then the last one it’s really taken off it’s been Orlando, very strong early results there, it’s not a major market for us but I think the influx of people from Puerto Rico has driven the population up and they are getting jobs and they are renting apartments, so those would be more of the positives.
And then anything on the negative side?
Right now, I think Boston has started out a bit sluggish, again that can happen, in the winter months there, we obviously had a disappointing fourth quarter in Boston where revenue growth was under 2% after being north of 5% and that was really related predominantly to pricing pressure within the CBD, mainly in our back-bay property, as well as there’s a lease up, that’s competing against us in our seaport area property.
But Boston is one that I think most people feel even the supply is there, the job growth is going to be very strong but it’s one that starting off on our stabilized deals, it’s been a bit weak, but when we look at the success we’ve had at our 345 Harrison deal, we’ve leased over 40 units there in the last month, and we don’t even open for occupancy for a couple more months. So, kind of we’re watching down but historically seeing in Boston that once March comes around you tend to see a significant acceleration in traffic patterns.
Secondly, it’s more of a I guess a housekeeping question, as you mentioned the contribution to the same-store revenue and NOI from properties being newly included in same-store [indiscernible] could you give us a sense of which properties are being included in that number, at least among the major ones just to know the changes that are proposed up?
Actually, if you guys out there want to look at on page 11 of our supplement we do detail out in the middle of that page what corner properties come into same store [indiscernible] so you’ll see the additions to the first quarter of ‘18 and [indiscernible] the full year same stores. And it’s predominantly I think it’s four props, three properties, four properties excuse me in the Seattle market, 880 Newport Beach which is the [indiscernible] down in Newport Beach and then Edgewater which is in the Mission Bay area of San Francisco, and it’s about 2200 doors.
Our next question comes from the line of Rich Hill with Morgan Stanley, please proceed with your question.
Hey good morning guys, thanks for taking the phone call. We spent a little bit of time on some of your bigger markets but also want to spend maybe a little bit of time, start talking about some of your smaller markets and how much that diversity is helping your revenue growth in the year ahead and maybe as you answer that question I’d love to maybe get a little bit more color on what you’re seeing in job growth outside of some of the major markets and how that relates to supply. It’s a big question but I’ll leave it up to you.
I guess I would start with you know probably three of the strongest markets we’ve had over the last two years have been our two Florida prop markets, Orlando and Tampa where not only have those markets done well but we’ve done exceptionally well within those markets versus our peers. When you look at Orlando and Tampa our expectation in 2018 will be a slight deceleration from this year but still revenue growth in the 4 to 5%, Harry spoke to the influx from Puerto Rico that’s affecting Orlando but even prior to that Orlando was enjoying very strong job growth and in 2018 job growth in Orlando is expected to be about 2.8% compared to about 1.3 nationally.
Tampa is coming in at about 2.7% so it’s also coming in very strong, and other than certain submarkets there’s not a ton of new supply. Our properties in those two markets also tend to be in the B, maybe in B- range, but we don’t compete nearly as much against the new supply.
Another market that has probably been our leader the last couple of years, it’s not really significant but it’s our Monterey portfolio which has had double digit growth and then high single digit last year in revenue growth. This next year it should once again be our top market at right around 6% revenue growth.
Employment growth is going to be stagnant at about 1.1% so slightly below national average, it’s predominantly an agricultural community. What really benefits that market is there’s been no new supply probably in the last four to five years as job growth has continued to do well.
And then the two markets that have been a little sluggish for us and we think will be in that middling range for us this year would be Baltimore and Richmond. Baltimore is this next year’s going to have job growth fairly close to national average at 1.3% Richmond’s going to be at about 1.5%. So, they’ll kind of be in the middle not big contributors or detractors.
Got it, and just one follow up question. Are you seeing any sort of population migration trends away from San Francisco, Seattle, D.C., Boston to some of these, I don’t know, secondary markets that you can identify at this point or is it maybe too early to put a finger on that?
It’s probably a bit too early, if you’re talking about -- are you talking about related to tax reform or…?
No, just generally speaking. We’re hearing that population migration is down over the past 5, 10, 20 years but starting to see some population migration trends to cities that are may be a little bit more affordable and still dynamic as well. So, you obviously have a diversified portfolio, and I was wondering if you’re seeing any evidence of that.
Yes. You’re seeing a bit. I mean, we’re seeing population growth come to places like Denver, Portland. I think Seattle has got some influx that of Northern California, within the state of California you’re seeing people move, especially protect jobs from the Bay Area down into Playa Vista down in Southern California. But, I wouldn’t say anything of significance other than those.
Just maybe one follow-up on that. We do pay attention to migration trends, the population growth. And given the diversified portfolio, clearly, while we have some markets that will experience outmigration at times, we’re most likely to benefit in other places. But traditionally, the Sunbelt is going to be where we see greater population employment growth but probably a little bit less on income growth. And if you go over to bicoastals, it’s typically where we see greater changes in income growth and wage growth. And that’s been pretty similar over the last year, if you look at our biggest wage growth, growers are -- it’s Northern California, it’s Seattle, it’s some of those -- we focus on the composition of both, not just immigration population but income growth and the ability to drive rental income ratios over time.
Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
I just wanted to follow up on Richard’s question on your Sunbelt exposure. It’s been going down steadily over last few years, it’s down 17% of your NOI and four years ago it was 27%. Will you potentially be allocating to the Sunbelt based on your findings of tax reform?
Hey, John. It’s Joe. So, first, a comment, before tax reform took place, if you look at what we’ve done over the last 12 months, I think you’ve seen us consistently say kind of the markets we want to increase exposure to which was number of those kind of Sunbelt type of markets such as Austin, Nashville, Denver and Portland. What you’ve seen is through DCP and other investments we’ve been able to increase exposure to I think all but Austin within those four that we have targeted at this point. So, you do see us trying to target those markets relative to our bicoastal. In addition, you’ve seen disposition activity in 4Q as well as our 1Q subsequent activity. As Harry talked about, the Orange County and Southern California dispositions, really more of a byproduct of our overweight to Orange County and the fact that we have Pac City coming on here this year which will increase NOI exposure.
As it relates to tax reform and impact of that, I’d say, it’s still early days. And I don’t expect to see a necessarily year one or year two impact from it but it is a good longer term question. When we ran through the numbers related to it, what we found by going down the IRS database and like many by income by zip code and by market, was that overall -- our consumer base has after tax increase of $1,700 or 3%. When you go to the bicoastals, you are really more like a call it 1% increase in New York, 2% in California, 2.5% in Boston and then all our other markets are kind of 3% to 3.5% increases. So, I would say not nearly as draconian as perhaps the headlines would have implied in terms of potential migration trends. But it’s something that we are evaluating and we will continue to think about.
And do you think the peak leasing season will give you an indication of this or will it take a couple of years potentially to realize the full impact?
In terms of migration trends within MSAs, it’s going to take longer than a couple of months of bottom line impact on the consumer pockets before we see an impact. The hope is of course that as everyone has more dollars in their pockets that as you go through leasing season, maybe you see some additional strength.
And then, my second question is on the MetLife and KFH JVs. I know you don’t really provide same store guidance for this portfolio. But, in the fourth quarter and that’s minus 1% same store NOI. And I’m wondering if you project that organic growth turns positive in 2018?
Yes, we do. When we look at our MetLife portfolio and it’s about 9% to 10% of the total Company on a pro rata basis, we see revenues next year coming in probably in the mid ones; that compares to again same stores coming in at around 3. Expenses probably be in the mid to high 3s because tax issues in 2018. And that would bring you at NOI in the low ones. I want to remind you, there is a heavy percentage of that MetLife portfolio, it’s really comprised of three or four assets that are in a very high supply markets. And these are not just A properties, these are A, plus, pluses, one would be in Columbus Square up in New York, one would be Ashton Austin, In Austin, one is in downtown Denver, which is with heavy new supply, and then you’ve got another one in right downtown [Indiscernible]. So, it’s understandable in our opinion to see how revenues are going to be a 150 bps below what our same store pool is.
Our next question comes from the line of Dennis McGill with Zelman & Associates.
First question just on expense side. The guidance the last couple of years I think coming out pretty close to the high end, maybe slightly above the high end. As you set the outlook this year, how much should that factor into it and how much variability you think -- what would drive the variability and I guess to the high end versus the mid or low end?
Yes. Again, our guidance this year’s 2.5% to 3.5%, pressure point is going to be on real estate taxes which once again are going to come in high single digits. We have some impact from 421s which will drive total expenses up, almost 40 basis points to 50 basis points. The other pressure points we’re feeling are personnel. And while we see wage pressures probably pushing us up about 2.5% to 3%, we’ve come up over the last year with some efficiencies within our workforce whether it’s on the sales side, the administrative side or maintenance side that I think will be able to compress the impact of that down.
Probably, we want to push us to the high end of guidance, if we get some unforeseen tax bad guys or don’t have as many appeal wins as we’ve typically had, we really don’t budget for those significantly but that could affect us on the tax side. On the personnel side, it really just depends on labor markets. Last year, we were surprised up in San Francisco as well as Seattle when wage pressures took our personal cost up between 5% and 7%. We feel like, in certain markets, we’ve addressed wage scale issues. But that’s something that could kick in this year. Joe was talking about both the benefit from tax reform but also we are seeing wage increases on national basis go up 3%. Now, if we see wage pressures, we would hope with some outsized rent growth that would accompany that. So if it pushes us to the high end there, we would think there will be a corresponding push to the high end ideally on the revenue side. But, our other expense categories, primarily it’s repairs and maintenance or marketing costs, we have continued to work to create a more efficient way for our residents to deal with this. And we think we can get both of those categories very close to flat to negative. In fact, currently, we’ve got about 33% of our onsite tours are booked through appointments online. So, we’ve been able to cut out some of the personnel burden there as well as over the last year, year and half, we’ve installed package lockers into over 100 of our properties, which has made our people much more efficient.
And then, if you look at last year, the upside or to the midpoint or higher -- coming at the higher end, was that more driven by property taxes or personnel relative to your initial midpoint guideline?
It was more personnel.
And then, separate question just entirely, on the land side, I think you made the comment earlier, you just -- the land market just seems to stubborn as far as adjusting and make it difficult on underwriting new development deals. What do you think breaks out? What has broken out in the past?
We have been talking about that for the last six or 12 months, which is why I think you’ve seen our pipeline obviously continue to dwindle down with new net additions to the land pipeline being effectively zero at this point. What we have continued to say is that while rents have kind of plateaued at long term levels and cost inflations continue to creep up above that level, the release [ph] continue to be land pricing. So, I don’t think -- what we have to see change is really anything other than that and that either rents actually accelerate and outpace inflation or land pricing has to reprice which while we’ve seen at least one example of that on a deal we are focused on, I wouldn’t say it’s widespread yet at this point.
Are there any markets where you feel like one of those two things has happened to be the catalyst, which you think is going to be a more likely catalyst for rents or repricing?
This is Harry. I think land prices tend to be fairly sticky because you are dealing with individuals with their own sort of emotional analysis in some cases that’s not always entirely rational. And so, land sellers tend to be slow to adjust their expectations unless there is some particular event that could be negative, if they don’t respond. Rents are purely cyclical. So, I think that rents -- and development cost, so the other variable that Joe didn’t mention, and again, as construction activity declines, typically, one would expect construction cost to decline. I don’t think it’s necessarily a market basis that we can speak to but it’s -- each market is going to have its own set of facts.
Dennis, not to wear the subject out too much, this is Toomey. What I think is land reprices when merchant builders are heavy on inventory of it and the financing market dries up. And will we see that anytime soon? I am not certain. But, that’s usually the characteristics that starts to push more dirt into the hands of other people.
Our next question comes from the line of Nick Yulico with UBS. Please proceed with your question.
A couple of questions. First on the multifamily transaction market. With debt costs having gone up over the last six months, are you seeing signs of cap rates going higher? And even if not yet, do you think it’s reasonable to assume cap rates go up by a certain level, given the rise in interest rates?
I think, there’s sort of three factors that go into cap rates, one is interest rates, one is NOI growth and the other and perhaps most important is capital flows. Today, at least in the near term, capital flows are extraordinarily high. And therefore, there’s no reason to expect that the cap rates are going to move. And we have not seen any evidence that cap rates are going to move. If in the future, depending on what happens with the interest rates, clearly, if interest rates continue to climb, over time, there tends to be some loose correlation between cap rates and interest rates. But again, it depends on how those other two factors move. So, I wouldn’t be surprised to see cap rates move a little bit over the next year or so, but we have not seen any evidence of that today.
So, I guess, if pricing is still strong in the transaction market, Tom, I am wondering how you and the Board are thinking about share buybacks or special dividends, your stock, like most of the multifamily REITs, showing a meaningful discount to NAV. So, at what point do you stop investing in the developer capital program, stop doing acquisitions and instead focus on buying back your stock and selling more assets, if the transaction market pricing is still so strong and there’s risk of maybe cap rates going higher?
Hey, Nick. It’s Joe. Maybe I’ll set it up and just give you a couple of parameters around how we’re thinking about it, and then if anyone wants to come over the top. It’s a relatively new phenomenon, obviously with the selloff that’s taken place in the last 30 to 45 days. But the way we kind of think about it is where do you trade versus NAV, what’s the leverage profile, what are your committed uses, what are the alternative uses they compete for and then call it corporate factors? So, as you kind of take through those you have clearly a discount to NAV in place today. So, we’d agree on that front. From a leverage profile standpoint, we like where we are at from a maturity profile, a line utilization standpoint, and solid BBB plus credit. But, we’ve not intent to lever up, especially for share buybacks. So, you can kind of take that source off the table, which reduces your sources back to just dispositions, cash flow. And so, then, you come over to kind of committed uses. And when you look to our sub between development in DCP, we still have 200 plus million dollars of committed uses at this point in time. In addition, we continue to take a look at DCP and development, and loans, not necessarily on balance sheet yet. We do have potential land parcels that we’ve been working on for a quite long period of time that could hit. So, when we’re thinking about shadow uses, that’s going to factor in the math. But ultimately, you get to a point where you do have available capital and similar to how our DCP and development program compete against each other for that amount of capital, you are going to have one more competitor in the ring which is share buybacks. So, compete those three against each other when we have the capacity. The other piece of it be in corporate factors which I think everyone is aware of is a REIT from a tax gain capacity standpoint, we can only sell a certain amount of assets each and every year. And right now, our dispositions are really allocated towards those preexisting uses at this point and time. But I think as the year moves on, we will take a look at where the discount is and what the alternative uses are and make the best decision at that point.
I guess, just following up and I appreciate lot of detail there. But, at what point do you -- I understand you have existing uses but how do you -- as a company -- I think, look, a lot of REITs are facing this issue right now. How do you think about continuing to invest in development at this point in the cycle based on how the stock price is doing, based on the fact that your FFO growth this year is 3%, which is matching your same store growth? I mean, what point do you start rethinking the value of investing and doing development versus again just maybe buying back your stock?
It’s a fair question. I think, we are going to continue to look at those IRRs on development, which are in that low to mid teens range. And whereas DCP is call it [ph] acquisition and development, you end up with a stock buyback on a unlevered basis, if your unlevered assets are seven, you have call it 10% unlevered asset value buyback, you are getting 7.5% to 8% type of IRR. So, IRRs are still arguably more compelling. Now, clearly, there is more risk associated with it. But that’s going to be the discussion as when we get there and as we look at each development, if we can get compensated and get the 150 to 200 basis points over range that we target; can we get to the upper end of that and account for the increased risk, over compensate or buyback. At the end of the day, we are never dependent on equity issuance. And we are looking at basically cash flow and dispositions to fund that development. So, the value creation margin still exist, the IRRs still exist. But we are obviously cognizant of the fact that we have another use of capital that we could potentially look at.
As it relates to your second point that you made a comment on same store growth and FFO growth being one and the same this year which we provided a little bit of lock in the earnings release as well as in my commentary. But, I think it’s probably important to expand on that a little bit because it does relate to the development pipeline. We mentioned that developments in DCP overall are net neutral contributor this year to earnings, which we got a couple of follow-up question overnight on that. What’s really going on is that you do have a net positive contribution from developer capital program. And then, you have a net negative contribution coming from development. And I’ll hit you with the punch line first which is basically you have a timing issue related to Pac City, 345 Harrison. What we have is, call it, 700 and plus million dollars of development in those two assets, which this year, we are going to end up with a FFO yield of about 2.5% coming off of that 700 million. As you guys know, that’s really just 4% cap interest disappearing on those developments, taking on expense structure which results negative cash flow initially and then ramping up as lease up comes on. Eventually, you go from a 2.5% FFO yield to stabilizing those assets out over a couple of year period into the high 5s. so, you have basically $600 million that’s already been paid for on that $700 million that has all NOI come into a sort of next couple of years with little bit of funding left in the form of disposition. So you’re correct that this year a zero contribution, but we would expect that to ramp up as we hit 2019.
Our next question comes from the line of Rich Anderson with Mizuho Securities. Please proceed with your question.
One of the reasons your stock is in a --stock performance misery, [ph] I guess, is the issue of supply. And Joe, you mentioned land being difficult to make sense. Is that -- I look at that as a good thing. I mean, okay, maybe won’t be able to do as much development, but the reason why multifamily stock has had a tough time this year in part, there is a lot of things, but partly because of supply. So, do you look at that as a good read through generally? And I guess that question goes to everybody or anybody.
Clearly it goes to a positive on the ground fundamentals if supply comes down. For 90 plus percent of our business, that’s a positive if development is more difficult to pencil. For the other side of the business, on the transaction side, you may see the pipeline ramp down a little bit, which results in less earnings contribution near-term but in theory you make it up on the same store NOI side over time.
Yes. It sounds like a good ratio, I will give up 10% from my 90% any day. So, in terms of how you’re looking at land, just the market in general away from you, do you still see -- it sounds like you’re still seeing deals happen. So, is it kind of stupid land trades are still going on, if not from UDR but from other players that could potentially lead to stupid new development projects also or do you feel like it’s starting to slow down even outside of you guys?
Well, I would hope that most deals are done -- are rational as opposed to stupid, particularly the ones we do. But I -- Rich, I think, it clearly -- and we’ve seen it, we’ve all talked about it for the last couple of quarters or more, it’s getting harder for these deals to get financed and fewer of these deals will pencil. But that doesn’t mean that none of the deals will pencil and that capital isn’t going to be a available to continue see new development deals and that UDR, even while maintaining sort of our consistent disciplined underwriting approach, won’t be able to backfill our pipeline. We all expect that to happen over time. But, it does mean that you have to look at a lot more deals before you find one that -- the pencils in it means that it’s likely the construction starts will continue below the levels of the last three or four years.
Right. So, hopefully, you guys -- you and the REITs are kind of leaders by example and we will see how it plays out. The last question I have is, Joe, you mentioned the development pipeline kind of staying at a lower end because of all of these factors. Do you see that -- what’s at least within the DCP effort, do you see that as the same six projects will be around for a little while or do you think there will some trades but you’ll kind of net out to the same number over the course of the year?
I think, there is potential to net out to the same number over time. We’re sitting at, call it, 160 million or so today of exposure there. Over the first quarter, you’ll see DTLA which is coming up through its option period, so we will work through the kind of buy, hold, sell analysis on that one. But we do have another 60 million of funding left on some of the other deals. So, will be at a 180 million or so of exposure. And we’ve talked in the past about kind of our earnings and cap on the program that we impose on ourselves. But, we think we still have another 100 million of capacity. The difficulty is going to be if we see development overall coming down, you can expect that there is fewer developers therefore looking for that type of capital. So, there may be fewer opportunities. But, we think we’ve probably got a shot at maybe a couple of them throughout the year that could continue to backfill the pipeline.
I’d add to that a little bit. I think you’ve been around long enough, and look towards the future, and you’ve got to realize if we’re in a rising interest rate environment, absent the NOI impact, the question is going to be loan proceeds and availability of lending in that environment and will that bring more assets to the market as construction loans start maturing. And we’re down two to three years down the road. But past experience always points to people wanting to get out ahead of that and start selling assets. And so, I think you are going to see a lot more transactional volume over the next couple of years. And inside of that’s always the opportunity to recap deals, buy deals. So, I think we’re just entering what I would call the natural progression of this cycle. And it will start with decreasing supply aspect, improving NOI trend, but at a higher interest rate environment creates a more transaction-driven market. And I think we are ready for that.
Our next question comes from the line of Nick Joseph with Citigroup.
I appreciate the detailed market commentary. But from a regional perspective, I guess, just thinking about your largest three regions. How would you rank the West, Mid-Atlantic and Northeast in terms of 2018 same store revenue growth?
You said the West, Mid Atlantic and Northeast?
Exactly.
I would definitely say the West will be the top, followed probably by the Mid-Atlantic and then the Northeast. You got the Northeast being heavily weighted by New York. New York, our expectation right now would be revenue growth in that 1% range. So, it’s going to [technical difficulty] Probably, if you went to the other regions, that southeastern region I think is going to compete with the western region to be the top.
And then, just your commentary on 2019 deliveries, and obviously there could be some slippage. But, are there any markets that you are either expecting meaningful decreases or meaningful increases kind of just versus the average?
And I think it’s a little bit too early to tell at this point. The markets that we’ve seen supply come down and permit -- sorry, permit comes down a little bit [technical difficulty] more Sunbelt biased. So, if we run through the regressions there, they imply maybe a little bit more come down to Sunbelt; overall, it’s fairly similar. [Ph]
Our next question comes from the line of Alexander Goldfarb with Sandler O’Neill.
Just two quick ones for you. The first, you guys have about 20% exposure to D.C. [ph] your biggest market. Just given that market’s propensity to produce a tremendous amount of supply in contrast to the job growth, do you guys foresee that market just pairing that back in the next year or two to maybe right size it relative to some of the other markets?
I think you can probably expect similar to what we are doing in Orange County, which is another market that we view as overweight versus our long-term average. We have kind of gotten to the point now that we can start to source capital from some of the more bicoastal and overweight markets, given that we are comfortable with the 20 markets we are in and diversified platform. So, I think you probably see us wind up a little bit over the next two or three years whether through right dispositions or just lack of new investment while we invest elsewhere. So, I think your thesis is correct.
Okay. And then, the second question is, you guys -- and this has been a sort of a recurring theme. Do you guys produce better than average same store NOI? And yet we look at where companies are expecting guidance for 2018 versus 2017, ex items, your FFO growth is basically in line with peers. So, one, what are some of the offsets that’s causing -- the offset to the same store NOI especially because you said the MetLife JV should actually improve? And then, two, when do you think on a more consistent basis we will see the outperformance on the same store lead to outperformance on the FFO?
Probably a couple of factors here. One, you mentioned MetLife and while it doesn’t prove, it is still at a run rate lower than our same store. So, when you blend the two, you do have a pro forma combined same store that’s below our 3% guide. So, when you lever that that obviously impacts the earnings growth.
When you go to the development pipeline, there is really two pieces to speak to. One, if you look at the development pipeline that’s winding down from say 1 billion to 0.5 billion, if you look at our interest expense guidance, we are up about $15 million year-over-year. About half of that’s really due to cap interest coming off. So, it’s really a development pipeline issue related to cap interest coming off and causing interest expense to go up a little bit more than perhaps what I think a couple of models factored in when we look at them.
The other piece goes over to Nick Yulico’s question and kind of my response there, as to 700 million related to Pac City and 345 Harrison. When you are earning 2.5% on $700 million of deployed capital but you funded that capital with call it 5, 5.5 dispositions as well as some debt, you end up with a fairly dilutive impact in the year that you go through lease-up. As we fast forward, call it a year or two and you go from 2.5% up to let’s say 5.75 to 6 over time, you basically have 3% on that $700 million that is effectively pure accretion outside of that 100 million that we still have left to fund. So, while 2018 is a negative impact from those two assets, we think we more than make up for it when we get into 2019 and 2020. So, I think you will see development start to be much more additive as we fast forward.
There are no further questions in queue. I would like to hand the call back to Tom Toomey for closing comments.
Let me have a brief closing, given the time element. First, I thank you for your time and interest in UDR. And second, if doesn’t come across, I want to make sure we state it. We feel very good about our strategies, about our continued execution and how this year is already starting out very strong for us. So, with that, we look forward to talking to you more in the future.
This does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.