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UDR (NYSE:UDR)

Q3 2013 Earnings Call

October 29, 2013 1:00 pm ET

Executives

Christopher G. Van Ens - Vice President - IR

Thomas W. Toomey - Chief Executive Officer, President, Director and Member of Executive Committee

Thomas M. Herzog - Chief Financial Officer and Senior Vice President

Jerry A. Davis - Chief Operating Officer and Senior Vice President of Property Operations

Harry G. Alcock - Senior Vice President of Asset Management

Analysts

Derek Bower - UBS Investment Bank, Research Division

Nicholas Joseph - Citigroup Inc, Research Division

Jana Galan - BofA Merrill Lynch, Research Division

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Andrew Schaffer

Richard C. Anderson - BMO Capital Markets U.S.

David Bragg - Green Street Advisors, Inc., Research Division

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the UDR's Third Quarter 2013 Conference Call. [Operator Instructions]

I will now like to turn the call over to Chris Van Ens. Please go ahead.

Christopher G. Van Ens

Thank you for joining us for UDR's third quarter financial results conference call. Our third 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 would 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.

[Operator Instructions] 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 W. Toomey

Thank you, Chris, and good afternoon, everyone. Welcome to UDR's third 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 to answer questions during the Q&A portion of the call. My comments will be brief today.

First, we had a good quarter in all aspects of our business and feel great about the balance of 2013. Jerry and Tom will cover the details.

Second, we remain focused on executing our 3-year strategic plan. With the first year nearing completion, we are on track or ahead of plan on all fronts. Our 3-year plan is focused on growing cash flow, NAV and dividends while continuing to improve the balance sheet and portfolio quality. As we look toward the future, we see an economic environment and supply demand fundamentals in our markets that confirm our view that our 3-year plan remains the best course. Our team remains highly focused on successful execution of this plan.

Looking at the drivers of our plan, as you're aware, the vast majority of our cash flow comes from the operating platform. Over the past 6-plus years, we've produced same-store revenue growth in our markets that placed in the top third of the peer group 60% of the time. This success has been achieved through Jerry and his team's unwavering drive to consistently improve our operating processes through the advancements of our technology platform, and of course, the hard work of our community teams.

We have a development -- redevelopment pipeline of $1.2 billion. Of our $1 billion in development that remains under construction, 30% will be delivered by year end. Overall, we are meeting or exceeding our expectations, and I'm grateful to Harry and his team for their foresight to get these communities underway in 2010 and '11. We continue to see favorable development opportunities in our core markets.

On the balance sheet front, we are executing on plan and expect that our balance sheet metrics will continue to improve through cash flow growth from our development and redevelopment pipeline. Our portfolio quality continues to improve, revenue per home has increased dramatically over the years and we have a good mix of markets in A and B quality communities. We will give you full 2014 guidance and a full update on the 3-year plan on our February 2014 conference call.

Finally, I would like to thank all of my fellow associates for their hard work in producing another great quarter.

With that, I will turn the call over to Tom.

Thomas M. Herzog

Thanks, Tom. The topics I will cover today include: first, our third quarter results; second, Hurricane Sandy insurance recoveries; third, a balance sheet update; fourth, an update on our development pipeline; and last, our fourth quarter and full year 2013 guidance. I'll begin with our third quarter results.

FFO per share was $0.37 inclusive of $0.025 of final settlement of Hurricane Sandy insurance recoveries that resulted from damages and business interruptions incurred in 2012 and 2013, none of which was contemplated in our previous guidance. Our FFO as adjusted per share was $0.36 inclusive of $0.01 of Hurricane Sandy business interruption recoveries incurred in 2013, which offset lost commercial rents at the affected properties. The $0.36 of FFO as adjusted exceeded our Q3 guidance at the midpoint by $0.02 as a result of the $0.01 of Sandy recovery and an additional $0.01 of miscellaneous timing items. Third quarter FFO per share was $0.31 which also exceeded our Q3 guidance at the midpoint by $0.02.

Next, in September we reached final settlement of our Hurricane Sandy claims. In total, we recovered $27.5 million of $30.4 million in damages and business interruption losses. We are pleased with this outcome.

Moving on to the balance sheet. At quarter end, our financial leverage on a historical cost basis, was 39%. On a fair value basis, it was 30%. Our net debt-to-EBITDA was 7.0x, which is also approximately where we expect to end the year. These metrics are consistent with the 3-year plan expectation set forth at the beginning of 2013. Moving forward, we will continue to gradually delever the balance sheet through non-dilutive means while targeting BBB-plus credit metrics.

As previously announced, in September we issued $300 million of 3.7% 7-year unsecured debt. The notes replaced debt that matured earlier in 2013 and the proceeds were used primarily to pay off our revolver. From a liquidity prospective, our balance sheet is in good shape with $1 billion of available funds at the end of third quarter consisting of cash and credit facility capacity.

Turning to our development projects. We expect to deliver approximately $290 million in developments or 30% of our active pipeline during the fourth quarter of 2013. As Tom mentioned in his earlier remarks, our in-progress pipeline should be solidly accretive to earnings and NAV when comparing current and trended yield expectations against market cap rates and our cost of funds. We continue to estimate these developments will on average deliver a current trended spread of 150 to 200 basis points. As of the end of the third quarter, there were $320 million left to spend to complete our current $1.1 billion pipeline.

As detailed on Attachment 11 or Page 23 of our supplement, we are actively in process of reloading our development pipeline with a number of projects. We expect to announce a new start or 2 later in the fourth quarter or early first quarter of 2014. Additional starts can be expected as 2014 unfolds. For us, development continues to represent a very positive risk-adjusted use of capital.

On to 2013 guidance. We are raising our full year FFO, FFO as adjusted and AFFO per share guidance estimates to $1.43 to $1.45, $1.38 to $1.40 and $1.22 to $1.24, respectively, to reflect the Sandy-related insurance recoveries previously discussed.

Our same-store guidance is also increasing with full year revenue now expected to grow 4.75% to 5%; expenses, 2.75% to 3%; and NOI, 5.75% to 6%. Additional guidance assumptions can be found on Attachment 15 or Page 27 of our supplement.

For the fourth quarter of 2013, we are providing FFO, FFO as adjusted and AFFO per share guidance of $0.34 to $0.36, $0.33 to $0.35 and $0.29 to $0.31, respectively.

During the quarter, we paid a quarterly dividend of $0.235 per share or $0.94 when annualized, our 164th consecutive quarterly common dividend paid. Lastly, we'll provide 2014 guidance and a full update of our 3-years strategic plan during our fourth quarter call in February.

With that, I'll turn the call over to Jerry.

Jerry A. Davis

Thanks, Tom, and good afternoon, everyone. In my remarks, I'll cover the following topics: first, the recorded operating results; next, fundamentals in our largest core markets, as well as recent A versus B performance in our portfolio; and finally, a brief update on our development lease-ups or redevelopment projects.

We are pleased to announce another strong quarter of operating results. In the third quarter, same-store net operating income grew 6%, driven by a 4.9% year-over-year increase in revenue against a 2.6% increase in expenses. Our same-store revenue per occupied home increased by 4.7% year-over-year to $1,490 per month, while same-store occupancy of 96.1% was 20 basis points higher year-over-year. On a total portfolio basis, including our pro rata share of joint ventures, revenue per occupied home was $1,640 per month. Sequentially, third quarter same-store net operating income declined by 10 basis points due to normal seasonality.

Turning to new and renewal lease rates. In the third quarter, effective rental rates on new leases at our same-store communities increased by 3.7%, while renewal rate was strong at 5.5%. San Francisco, Seattle, Boston and New York remained vibrant, while Mid-Atlantic regions struggled. As a reminder, new and renewal lease rate and turnover by market for the third quarter are available in our supplement on Attachment 8G.

Annualized turnover in the third quarter increased by 160 basis points year-over-year, although still 50 basis points lower on a year-to-date basis. The third quarter increase was a result of our initiative over the past year to move more of our 2013 lease expirations into the third quarter, which exhibits better demand characteristics than the first or fourth quarters. Rent as a percentage of our tenant income held steady at roughly 17%. Move outs for home purchase were same as the third quarter 2012 at 12.7%.

Expense growth was 2.6% higher for both the quarter and year-to-date as real estate tax pressures were offset by reductions in repairs and maintenance expense and marketing costs. Making our service teams more efficient, which enables them to do more work in-house, has been a top priority. We're seeing positive results from that.

Next, some remarks on our primary core market order of [ph] contribution to NOI. New supply in Washington, D.C. can [ph] more directly affect us during the middle of the third quarter, however, we still see blended rental rate growth remain positive in the fourth quarter. San Francisco remains strong despite some difficult seasonal slowing. We are seeing good demand in the city proper and our Mission Bay development is sdzfpre-leasing very well. Orange County employment growth is improving and results are getting better in this market after a weaker first half 2013. Downtown Seattle has supply coming in. The job growth seems to be absorbing. Bellevue may still be the best [indiscernible] market we have right now.

As mentioned last quarter, New York has fully recovered from Hurricane Sandy, which is evident in the strength we saw in rental rate growth and occupancy during the third quarter. Finally, Boston has been one of our better markets in 2013, but it is entering its seasonally slower period. Still, we expect this market to remain well above average as we go to 2014. Dallas is generating significant jobs right now but also a lot of new supply. We're not seeing a major difference between our North Dallas, Addison or Uptown products with regards to demand, and it comes -- continues to be a good market for us.

Moving on to performance of our core A and B communities. In the third quarter, As -- Bs, excuse me, outperformed the As in our core market for the first time as we began tracking the data couple of years ago. However, the disparity was not as large at 4.9% full-ended lease rate growth for Bs versus 4.6% for As. I will remind everyone, although we have moved our portfolio towards the heavier mix of As over the past decade, our core market A/B mix is still roughly 50-50. This inflection point in lease rate -- lease growth is likely due to our lower quality properties not competing directly with new supply to our higher quality communities with easier growth comps Bs have versus As. At the market level, this dynamic was evident in Washington, D.C., Boston, Dallas, Orange County and San Francisco during the quarter.

Turning to our development and redevelopment program, which are highlighted in Attachment 9 and 10 of our earnings supplement. During the quarter, we completed the development of 520 homes on $70 million in incremental spend. Lease-ups at Bella Terra in Huntington Beach, Channel Mission Bay in San Francisco and 13th and Market in San Diego are tracking well ahead of initial underwriting expectations at this point.

Gross lease-ups in Mission Viejo and Domain College Park across the Street and University of Maryland's business school are achieving lease rates and closing ratios in line with our underwriting expectations. Fiori at Vitruvian Park JV is achieving the rental rates we expected, but leasing units at a slower pace than anticipated. Finally, Capitol View. Our only completed project at this juncture reached stabilized occupancy during the summer roughly 9 months after welcoming our first resident. All in, we are quite pleased without the lease-ups are progressing.

Moving on to redevelopment. During the quarter, we completed the redevelopment of 209 homes on $22 million in incremental spend. Both Rivergate and 27 Seventy Five Mesa Verde are generating renovated home rent [ph] in line with our initial expectations. As a reminder, additional details regarding quarter end lease and occupancy percentages for both development and redevelopment can be found on Attachments 9 and 10 of our earnings supplement.

With that, I will open up for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Derek Bower of ISI Group.

Derek Bower - UBS Investment Bank, Research Division

Jerry, just wanted to follow up on the A versus B performance. Can you talk about what that spread was in the D.C. market specifically?

Jerry A. Davis

I don't have it in the D.C. market. I've really broken down D.C. more between submarkets. And what I can tell you is our weakest submarket in D.C. right now is the product we have in suburban Maryland. We are doing a little bit better when you look at the BB-minus products. We only have one of those within the city where we have revenue growth north of 5. But most of the product inside the Beltway is fairly close to the 3.3% revenue growth we had. When you go outside the Beltway, it's about the same except when you get into the supply-impacted areas such as Woodbridge for us. And I did see your call note this morning where you were asking about the effect of rent-stabilized homes in D.C. and I did want to address that. We really only have one asset in Washington, D.C. that's rent-stabilized. It's called Waterside towers, and it represents about 13% of the total revenue in Washington, D.C. It produced 5.4% revenue growth, and if you take that out of our D.C. portfolio, we still would have revenue growth of 2.9%.

Derek Bower - UBS Investment Bank, Research Division

And then just going to the reduction for the development redevelopment spend for the year, can you just speak to is that reduction caused for a reduction in attractiveness in rates or are you being less aggressive with supply [ph] and capital, as I assume you're still not going to issue equity below NAV at this point?

Thomas M. Herzog

Yes, Derek, this is Tom Herzog. It has nothing to do with performance or access to capital. It's all due to timing. As I think you know, we've got 1 or 2 starts that we're expecting in the fourth quarter of 2013 and more in 2014, so this is all just timing.

Derek Bower - UBS Investment Bank, Research Division

GoT it. Great. And then just last one. There was a pretty large pop in the Sacramento same-store performance and I -- it sounds like you guys may be actively marketing that according to a couple of publications. So can you just kind of talk about the performance of those assets and timing of dispositions and how that might affect that capping -- cap rate pricing?

Jerry A. Davis

Yes, this is Jerry. I'll talk about the performance, and then I'll turn over to Harry to talk about the transaction activity. Yes, I would remind you first, Sacramento represents 1% of our total NOI, so it's small. We've always been looking to exit that market for the last several years when the timing was right. I can tell you I think fundamentals in that markets have improved a little. There's no new supply. They've added about 11,000 jobs there. I would also add that our team at the 2 properties we have there is the best we've had in years, and that what you're really seeing in that growth is a recovery over how we performed in the last year or 2. But yes, when you do look at it, it is a significant revenue growth and it's really been pushed not only by some occupancy gains but also above-average new lease rate growth. So the team's doing well. The market has improved and I think it's an awful [ph] time to be exiting the market because of the condition we have those properties in, but I'll let Harry talk about the other part.

Harry G. Alcock

Jerry answered most of it. We are in the market with the 2 Sacramento assets. As Jerry mentioned, it is a market that we have always intended to exit. Candidly from a timing standpoint, selling the property when the fundamentals are positive tends to yield a more positive result.

Operator

Our next question comes from the line of Nick Joseph with Citigroup.

Nicholas Joseph - Citigroup Inc, Research Division

Going back to D.C., how did new and renewal rates trend over the quarter and where are rentals going [ph] out today?

Jerry A. Davis

Hold up one second. Renewals trended throughout the quarter: July was 5.2%; August was 4.6%; September was 4.3%; and October is 4.1%. And what we're seeing now in D.C. for the next 2 to 3 months is probably in the 4% range. I don't have except numbers in D.C. with me. I can tell you when you look at the trending for the total company same stores, we trended 5.8% renewal growth in July and then it was 5.4% in August, 5.4% in September. October's looking like a 5.3% and what we sent out at -- company-wide average for the next 2 to 3 months in that 5.25% range. And we typically do achieve very close to what we send out.

Nicholas Joseph - Citigroup Inc, Research Division

Okay. And then in terms of the development pipeline, what construction cost pressures are you seeing today? Could continued pressure affect potential decisions with starting new developments going forward?

Harry G. Alcock

Hi, this is Harry. First, there's no question costs are rising. The amount really depends on the market and construction type. I think generally, costs are up as little as 5% over the last 12-to-18 months to as much as 10% to 15%. We do expect costs to continue to rise over the next year, perhaps another 10% to 15% -- 5% to 10%. Looking forward, rent increases are generally offsetting these cost increases, although again, that's product and market dependent and we do consider the impact of the increased costs in our underwriting. As we look at our land portfolio, we're confident that we have a number of projects that we will pencil in the future. We won't start a new project unless we have a 100 to 150 basis point spread and leased [ph] to current market cap rates, until we have a complete set of drawings, until we have a max price contract with a third-party general contractor.

Operator

Our next question comes from the line of Jana Galan from Bank of America.

Jana Galan - BofA Merrill Lynch, Research Division

Maybe following up on the construction or the development pipeline. It looks like scheduled completion was pushed out a quarter for the San Francisco and the Alexandria projects. I was just curious the reasoning behind that.

Harry G. Alcock

Hi Jana. This is Harry Alcock. Mission Bay, the initial deliveries are going to be this quarter as scheduled, but given the high number of deliveries that we had, unit deliveries in November and December from a construction standpoint, we simply pushed some of these units into January and February.There are no construction delays. In terms of del Rey, the construction is delayed about 6 weeks from our original estimate. We originally thought the end of Q1. Current schedule shows the middle of Q2. We're confident that we'll meet this revised forecast.

Jana Galan - BofA Merrill Lynch, Research Division

And then, Jerry, if you can let us know maybe move-out to the homeownership in the third quarter?

Jerry A. Davis

Sure. It was 12.7%, which is basically flat with 3Q of last year. It's down slightly from 2Q of this year. One thing we did see is move-outs to home purchase were a little bit heavier in the A product than the B product, which you would expect. They're more qualified. Our As were at about 14%. Our Bs were at about 11%. And the 2 markets that we have where we had move-outs to home purchases that were north of 20% of the reasons for move-out were Charlotte and Boston, where we have a very high percentage of the portfolio is A.

Operator

Our next question comes from the line of Haendel St. Juste from Morgan Stanley.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Jerry, a question for you. Appreciate your earlier comments on turnover, but I wanted to dig into the Sunbelt a bit. We saw a healthy bit of turnover this past quarter in the Sunbelt. Can you give us a bit of the story behind the numbers and talk about Sunbelt in relation to New York, the West Coast, where the turnover was relatively unchanged? Is the turnover being driven by perhaps waning pricing power, perhaps a supply concern? Appreciate some context.

Jerry A. Davis

Sure, Haendel. Yes, I don't think it's pricing power. What I would tell you is about a year, 1.5 years ago, we finally came to the realization after seeing it for multiple years that pricing power on new leases has a definite seasonality in the apartment sector nowadays where more leases in the third quarter and second quarter tend to be 300 basis points higher than they were in the first quarter. And what we did last year is we worked to move more of our lease expirations from the fourth quarter into the those higher lease rate quarters in the second and third. So we effectively moved about 200 to 300 lease expirations into third quarter from fourth quarter, and assuming about half of those people renewed, half moved out, that accounted for about 150 more move-outs in the second -- in the third quarter than we had last year. Now, most of those, as you saw, did occur in the Sunbelt markets. What I would tell you is when I look at my month of October turnover, I have 120 fewer move-outs in my same-store portfolio in October of this year than I had in October of last year. So our strategy being able to reprice those, the 150 units, at more of a 4.5% rent increase rate instead of the 1.4% or so that I'm experiencing [ph] in October, worked.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Got you. Okay. And just to follow-up to that, can you share with us the October and November renewals? And then perhaps break it out by just giving the Sunbelt numbers specifically?

Jerry A. Davis

Sure. October renewals, currently they're running at about 5.3%. In the Sunbelt markets in -- they're more, in the Florida and Texas markets, in the 4%, 4.5% range. What gets me up to my 5.3% renewal rate growth in October, what lifts it is more of my California influence as well as Boston and New York.

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Okay, great. One last question on taxes. We saw you lowered the high end of your expense range. Just curious about your experience on the real estate tax assessment [ph] during the quarter. Is the lowering of the high end of expenses largely reflective of perhaps more successes there?

Jerry A. Davis

We've got a little bit of success that we were able to show in the third quarter and we're hopeful as we go into 4Q that we'll have more success. But yes, a lot of that is tax rate driven.

Operator

Our next question comes from the line Nick Euleko [ph] with UBS.

Unknown Analyst

I'm wondering on the development side, what at this point is holding back starting the projects in LA, San Francisco, and then even looking at the MetLife partials which are all in California or Bellevue?

Harry G. Alcock

Hi, Nick. This is Harry. In each of those cases, we're working through as we speak the -- in some cases the entitlement process. In some cases we have entitled assets and are working through the design development process to get through to a permit-ready or shovel-ready project. So it's really just the timing of completing those events that dictates the start dates. Certain of the projects we're going to be in a position to begin construction the first part of 2014. Other projects are further out in later '14 or even into 2015. And that relates to both the UDR wholly-owned projects, as well as certain of the land parcels that we own in partnership with MetLife.

Unknown Analyst

Okay, so it sounds like some of them are going to start next year, some might wait later into 2015. I guess what I'm just wondering is, I mean, how should we think about that? Because I mean, California's already fundamentally doing very well. I mean, is this is really going to be another slow [ph] year sort of cycle for California? And was the risk for kind of leasing starting development in California at the time where the fundamentals are strong?

Thomas W. Toomey

Nick, this is Tom Toomey. You make a couple of good points and let me try to provide some clarity. Within the confines of the 3-year strategic plan that we put forth, we identified and said we would spend on an annual basis $400 million to $500 million and that we would only commence development when we have a GC contract in-hand, when the investment as a spread over existing cap rates was 100 to 150 basis points and that we had a funding source that made sense on a accretive basis, both NAV- and earnings-wise. So that's the driver behind us making the decision to go forward with the development activity. We will stay within those parameters, $400 million to $500 million on an annual spend. With the respect to markets, looking at the current pipeline of deliveries, you have about 45% that will be delivered probably next year, 18 months in California, another 10% in Boston, so I feel good about the market mix of our delivery and the timing of the strengthening of those markets. I think we'll do well on the lease-ups to those with Jerry's team, and I feel good about that. Backloading it, Harry is right. We're going through the process on all the other opportunities we have. And as we get them there and if they meet the return requirements, then we'll push them into the pipeline and announce them as they get there. But we feel good about the quality of it, about the returns, about our execution capability and the size and scope of it given the size of the enterprise.

Operator

Our next question comes from the line of Andrew Schaffer with Sandler O'Neill.

Andrew Schaffer

Your positive revenue growth in D.C. was pretty impressive given your peers have been reporting negative growth. I was wondering if you'd highlight anything specifically that you did in order to achieve these results?

Jerry A. Davis

Yes, this is Jerry. I think, like some of my peers have already discussed, we went out and tried to attack renewals -- really 90 days before expiration to get a better indication of what people were going to do so we could address notice to vacates more proactively. I think the other factor that I brought up many times is I think our team in D.C. is second to none. And I think the locations that we operate in, while they are somewhat affected by the new supply, the exception of the U Street Corridor and out in Woodbridge, we're not really feeling the direct impact the way that some of the other multifamily REITs are.

Andrew Schaffer

Okay. And secondly, for your Pier 4 element in Boston, I was wondering what the expected average unit size is and the rents are for this project?

Harry G. Alcock

This is Harry. If you remember, we are not going to deliver first units on that until the first part of 2015. The average unit sizes in that one are a little over 800 square feet. And we expect the rents per foot to be slightly above $4 per foot.

Operator

Our next question comes from the line of Richard Anderson with BMO Capital Markets.

Richard C. Anderson - BMO Capital Markets U.S.

So does the 5 -- or excuse me, 3-year plan with a fair amount of development involved in that plan suggest a slower FFO growth model for that -- over that period of time relative to your peers?

Thomas M. Herzog

Rich, we've got a -- this is Tom Herzog. In the 3-year plan we have indicated somewhere in the vicinity of $400 million to $450 million in 2014 and 2015, just the numbers that we have put out. We're not straying too far off those numbers. We have a little bit of a gap in the timing as the result of the starts at the end of 2013 and into '14. But I don't see us having a marked difference in the numbers that we're running as we look forward in '14, '15 for this particular item. So we haven't given our 3-year strategy for '14, '15 and '16 yet, which we will in the next call, but I don't see this being a major factor at this point.

Richard C. Anderson - BMO Capital Markets U.S.

Okay, so if you're out there with a 3-year plan and sounds like you're going to roll that forward, do you -- can you remind us of the -- your image of the fundamental landscape at the end of 2015. And assuming that you had an image and kind of worked backwards to develop the strategic plan, what do you think the market for multifamily real estate will look like from a economy standpoint, a supply, a rent growth standpoint? Like what's the vision you have?

Thomas M. Herzog

Well, we set forth the various expectations in the 3-year strategy document with the various economic factors. And at this point given our timing, we're not ready to provide an update to that. We will in the February call, but we're not going to roll that forward at this point.

Richard C. Anderson - BMO Capital Markets U.S.

I apologize for not having that committed to memory, but I mean is it -- just to put it, yes or no. I mean, do you see the fundamental picture for multifamily extending much further than what maybe the common perception is in the market today? I mean, is this a second or third inning that we're in right now, or is it -- maybe just give me a little color on that end.

Thomas M. Herzog

I'm going to give you my take and then I'm going to turn it to Tom Toomey. I would tell you this, as we look to where we are at in 2013 and how we're performing, what our numbers look like, ops, development, balance sheet, et cetera, we are tracking on or ahead of plan, and as we look into 2014, we think we have a lot of momentum. So we feel good about where it's going again we're not going to give specific numbers but, Tom, let me turn it to you, see if you might have some things to add.

Thomas W. Toomey

Yes, Rich, certainly I don't think anybody's got a good crystal ball, but our clarity probably would be much of the same fundamentals that we see today. In that you see a steady job growth diet of 150-kind-of-thousand jobs a month, what I think is more importantly, is what's the waiting of our markets to that national number, and I think our portfolio will perform well versus the national numbers primarily because of our exposure to tax, energy, certainly import/export markets and I like our exposure to biotech. So I think that we've picked the right markets for the right jobs over the next 2 or 3 years. And I think that will be reflective. I think we picked the right A, B mix in those markets to garner better than average in performance. With respect to what's beyond that supply, my guess is we're right in the transition period in the banking industry with respect to lending and that's going to have a great influence on the amount of supply. I don't see the swelling of capital or bank lending pattern that's going to indicate that we're going to get in above 350,000 deliveries on an annual basis. So I suspect we won't see the threat of supply that we've typically seen in the past in these economic periods. And then what's the wildcard? Obviously, on the finance side, you've got the GSE reform question that looms. The fact they can't even agree on how to run the government probably means they won't change a whole lot on that front. And so I see stability but not a robust capital environment that leads to a great deal of inflation for asset values. It's probably just going to garner out cash flow growth. So on that, I guess, Rich, look at our assumptions. You ask the question about how our FFO growth is going to compare to peers. I don't know what the rest of the peers are forecasting. What I do know is we're targeting annual AFFO growth in the 8 to 10. That's what we put forth in the '13 plan that we put over the next 3 years. And we'll update it in February if we see it materially change. But we feel good about the business.

Richard C. Anderson - BMO Capital Markets U.S.

And just -- I think part of what is holding down the sector has been this perception that it's good but decelerating growth on a year-over-year basis. I mean, is that the thesis, too, when you look to 2015, that it's good but it's decelerating from 1 year to next? Or do you think you could stay in the mid-single digit type number over the course of 3 or 4 years?

Thomas W. Toomey

My -- to continue to expound upon that, it's going to turn into markets and the right combination of markets and exposures. And then I think that that will be what your job is, is to sort through what those individual market dynamics are and how they are painted out. My view is the fundamentals of the business point to -- and I thought that the guys at Avalon had it right. There's a potential shortage of housing in America from a number of fronts, from the single-family, from the multifamily front, and that we're going to run at a very high occupancy and pricing power is going to be dependent upon job growth and wage inflation. And so I feel good about those 2 dynamics playing out to better than what the expectations are from the Street. We'll see how that dynamic plays out. I think we've got a great operating platform to take advantage of it, if it's there. But I'm more optimistic, have always been glass half-full type person, and just see a more positive robust opportunity than maybe what most of people are publishing these days. And I'd add to it, Rich, costs go up for replacing these assets. The value of your in-place inventory has to continue to grow if it just costs more to replace it. And so I think the combination of cash flow and cost increases probably is going to lead to a little bit more NAV growth than people are forecasting at this present time.

Operator

Our next question comes from the line of Dave Bragg with Green Street Advisors.

David Bragg - Green Street Advisors, Inc., Research Division

First question's on the development yields. If I understood correctly, are -- the 150 basis point spread that you target, is that on trended development yields versus today's cap rates?

Thomas M. Herzog

Yes, Dave, this is Tom Herzog. We think about it this way -- we think in 2 ways. It's 100 to 150 un-trended and 150 to 200 basis points trended on average across our development pipeline. So there will be some at the high end, some at the low end and some down the middle. But that's how we've expressed those.

David Bragg - Green Street Advisors, Inc., Research Division

Okay, so when we see you start deals later this year or early next year, you'll be looking for 100 to 150 basis points spread over prevailing cap rates?

Thomas M. Herzog

That's correct. On an un-trended basis, it's 100 to 150 basis points.

David Bragg - Green Street Advisors, Inc., Research Division

Second question is on Attachment 1. Looking at 2 expense line items that we think are outside of your same-store expense pool, property management and other operating expenses, we noticed outsized growth for these items on a year-to-date basis relative to the same-store expense pool. Can you talk about the drivers of these 2 lines?

Thomas M. Herzog

I'm sorry, property management and what was the other one?

David Bragg - Green Street Advisors, Inc., Research Division

Other operating expenses.

Thomas M. Herzog

The property management, we're going to have -- the Vitruvian is one of the items within that. But I tell you what, these items are not included in Attachment 5 when you get down to those same-store results, or any of those operating results. Those lines are excluded when you're trying to get to your margins on Attachment 5, if that's part of what you're looking at.

David Bragg - Green Street Advisors, Inc., Research Division

Tom, do you mean Attachment 6?

Thomas M. Herzog

No I think it's Attachment 5.

Harry G. Alcock

It's 6.

Thomas M. Herzog

Is it 6?

David Bragg - Green Street Advisors, Inc., Research Division

But Tom, are we correct that those 2 lines are not included in Attachment 6, same-store expenses?

Thomas M. Herzog

Yes, that's correct.

David Bragg - Green Street Advisors, Inc., Research Division

Okay. And then what's driving the 6% growth for property management expense and the 22% growth for other operating expenses on a year-to-date basis?

Thomas M. Herzog

You know something, Dave, I'd actually have to -- I have to take a look at that. I can't answer that right off the cuff. But if you give me a call after the call, I'd be able to take you through that.

Operator

Our next question comes from the line of Michael Salinsky with RBC Capital Markets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Tom, just going back to the starts, should we expect those to be on balance sheet or are you looking more towards venture capital given where the stock's trading right now, in terms of new developments?

Thomas M. Herzog

Harry, maybe you want to take that?

Harry G. Alcock

Mike, it's Harry. I mean it really just depends on the property itself. Some of these properties are owned in joint ventures with MetLife and therefore they will naturally be JV properties. Some are wholly-owned and therefore we will develop them ourselves.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Would you expect to sell any of them into joint ventures?

Thomas W. Toomey

This is Toomey. That's always weighs in our decision about moving forward is the capital source and the size and scope of the development pipeline. If we found [ph] opportunity but felt that it stretched our capital capabilities beyond where we want to go, we'd certainly look at joint venture partner to offset some of that. We're going to stay in the confines, Mike, of the $400 million to $500 million of our spend on an annual basis, stack the best opportunities we can inside of that number and weigh capital as one of the those alternatives.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay, fair enough. Jerry, a question for you. Can you give us where the loss-to-lease stands at the end of the third quarter? And also if we look at in-place rents today versus current market in D.C., how does that compare?

Jerry A. Davis

I don't have D.C. on me. My guess is in D.C, there's probably no loss-to-lease at this point, the in-place is comparable. Again, I don't have that with me. I'll get it for you later on the follow-up call. For the company, the loss-to-lease at the end of the third quarter was 1.5%.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. Then finally just as you're looking at the 3-year capital plan right now, I'd be curious, as you look out -- and potentially slowing growth, to go back to Rich's question, does that give an impetus to maybe accelerate some of the recycling you'd planned out over the 3-year plan? Maybe you'd pull a little bit that forward in terms of capital raising and funding in the next cycle -- in the next go around of development?

Thomas M. Herzog

Probably not, Mike. When we look at -- as you noted from our 3-year strategy, we had acquisitions and dispositions generally matched up. We would be putting [ph] in certain assets and acquiring assets that could be more core for us. So that has not caused us to necessarily accelerate the plans around liquidation of those assets.

Michael J. Salinsky - RBC Capital Markets, LLC, Research Division

Okay. And as you've been on the market looking to sell a few assets there, are you seeing price escalation or retrading on any of those?

Harry G. Alcock

Mike, this is Harry. I think if you look at the A.S. [ph], that's the may-to-main [ph] type assets, there continues to be significant investor demand, and these buyers tend to be less leverage sensitive. We haven't seen any retrading there. As you move to the Bs, you have seen some cap rate expansion. I mean there was clearly some retrading activity going on last summer when we initially went through this sort of volatile interest rate environment. Today, I'm not sure we've seen enough trades to form a definitive conclusion but interest rate movements have calmed down. Interest rates have actually floated down, which is going to help with values and predictability. But suffice to say there has been a little bit of cap rate movement on the B properties.

Operator

Our next question comes from the line of Paula Poskon with Robert W. Baird.

Paula J. Poskon - Robert W. Baird & Co. Incorporated, Research Division

Jerry, just a question for you. How are rent-to-income ratio's trending? And is there any notable difference between As and Bs?

Jerry A. Davis

I don't think there are. I looked at it last quarter and there wasn't a notable difference. I can tell you right now, rent-to-income is staying very consistent with what I've reported over the last probably 5 to 6 quarters in that 16% to 17% range. Right now it's at a 17.1%. Last quarter it was 17%. A year ago it was 16.9%, so it stays pretty stable.

Operator

Thank you. And that does conclude our Q&A portion of the call. Please continue with any closing remarks.

Thomas W. Toomey

Well again, I thought we had a great quarter as a team, as a company, our associates on the ground doing a great job. We certainly are happy with the 3-year plan and the first year almost in the bag and where we stand with it. Look forward to giving you more details about 2014 as we wrap up the business plan part. And we will see many of you at May Reach shortly. And with that, take care.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. You may now disconnect.

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