Greetings. Welcome to UDR's first quarter 2018 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance in the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vice President Chris Mannen. Thank you, Mr. Mannen. You may begin.
Welcome to UDR's first quarter financial results conference call. Our first quarter press release and supplemental disclosure package were distributed yesterday afternoon and posted to the investor relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements.
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. Welcome to UDR's first quarter 2018 conference call. On the call with me today are Jerry Davis, Chief Operating Officer, and Joe Fisher, Chief Financial Officer, who will discuss our results, as well as Senior Officers Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call. Our strong first quarter results reaffirm the 2018 macroeconomic outlook we provided back in February, in which we anticipated solid job growth and accelerating wage growth with a bias towards tax reform being a net positive. These factors, when weighed against elevated new apartment supply, contribute to our ongoing view that 2018's pricing power and occupancy will be relatively similar to 2017 levels. Taken altogether, a strong backdrop for apartments. Moving on. The UDR team is optimistic on our prospects. Why? First, our operating platform continues to produce steady results in a volatile world.
While it is still early in the year, occupancy is near 97%, and we are set up well entering the peak leasing season. Jerry will further highlight our success during his prepared remarks. Second, our $811 million of development in lease-up is 90% funded, with aggregate rental rates and velocities in line with expectations. Strong pre-leasing at 345 Harrison and a pickup in leasing velocity at Pacific City, our two large developments in Boston and Huntington Beach, reaffirm our view that 2019 development earn-in will improve materially versus 2018. Jerry, again, will provide some color on these communities. Third, our balance sheet remains liquid and safe. Disciplined use of capital during the quarter included $20 million of share repurchases and the funding of a new Development Capital Program deal. We continue to underwrite a variety of opportunities in the market with a focus on additional DCP investments.
Joe will provide more details in his prepared remarks. Last, a special thanks to all our UDR associates for your continued hard work to produce another solid quarter of results. With that, I will turn the call over to Jerry.
Thanks, Tom, and good afternoon, everyone. We are pleased to announce another quarter of strong operating results. First quarter year-over-year revenue and NOI growth for our same-store pool, which now represents 85% of total NOI, were 3% and 2.7%, respectively. After including pro rata same-store JV communities, which are heavily weighted towards urban A-plus product that is battling new supply, revenue and NOI growth were 2.7% and 2.5%, respectively. These results were primarily driven by solid blended lease rate growth of 2.7% and a robust top-line contribution from our long-lived operating and technology initiatives. While it is still early in the year, we are encouraged by what we are seeing on a number of fronts as we approach the prime leasing season. First, our year-over-year blended lease rate growth for the quarter was 20 basis points higher than during the same period last year.
This crossover is the first positive spread we have seen since the first quarter of 2016. Second, other income grew by 9% in the quarter. As in past quarters, this was driven by our revenue-generating initiatives, specifically parking, which increased by 19%, and our shorter-term leasing program, which has grown nicely since its rollout in early 2017. Third, year-over-year turnover declined by 120 basis points. This is especially impressive given that our short-term leasing initiative should result in higher turnover. Fourth, while our quarterly overall expense growth was elevated at 3.6% due to real estate tax pressures, our controllable expenses declined by 0.4% year-over-year. Of particular note, our personnel costs declined by 2.8% due our continuing focus on achieving efficiencies throughout our business. We remain comfortable with our same-store expense growth guidance of 2.5%-3.5%.
Fifth, rent concessions during the quarter were 22% lower than last year, and gift card expense was down 48%. Both of these indicate a more rational pricing environment for lease-ups. These factors, when combined with our 96.9% occupancy, set us up well for the prime leasing season. Next, a rundown of markets. The vast majority of our markets are performing in line with expectations, with a few exceptions. To date, Orlando has meaningfully outperformed our original forecast, while Austin has struggled as the result of new supply pressures. As a reminder, these are both relatively small markets for UDR. Regarding New York City, year-over-year same-store revenue and NOI growth turned negative during the first quarter. This is more so the result of positive one-timers realized in the first quarter of 2017 than a change in market dynamics. We continue to forecast slightly positive growth in New York during 2018.
Moving on, we saw minimal pressure from move-outs to home purchase or rent increase at 12% and 6% of reasons for move-out during the first quarter. Likewise, net bad debt remains low at 0.1% of rents. All are at levels consistent with previous quarters. Last, our development pipeline, in aggregate, continues to generate lease rates and leasing velocities in line with original expectations. At our $350 million Pacific City development in Huntington Beach, leasing velocity increased significantly during the first quarter as construction was completed. We ended the quarter at 51% leased and sit at 56% today, all with rent rates in line with our underwriting expectations. At 345 Harrison, our $367 million project in Boston, we ended the quarter at 35% pre-leased and are 39% today, with rental rates in line with underwriting expectations.
We deliver our first homes in early May and are enthused by the community's reception to date. Our two JV developments remain on budget and on schedule. Similar to last quarter, our Vitruvian West community, located in Addison, Texas, continues to perform well in excess of underwriting expectations. Our Vision on Wilshire community, located in Los Angeles, recently opened its doors and is performing in line with expectations. Community-specific quarter-end lease-up statistics are available on attachment nine of our supplement. Finally, I would like to again thank all of our associates in the field and at corporate for another strong quarter. With that, I'll turn it over to Joe.
Thanks, Jerry. The topics I will cover today include our first quarter results and forward guidance, a transactions and investments update, and a capital markets and balance sheet update. Our first quarter earnings results came in at the midpoints of our previously provided guidance ranges. FFO adjusted and the AFFO per share were $0.47 and $0.45. First quarter AFFO was up $0.02 or 5% year-over-year, driven by our strong operating results and disciplined capital allocation decisions. I would now like to direct you to attachment 15 of our supplement, which details our latest guidance expectations. We have reaffirmed our previously provided full year 2018 FFO adjusted, AFFO, and same-store growth guidance ranges. For the second quarter, our guidance ranges are $0.47-$0.49 for FFO adjusted and $0.43-$0.45 for AFFO. Next, transactions and investments.
As previously announced during the quarter, we sold Pacific Shores, a 264-home, wholly owned community in Orange County for $90.5 million at a low 5% yield. Regarding development, our desire to add land to the balance sheet to restock our pipeline over time continues to be a goal. However, given the difficulty in sourcing economical land in many of our markets, our pipeline will continue to shrink for the foreseeable future. Still, there are opportunities that satisfy our disciplined underwriting approach. With this in mind, we entered into a contract to purchase a $13.2 million land parcel located in Denver during the quarter. The acquisition is expected to close in the fourth quarter of 2018, subject to customary closing conditions. In our developer capital program, we invested $20 million into a 220-home development located in Alameda, California, at a current return of 12%.
All of DTLA, a 293-home West Coast development joint venture community located in Los Angeles, transitioned to a longer-term hold as the option period for purchase lapsed during the quarter. At quarter end, our DCP investment balance was $159 million, with an effective yield in the mid-7% range and maturities that take place over the next four and a half years. We continue to favor further investment in our DCP program, assuming new opportunities satisfy our parameters. Capital markets and balance sheet. During the quarter, we repurchased $20 million of common shares at an average price of $33.69. A strong use of capital given our prevailing discount to NAV and the inherent risk-adjusted return in our stock. At quarter end, our liquidity, as measured by cash and credit facility capacity, net of the commercial paper balance, was $843 million.
Our financial leverage was 33.1% on undepreciated book value, 25.8% on enterprise value, and 30.7% inclusive of joint ventures. Our consolidated net debt to EBITDA was 5.8 times, and inclusive of joint ventures, it was 6.4 times. We remain comfortable with our credit metrics and don't plan to actively lever up or down, although you will likely see lower commercial paper balances later in 2018, depending on the size of our forward capital commitments. With regard to the profile of our balance sheet, we continue to look for NPV-positive opportunities to improve our 5.1-year duration and increase the size of our unencumbered NOI pool. We declared an annualized common dividend of $1.29 in the first quarter, for a dividend yield of approximately 3.6% at quarter end. With that, I will open it up for Q&A. Operator?
Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Nicholas Joseph with Citigroup. Please proceed with your question.
I'm wondering if you can walk through the decision to transition the West Coast JV asset to long-term hold versus selling or anything else that you contemplated.
Nick, this is Harry. I tell you, we like the asset long term, realize there's some short-term headwinds in downtown L.A. with supply. We didn't want to be a buyer due to the short term, nor a seller due to the long term. Wolff, our partner, agreed, we ended up with a hold where our return is based on our below-market value buy-in price.
Nick, the only thing I'd add to that, this is Joe, is just in terms of you look at our guidance, how we moved around the uses. The fact that we did not execute a buy on DTLA, we were actually able to pivot some of those planned uses over into a stock buyback of about $20 million. We effectively traded a low fours gap for a mid-fives on our stock.
Thanks. Then you mentioned the crossover in terms of blended lease rate growth in the first quarter, with 1Q18 being higher than 1Q17. Does guidance assume that the positive spread is maintained throughout 2018?
Nick, this is Jerry. Right now, the guidance really assumes it's going to be about even with last year, so maybe slightly ahead. As we look into the month of April, we're continuing to see it being right on top of where we were in 2017. Our expectation is it may broaden a little bit, depending on how the leasing season goes. Yeah, when you look at the blended rate growth for the whole year, we think it's probably going to be in the mid-to-high 2s, which would be right about where it was last year.
Thanks.
Thank you. Our next question comes from the line of Juan Sanabria with Bank of America, Merrill Lynch. Please proceed with your question.
Hi, thanks for the time. Just on the same-store revenue guidance, what's the upside and downside risk from here relative to the midpoint? Could you give us a sense of any second quarter trends you're seeing to date, either on new or renewal trends?
Sure, Juan. This is Jerry. Right now, as we look into second quarter, for the rent trends, we're seeing April come in slightly higher, as I just said to Nick, than it did last April, but it's modest. It's the typical seasonal progression as you would expect. In the first quarter, we had first quarter new lease rate growth of 0.4%. When you look at the components of that, it went from a -0.3% in January to a -0.3% in February, then it jumped up to 1.5%, which again, is kind of normal seasonality. Right now, April for new is looking like it's going to be low 2s. Continuing to increase as we would expect throughout the summer. On renewals, those stay pretty static throughout the year.
We came in right around 5% in the first quarter, and that's about where April is looking to come in, and that's what we would expect for the second quarter. When you look at revenue growth for the progression, we had 3% revenue growth in the first quarter. We expect that to increase slightly in second quarter. When you get beyond second quarter, it's heavily dependent on the strength of leasing season. As we look at leasing season, the position we're in today, with occupancy at 96.9%, concession levels being a bit lower than they were last year, and not as much of a reliance on gift cards, we feel pretty good going into the middle of the year in this prime leasing season.
When you say how do you get to the top and bottom of our revenue guidance, and again, to remind you, our guidance is two and a half to 3.5, so we're right on top of the midpoint in the first quarter. It's probably going to be difficult to get to the bottom half unless there's really a downturn in rent levels later in this year. When you look at the upside, what it really takes is a continuation of the contribution from other income, which is putting in about 60 basis points of additional revenue growth, as well as a pickup in rate that ideally we would get with a seasonal uptick.
Great. Thanks. Just one more question from me, just on supply. What's the level of conviction that 2019 supply deliveries will in fact be down across your markets? Any thoughts on the volatile but stubbornly high permit levels, and just general comments on access to construction financing?
Hey, Juan, this is Joe. I don't think our overall view on supply in 2019 has really changed from last quarter when we spoke to kind of a flat to down 10% type of number. That was predicated on what we saw throughout 2017, which was permits and starts activity both coming down about 10% from 2016 levels. Obviously, that outlook gets a little bit more fuzzy with the start and permit activity that we've seen to start the year that's ticked back up a little bit.
When we look at the 2017 activity, when we look at our permit-based regression model, and then when we take into account all the qualitative factors, meaning the difficulty in finding land, the difficulty on the construction financing side, continuing to see hard costs exceed rent growth, and therefore, difficulty hitting return requirements, I think you still have a difficult environment to see supply ramp up meaningfully. Overall, we think we're probably flat to down 10% in 2019 with market-wise, probably the markets that are down more in our view would be Orange County, Orlando, Nashville, and Austin. And those that probably might see a little bit more flat to maybe even up would be D.C., L.A., and Northern California.
Thank you. Our next question comes from the line of Richard Hill with Morgan Stanley. Please proceed with your question.
Hey, good morning, guys. Wanted to maybe just dig in a little bit to the Southwest portfolio and specifically Austin and Dallas. We hear about some increasing demand in the state of Texas, but it seems like it's becoming a much more nuanced market between cities and even micro areas within cities. So maybe the Southwest was a little bit weaker than we were expecting. So I'm just curious about what you're seeing, maybe focused on Dallas. Would you consider the Houston market? How are you thinking about the Texas market at this point?
I guess I'll start first about what we're seeing in those two markets, and then maybe Tom or Harry can jump in on the markets we're not currently in. You look in Dallas, and it definitely was a slowdown from the results we put up last year as far as revenue growth. And while job growth in Dallas continues to be strong at about 69,000 new jobs expected in 2018 or about 2.6%, you're seeing, especially in our portfolio, heavy new supply coming into that North Dallas area of Plano, Frisco. We've got a 1,000-unit property that's in the Legacy Village retail area, and new supply has been able currently to offset the positive impacts of jobs from Toyota, Liberty Mutual, JPMorgan coming into there over the last six months and what we would expect in the next couple of months.
Down in our Addison area, we've got some B properties down there. When there's not new supply, they're doing extremely well with revenue growth of about 7%. Also we're doing the fourth project in our Vitruvian West assemblage, and that property's doing extremely well. We're getting a little bit more than pro forma rents, but in the three months since we've opened there, we've gotten leased occupancy up to about 56%. It is a sub-market by sub-market issue, so that Addison area is tending to do well. B products doing extremely well. Uptown, where we have just one property, it's very difficult down there, but right now, what's affecting our same store numbers predominantly is that Plano area. When you jump over to Austin, same story.
Job growth is strong there and job growth's at about 3.5%. A heavy supply of about 8,000 homes coming in 2018 is really putting a lid on where rent growth can go. What's interesting, though, is our MetLife joint venture product, which is A-plus downtown product, is doing really well. It came in with stronger revenue growth than we've seen in the last couple of years. It was at 2.6%, and that was even higher than some of our B product up in the Cedar Park area. It's pocket by pocket. Downtown Austin is starting to loosen up a bit and allow us to get some growth, but it's moved out to other sub-markets and price points.
Got it. You're seeing any opportunities in Houston, or are you sticking to your knitting in Austin and Dallas at this point?
Yeah, I think we're very comfortable, this is Tom, with respect to our Dallas and Austin exposure. We'll continue to look for opportunities in those two markets. Houston's not particularly attractive to us at this time.
Joe, maybe just one quick question for you on the DCP program. It looks like it's maybe a little bit lower than where it's trended recently. You think you can get that back up to $300 million, maybe even a little bit higher?
Yep. Hey, Rich. Our goal, our soft ceiling that we've placed on it, is around $300 million.
Yep.
Really driven by, we want to be in assets and markets that we would want to own long-term, and then obviously, the earnings accretion that comes from it is nice, but at a point in time when construction financing may come back in the future, we don't want to get squeezed out and have an earnings cliff, despite the fact that we do have pretty long duration on these assets. We have about another $50 million, call it, of funding related to the DCP other assets that are down on the bottom of 12B. That'll take us to just over $200 million. I'd say that Harry and his team are still hard at work trying to find additional assets to backfill any future roll-off or try to get to that $300 million.
I think we'll hopefully have some success at some point this year on that front, nothing's been taken into account within guidance at this point.
Great. Thank you, guys. I appreciate it.
Thank you. Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.
Hi. Thanks for taking the questions here. First one, Jerry, you mentioned rent concessions and gift cards have abated pretty significantly year-over-year. I'm just curious, what markets are you seeing the biggest declines in? Any markets that are increasing, I guess, on the flip side, and what are you expecting for that? How do you expect that to trend as the year progresses?
I think as you compare to last year, I wouldn't expect concessions to go up. They'll probably stay fairly stable to down modestly. Seeing a little bit more concessionary pressures in New York. I wouldn't say it's significant. Markets that are down most significantly are Bellevue properties, are feeling less new supply. That could perk up a little bit later this year when another 600-1,000 units get delivered. We went through new supply last year, and right now, it's fairly stable. Then our San Francisco, specifically SoMa area, properties are down. Most of the decline is in those markets.
Thanks for that. Maybe sticking with San Fran a bit. It's been a market, you said on the last call, I think, that it started out the year better than expected. Blended lease rates were up sequentially and year-over-year, yet revenue growth decelerated a bit. Is that just timing related to when those leases hit, or was there something on the other income component that was a bit of a headwind? Can you just provide a little bit of color there?
It's really not other income. That's still doing well. I think San Francisco should continue to accelerate as far as revenue growth throughout the rest of the year. You're still playing off. When you look at revenue, it's a buildup of, as you know, what you've done over the prior four quarters. We're encouraged by the strength of blended rate growth right now in San Francisco. While the first quarter came in roughly where we expected it to, I think some of the rents we've been putting into place over the last 60 days or so should help it to outperform unless there's a slowdown that comes. We're really seeing a bit of strength, I won't say strength, but stabilization that's happening in that downtown area. A lot of jobs have come into the financial district. The Salesforce building opened.
You're seeing new job creation down in Mission Bay. We did feel some weakness, though, in this quarter in the Peninsula.
Austin, this is Harry. Just real quick, one other point. Jerry mentioned the jobs, it's pretty remarkable if you look at the sort of volume of office leasing activity that's taken place, both in downtown and in Mission Bay, where Salesforce has taken 700,000 square feet, Dropbox has taken 500,000 square feet. Down in Mission Bay, Uber's taken 500,000 square feet. There's sort of a rumored single-tenant lease of 700,000 square feet to come in the future near our 399 Fremont project. These are going to tend to be high-paying jobs. It really is pretty remarkable.
I appreciate the additional color. What was your guys' revenue growth assumption for San Fran this year?
Oh, gosh. I want to say it was in the high end of our guidance range. We typically don't-
Back to it.
Okay.
Let's move on.
That's all I've got. Thanks for the time.
Thank you. Our next question comes from the line of Richard Hightower with Evercore ISI. Please proceed with your question.
Hey, good morning, guys.
Morning.
Hi.
I want to start on the labor expense success during the quarter. Pretty impressive compared to other prints that we've seen. Jerry, maybe can you give a little more color as to what was driving the same-store reduction? Was it reductions in FTEs, or something related to staffing models, or just what was some of the detail there?
Sure, Rich. It was predominantly what you just brought up. Our personnel was down 2.8%. We give raises at the beginning of each year. I can tell you the raises that we gave were between 2.5% and 3%. We are continuing to increase people's compensation. Middle to late of last year, we started looking at finding ways to create a more efficient workforce, either through technology or just redundancy in staffing, and we were able to cut several percent of our workforce out in the field. The second thing, though, is in the first quarter, we probably went with some open positions a little bit longer than we would want to because of the lack of available labor. A little bit of it was purposeful staffing reductions.
A smaller portion of it was holding positions open a little bit longer as we look to find the right people. Our expectation as you get through the full year would be that personnel expense would be slightly negative to maybe flat. I wouldn't expect it to be down 2.5%-3% for the remainder of the year, but I still think we're going to have good control over it.
All right. That's helpful. One quick follow-up there. Are you noticing a divergence between B assets and A assets or different markets where maybe supply has been more of an issue that might lead to more labor tightness as you think about where expenses might grow across the portfolio and where you're seeing those reductions that you just described?
Yeah. I think the reductions that we found predominantly were on B garden assets, as we really looked at it hard. I think pricing or wage pressure, you're finding being more prevalent in the A assets, specifically in urban locations where there's heavy competition for people.
Great. That's very helpful. My next question here is probably for Joe. Just in terms of the share repurchase activity for the quarter, is there a message to communicate there to the market in terms of the predictability of those sorts of investments, or is it just opportunistic as you're able to sell assets and sort of recycle that capital in a way that realizes that positive cap rate spread that was mentioned earlier? How should we think about that in terms of the predictability, the volume, the pace, et cetera?
Yeah. I think, Rich, one of the words you used in there of opportunistic is probably the most appropriate. When you look at the parameters we laid out in the past around discounts to NAV, sources and uses, leverage neutral, et cetera, the only one that really changed within the quarter was the discount to NAV from last time we spoke. We got down to a fairly substantial discount, was able to purchase shares at a 5.6%. What you saw is we didn't actually shift our sources of capital, meaning we didn't go out there and try to ramp up dispositions to fund it. We simply pivoted from additional development and additional acquisitions.
I think we'll take it week by week, month by month, and evaluate when we get to a certain level of discount, if we have additional capacity available to us, and like the risk-return on buybacks versus some other alternative investments, we'll look to pick away, but we definitely aren't committed to a certain dollar size. We're not going to come out and communicate that. Overall, we like what we were able to execute, even if it was a little bit small.
Got it. Thanks, Joe.
Thank you. Our next question comes from the line of Dennis McGill with Zelman. Please proceed with your question.
Hi. Thanks for taking the question. Sure. First one just has to do with the short-term lease program that you talked about and the success that you're having. Can you just maybe frame a little bit what percentage of leases today are on that short-term basis, then any characteristics of the residents that are choosing short-term, and any thoughts on why that's been gaining traction?
Sure. I will tell you, even though it's had a fairly significant impact to our other income growth, we think it's going to contribute, call it $3.5 million, $4 million this year to our bottom line. The number of leases at any given time rarely get above 100 throughout the portfolio, with some of those being in our MetLife portfolio, some being in the same stores. It's a fairly small percentage of our total occupancy. We try to put a limit at most properties of no more than 1%-2% of the unit count, so we don't get overly exposed. Not a huge risk there.
When you look at who's coming in, it's really a split between 50/50, roughly, between business, it's corporate relocations, short-term assignments of people wanting to come in, they need to come in for 31 days plus, although our average stay is up in the 70s, it's much more affordable than a hotel. The other half is more on a personal basis. I sold my house, I need somewhere to live for a little while. I have some sort of a medical issue where I need to be near a hospital, things like that. It's about 50/50 between personal and business.
Okay, that's helpful. Just to clarify, that would only be on new leases. You're not offering that on renewals?
No. These would be I don't know. Probably if somebody really wanted to, we would look at it, but I think everything we've done to date has been on new.
Okay, perfect. Separately, can you maybe just offer thoughts on Seattle and what you're seeing in that market? It seems to be transitioning maybe a little quicker than some of the other markets, not necessarily your portfolio, but industry-wide, and curious on your perspective, what you're seeing.
I think Seattle, as you know, has heavy new supply currently. I know in the first quarter, we had revenue growth of 5.2%. We have really no wholly-owned assets in the downtown area. We have one MetLife joint venture that is combating new supply, so it's a bit of a challenge downtown. We have two properties up in the University District as new supply, but a lot of the new supply sitting today is downtown. The majority of our portfolio's over on the east side with a heavy segment in Bellevue. As I stated earlier on the call, Bellevue went through a bout of new supply coming at it throughout last year. We expect some new supply to come at it later this year, too. Right now, Bellevue remains strong. It had revenue growth in the first quarter of 5.9%, so it's strong.
Interestingly, when you look at office vacancy rates in Bellevue, it's down to 2%, so it's full. You've had a lot of large tech firms, and other types of companies, create campuses over there. REI just consolidated four or five of their facilities to form a campus. Salesforce has rented out a building over there. Amazon jumped across Lake Washington, and they have a foothold there, too. Facebook is over there. Bellevue's doing very well. We've got some B product also that continues to put up very strong numbers. I think when you look at the supply that's coming at Seattle, a lot of it has been focused downtown, so it does affect the entire market. It probably affects us a little bit less than most because of our heavier weighting over on the east side.
A lot of people are concerned about the HQ2 diverting some of the jobs away from downtown Seattle. I can tell you, it seems like it's being supplemented as those Amazon job projections go down a bit. You've got an influx of people into both Bellevue as well as the South Lake Union area from Apple, Facebook, Google. Job growth continues to feel good. Wage growth in Seattle is over 3%. Supply, I think, is going to be a headwind throughout this year, maybe early next year, but it's going to be predominantly focused in the downtown area.
That's really helpful. Thank you, guys. Good luck.
Thank you. Our next question comes from the line of Robert Stevenson with Janney Montgomery Scott. Please proceed with your question.
Good afternoon, guys. Jerry, D.C. and Orange County were in your sort of 2.5%-3.5% same-store revenue growth bucket when you gave guidance a few months ago. Anything operational you're seeing after four months give you more optimism on D.C.? Then on Orange County, given that they did 4.1 in the first quarter, are you expecting any deterioration in same-store revenue growth there, or is it on track to outperform initial expectations?
Yeah, I'll start with Orange County, Rob. Orange County had a good first quarter, like you said, 4.1, a little bit higher than our full year. It's kind of pacing where we would expect it to. I still think at this point, we're comfortable that it's going to probably come back down a little bit. Ideally, we'll find a way to beat that range. Right now, I don't think there's a big change. You're seeing a decent job growth. New supply of 5,000 homes is putting some pressure on us. D.C., we had an uptick in revenue growth from where it was in four Q. It was 1.9 in four Q, it's 2.3.
There's heavy new supply, as I've stated in prior calls, still coming at us in the Southwest Waterfront, Ballpark, NoMa areas. Our B portfolio is doing well. Our A assets inside the city are continuing to feel pressures, especially our U Street product. Our 14th Street, rather, up around U, is getting hit pretty hard. We're seeing a spread between As and Bs in D.C., where As are currently at about 200 basis points lower growth than Bs. Last year, that had kind of compressed. Now it's expanded again as new supply is coming downtown. We do believe that we'll end up at least in that range of 2.5%-3.5%, as we had said early in the year. Nothing really negative at this time. Job growth is starting to come into the city.
While there's still some heavy concessionary pressures, again, in those certain sub-markets within the district, it doesn't feel like it's having as much of an impact as it did in the second half of last year.
Given your comments about capital allocation, from that perspective, where does redevelopment rank today? What's the redevelopment opportunity, both in terms of the more general kitchen and baths and other small-scale refreshes, versus the larger scale construction projects available to you in the portfolio today?
Hey, thanks, Rob. It's Joe. You mentioned two different pieces there. One being our traditional revenue-enhancing program, which we guided to $40 million-$45 million, slightly down from last year, but still seeing a good opportunity set in terms of the ability to get mid to high teens cash on cash, getting IRRs that are 150 basis points above what we have for a WAC. Still seeing a good opportunity set there. I'd say about, call it 35%-40% of those are K and Bs, with the rest being more amenity-based projects.
From a redevelopment standpoint, we continue to look at it, whether it's densification, larger scale opportunities, taking a building offline and densifying, saying, "Take 30 units off and put 100 up." There's a number of opportunities that are being evaluated given the fact that overall, we feel pretty good about the fundamental profile going forward in most of our markets. It ranks up there. It's a priority that the group's working on, we don't have anything today that we put into the pipeline.
Yeah, I would add, Rob, there's probably, I don't know, 5-10 properties that would screen towards potential redevs as we look at them. When I look at the markets they're located in, there's probably a couple in Seattle, a couple in Boston, a handful in D.C. that would probably screen towards that at this point. It's not a super deep bench, there are some opportunities, I think we'll be looking at those as we get into the summer to determine if there's any we want to start and have in process next year.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.
Thank you. On the Denver land acquisition, can you just provide some color on the sub-market where you purchased the land and the potential timing of construction? I think in the past you've talked about Denver being a market with supply pressures. I'm just wondering what makes you comfortable building in that market.
Sure. John, this is Harry. First, it's in a gentrifying area right up above Mile High Stadium. It's near transit. It's an area we believe will benefit significantly from continued gentrification in and around the site. Denver Broncos have a major plan, which is right across the street. Elitch Gardens redevelopment is also right across the highway. Continued Sloan's Lake development, et cetera. We wouldn't start construction until the first half of next year, meaning this is really a late 2020 or early 2021 type lease up, which is one of the variables that gives us comfort in terms of supply. We're really looking two and a half or more likely three years out. As it relates to development, we continue to look for sites. As you know, we like development and all its benefits long term. We continue to be disciplined.
You can see our pipeline at $800 million or so, which 90% is funded. Most of our existing pipeline will be completed by early next year. This is just a site that could serve to backfill our pipeline in ordinary course.
Yeah, I would add, John, just one or two things about that site. Harry told you about the location. It's very walkable to the light rail. When you look at the price point he's going to be able to build that at, the rents are going to be significantly below what downtown product is renting for, similar to what we did at our CityLine property up in Seattle, where you get that kind of a divergence in price from that core to a slight travel in. I think it really has the opportunity to do extremely well. I do think the retail in that area is going to build up along with the nightlife. The big thing Harry said that you should keep in mind, it's several years out.
The supply pressures that we're feeling right now should easily get absorbed by the significant population and job growth that's coming today and should come for the next several years.
Okay. The 9% increase you had in real estate taxes, how much of that was related to 421-a in New York versus other markets? Are there any opportunities to appeal taxes in the market?
Hey, John, it's Joe. I'll briefly touch on just the 421-a. Jerry can maybe take you through appeal opportunities. If you actually look on attachment six in our supp, you could see down there at the bottom, we do still provide detail related to 421-a down in footnote two. You could see in the quarter, about $366,000 or basically a 1.4% increase to real estate tax. If you look at our full-year expectations, we think it's going to be about $1.3 million, which is again, about a 1.4% increase to real estate tax. Obviously, a much lower percentage impact when you go do total expenses, and really only about a 15-20 basis point impact to NOI overall. Fairly minimal, but we do expect kind of a similar impact going forward for the next several years.
I would just add on the total real estate taxes. We appeal everything. I think there's a few out there that we would expect to win that aren't in our forecast. I don't think it's going to be a hugely significant amount. As we stated early this year, when we gave out guidance on expenses, we knew the real estate taxes were going to be high single digits. We still believe that's probably going to be true. We're working hard to offset it with controllable expenses being kept in check. This past quarter, they were basically flat, if not down slightly. In addition to New York, as Joe said, you're looking at valuations going up in places like Seattle, Florida, Texas, that are driving a lot of this real estate tax growth, too. You got to look at the other side of it.
While your taxes are going up, so are the values of the properties that are having to pay these higher taxes.
Can you remind us, is the 421-a burn-off a one-time issue predominantly this year, or is it going to also be an issue going forward?
No, that's it. It's going to remain an issue for the next several years for us. It peaks out in 2020, not much above these levels, and then dwindles from there.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
Thanks for taking my question. Just quickly, just wanted to know if you guys could comment on your general ability to shelter gains from asset sales to fund buyback.
Yep. Hey, Daniel. It's Joe. We do have restrictions as most REITs do in terms of payout of income and gain capacity relative to our taxable income and our dividend. Today, I'd say we have about $100 million of gain capacity in the system, which depended on the efficiency of the asset, i.e., the embedded gain that exists, can give you anywhere from, say, $100 million to $200 million, if not more, to be able to sell in a given year. Those sales are typically allocated to fund normal course business, meaning our development program, our DCP program, et cetera. To go beyond that and sell additional assets, you do have certain levers that you can pull, meaning pulling forward dividends and things of that nature. But those are really kind of one time in nature.
That may set you up on a go-forward basis in a less than advantageous position. At this point, we don't feel the discount is compelling enough to start to pull forward dividend and gain capacity. We do have that lever to pull in the future, to the extent that we are much larger discount.
Got it. That's helpful. Thank you.
Thank you. Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.
Great. Thank you. I'm a little new to this, but it looks like you did a $20 million land loan in Alameda with a one-year maturity. It almost seems not worth the effort for only a year maturity. Is there more to it than that?
John, this is Harry Alcock. The expectation is that once the developer has a completed development plan and begins construction, that we would roll that and actually increase it into sort of a normal developer capital program/preferred equity type investment. In fact, in the document, we have a right to provide that, providing the ultimate economics makes sense to us. Our expectation is, this is going to roll into a much longer-term investment.
Great. Okay. Then, sort of a big picture question. It seems to me that depending on whose numbers you look at, we're delivering about 350,000 units annually in this country, and that probably equates to at least 2,000 projects. It appears to me that most of these projects are delivering, except for in the most aggressive areas, at a six yield on cost. Why is it that UDR has chosen to not play that game? This supply is going to come whether UDR or the public REITs build a project or two or not.
Hey, John. Maybe I'll just take a little bit of it. One, I think you got to start with cost of capital. If you look at where we're at today at a discount to NAV, which doesn't necessarily give you a strong signal to go and be aggressive on external growth. Two, if you look at alternative uses, we do have other opportunities out there. We are not just purely a developer. We can pivot at any given point in time, which we've shown with DCP and buybacks. Lastly, we are participating. We've just remained incredibly disciplined around it, which has been shown through the shrinking pipeline over the last couple of years.
Now that we are starting to find some opportunities, such as this Denver deal, that still meets our 150-200 basis point spread requirement and gets us up into the six-plus type of yield. It's not that we're not going to participate, it's not that we don't want to, it's simply that there's a discipline and alternatives around it that we can go to.
All right. Thank you.
Thank you. Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.
Thanks. Going back to the property tax conversation. Outside of the typical catch-up from assessed values to market values, are you guys seeing any inflection points from perhaps fiscally strained cities or states that are reaching more aggressively for property taxes, which could persist for a couple of years now?
Yeah, probably. This is Jerry. The only one I've heard or seen that occurring at maybe is in Seattle market, with either King or Snohomish County, but I haven't seen it anywhere else.
Okay. Harry.
John, certainly I would add, I think your research has pointed it out. This is primarily driven by the fact that the asset values continue to go up and operations trends continue to improve. Our earlier remarks, we continue to believe that the real estate and tax environment's going to be challenging, but in reflective, it makes rational sense if operations are improving and values are improving.
Sure.
How states fund themselves, I think there's a wide range of outcomes on that topic, and I'm waiting to see some more research from people when they start looking at deficits and how cities are planning to fund their education for the future.
Exactly. That's why I asked, trying to catch early glimpses of the next Chicago to overuse a case study. Harry, how would you characterize the competitiveness of the mezz or preferred lending space versus last year? Is this tranche of financing becoming cheaper or more expensive for the developers you guys usually work with?
I think it's remained fairly consistent. There continue to be opportunities. The senior sort of lending environment has not changed, meaning proceeds have not ticked up. Developers are still typically limited to 50%-55%, maybe 60% loan to cost. In some circumstances, equity is still available, but not in the same levels that it was two years ago. I think that tranche has remained fairly consistent over the past 12 months or so in terms of both opportunity set and in terms of pricing levels.
John, this is Tony. I'd add a couple points that are interesting to me when I look at it. The spread on construction loan, L + 200 a year ago, two years ago, is now a L + 350, 400. When you combine that at a 55%-60% proceed, there's probably more opportunity coming our way. What's intriguing to me is the construction loans rolling over to perms, and you're realizing people at a 10-year are basically borrowing at four and a quarter at 70%. I'm intrigued to see how all this construction activity gets refied. Will it be done quicker to try to get off that burden of those construction loans?
Well, what we do know is Fannie is a little bit behind in its book of business this year, you're probably going to see a lot of people trying to stabilize and push, get off those construction loans. It's an overall topic we're discussing, looking at it and asking ourselves, where is the opportunity set moving to?
Mm-hmm. Okay. That's all for me.
Thank you. Our next question comes from the line of James Sullivan with BTIG. Please proceed with your question.
Thank you. A couple of questions about the New York market, just to follow on some of the commentary earlier about 421-a. When we take a look at the expense growth in that market on a same-store basis, really going back to 2016, the expense growth was, what, 7% in 2016, 11.5% last year, just about 7% here in Q1. Tying that together with the comments that were made earlier about 421-a, do you expect the same store expense growth to kind of stay at that level until the 421-a burns off, number one? Kind of number two, you've referred to concessions generally, and I know they've been a factor in New York. To what extent is that at play here in these numbers?
This is Jerry. First, I do think you should expect to see New York expense levels remain elevated until that period Joe was talking about when the 421-as burn off. The rest of our expense load there has been well controlled. Yeah, I think you're gonna see that until at least probably 2021, till it moderates somewhat. Concessions, they're a contra revenue account, so they're not impacting the expense line at all.
Okay. If we look at the revenue line, back in 2016, you had better than 4% growth in the top line, and that delivered a little over 3% same store. Of course, that has been weakening since that time, 2017 and so far in 2018. Given your view as to the amount of supply that's coming and how much is coming in the markets that you're sensitive to, when do you expect, or thinking about it out through the next several quarters, do you foresee that top line getting back to kind of a 4% number within that period of time? I guess, if not, to what extent do you think about monetizing some of the value you've been able to create in New York?
Yeah, I'll start with the growth. We had a weak quarter. It was negative 0.4%, really related to two or three things. One, the primary one, very tough comp to last year where our utility reimbursements, which are a revenue line item for us, were at kind of an elevated level compared to this year, just because utility expenses were much higher. In addition, concessions were a bit higher this year than last year. Right now, New York is very competitive with new supply. We have predominantly a B portfolio. Two of our assets are in the Financial District, one's in Murray Hill. Those properties, while we're not losing people over to the new lease-ups in Long Island City or Brooklyn, I do think that first-time renters that typically would've started out with us there are seeing other opportunities in LIC, in Brooklyn.
It's really putting kind of, again, a ceiling on where our rent growth can be. While we've had exceptional, really industry-leading revenue growth in New York for the last three or four years, I think right now, because of the competition from some of these inferior boroughs that have new product, they're putting more pressure on our lower price point Manhattan properties. When's it gonna get back up to 4%? I don't see that happening until probably at the earliest, I don't know, 2020. I think 2019 is gonna continue to be difficult. I think job growth in New York has picked up. Wage growth is north of 3%. I think on the demand side, you're seeing some strength, but we just have to get through these 25,000 or so new apartment homes that are being built.
As far as monetizing, Tom or Harry, you want to jump on that one?
Sure. This is Harry. We would consider that in the context of ordinary capital allocation decision processes where we look at overall sources and uses, opportunities to redeploy capital, gain capacity, long-term fundamentals of the market or individual properties, that type of thing. We don't have any immediate plans to talk about, but at New York, we consider in the context of these other opportunities.
It sounds like if the same property NOI growth is going to trail the portfolio averages for a while, it should certainly be kind of high on the list of candidates to monetize, no?
Yeah, maybe. I think, you got to look in long-term perspective. We're not looking one or two years out. We're looking at the long-term fundamentals of New York, I don't think we want to make a snap decision for what's going to be happening over the next year or two.
If you think about it, just to sort of pile on that a little bit, as that sort of tax abatement burns off, therefore, your sort of NOI flattens out, each sort of year where that tax abatement burns off, in theory, the cap rate on the underlying asset decreases because, again, the long-term NOI growth increases as you look out 10 years or whatever any ordinary buyer would. That in theory, the value of the asset is going to be fairly priced in the market. That would be reflected if we were to sell the asset.
Okay, good enough. Thank you.
Thank you. Our next question comes from Wes Golladay with RBC Capital Markets. Please proceed with your question.
Hi, guys. Just going back to the Alameda, the 12% yield is quite nice. Is that just a function of the shorter duration, a little bit early in the process of the development? Or is there just not a lot of skin in the game for the developer at the moment?
This is Harry. Again, as you've seen our Developer Capital Program, we price these in a number of different ways, anywhere from 6.5% with a 50% participation, all the way up to this one and a couple of others at a straight 12% coupon with no participation and a couple that are in between. It's really just a function of a negotiation with the developer between the sort of allocation between current coupon and participation. There's nothing unusual about this one.
Wes, just in terms of skin in the game, this is not a legacy land parcel that we're giving appraised value to. This was new cash coming in to purchase a land parcel. We're up to about 80% of cost on this one, we have sufficient cushion behind us.
Okay, sounds good. That's what I was looking for. Thank you.
Thank you. If there are no further questions in the queue, I'd like to hand the call back to Chairman, CEO, and President, Mr. Toomey, for closing comments.
Thanks all of you for your time and interest in UDR today. We started off this call with a statement that it was a strong first quarter, clearly from the prospects that we have for the second and the tone of this call, you can see that we're in pretty darn good shape headed into Q2. I want to reiterate that we'll continue to focus on our execution, we have a lot of opportunity.