Greetings, and welcome to UDR's 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 Enns.
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 Statements made during this call, which are not historical, may constitute forward looking statements. Although we believe the expectations reflected in any forward looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met.
A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward looking statements. When we get to the question and answer portion, we ask that you be respectful of everyone's time and limit your questions and follow ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to UDR's Chairman, CEO and President, Tom Toomey.
Thank you, Chris, and welcome to UDR's 2nd 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 Troop and Harry Alcock, who will be available during the Q and A portion of the call. We again reported strong results during the Q2 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 their prepared remarks.
But in summary, through the first half of the year, blended lease rates 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 returns 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 at our prospects given the increased probability for better year over year revenue earning and the anticipated improvement in bottom line contribution from development activities. From a capital allocation standpoint, we remain flexible Last, a special thanks to all our UDR associates for their continued hard work to produce another solid quarter of 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. 2nd quarter year over year revenue and NOI growth for our same store pool, which represents approximately 85% of total NOI, We're up 3.4% and 3.5% respectively. During the quarter, we posted Solid blended lease rate growth of 3.8 percent, a robust top line contribution from our long lived operating and technology initiatives and continued to rein in controllable expense growth.
1st, year over year blended lease rate growth for the quarter was 20 basis points higher and during the same period last year. While this positive spread did not widen versus what was realized during the Q1, Market rents exhibited typical seasonality during June July by continuing to accelerate, something we did not see during 2017 when market rents for our same store portfolio peaked in late May. 2nd, 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 It's a recurring differentiator and a meaningful driver of incremental growth.
3rd, year over year turnover continues to decline. Year to date annualized turnover is down 160 basis points, an acceleration from the 1st quarter's 120 basis point decline. This is especially impressive given that our short term leasing initiative should result in higher turnover. 4th, 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 stack 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 in site level staffing, benefit from reduced resident turnover, Invest in energy saving capital expenditures and drive down marketing costs 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 5th, rent concessions during the quarter were 29% lower than last year and gift card expense was down 54%. Throughout the first half of twenty eighteen, the pricing environment for lease ups remains more rational than during 2016 or 20 17. 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. Our year to date revenue and NOI growth through 6 months was 3.2% and 3.1% respectively, Just below our upwardly revised midpoints of 3.25 percent.
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 Q1, The majority of our markets are performing in line with expectations with a few exceptions. The Florida markets, San Francisco and Boston have outperformed versus original forecast, 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 Q2. 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 velocity in line with to slightly ahead of Original expectations. At 345 Harrison, our $585,000,000 project in Boston, We ended the quarter at 59% leased and are 64% leased today after only being 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 and its anticipated contribution to 2019. At our $350,000,000 516 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 2 JV developments Totaling $94,000,000 in pro rata spend remain on budget and on schedule.
Our suburban mid rise Community located in Addison, Texas. Vitruvian West continues to be a home run 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'd 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 2nd quarter results and guidance, A development and investments update and a balance sheet update. Our 2nd quarter earnings results were $0.49 $0.45 respectively. 2nd quarter AFFO was up 0.02 dollars 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 FFOA per share to $1.93 to 1 $0.96 and AFFO per share to $1.78 to $1.81 Primary drivers of the increases include Upside from our same 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 We're each increased by 25 basis points at the midpoint to 3% to 3.5%. Year to date blended lease rate growth outperformance drove the upside to top line guidance, While non controllable expense pressures increased our expense growth guidance. For the 3rd quarter, Our guidance ranges are $0.48 to $0.50 for FFOA and $0.43 to $0.45 for AFFO. Next, development and investments. We continue to work towards stabilizing our development pipeline around $400,000,000 to $600,000,000 As 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 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 development contribution to earnings, in 2018, dollars 716,000,000 Our wholly owned projects are in lease up at an FFO yield that will average in the mid-2s. In 2019 2020, We anticipate this yield will improve towards 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 $771,000,000 Our financial leverage was 33.4% on an undepreciated book value, 25.2 percent on enterprise value and 30% inclusive of joint ventures. Our consolidated net debt to EBITDAre was 5.7x and inclusive of joint ventures, it was 6.3x. 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 2nd quarter or $1.29 per share when annualized, representing a yield of approximately 3.4% as of quarter end.
With that, I will open it up for Q and A. Operator?
Thank you. At this time, we will be conducting a question and answer session. One moment please while we poll for questions. Our first question comes from the line of Juan Sanabria with Bank of America Merrill Lynch. Please proceed with your question.
Hi, thanks for the time. Sure, can you give us your latest thoughts on supply? There's clearly been some slippages in years past, but if you could give us a sense of What you're seeing in terms of 'nineteen versus 'eighteen deliveries and any major movements across markets that you could highlight would be fantastic.
Hey, Juan, this is Joe. So I would say overall, our expectations really haven't changed at this point from the last couple of quarters. We've been factoring in an expectation of slippage throughout the year. So when we've been talking about 2019 being flat to down 10%, That's already incorporated that number. And so through a combination of looking at 3rd party data, looking at our internal regression models, Then of course talking to our people in the field and getting their sense for where it's at, still think 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 2 Florida markets, our 2 Texas markets as well as New York City and Orange County.
Great. And then just on the revenues that you guys talked about 2019 improving Based on the earn in at the end of the year to the start of 2019, could you just give us a sense Kind of from an earning perspective, where you are today and kind of what guidance implies to end the year at versus Where you ended last year at?
Yes, Juan, this is Jerry. I don't have that number of what the earn in is as of today. But one thing I would And why we said that we expect the earn in to probably be higher as you get to the end of 2018 and 2017. So when you look at market rent growth, I had this in my prepared remarks, but market rents peaked last year as 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, but 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 3 or 4 months of the year, last year being an aberration. So When you look at the earn into next year, a lot of that is built throughout prime leasing season, 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 see for available rents going forward Is that you're going to see a continuation of what that normal seasonality rather than the 2016, 2017 scenarios were.
Great. And do you mind sharing the July stats for the new and renewals? Sure.
July is in the mid-2s for new and it's in the high 4s for renewals.
Thank you.
Sure.
Our next question comes from Nick Joseph with Citi. Please proceed with your question.
Thanks. On development, can you talk about what you're seeing in your desire to backfill the pipeline? And in the event you don't add 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 toss 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 6, 12, 18 months. On the development side, you saw in my prepared remarks, we think by later in 2019, we'll probably stabilize out in that $400,000,000 to $600,000,000 range. And as a reminder, we're going from $800,000,000 today, which is 96% or so funded down to 0 relatively quickly. So 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 that moving forward.
Yes, Nick, I mean, you hear it from everyone else. The market is 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 Back to start, we've got next phase at Vitruvian.
We've got a property in Denver that we've talked about that's tied up and a couple of others that we're working on that gives us Comfort or confidence that we'll be back up into that $400,000,000 to $600,000,000 range throughout 2019. I'll tell you that We continue we haven't changed our underwriting program. We underwrite each asset and its own merits using revenue costs, direct growth Assumptions that we believe are appropriate, while maintaining our target 150 to 200 basis point spread.
Thanks. With the shift more maybe to DCP, is there still a soft target of about $300,000,000 for that? Or could you see that moving up as well?
Yes, I think it's really going to depend on the opportunity set moving forward. So we have $180,000,000 today. We have additional funding of $30,000,000 with a pre existing pipeline, so at least $100,000,000 to get to that soft target. But as we have talked about, there's a number of other factors 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, opportunities, Yes, you could see it drift higher.
You could see it not get to that $300,000,000 level, but we'll take it deal by deal and then talk about it with you guys as they come in.
Thanks. And just maybe quickly on occupancy, it looks like 2Q same store occupancy at 97% is Maybe an all time high, first half was almost 97%, but you maintained occupancy guidance for the year, which would imply slightly lower 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 it just an assumption that these high levels can't be maintained?
I think the high levels, again, you've pointed out, we've carried it for the last several months. I would point out a couple of things. Occupancy gets Propped up a bit 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 the year continues to drift a bit.
The other thing is 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 twenty eighteen is going to have more deliveries in the first half. So We're just a little cautious as we look at the back half of the year, how directly we're going to be affected By those deliveries. But right now, occupancy today sits still at 969 or so. So it's holding up very well.
Thanks.
Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Hi, thanks for taking the question. You've talked about some of the challenges you faced in New York City due to supply and we've seen some peers of yours Opportunistically reduce their exposure or evaluate reducing their exposure to Manhattan. I guess I'm just curious if that's something that you guys would consider.
Yes. Hey, 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 jobs relative to our initial expectations, surprise to the upside this year.
And then if you look at supply, I think everyone is well aware that supply expectations in 2019 should start to come down fairly dramatically. And 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 it. But think maintaining kind of a market weight exposure relative to peers today makes sense.
I appreciate the thoughts there.
And then separately, in the context of Prior conversations around entrance into new markets, we talked a little bit about Philadelphia as maybe And so just curious if you could provide an update on that front and some detail as to your thoughts on how you would enter new markets and maybe what kind of exposure you would take longer term?
Yes. So Overarching kind of the portfolio strategy is, of course, the view that we're going to maintain diversification across plus or minus 20 markets, etcetera. And so Yes. You mentioned Philly there, which we have been taking a look at. And I do want to remind everyone that's not necessarily a new market.
We do have a pre existing asset there within a joint venture. And so we've been active in the market. We have boots on the ground. We are looking at a potential developer Capital program transaction within that market. It's a market that from a job perspective, whether you look at medical or educational, It 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 long term, relatively stable and lower 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're thinking about it On the DCP context as we look to potentially expand a little bit in that market.
Great. Thanks for the time.
Thank you.
Our next question comes from Richard Hill with Morgan Stanley. Please proceed with your question.
Hey, guys. I want to circle back to the development pipeline. I noticed Stad, you mentioned that all your development pipeline was in lease up. How are you thinking about your development pipeline going forward? And look, if development was Shut off today entirely.
Is it your view that you can continue to grow this trajectory that we've seen over the past couple of quarters?
Hey, Rachel. I think going 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 0. While it may temporarily go there for a quarter or 2, as Harry mentioned between The Dublin parcel we have, the Denver parcel we have under contract, Vitruvian parcels that we have within the joint venture, As well as visibility on a couple of other items we're working on, we do expect it to ramp back up to that kind of $400,000,000 $500,000,000 $600,000,000 range. Admittedly, that is approximately half of where we've been running most of the cycle. And so again, the discipline that we've exercised 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 keep creating value off of that piece of the platform.
Our next question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.
Good afternoon, guys. Jerry, sitting here in essentially August 1, what markets have Outperformed and underperformed your expectations from the beginning of the year by the widest margins thus far. And what sort of magnitude are we talking about?
I wouldn't say anything's significantly off from original expectations. Probably The 3 markets that have surprised to the upside would be the 2 Florida markets, Orlando and Tampa have both Done very well for us in a couple of our best markets, but I'd say they're maybe 50 basis points ahead of 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 into the Bay Area a little heavier in the second half. So I'd say those 3 are the positive outliers. Really there's 2 negatives.
1 is Austin where Supply outside of the CBD has been hitting us at 3 of our mature B asset quality properties. And then probably the biggest disappointment has been New York City. New York year to date is at negative, I think, 0.4% Going into the year, we thought it was going to be, call it, a 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 it's having more of an effect on our B The assets in the financial district than we originally projected. 2nd, we lost a corporate 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 We did a central system building upgrade at one of our properties in early 2017. That drove down both utilities expense and also utility reimbursements. And we show utility reimbursements as a revenue component.
The benefit to NOI was positive, but this change in the system Resulted in a reduction of our 2nd quarter revenue growth in New York reporting 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 are expecting to see accelerate in the back 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 and early part of 'nineteen from that supply?
No, we do see the I think as long as we're watching concession levels, but D. C. Has been 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 Cumming is over in the ballpark area and while we don't 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 2 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.
Okay. Thanks guys. Appreciate
it. Our next question comes from John Kim with BMO Capital Markets. Please proceed with your question.
Jerry, you just Talked about some of the disappointing markets, but I'm wondering if you would include the MetLife joint venture as part of that conversation, the disparity between the performance of your joint ventures and your consolidated assets continued to widen. And I'm just wondering what was driving that?
Yes, I think it's a couple of things. 1, I think a lot of you have seen our MetLife assets, they're top of the market A pluses, 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, really 6 properties that are 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 of San Diego. We've got probably the premier property in Downtown Seattle That's finding new supply. We've got a property in downtown Denver that's included in this group. And then we also have one in 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 you're seeing right now.
Can I ask a question about other income? You have parking growing at 22%. And I'm wondering if you could provide some color on how much runway is left? Other words, how many properties are you charging for parking? What's the opportunity going forward?
And in relation to the Joint ventures, do you have the same other income levers on your joint ventures that you do on your 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 parking in urban areas where you have garages and parking is at a minimum. So while a lot of the MetLife deals are in those urban areas, there's less opportunity To drive outsized rate or parking fee growth at the MetLife deals. I'd say at the rest of the portfolio, we've turned parking on throughout the entire UDR platform.
2 years ago, we started charging just to existing or to new incoming residents. Over the last year or so, we've started Assessing it on renewing residents. This year, we're looking and next year, we're looking more at Reserved type parking spaces where people can select where they want to park as well as finding opportunities in some locations To allow non residents to park in our communities, that's been a good driver up in Seattle, for example. But I think you'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 it can keep going at that pace, but I I'm confident to say it's going to continue to grow well in excess in multiples of rent on our apartments growth. 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 And our earnings model going forward, there's a few things that we're we started this year that I think are going to have We're going to grow incrementally over the next few years too such as renting out common area spaces such as conference rooms, rooftops, Resident lounges to non residents. This year, it's going to be a minimal impact, maybe $500,000 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 as what inning you think we're in On the other income bucket?
Gosh, I'd say we're in the first half of the game.
Our next question comes from Drew Babin with Robert W. Baird and Company. Please proceed with your question.
Hey, good morning. I wanted
to touch on Orange County as well as Los Angeles. But starting on Orange County, do you feel like the Pacific City Development is maybe cannibalizing some of your same store performance. The market is still growing decently in terms of your revenue growth but decelerating some. And I guess Can you just talk about that as well as kind of the general supply and demand dynamics in the market that would help?
Sure. Drew, this is Jerry. Pacific City, again, it's in lease up right now. It's a little over 70% Leased, we do have 3 other properties in Huntington Beach. 1 is probably a mile away from Pacific City and I would 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 a Much different price points, so I don't think it's being affected at all. And then our Bellaterra community, which we built 4 or 5 years ago, is Not really located on the Beach, it's right up on the 405 freeway. It's probably been somewhat affected, but not as materially. But I would tell you that Huntington Beach is one of our, if not the, weakest submarket that we have in Orange County right now. When you look at supply and demand within Orange County, we've got about 1700 units that are In 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 hoped for this year. Current projections are about 21,000 jobs In 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're optimistic as you get into next year that you're going Supply come down a bit and some stability reemerge.
Okay. And then smaller piece of the puzzle, but I
was hoping to About the Marina del Rey portfolio, looks like turnover was up a little bit. Is there any supply kind of directly impacting that this year and just kind of what are the local dynamics this time?
Yes, there's really there's about 600 units of new supply that's coming into play up in the Marina area. Yes, MDR is I mean, it's I think turnover when you look at that, and again, our turnover About 200 basis points, a lot of things can impact that. Probably the largest impact is when you have a lot of New supply with irrational pricing coming directly at it. And I would say last year we were pretty stable. This year It's up 400 or 3 60 basis points, but still roughly about UDR average, so I don't think there's really a story there in LA other than it's a smallish portfolio, so it doesn't take many new move outs to affect it.
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 Spiring in a certain time period and how much of attention are you placing on customer service. And I will tell you, we 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 in traditional development lending or anything kind of industry wide that would be causing the opportunity set to widen for you or is it just maybe more Coincidence or kind of bit more time kind of out of the gates with the DCP program talking to folks?
Yes. I think your last comment there, Drew, is really what's driving it for us specifically, meaning the fact that we have been out there for a while, we've been consistent in the space. Think the funnel just continues to widen a little bit. You see more and more opportunities come 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. 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. Great. That's all for me. Thanks.
Our next question comes from Rich Hightower with Evercore ISI. Please proceed with your question.
Hey, good afternoon, guys. Thanks for taking the question here. So I want to touch on The same store revenue guidance really quickly. So we've had 2 quarters of better than expected results in each case. The midpoint 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. 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? 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 Then the bottom, but we are cognizant that you do have supply coming into several of our markets a little more heavily The back half of the year that we're just watching out for. 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 45 is strong numbers. And when you look at the components, Which include the occupancy growth of 30 basis points, contribution from other income of about 60 bps to 80 bps and the rest coming from rents. Yes, we're happy with where it's coming in.
But yes, we're always watching out for Indicators of concern and while we're currently not seeing anything coming at us that gives us a 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 2 months free. We feel good about where we'll end up this year.
Okay. That's helpful, Jerry. And then 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 2, and then you described your experience With the very strong lease up at 345 Harrison, just walk us through what's going on in the market there? And has anything Structurally changed in the last 3 or 6 months that we should be aware of to the positive that is?
Yes. I think you had We had a time period that we're still in where competition, especially downtown against new supply kind of subsided In our Seaport area, you had the Berkshire deal that I think achieved stability. So we were able to get a little pricing Power at our Pier 4 community. Our 2 properties up in the North Shore did extremely well. They had revenue growth over 5% We're about 5%.
When you look at the combination of how Pier 4 as well as our Back Bay Property did. They were coming in around 3%. And then the South Shore where we have some A communities has been a bit weaker, but still coming in at 2. 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, you only have 800 units this year Delivering within a 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's 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 Q1 with concern Because of the weather patterns and then once you get to March over the last 2 to 3 years, it seems like we've been able to hit the accelerator and take off And this year proved to be no different.
Great. Thank you. Sure.
Our next question comes from Rich Anderson with Mizuho Securities. Please proceed with your question.
Thanks. Good afternoon. It's ironic that Parking is a driver of growth, I thought I had to say that. But Jerry, I'm curious about this parking strategy. Are you leading the market Or meaning is your competition charging or are you following the market and the question being are tenants potentially going to be
I think we're leading, especially in suburban areas throughout the country. I don't think a lot of our peers Yes, are really following. And what I would tell you is it's a rather de minimis amount. You're talking $5 to $10 typically For a non reserved parking space at a garden community and when your average rents in those types of garden communities are say 1500 to 1700, the UDR average It's over 2,000 that exceeds the urban high rise. It's just not a material amount.
And I think when you can offer someone A specific spot that's theirs when they get home at 10 o'clock at night, I think it's beneficial. And I think especially when you look at some of our older properties where Parking is at the minimum because they were built in, call it, the 1960s, 1970s. I think people want to be assured that they have a space. So I think better policing of the parking lots Makes it a benefit to the residents that we have not seen or heard an uprise from our residents. We haven't seen turnover go up, Obviously, as you look at our numbers and I think it's something that they're willingly accepting.
Okay. I guess the numbers kind of put in perspective too in terms of relative to the rents they'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's 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 wither a bit maybe a year or 2 from now. And if that is the case, the way you're seeing it, how does this, sort of, call it an inflection point, Change your behaviors as a company relative to what we've seen more typically in previous cycle shifts.
Hey, 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. And our conversations always come down to about 3 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 is an echo of that. That drives us to an optimistic view of the economy.
Demographics, hell after talking about it for 15 years, you're 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 And the second thing we talk about is where our value creation opportunities are. And you're hearing it in the operational side And Jerry didn't mention many of it, but a lot of it is, I think multifamily space has been low to adopt technology solutions. And we've been more of an industry that's followed instead of lead. 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 talk 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're probably a little bit more defensive in nature in our investment. So The combination of the 3 always leads to where is the numbers better results. And I think that nice dialogue that we have here And the full breadth of the experience in the room is weighing to just what you saw, very good quarter And prospects for the balance of the year to be good. And we're frankly, we're very focused on 2019 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're doing anything but the responsible thing.
Okay, fair enough. Thank you.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
Hey, good morning out there. Joe, I just was wondering if you could just talk a little bit about capitalized interest. If you guys said that you're having $800,000,000 in development now, going to go down to 0 for maybe a quarter or 2 before ramping back up to that $400,000,000 to $600,000,000 So it would sound like as we think about our 2019 numbers, Interest expense would go up materially as capitalization comes off. Is that a fair way to think about it? Or are there some offsets there?
Go ahead. I think you may have jumped to me by 1 year on that one. Okay. Really in 2018, if you look at our Guidance for interest expense relative to last year, we're up about $14,000,000 on interest expense. Half of that is really driven by The decrease in cap interest that we saw from 2017 to 2018, so that number came down from I think around $17,000,000 $18,000,000 down to around $11,000,000 This year, the predominance of that was really felt kind of the first half we had higher cap interest driven by 345 in Pac City.
In the second half, we're going to have relatively minimal cap interest. We'll probably end up second half somewhere around $2,500,000 to 3,000,000 Which tells you that the 1st 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, dollars 500,000,000 By late 2019, you'll start to see cap interest tick back up. But yes, I think we're kind of leveling out here a little bit on cap Given how much we've come down in the last year or 2.
Alex, let me just add one thing. As cap interest comes down, we expect NOI to go up. So in effect from an earnings standpoint, if 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.
Yes. That's a great point. Just to remind you, Alex, that $716,000,000 between the two big developments, That's what's yielding in the mid-2s this year between FFO and NOI combined. Next year, we think that will move closer towards stabilization in 2019 2020. So You do have a nice pickup going forward from an earnings standpoint off of those two developments.
Okay. I appreciate that. It often seems like there's a mismatch and 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 said, obviously, there's it sounds like there's more opportunity for you, but imagine there's still more competition.
So as interest rates have risen and as construction costs 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've able to maintain that or have 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. I mean, first in terms of risk,
our
position in the capital stack is unchanged. We have not Increase 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.
I mean, if the sort of first Cycle deals we did in $13,000,000 to $15,000,000 $230,000,000 or so, we were sort of underwriting 10% to 11% type IRRs. Today, That number is more like $12,000,000 to $13,000,000 So no change in risk and actually an increase in expected returns on this product.
Okay. Thank you, Harry.
Our next question comes from John Guinee with Stifel. Please proceed with your question. John Guinee, your line is now live. Our next question comes from the line of John Pawlowski with Green Street Advisors, please proceed with your question.
Thanks. Jerry, a follow on to the MetLife question from earlier. I know We've talked about it for the better part of 4 years as supply being an issue. As it continues to lag, is there any incremental concern that the absolute level of rents on that Portfolio are too high and just the 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 in their submarkets, I think things will be fine. I'll give you an example. A year ago, there was a bit of a Slow down in the submarket in Seattle, where our Class A plus property is, and we had 4%, 4.5% revenue growth for a couple of quarters since that won't 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 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 millennials Age and they want to continue to live in a city and they may be not able to move out to the suburbs 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 type and the thought that we have As baby boomers continue to age and sell their big houses out the suburbs and move into the city, I think this portfolio caters 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 in
a couple of years, I think they're going to perform at least as well as our same stores.
Okay. Thanks. And Harry, on the competitive development front, is it your sense that sponsors that are competing for you guys in the tent, Is it a sense that they're ratcheting up leverage and doing some financial engineering or are they just punching any rational growth rates to justify the IRR?
I don't think I mean, I guess I'd answer it this way. I don't think leverage has changed meaningfully. I mean, there's debt capital has increased moderately Recently in terms of loan to cost on available construction financing, but that hasn't changed it meaningfully. I think what has happened to some extent is that equity capital has become Moderately more aggressive as they look to deploy in effect their dry powder. So I think When you have a situation where equity is pushing the merchant builder to Deploy capital, you have 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 the pie and Seems to be just gaining favor across so many different networks of either pensions, foreign capital that haven't been here for a decade And they're 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 the capital pie.
Yes. Tom, in those conversations, We scratch our heads too. They keep putting money to work in the private market, but you and your peers' share prices are at a discount. How are you changing your pitch to investors to look at public REITs as a proxy for real estate? And are you making any inroads?
Do you have any hope That the foreign SWIFs and the pension funds will look to the REIT market increasingly with private market pricing being pretty damn aggressive.
Yes. What I would say is I think the team at NAREIT is doing a fabulous job of outreach across the broad spectrum. You're seeing more and more speakers at conferences talk about the asset class in their particular market gaining favor. And so my suspicions are is that the local investor will pump capital into their local markets, Take that of Berlin, the Nordics as examples in many Eastern Bloc countries. And as they see that performance elevate, Then they'll expand more to what I would call the publicly traded share model.
But there's it's just going to take time. What I'd say is, it took us 10 years to get up off the floor. We're 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.
One moment please while we poll for more questions. There are no further questions in the queue. I'd like to hand the call back over to Chairman, CEO and President, Mr. Toomey 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 2018 and looking into 2019, we're optimistic on our prospects And we wish all of you to have a good summer. Take care.