UDR, Inc.
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Operator:]

Good day, everyone, and welcome to UDR's 2Q '14 conference call. This call is being recorded. And now, I'll turn the call over to your host Chris Van Ens. Please go ahead, sir.

[Christopher Van Ens:]

Thank you for joining us for UDR's second quarter financial results conference call. Our second quarter press release and supplemental disclosure package were distributed earlier today and posted to our website www.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. I'd like to note that 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 this morning's 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'd 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 our President and CEO, Tom Toomey.

[Thomas Toomey:]

Thank you, Chris. And good afternoon, everyone, and welcome to UDR's second quarter conference call. On the call with me today are Tom Herzog, Chief Financial Officer; and Jerry Davis, Chief Operating 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. First, all aspects of our business continue to perform well in the second quarter. Operations are strong throughout our portfolio, our aggregate development pipeline is meeting or exceeding expectations, and our balance sheet is solid. In short, we continue to check all the boxes with regard to the key components of our current three-year strategic plan published last February. We are just over halfway through 2014 and the macro environment for apartment demand in our markets has been slightly better than we initially expected. These markets continue to generate superior fundamentals relative to the national average. Against this backdrop and in conjunction with our strong 2014 results to date, we raised our full year earnings and same-store forecast in today's release. Tom will discuss details in his prepared remarks. While it is too early to comment on 2015, we will re-price approximately 30% of our apartment homes in the third quarter. And if current trends hold true, we expect another strong year for apartments and UDR. Jerry will provide further details on our forward operating strategy in his prepared remarks. Second, we closed on $81 million of dispositions during the quarter, had better pricing than originally contemplated. Additional sales have closed in the third quarter. Tom, will provide further details. From a big picture perspective, continuing to fund our accretive development pipeline with non-core dispositions is a trade off and is working. Later this year, we plan to market additional assets and anticipate strong demand, given the depth of acquisition capital in the marketplace. We are confident in our ability to execute upon our disposition guidance of $350 million to $450 million in 2014. Third, we are forecasting two or three additional development starts during the remainder of 2014, with anticipated cost to construct of $200 million to $325 million, depending on actual starts activity. The starts will be in our core markets and may include Orange County, San Francisco Bay Area and Los Angeles. At least two are anticipated to be with MetLife in a 50-50 ownership structure. Like our current pipeline, these new projects will help drive strong NAV and cash flow growth for UDR and its shareholders. Fourth, we successfully issued $300 million of 10-year unsecured debt during the quarter at an attractive 3.75% coupon. This issuance points to the strength of our balance sheet, which continues to improve. And finally, I'd like to thank all my fellow associates for their hard work in producing another strong quarter for UDR. We look forward to the remainder of 2014. And with that, I will turn the call over to Tom.

[Thomas Herzog:]

Thanks, Tom. The topics I will cover today include

[Jerry Davis:]

Thanks, Tom, and good afternoon, everyone. In my remarks, I'll cover the following topics

[Operator:]

(Operator Instructions) We'll hear first from Nick Joseph with Citi.

[Nick Joseph:]

In terms of funding the remainder of the development spend, how do you internally weigh decision between selling additional assets and issuing equity at this price?

[Thomas Herzog:]

Nick, this is Tom Herzog. We still have a view that funding the remaining development through sale of non-core assets is how we would intend to fund that. As it pertains to issuance of equity, as we've been saying since the beginning of the year, trading at a premium and having accretive use for the funds that we will consider as an option, but as far funding development it is intended through the sale of non-core assets.

[Nick Joseph:]

So when you say accretive use of funds, so you're putting development aside, is that really only acquisitions?

[Thomas Herzog:]

It would be acquisitions or other, but excluding development.

[Nick Joseph:]

And then could you talk about what has driven the increased occupancy? And if that was an active decision that you targeted within your revenue management system?

[Jerry Davis:]

Nick, this is Jerry Davis. We really started driving occupancy up probably about nine months ago. And it's really a couple of factors. We really didn't do any of it within the pricing system. I think when you look our rent growth and renewal growth, it's comparable to most of our peers, but we have seen a pickup in occupancy. And there is really a two or three primary drivers of that. One, starting in fourth quarter of last year, we brought in-house, what we call an outbound call center, and all that is, is a small group of people that go through a discarded leads from our sites, that our sites folks have just determined that they are not hot leads, and we try to resurrect those. And even though the hit ratio on those is relatively small, we found we've been able to pick up over 250 incremental leases, so far in the first seven months of this year. And when you look at that over the entire portfolio not just the same-store, that's probably at least a 40 basis points or 50 basis points pop to occupancy that was done with nothing to do with pricing. The other factor and we've been working on this for a couple of years is continuously driving to reduce the number of days an apartments sits vacant between when the prior resident moves out and the current resident moves in. Two years ago, we were about 26 days to reoccupy unit, our goal this year is to get it to 22 days. We hit 24 days last year. And we think we can continue to drive that down further by becoming more efficient on turning apartments, as well as putting more of an emphasis on pre-leasing, notice to vacate units instead of just vacant units. And I would remind you, everyday we can cut off of our average days vacant about $1.05 million of additional revenue drops to our bottomline.

[Nick Joseph:]

Where do you think that 22 days could eventually get to?

[Jerry Davis:]

I think we can get it probably to the mid-to-high teens. We're currently, when you break it down between turn time and time to reoccupy after the unit is made ready, we've gotten turn time down to a little under seven days. And the amount of time to get it occupied after its ready is about 15 days. Those numbers fluctuate and there's some seasonality this time of the year. My goal for the month of August is to get to 15 days of total vacant days. But when you get to the winter months, they can get up to the mid-to-high 20s. And I do have some tight markets that I typically can run at about 10 days such as San Francisco and pockets in New York.

[Operator:]

And next you will hear from Haendel St. Juste with Morgan Stanley.

[Haendel St. Juste:]

Tom Herzog, a question for you. So I guess some clarity on the FFO per share guidance here. Curious on, it looks like you were raising the full year as adjusted guidance by just $0.02 here when you're already $0.04 ahead on the first half so far year-to-date. So curious on perhaps what's holding you back from a slightly larger increase here? Is it fairly down to conservatism or is it perhaps something that we're not fully appreciating like, well, anything that we're not fully appreciating?

[Thomas Herzog:]

When we look at the first half, we came in at about $0.75 of FFO as adjusted and we have $0.76 in the second half. The reason that the growth is in a little bit bigger in the second half, well, there is a couple of things you probably expect. We issued that unsecured debt in June and then we've got the dispositions in the second half of the year. So it's kind of in line with what we expected. As to the beat that we had in Q1 and then Q2, just a little bit of conservatism, probably both into the guidance for the first two quarters, as each of those quarters came up, as they were both early in the year and a little bit of uncertainty. So there is really nothing beyond that.

[Haendel St. Juste:]

And a follow up. So it sounds like, well, your recent dispositions have been in your call it warehouse markets, where you've capitalized on what looks like to be pretty good pricing for those assets. I'm curious as you look ahead, when you talked about some thoughts on near-term asset sales. Would you consider perhaps broadening your perspective and selling some assets, some of your better quality assets in your core urban coastal markets, given what seemed to be pretty full asset pricing here? And we're starting to see some condo converted stock get back into the marketplace.

[Harry Alcock:]

I think as Tom mentioned in his prepared remarks today, including the B note payoff, we closed about $225 million year-to-date. We've got another $47 million scheduled to close this week. A couple of properties in non-core capital warehouse markets in Virginia Beach that will get us to a little over $270 million. That leads in order to hit midpoint of our guidance another $125 million or so. We will at times consider selling properties in core markets, particularly non-core properties in core markets. We're aware that condo pricing is starting to manifest itself a bit in certain markets in New York City and San Francisco, we're not looking to do anything specifically today, but that potentially is an opportunity in the future.

[Haendel St. Juste:]

And Harry, while you're on, just one more follow-up on that front. The B assets you sold, curious as to the type of buyer that showed up, were there more institutional buyers? Were there just a greater number of buyers? I'm just curious if there was any retrading or you're effectively getting your full price?

[Harry Alcock:]

The three Florida assets, where we received 20-plus bids on each of those. It's just a very broad buyer base, mostly kind of local and regional syndicators. But there is a lot of folks that are selling for those types of assets, they're leverage buyers. It's a very deep and liquid market right now. There were no retrades on those three. The two Hampton Roads assets, the buyer base is a little bit different. It's more of a local type buyer typically. We get several bids, but we're not going to reach the 20-type buyer range. But again, it's going to be a leverage buyer, and there was no retrade of any kind on those either.

[Operator:]

We now move to a question from Alexander Goldfarb with Sandler O'Neill.

[Alexander Goldfarb:]

Two questions. First, did you say the rents on the Beach & Ocean deal are $2.55 a foot?

[Thomas Toomey:]

I did -- No. Alex, the $2.55 a foot was actually on the Bella Terra deal.

[Alexander Goldfarb:]

If you could just comment on the rents that you're getting at Beach & Ocean, and then what you expect for the Pacific City site?

[Jerry Davis:]

Sure. I'll start with the Beach & Ocean. We're currently getting $2.69 market rents per square foot at Beach & Ocean. And I would tell you, we'll accept our first units their in October, and we've already pre-leased 16% of the property. We're still in design for the Pacific City deal. So we haven't finalized rent levels at that property at this point.

[Harry Alcock:]

Alex, if I can jump in a little, I can tell you, this is Harry, with certainty we're going to get well above $3 a foot rents at that project. It really is a unique piece of dirt in Huntington Beach adjacent to 200,000 square foot retail center that will open in about a year. Tenants include Apple Store, Equinox, really unique type of project. Next to it, the hotel site has started construction. The hotel operator will be a resort-boutique type operator that operates the properties like the Bacara in Santa Barbara. So we're really going to have a very, very unique product offering there.

[Alexander Goldfarb:]

And then on the B note, do you guys have other of these B note investments out there? Do you see this as a business line the way you guys used to look at the RE3, the merch business? Do you see this as a way to put capital out to try and get accretive returns or was this a one-off?

[Thomas Herzog:]

It was a one-off. It was class A asset in L.A. that over time it would have been a nice asset to own. So it was a one-off. We don't have any further assets like that in our portfolio at the current date.

[Operator:]

And Jana Galan with Bank of America Merrill Lynch has the next question.

[Jana Galan:]

For Jerry, I am sorry if I missed, can you give us an update on rent as a percent of income? And then maybe give a little bit more color on how much this number ranges within your portfolio and how that compares to prior peaks or your historical average?

[Jerry Davis:]

The percent in second quarter in total was 19%. It's actually a hair under. That's up a little bit over the last year or so, when we were more in the 17% to 18% range. And I can tell you, I don't have good information on historical numbers related to this, and I don't know if they would be valid anyways, given how much UDR's portfolio has changed over the last seven years, the totally different type of product and resident base. It ranges from mid-teens to mid-20s, but the majority really do come in between that 18% and 22%.

[Jana Galan:]

And then just following up, I heard your As versus Bs performance in D.C., but do you have that for the portfolio?

[Jerry Davis:]

I sure do. For the last couple of months on new leases, Bs have outperformed to As, somewhere in the 40 basis point to 50 basis point range. And on renewals Bs are getting about 20 basis points to 30 basis points better. So call it a blended 30.

[Operator:]

And our next question will come from Nick Yulico with UBS.

[Nick Yulico:]

First question on the development pipeline. You talk about, I think you said it was 170 basis points is the spread right now between the yield and cap rates. I think that was for the projects that were completed, but not stabilized. Is that right?

[Thomas Herzog:]

That's actually for the ones that are under construction, that are in the pipeline. The 180 basis point is for the entire $1.1 billion pipeline, including those that are completed.

[Nick Yulico:]

So for the ones that were completed, I think you guys are saying something similar as far as the spread in the first quarter. So the ones that are completed, are they sort of performing the same way that they were you thought in the first quarter or have you got any uplift in yield from any of those projects that have been completed now?

[Harry Alcock:]

I'll start and Herzog and Jerry can chime in, if they have any additional input. But remember, these are stabilized yields that we're calculating. So mostly those stabilized yields are calculated one year after completion. So these are sort of 2015 and into 2016 are the measurement periods. So in the last quarter we for the most part have not updated any forecast associated with those dates. But the assets are continuing to lease up as expected and that the forecast have remained largely unchanged over the last quarter.

[Jerry Davis:]

I would agree with that. Lease up velocity over the last 30 days has been strong throughout the development portfolio. On Page 21 of the supplement, we show leased occupancies at these properties and they continue to strengthen. I can tell you for example, Channel Mission Bay, a San Francisco property today is 97% leased, and I'd remind you that we expected our first residents just seven months ago in December. Bella Terra is 99% leased. Domain College Park, which has been a little slow to lease up, because it caters to the Smith Business School at the University Maryland, it's 99 % leased today, and 30 days from now once school returns, it will be at about 98%. So we'll have achieved over 90% occupancy in about 13 months, because we accepted our first building last year in June or July. And then when you get down to 13th & market, which is our property in the East Village, downtown San Diego, leased occupancy today is 81%. We accepted our first units there last fall and that's another property that we fully expect to hit stabilized occupancy over 90% within 12 months. And I stated earlier to Alex that Beach & Ocean are property that will open its doors in October in Huntington Beach. We've already pre-leased 16% of the units there. And the DelRay Tower, our property in the DC area, where we renovated and added density to existing property, we opened that property later this week and we've already pre-leased 21% of the units there. So leasing velocity is good. And I would tell you, the ones that's been a little bit slower than normal, we tend to lease up in 12 months or less on average, but Fiori, our property in Vitruvian Park, which at about month 14 -- I mean 18 right now, is 92% leased. So we're about to hit stabilized occupancy there.

[Nick Yulico:]

And then I know you guys like to quote these projects in relation to where the yield is versus market cap rates, but it would pretty helpful to get a sense for where you think the absolute stabilized yield is for this pipeline right now. And then if you could talk about then as well, since it sounds like the new starts are to mostly be in California, what the yield would be on those projects?

[Harry Alcock:]

Nick, its Harry Alcock. The yields for the pipeline, the 180 basis points are about 6.1%. And then the future projects in California, again, we'll announce those once we start the project. But I think you could assume something relatively similar.

[Operator:]

And we'll get the question from Rich Anderson from Mizuho.

[Rich Anderson:]

So Tom, I don't know if you mentioned this, but how did you -- I kind of got on a little bit late, how do you feel about floating rate debt at 17% and maturing debt in 2015 at 14%? Are you comfortable within prospect of higher interest rates or just if you could comment on your strategy?

[Thomas Herzog:]

Well, let me hit the floating rate debt first, I didn't hear the second part. So floating rate debt, we're somewhere between, call it, 10% and 20% or even 15% to 20%, we're comfortable in that range, especially multi-family where you've got a lot of resets or quicker reset on rents. So there's some correlation in that respect. So we're comfortable with that range. What was the second part of your question?

[Rich Anderson:]

Maturing debt in 2015?

[Thomas Herzog:]

Again, we're comfortable with the -- we've got about $500 million maturing. Its $300 million or so in January, and then the balance of that I think is in December. It comes in at a rate of somewhere around 5.6%. And as that refinances, it probably comes in a lower rate. So it's a pickup in our model depending on how that plays out. But we're comfortable with that.

[Rich Anderson:]

And then the second question, I don't know if this was brought up either, but Tom Toomey in the beginning said you're doing a better job in dispositions and getting a better rate than you thought going in. Can you quantify what that is and what the driving factors are you think are behind that lower or that better cap rate, disposition cap rate?

[Harry Alcock:]

Rich, this is Harry. I mean couple of things. One, demand for these assets have been very strong, as I mentioned earlier in the call. And there really, given the demand and the competitive environment for these assets, there simply are no retrade, which there haven't been in our experience this year, which candidly is a bit unusual. Remember, we expose a number of assets to market, the mix of assets sometimes impacts cap rates, but primarily it's just a very favorable sales environment. And an environment in which interest rates, if you recall, have actually floated down, which also impacts pricing.

[Rich Anderson:]

I guess, my question is you mentioned in New York and San Francisco starting to see some condo pricing, but that has not played a role yet in that number. Is that correct?

[Harry Alcock:]

Correct. There is condo interest whatsoever for the assets that we're marketing.

[Operator:]

We'll now move to a question from Derek Bower with ISI Group.

[Derek Bower:]

Jerry, I had a follow-up on the call center. Do you think this program can maintain that 40% to 50% lease per month hit rate that it seems to be having this year? And if so do you think that means occupancy can sort of normalize in a mid-96% range going forward?

[Jerry Davis:]

I don't see why it cannot continue at that rate, Derek. The only thing I could see changing, but I think we would still be able to keep that occupancy, if my people on the ground maybe keep these leads alive a little bit longer. I think they have a lot of things to work on and some times you do just have some traffic that falls off the radar that these people pick up. But yes, I think the new norm, especially given the portfolio that UDR has today and the markets it has today and the quality it has today, it's probably going to continue to run 50 basis points higher than we did a year ago. I think this is a new norm. And the good thing, I would tell you because of the boost in occupancy that that team gave us, is it's put us in a position about three months earlier to have very high occupancy. This morning, when I was looking to my dashboard, I'm between 96.8% and 96.9% physical occupancy at my same-store portfolio. When you have that kind of occupancy at this time of the year, it gives you the ability to push rate a little bit harder. I'll give you a quick example. I look back last year, and when I looked at my June market rents and my July market rents, I had started decelerating by about $10 per unit from June to July last year. When I look at June to July this year, my market rents per unit accelerated $10. That's about a $20 or a little over probably 120 basis point increase in what I'm going to be able to push rents at. And we're willing to let occupancy slide down a bit. Its still be in that mid-96 level to set ourselves up for higher rent growth today than we normally would have been able to get. And the reason we did that as we think it's going to help propel us in not just fourth quarter, but it set us up at least through the first two to three quarters of 2015 with strong revenue growth.

[Derek Bower:]

And are there any markets where it sounds like you might be more aggressive with rate later this year? Are there any concentration in your portfolio?

[Thomas Toomey:]

I think San Francisco and Seattle and Portland, the Pacific Northwest as you can see on Page 20 of our supplement, we're already getting very high-single digit new lease rate growth. I tell you what's been encouraging, I had in my prepared remarks, and a lot of people have asked about Orange County, because Orange County when you look at my supplement, we had new lease rate growth that was a negative 0.5% in the quarter and our revenue growth was up 4%, which was pretty disappointing in my expectation as it's going to be at the low end of my peers. What we were doing there was fixing the Coronado's where we had really catered over the last five to 10 years to a lot of short-term leases. What that created was a lumpiness in my revenue stream where I would peak in the spring and summer, but then fall down drastically in 4Q and 1Q. We've been pushing more for longer-term leases, which hurt our occupancy a bit and also took down our new lease rate growth. We think it's going to pay dividends, not just into this year, but also going into '15. But what's really encouraging is when I do go back and I look at how much my market rents have gone up from June to July. They've gone up $25 per unit in just the last month, which is over 2%, and my occupancy today in Orange County is 95.9%. So I think it was a painful strategy that we had to go through in the first half of the year to restabilize Orange County, but I think it really will set us up for a good end of this year and a strong 2015.

[Derek Bower:]

And then, just the last one, on Fiori, obviously that seems like velocity has picked up there on leasing. I know you guys cut rate back in April, have you had a cut rate again over the last three or four months or is that from the seasonality and you cut rate once and now you're just starting to see a pick up in demand?

[Jerry Davis:]

No, it's really more of a one-time cut. Effective rates today are about $1.80, that's about where it was when we did the original cut. What you're really seeing is just a normal seasonal pickup that occurs in Dallas. The last two to three months we've been grossing 40 to 45 leases per month there and netting somewhere in the 35 range. And so Dallas is a tough market, especially at the end level. You've got new supply that's coming in both [Technical Difficulty] Plano area. So we're kind of getting squeezed on both side as we introduce this new price point in that Addison market. One thing we're encouraged by and this won't help us all at once, but we think it will over time, is the Toyota headquarters building that moved from Torrance, California is up in Plano, which is probably only a 10 or 15 minute drive from Fiori, and we think we're going to be able to capture some residents from that relocation.

[Operator:]

And our next question will come from David Bragg with Green Street Advisors.

[David Bragg:]

Jerry, did you say earlier that D.C. is improving modestly? And if so, can you elaborate on that?

[Jerry Davis:]

D.C. is stable. I wouldn't say it's necessarily improving and I think we're really going to have challenges over the next nine to 12 month as is new supply continues to come and job growth continues to be moderate. We've been stable. We had 1.3% revenue growth in 1Q, it was 1.2% growth in 2Q. What I can tell you is the differential that we have experienced between our best performers and worst performers has tightened. In the first quarter my best performing property was a deal out in Fairfax County. It was a B quality asset that had 5% revenue growth. And my worst performer was a stabilized property in the U Street corridor, that's right across the street from our Capital View development. And now it had about a negative 4% revenue growth. This quarter my best performing property was that same Fairfax County property and it had positive revenue growth of 3%, but my worst performing property was a property inside the beltway on Columbia Pike that was at negative 2%. So it still is a submarket-by-submarket deal, but I think D.C. is going to continue to be the struggling market for another nine to 12 months.

[David Bragg:]

And also, I think you said earlier that you expect a pause in the deceleration of revenue growth to occur in the first quarter of '15, is that right?

[Jerry Davis:]

Yes.

[David Bragg:]

And what type of economic environment does that assume? Does that assume a continuation of the type of job growth that we've seen so far this year?

[Jerry Davis:]

Yes. I think if things continue as they are today, Dave, adding 200,000, 250,000 jobs a month, when that supply continues to come where we're seeing from AXIO that it's going to hit our submarkets. We're comfortable that things next year probably going to look kind of similar to what they are right now, and the deceleration will probably continue through the back half of this year for us. That is going to be predominantly due to us not being able to pick up any gains in occupancy, because we hit high occupancy late last year, and today we're trying to push rents. But we think it's really a continuation of what we're seeing today.

[David Bragg:]

And two more quick ones for Tom Herzog. First, Tom, on Attachment 5, there a really high margin is implied within your stabilized non-mature pool. I realized that's small, but want to ask you, what's driving that?

[Thomas Herzog:]

Dave, let me look at the details of that, we could take that offline. Let me call you back after the call. There is nothing down there, but I do want to take a look at that and answer it after the call.

[David Bragg:]

And last one for you is, can you please just explain your cash flow cap rate methodology? Walk us through management fee, CapEx, what NOI we're talking about and is that consistent across the Florida sales and the Virginia sales?

[Jerry Davis:]

We're taking a full cash flow cap rate approach. We take 2014 NOI. We're using real CapEx not the $300 to $500 dual version of it. So $1,200 a door and then 3% management fee, so very much of a straight on cash flow cap rate approach.

[David Bragg:]

And that's consistent across all of the dispositions you've talked about today, Virginia, Florida, anything else. Okay, thank you.

[Operator:]

And now moving to the next question, that will come from Michael Salinsky with RBC Capital Markets.

[Michael Salinsky:]

Jerry, did you actually give what the July new lease number was? And then also you broke it out between A and B, could you talk about what you're seeing urban versus maybe some of the suburban assets there?

[Jerry Davis:]

Sure. I'll give you the first one. July new lease rate growth in total was 4.1%, which is up a bit from May and June. Both May and June were 4%. So it's continued to accelerate. And as we look out into the month of August we have visibility of what market rents are on those units that either have not been leased yet or have been pre-leased. I would expect August to be roughly in that range too. And then, renewals in the month of July came down a bit, they were 5.1%, and I would expect renewals over the next quarter or so to be in the lows. And then, you asked about urban and suburban, we typically track it more A, B and things like that. I will tell you, we look at urban and suburban, I'm going to let Thomas Toomey address this in a second, but just when do you look at the growth rates, urban As and suburban As for us, they are both right about 4.1%. This is more on the revenue growth for the second quarter, not new lease rate growth. And then, our best performing segment was really the suburban Bs, which came in the 4.7% range. But I'm going let Tom a minute about how we look at urban and suburban and our view on that.

[Thomas Toomey:]

Yes, Mike. One thing we found and we keep reading through everybody's research is there's lines between urban and suburban seem to be blurred in our view, because you're seeing a lot of these cities are really connecting both of those areas of their communities through enhancements in their transportation systems and jobs are moving around that transportation hubs. And so it's hard for us even when we look at particular cities to draw a distinction between urban product and suburban product. What we're really more focused on as a company and where we allocate our capital is really kind of get more focused on our submarkets and where we think rent to income levels are supported, supply constraints might be greater, and the prospects out into the future. And so you take Manhattan, which we've stepped into probably four years ago, we really looked at the market and said, we wanted it would be a B product in Manhattan. And then we thought over the long-term, that's where the greatest potential for either redevelopments or steady cash flow growth over time. And always felt that an A in Manhattan would be a tough deal, because that's a renter by unique standards and would be very frugal in terms of where they always move to the next new great deal. And you contrast that where Bella Terra in Huntington Beach, the submarket to us was really attractive, because nothing had been built in 20 years. And it's very clear after putting up a 500 unit community, and Jerry leases it practically out in eight months that that was a good identified opportunity. And so you will find us going forward and probably doing a better job of communicating it, is trying to articulate clearly why we think the submarkets that we're building in and the product that we'll have in that market, where it's positioned, and why we think over the long-term it creates greater value. And so we're not trying to marry ourselves to an A product or B product or an urban or suburban, we're really trying to throw a very careful dart around a particular submarket and a particular product that we think over the long-term really generates the right returns. And I think that's what we are challenged to do and communicate in the future and you will see us do a better job of that.

[Michael Salinsky:]

Just as my follow-up then, probably for either Tom there. Given the pricing we're seeing in the market, we've seen a decent amount of compression in some of the B markets there, some of the B or secondary markets. And also, just given the appreciation in shares today, realize you guys put out the three-year plan. But is there any thought to potentially accelerating that especially with $553 million of debt maturing. Is there any thoughts rather to maybe accelerating some of that deleveraging? I know you had set out a gradual deleveraging plan, but just in light of the current capital environment.

[Thomas Toomey:]

Tom will add some, but I would tell you this. I think asset pricing had some to room to run. The capital is stacked pretty darn deep, cash flows are growing, availability for leverage is still out in the marketplace at very attractive prices. So we think there is some room to run these asset prices, and by no measure calling a top on pricing. So I think we're going to continue to just expose assets, see where pricing comes in. If we feel like we're reaching a toping mechanism, we'll certainly revisit our strategy and our plan.

[Thomas Herzog:]

I think Tom covered it. As it currently stands, Mike, we still do think that that matching the sales of non-core against development is the right approach. But certainly as conditions change, we'll revisit that. But that's currently where we stand.

[Operator:]

And now we'll here from Jeff Donnelly with Wells Fargo.

[Jeff Donnelly:]

Thanks guys, and Jerry, thanks for your remarks on the D.C. market. I know that you think there is going to be some more choppiness there for another nine to 12 months, but are there submarkets within D.C. that you feel might have already seen the worst?

[Jerry Davis:]

Well, it's hard to tell. There is still more supply coming. I can tell you I'm a little encouraged for example at U Street. Again, we have Capital View and a property called View 14 that is in my same-store pool, that when I compare to last year, it's a bit better. I can also tell you it's interesting when I look at D.C. and I look at market rents compared to what they were a year ago. We're about within 1% of where they were a year ago, and they're actually 4% higher than they were at year end. So there are some submarkets that I think have been fairly stable, when we look out it Woodbridge, when you look at some of our properties in the district around Logan Circle and places like that, things feel fairly stable. But again, wherever the new supply is going to continue to come out of the ground, I think you're still in for tough sledding.

[Jeff Donnelly:]

Any discernible change in how buyers in that market are underwriting assets there?

[Harry Alcock:]

The truth is there is still a lot of demand for apartments in the good D.C. locations and pricing of recent trades reflects that. Buyers inevitably here are going to contemplate that the next year or two is going to be, call it, flat in terms of revenue growth. But the good product still has a plenty of buyer demand.

[Jeff Donnelly:]

I guess maybe switching to Boston, if I could. Jerry, how are you thinking about Boston as supply comes into the market in the next two or three years? And then how would you compare that outlook for the market compared to what we've already seen in D.C., do you think it's going to be a similar impact or better or worse?

[Jerry Davis:]

Yes. I'll start, and then I'll probably throw it over to Harry, since he looks more out in the future of the pipeline. I think what you're going see is this first wave of new supply, and what we show is it's going to grow by about 7,000 units in 2014, quite a bit in the CBD. Yes, that's about a 1.7% increase in supply. And we felt over the last couple of years that the downtown area was actually slightly under supplied and could absorb quite a bit. And we're actually seeing that. We're holding up fairly well throughout Boston. Even our one property in the Back Bay I think had revenue growth of about 5%. So it's holding up. I think it's definitely going to get choppy in some of the submarkets as they come. We have a property that we're pretty excited about down in the Seaport area. We love our location. It's going to be delivering in later in the first quarter. But there is going to be other supply that comes in proximate too and it's probably going to be to some degree a competitive world with some of the other new product coming. But we like the job market in Boston, whether it's education, tech, financial. We think Boston can probably act more like Seattle, which had a lot of new supply as well as in Austin that had a lot of new supply, because you have high-quality jobs that are there to absorb it. And I think that's one of the big differences when you compare to D.C. is, you had a situation where D.C. had excessive new supply, where you're adding 3% to 4% over the last couple of years of new product, and you had job growth that was basically zero. So I look at it with that kind of a difference. So we're a little more optimistic about Boston being more similar to Seattle and Austin than it is to a D.C. But Harry, anything you'd add?

[Harry Alcock:]

I think you hit it. The main point is that there is a lot of good jobs being created in Boston, whereas in D.C. job growth is largely flattened out. If you just look at the jobs coming into the submarket adjacent to our Pier 4 project, in Seaport, that we'll begin delivering early next year, we spend over 2 million square feet of office that has either been delivered in the last year or is under construction, 70% or 75% of that is already leased. Companies like Vertex relocating into the Seaport, taking 1.1 million square feet, which is 3,000 or 4,000 jobs. Goodwin Procter is taking 4,000 square feet in an office building right next to our Pier 4 project. So you do have an unusual amount of job growth that we expect will fuel demand for the apartments that are being delivered over the next couple of years.

[Operator:]

And now we'll hear from William Kuo with Cowen and Company.

[William Kuo:]

Just a point of clarification. As I look at the full-year guidance, it looked like at the midpoint revenue growth was revised up 12 bps. Occupancy was revised up 50 basis points. Does that imply that rent growth expectations came down a bit?

[Jerry Davis:]

Not really. This is Jerry. The occupancy increase in guidance was really much more related to how well we've done in the first half of this year. We were able to hit 96.8% this quarter. I think year-to-date occupancy is 96.5%. Our expectation was really that the first half of the year we would probably be in the low 96%. We weren't as confident at that time that this outbound call center would be so successful. So it's really a continuation of the same occupancy we've had. And I would tell you the increase in occupancy that we had in the first half of the year really was able to help fuel the revenue growth, because we actually came in a little bit under in the first half of this year in rent growth based on our original plan. So basically what I'm saying, I think occupancy continues roughly where it is. And you probably see a slight deceleration or flatness, if you will, in rent growth.

[William Kuo:]

And then secondly, again, with the guidance, G&A went up about $1 million at the midpoint, and it looked like $0.6 million of that was from the long-term incentive plan. Is there something else making up that difference or is it more just a rounding thing?

[Thomas Herzog:]

We had a couple of things going on in the G&A. There was about a $1 million of timing in the first half. We just had an acceleration of about a $1 million from what we would have in the second half. And the second thing is we did bump the guidance up at the midpoint, [Technical Difficulty]. You're correct, part of this is just delta based on performance. The other small amount is just miscellaneous other items.

[Operator:]

And we'll hear from Nick Yulico of UBS.

[Nick Yulico:]

Just a follow-up on the G&A question. Can you just quantify, I mean, if it is going up by whatever it was one at the midpoint. I mean was the savings in the same-store property operating expenses an offset to that?

[Thomas Herzog:]

The G&A up by $1 million, it has no connection really with the same-store operating expenses at all. It's just two totally separate things.

[Nick Yulico:]

And I'm just still a bit confused as to I mean the same-store NOI is better, the bond deal you got execution like you thought you would, the asset sales sounds like it have been a little better, the G&A is kind of an offset to that. And as it seems like again your FFO going up $0.01 and your adjusted FFO, it just seems like there will be more of a benefit from how the same-store did?

[Thomas Herzog:]

Well, we said a couple of things. So same-store has improved with better results on the development as far as timing, the lease up on that. G&A is an offset. We did have some timing on the interest expense, where we've got the bond offering that occurred late in the June timeframe, we've got some timing on the sales. So when you factor all those components in, that's what's driving the $0.01 improvement.

[Operator:]

And this will conclude our question-and-answer session for today. I'll turn the call back over to Tom Toomey for closing remarks.

[Thomas Toomey:]

Thank you for all of you, for your time and the comprehensive dialogue on the call. In summary, it was a very good quarter. We started out that way. We feel great about the quarter. It's a great time to be in the apartments business again. And lastly, I'd say, we're very focused on our plan and in particular about building a strong 2015. We feel like we got a lot of right momentum, a lot of right operating strategies, execution on the development activity, the financing front. So we feel really great about the business and are looking forward to getting this year behind us and getting into '15. With that, we'll sign off. And wish you to have a good happy summer.

[Operator:]

And ladies and gentlemen, that does conclude your conference for today. We do thank you for your participation.