UDR's (UDR) CEO Tom Toomey on Q3 2017 Results - Earnings Call Transcript

UDR, Inc. (NYSE:UDR) Q3 2017 Earnings Conference Call October 31, 2017 1:00 PM ET

Executives

Chris Van Ens - Vice President

Harry Alcock - Chief Investment Officer

Jerry Davis - Chief Operating Officer

Joseph Fisher - Chief Financial Officer

Tom Toomey - Chief Executive Officer, President and Director

Analysts

Nick Joseph - Citi

Juan Sanabria - Bank of America Merrill Lynch

Austin Wurschmidt - KeyBanc Capital Markets

Nick Yulico - UBS

Drew Babin - Robert W. Baird

John Kim - BMO Capital Markets

Rich Hill - Morgan Stanley

John Guinee - Stifel Nicolaus

Pete Peikidis - Zelman & Associates

Alexander Goldfarb - Sandler O'Neill

John Pawlowski - Green Street Advisors

Rich Hightower - Evercore ISI

Rich Anderson - Mizuho Securities

Neil Malkin - RBC Capital Markets

Operator

Greetings, and welcome to the UDR third quarter 2017 earnings call [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you, Mr. Van Ens, you may begin.

Chris Van Ens

Welcome to UDR's Third Quarter Financial Results Conference Call. Our third 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.

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 our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements [Operator Instructions].

I will now turn the call over to UDR's President and CEO, Tom Toomey.

Tom Toomey

Thank you, Chris, and good afternoon, everyone, and welcome to UDR's Third Quarter 2017 Conference Call. On the call with me today are Jerry Davis, Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers, Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call.

First, macroeconomic drivers and overall apartment fundamentals remain conducive for the continuation of strong growth for UDR in our industry. Stable job growth, combined with improving wage growth and consumer sentiment, bode well for future demand. While it is true that some new apartment supplies scheduled for delivery in 2017 have slipped into next year, current demand remains resilient and we have seen no recent signs of widespread irrational concessionary activity. Like everyone, we continue to monitor the developments in Washington, D.C. and at the Federal Reserve while being mindful that we will provide a basic necessity and demographics tailwinds are at our back.

Next, our team again produced solid results in the third quarter, driven by 4 areas of strategic focus: one, the dedicated work of our site level and corporate teams; two, our diversified portfolio along market mix and price points; three, the continued success of our long-lived, high-margin operating initiatives; and four, incremental investments in our high risk-adjusted-return Developer Capital Program.

In summary, 2017 has gone well, leading us to raise full year 2017 same-store and earning guidance ranges. Jerry and Joe will provide additional commentary on these topics in their prepared remarks.

Next, I'd like to thank all of my UDR associates for their contribution to another great quarter and especially to those associated in our Texas and Florida markets for their dedication and commitment to helping our residents get back on track after the recent hurricanes and the focus they have shown to finish out a strong 2017.

Last, looking into 2018 and beyond, our strategic focus continues to revolve around how to best drive our business forward, getting better at what we do and continuing to grow long-term shareholder value. We look forward to sharing our 2018 and '19 expectations with you on our fourth quarter conference call with a release as well as the two year outlook.

With that, I'll turn it over to Jerry to address his operations.

Jerry Davis

Thanks, Tom, and good afternoon, everyone. I'm pleased to announce another quarter of strong operating results. Year-over-year, third quarter same-store revenue and NOI growth were 3.3% and 3% respectively. After including pro rata same-store JV communities, which are heavily weighted towards urban, A+ product, revenue and NOI growth were 3% and 2.8% respectively. Year-to-date, 2017 same-store revenue and NOI growth results of 3.9% and 4% remain slightly ahead of original expectations due to our proactive operating strategy and more rational pricing on lease-ups and assorted markets.

Strategically, we remain focused on: first, retaining a larger percentage of our residents by higher growth rate renewals; second, maintaining portfolio occupancy in the high-96% range; and third, continuing to drive our long-lived, broad-based operating initiatives. Our quarterly results speak to our successful execution of these strategies.

First, third quarter renewal rate growth remained strong at near 5%, with new rate growth just above 1%, while annualized turnover declined by 140 basis points year-over-year. Our teams in the field as well as our corporate level renewal and reputation management teams deserve all the credit for generating these high-level results.

Second, same-store occupancy of 96.7% in the quarter was flat year-over-year. I'll remind everybody, the easier occupancy comps we saw in the first half of 2017 remain more difficult in the second half of the year.

And third, our revenue-generating and cost-constraining operating initiatives continue to produce fantastic results.

Other income, which makes up nearly 10% of our total revenue, grew by 12.5% in the quarter, fueled by a variety of long-lived, sustainable initiatives such as parking, short-term furnished rentals and package lockers. We anticipate a continuation of outsized future growth in our other income basket for the foreseeable future.

On the flip side, expense growth has not been as kind of late. Similar to past quarters, real estate tax and personnel costs remain our two primary pressure points. For full year 2017, we still expect real estate taxes will grow by high single digits versus 2016. On the personnel front, wage pressures continue to intensify as does demand for our people. Similar to past quarters, we are actively combating these forces through additional technological and corporate level solutions that yield greater productivity at our sites. Wage pressures do have a silver lining though, which is better potential for future rate growth.

Moving on. We see minimal pressure for move-outs to home purchase or rent increase, which totaled 12% and 5% of responses during the third quarter. Likewise, net bad debt remains low, all our levels consistent with previous quarters.

Onto a brief market update. First, Seattle, San Francisco and the Monterey Peninsula continue to outperform versus initial 2017 expectations. Demand remains resilient as wage growth has ramped up over the past year and lease-up concessions have rationalized somewhat versus 2016. Second, Washington, D.C. continues to slightly underperform but is a market that should continue to produce solid results in the years ahead. Third, after a lackluster start to 2017, Orange County is feeling slightly better. We continue to feel good about the long-term prospects of our portfolio, which is primarily located west of the 405 freeway.

Our remaining markets are generally in line with expectations. Next, our development pipeline, in aggregate, are generating lease rates and leasing velocities at or above original expectations.

With regard to Pacific City, our 516-home development in Huntington Beach, we are experiencing construction delays averaging 3 months, which have increased construction cost by 2%. These delays have also negatively impacted our ability to lease as effectively as we would like given uncertainties around firm delivery timing of amenities and apartment homes as well as the high-end nature of the targeted Pacific City resident. Positively, our achieved rental rates remain on plan.

At 345 Harrison as well as our JV developments, we remain largely on budget and on schedule. Community-specific quarter-end lease-up statistics are available on Attachment 9 of our supplement.

Moving on. We incurred minimal damage from the third quarter hurricanes that impacted Texas and Florida. A special thanks goes out to our teams in Austin, Tampa, Orlando and West Palm Beach. You all went above and beyond to get our properties back in working order and ensure that our residents were taken care of. We appreciate your hard work and sacrifice leading up to, during and following those storms.

Last, summing it up. The third quarter was another solid quarter as our operating platform and diversified portfolio continued to drive good results. We remain highly confident in our ability to execute through the remainder of 2017.

With that, I'll turn it over to Joe.

Joseph Fisher

Thanks, Jerry. The topics I will cover today include our third quarter results and forward guidance, a transactions update, a balance sheet and capital markets update. Our third quarter results came in at the mid- to high end of our previously provided guidance ranges. FFO per share was $0.46, FFO as adjusted was $0.47 and AFFO was $0.43. On a year-over-year basis, AFFO was up $0.02 or 5%, driven by solid NOI growth and capital deployment opportunities.

I would now like to direct you to Attachment 15 of our supplement, which details our latest guidance expectations. Full year 2017 FFO per share guidance was reduced to $1.83 to $1.85 as a result of hurricane damages incurred during the third quarter, while FFO as adjusted and AFFO per share were increased by $0.02 at the low end to $1.86 to $1.88 and $1.71 to $1.73 respectively. The primary drivers of the raises were increased investment in our Developer Capital Program, fewer planned asset dispositions and stable consistent operating results.

Our full year same-store revenue growth guidance was raised to 3.5% to 3.9%, expense growth was increased to 3.1% to 3.6%, and NOI growth was increased to 3.6% to 4.2%. Average 2017 forecasted occupancy was reaffirmed at 96.7%. For the fourth quarter, our guidance ranges are $0.46 to $0.48 for FFO per share, $0.47 to $0.49 for FFO as adjusted per share and $0.42 to $0.44 for AFFO per share.

Next, transactions. Regarding our Developer Capital Program, the third quarter was a busy one with numerous transactions completed or going under contract during the quarter and subsequent to quarter-end. After accounting for subsequent acquisition activity and disposition activity, our invested balance in the DCP program is approximately $140 million at a yield of approximately 7.5%, with $79 million remaining to be funded. This program has continued to create value for shareholders as we harvest capital and stabilized investments and look for new deployment opportunities.

During the quarter, the West Coast development joint venture sold 8th & Republican, a 211-home community located in Seattle for approximately $101 million. While we liked the product and the location, the property made more economic sense as a well-priced source of capital to fund other recent DCP investments.

Second, we added 1200 Broadway in Nashville, a large mixed-use asset that will have 313 apartment homes, 65,000 square feet of office space and be anchored by a Whole Foods when complete. Our initial capital outlay was approximately $13 million, with a total funding commitment of approximately $56 million. We will earn 8% on our outstanding investment, with a share of upside upon sale of the community.

Third, subsequent to quarter-end, we purchased Steele Creek, a 218-home community located in the highly desirable Cherry Creek submarket of Denver for $141.5 million at a 4.5% nominal cap rate. We originally provided $93.5 million of financing to the developer and were entitled to 50% of the upside versus all-in construction cost upon sale of the community. Our upside participation totaled $14.9 million, resulting in an effective basis and yield of $126.5 million and 5%. Steele Creek is an A+ asset with high walkability, expansive high-end amenity areas, including a rooftop pool and 17,000 square feet of extremely well-located ground floor retail.

And last, the West Coast development joint venture placed Katella Grand, a 399-home community located in the Platinum Triangle submarket of Orange County, under contract for sale subsequent to quarter-end. The sales price is approximately $148 million and is expected to close later in the fourth quarter, subject to customary closing conditions.

Moving forward, you can expect that our capital deployment focus will remain on high risk-adjusted-return DCP investments and sourcing new land parcels to support our development pipeline. Please see attachments 12B and 13 of our supplement for further details on this quarter's transaction activity. Next, balance sheet and capital markets activity. At quarter-end, our liquidity as measured by cash and credit facility capacity net of the commercial paper balance was $851 million. Our financial leverage was 33.5% on an un-depreciated book value, 24.6% on an enterprise value and 29.2%, inclusive of joint ventures.

Our net debt-to-EBITDA was 5.4x and inclusive of joint ventures, was 6.4x. Timing will drive some variability in our quarterly credit metrics and commercial paper balance, but in total, they are tracking in line with our strategic plan. Finally, we declared a quarterly common dividend of $0.31 in the third quarter or $1.24 when annualized, representing a yield of approximately 3.3% as of quarter-end.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Nick Joseph with Citi.

Nick Joseph

Maybe just starting with supply, if you can talk about your expectations for '18 versus '17. And any markets that you expect to see a meaningful increase or decrease relative to this year?

Jerry Davis

Hey, Nick, this is Jerry. I'll take that one. I just want to mention a couple of things. First, as we look at supply, we rely on outside sources, predominantly Axiometrics, and then we run permit regressions for a forward supply forecast. Axio's current forecast for our submarkets in '17 is about 42,000 units. And when you look out to 2018, it goes down about 12% to 37,000 units, so a decline. That being said, as we've seen throughout '17, there have been -- there has been some slippage that could still happen in the fourth quarter of this year as well as at points next year.

When you look at specific markets where we see increases in deliveries in 2018, really, 3 stand out, the first one's New York City, the second is Los Angeles, and third is Seattle. And then we've got about 5 markets where we see declines of more than a couple of thousand homes, and that would be Nashville as the largest decline, the San Francisco-San Jose area, Dallas is also going to decline modestly, Austin is looking to decline, and then lastly, Orlando. All of the rest of them are pretty much flat.

Nick Joseph

I appreciate that. And then just in terms of turnover, you've seen it continue to trend down, but is there an opportunity to push that further down? Are we close to kind of the -- a frictional level where essentially people are going to move out because they're going to move out?

Jerry Davis

We continue to work on that. As I had in my prepared remarks, we've got an inside renewals team that has worked hard this year to really try to save as many notices to vacate or slow responders to our renewal request. We've had good traction with that. I think that team can continue to drive results. It's something that as we listen to Yelp reviews and respond to what our residents are telling us they're not happy about at our properties, we think we can continue to drive that.

What you're seeing is fewer and fewer people, at least now, moving out the home purchase. That's at about 12%, so it's still at historically fairly low levels, so you don't have that competing against you. But I'm hopeful that we can continue to drive it down even further in the next couple of years if there's some of these initiatives we've turned on.

Operator

Our next question comes from the line of Juan Sanabria with Bank of America Merrill Lynch.

Juan Sanabria

I was just hoping you guys could give an update on how you see the urban, suburban coast over Sun Belt markets playing out into '18. Does that gap shrink, and if you could just give us a sense of how those are performing today?

Jerry Davis

Yes, I'll take that initially, Juan. This is Jerry. Right now, when we look at the past quarter on at least an A versus B ratio -- comparison, A is underperforming B at probably 50 to 100 basis points on revenue. When I look at new lease rate growth and renewals, more recently, on an urban and suburban, I think it would track fairly similarly. Right now, most of our A product is urban and the B is suburban, so I don't think there's a significant differentiation. But the suburban is continuing to outperform. I think when you look at where supply is going in the future, it is going to be a little bit less in some of our urban markets in the future, so I think it's going to tighten up a bit. I don't know, Harry, would you add anything?

Harry Alcock

No.

Juan Sanabria

And then just a question on seasonality, you guys noted maybe it came a little bit earlier this year than typical. What do you think drove that? And does that change kind of how you're trying to target lease expiration timings at all? Or how are you guys thinking about that?

Jerry Davis

No. It was just a month. I think we stated last quarter that -- and we saw the deceleration in new lease rate growth that usually starts, I think, in August, and it started in July. So it was only 1 month, but it's not going to really make us rethink lease expirations. We think we've got our LEM schedule pretty set years ago. Today, we have about 20% for leases expiring in the first and fourth quarter, and then you're right around 30 give or take, in the second, third. That feels right to us. And it can defer market-by-market, but on a national basis, I think that's the right spread to optimize revenue growth.

Operator

Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt

Just curious, you've talked in the past about casting a wider net in terms of development opportunities across your markets, and most of the investment we've seen, I guess, in more of the Sun Belt markets has been through the Developer Capital Program. Is that just a function of the investment opportunity set that's available today? Or would you consider ground-up development in those more Sun Belt markets?

Harry Alcock

Austin, this is Harry. We consider investing, whether it's in DCP through acquisitions or through development in any of the markets in which you've just seen us investing recently, that includes the large coastal markets, then also Denver, Portland and Nashville, where, as you mentioned, we've invested in DCP recently.

Austin Wurschmidt

And then what are you seeing, I guess, across -- and maybe this is for Jerry. In D.C., blended lease rates moderated a bit there. Could you just give us a little bit of an overview of the submarket performance this quarter and what you're seeing into the fourth quarter?

Jerry Davis

Yes. When you really look at the submarkets, the B product did better, sometimes Bs and As will flip flop in D.C. A couple of quarters ago, I think we saw As which were inside the Beltway, get as strong as Bs this quarter. Our Bs were about 160 basis points higher as far as revenue growth in D.C. We're seeing quite a bit of new supply coming in the Southwest Waterfront ballpark area, where it's driving concession levels anywhere from 4 to 8 weeks. We're feeling the effects of that. And a lot of the submarkets within the district, even over at our U Street area on 14th, we had revenue growth there. It was really our worst submarket in D.C. It was at negative [2%]. And then over in the Columbia Pike area is our strongest submarket at 5.4%. So both were inside the Beltway, but that higher-end A product on 14th definitely has felt more of the effect of that new supply over by the ballpark.

Operator

Our next question comes from the line of Nick Yulico with UBS.

Nick Yulico

A couple of questions on development. First, as you think about new supply, competitive supply, perhaps easing in some markets next year, are you looking to increase the amount of development that you would be doing? And then how should we think about how you would get -- your dollars get weighted towards development opportunities on balance sheet versus JVs versus the Developer Capital Program?

Harry Alcock

Nick, this is Harry. I'll start then hand it over to Joe. So our goal strategically, as we've mentioned, over the past several years is to maintain the development pipeline between $900 million and $1.4 billion. However, we'll do so while maintaining a disciplined underwriting approach. It's likely that by year-end, our pipeline will be down to $800 million to $850 million. And while we're looking to backfill, we would not be surprised if our pipeline stays below the bottom end of that $900 million to $1.4 billion target through 2018, and it's really just a function of the opportunity set that we see while maintaining that disciplined underwriting.

Again, strategically, we intend to continue to backfill, but tactically, that's going to be driven by the opportunity set. Again, we're looking to invest or develop in the same markets where we've been investing recently. We look at urban, we look at suburban, and again, it's driven by the opportunity set.

Joseph Fisher

Hey, Nick, it's Joe. The only thing I'd add there, just as it relates to your DCP and joint venture question, within DCP, as mentioned, we're down to right around $140 million of exposure after the suburban activity. It's going to ramp back up to about $80 million for the additional funding for commitments we have. So we're really sitting around $120 million, which gives us a decent amount of capacity, still up to with our self-imposed limit of $300 million. So still, that's why we're looking for activity there and expecting to really do what we've been doing in terms of evaluating each deal in a disciplined manner as it comes up and consider recycling or buying that asset.

And then on the MetLife side, the most recent wave of development that's come through there has really cleaned out a lot of that land pipeline. You're really down to just the Vitruvian land in Dallas. So any future development is really probably going to be on balance sheet and not necessarily from MetLife outside of that Vitruvian deal.

Nick Yulico

And then you talked about San Francisco, San Jose, seeing supply come down next year. Is that for the entire market there? Or is it only specific submarkets that you think -- I'm trying to get a feel for where the supply is -- you think is coming down. The impact is coming down across all of San Francisco and San Jose, or if it's only specific pockets that would be, I guess, less impacted by supply.

Joseph Fisher

Thanks, Nick. Hey, it's Joe just following up again on -- on San Francisco, overall, Jerry's comments related to San Francisco and San Jose combined. When we break that down into that same level, that's [going to break down] pretty similar, about 1,000 units, at least in San Francisco and San Jose. And then when we look at it within our submarket exposures, the submarket exposure for us in San Fran is down a little bit. It was down quite a bit more in San Jose. And we really don't have much exposure over in [indiscernible] just so through submarket [indiscernible]

Operator

Our next question comes from the line of Drew Babin with Robert W. Baird.

Drew Babin

I wanted to ask about the competitive asset swaps. I would assume, with B cap rates having trended down and submarkets probably still trending down and maybe some pickup in kind of the urban CBD A product, are there any markets where you might see some types of asset swap opportunities to maybe trade into more urban locations to take advantage of supply maybe waning a bit in those locations into position for the next cycle?

Harry Alcock

Drew, it's Harry. I mean, I think you'll see that we did sort of a little bit of that through DCP this year, where we bought really an irreplaceable asset in Denver, in perhaps the top location in the state, sold assets at this Platinum Triangle in Anaheim. I think we continue to look at those types of opportunities. You are right that the spreads between, call it, the B assets in suburban locations have compressed relative to the A assets in the urban locations, and we'll continue to look at those opportunities as they arise.

Drew Babin

That's helpful. And then looking at the expense outlook that was in the strategic outlook, calling for the 3% to 3% -- or 3% to 5% expense growth next year, and obviously, you're not providing an update to that right now, it would sound like real estate taxes are maybe something that's putting negative pressure on that or negative in the sense that there's going to be continued pressure. Are there any expense line items that you can talk about that have maybe improved in the asset management programs or things that we can expect expense growth to be much more benign next year?

Jerry Davis

Drew, this is Jerry. I guess I would start with when you look at controllable expenses in total this year, and I'll get to '18 in a second, for the quarter, they're only up 0.5%. So you had real estate taxes up 10% and everything else in, probably 0.5%. On a year-to-date basis, most of the other categories are up 1.2% of the total real estate taxes. So we continue to work on, I think whether it's in repairs and maintenance as well as in personnel cost to drive down growth rates there. The other thing we're consistently looking at is ways to invest ROI dollars in expense-reducing utility initiatives, such as LED lights as well as xeriscaping properties, things like that. I mean, I think, on the marketing side, we've done a good job this year of driving down marketing cost. It doesn't always look like it because there are some offsets to our short-term furnished rental program, predominantly renting the furnishings, that's driven up that after-marketing capital freeze. But I can say we're consistently working to keep non-controllable or controllable rental expenses in check because we are very aware that the real estate tax will provide the mixture that you've talked about.

Operator

Our next question comes from the line of John Kim with BMO Capital Markets.

John Kim

Just a follow-up on the short-term furnished rental program, I think, Jerry, you mentioned other income is 10% of revenue in the fast-growing segment, but can you break out the different buckets between the rental program versus parking and package lockers?

Jerry Davis

Yes. I can probably do it offline a little bit better on components, but you're right, it is a total NAV percent. I will tell you, of the parking for the quarter, it was up $700,000 year-over-year, so that was a significant increase. I think it was about 20 -- over 20% up. Short-term rentals, which we didn't even have in place last year, for the quarter, revenue -- the revenue component was up $1 million year-over-year, and the NOI was up about $700,000. As I stated earlier, there are some expenses that are related to this, predominantly furniture rental. So on a combined basis on the revenue side for the quarter, those 2 were making about $1.7 million of the increase.

John Kim

And how big do you want that to be -- or how big can it be? Is it an Airbnb-driven business, and is it sprinkled throughout your portfolio or just certain assets?

Jerry Davis

First, it's not Airbnb. It's over 31-day rentals, so it's not short-term. The average term actually is 79 days. It's not even just 31 days. It is spread throughout the portfolio, although I'll tell you that the major concentrations are in some of our urban markets. About 35% of the programs in San Francisco, 24% is in Boston, and then 11% is in Orange County. So those 3 markets make up almost 2/3 of the program. I won't say we'll hold strong for this, but we do try to keep the exposure in any individual property to no more than about 1% or 2% of the product there. If it was a property that was in lease-up, where we have plenty of availability we'll go ahead, knowing that when those units do turn, we can put them back into 12-month rentals.

John Kim

Okay. And then on the sale of 8th & Republican, it seems like a great location. It sounds like the union -- the joint venture didn't really sell it for much of a profit. So why not exercise the purchase option rather than sell the asset?

Joseph Fisher

Yes, hey, John, it's Joe. I guess I'd go back to what we're trying to imply in my opening remarks, which is it's just a well-priced source of capital. So as you know, as we look at the overall first wave of these investments, stepping back, we've had 4 come up this year, it means CityLine, Steele Creek, 8R and Katella, of those 4, we're going to end up selling 2 and buying 2. So the program's doing about what we expected from that respect. Overall, you end up with a couple of home runs in Steele Creek and CityLine and a couple of singles in the other 2. But blending that, you're going to get into the right IRR of plus or minus 10%. So when you look at why sell 8R, you're correct, we like the submarket, like the asset, but we happen to like Steele Creek better.

So when we look at the ability to source capital in the mid-4s coming out of Katella and 8R and going into a blended 5% on Steele Creek and a 4.5% on the $141.5 million price, you end up with a better IRR over time. And if we had a better cost of capital or more opportunities to sell assets, 8R could have been a purchase. But that's the way it played out when we played the capital against each other and the IRRs against each other.

John Kim

And can you just remind us of the mechanics of the preferred return on that? So you get the 6.5% during the construction phase, and then you share 49% of the profits on sale?

Joseph Fisher

Correct. So you have a 6.5% press up until we reach 80% stabilized for 3 consecutive months. At that point in time, you're going to go to a cash flow split based off the ownership interest. And then upon sale, you're correct, we're going to receive our ownership percentage if we sell it. And if we exercise our option price, we'll be pricing it at that option price.

Operator

Our next question comes from the line of Rich Hill with Morgan Stanley.

Rich Hill

Continuing on the, just the line of questioning on the Developer Capital Program, we obviously heard about some banks pulling back on construction lending, which provides a pretty meaningful opportunity for you, guys, which I think is resonating in your results. But I'm curious, how do you think about underwriting these construction loans? Is it really all about the property and location of the property? Or are you thinking about the -- effectively your borrower as well? I'd love to just get a little bit more detail on how you're thinking about underwriting them.

Joseph Fisher

Look, as we said all along, the asset ultimately has to be an asset that we want to own in a submarket and a market that we want to own. So it comes down to a real estate underwriting position because we do have backside participation in a number of these deals. We have an option price on the West Coast development joint venture deal, so you have to underwrite it from a real estate equity perspective, not necessarily a lender's perspective. At the same time, you do want to think about it from a lender's eye in terms of what your rights are if the deal goes south. So you're kind of looking at it from that perspective as well. So you're kind of looking at it from both ways, but ultimately, you got to think about it as a deal that we want to own and therefore, a real estate underwriting.

Harry Alcock

And I think I just -- I'd just add that if you think about the investment the REIT holds between an acquisition and a development on risk-return continuum, where you have some development exposure in terms of the lease results, but we get paid the 6.5% through the development lease-up periods, with no schedule or cost risk. And in the case of Wolff, we have a fixed-price option in the future. So it really is kind of a hybrid.

Rich Hill

And at the risk of asking a 2018 guidance question, is sort of your activity in 2017 reflective of how we should be thinking about it going forward? Or do you think that's -- this is a program that you'll see more opportunity in, in the future as other lenders start to pull back a little bit more?

Joseph Fisher

Yes, Rich, I think the activity you saw this year is what we would like to do and accomplish with the program. But at the end of the day, it's going to be very opportunity-specific. As long as we keep constraints on ourselves in terms of making sure it's an asset that we want to own, that's going to limit the pool of investors to some degree. In addition, as you've seen, new starts and new supply are expected to start coming off in '18 and '19, so that's going to limit the pool of opportunities as well. So we're going to remain active in trying to find deals and source deals that meet the underwriting standards, but not a guarantee that we're going to develop through this volume of activity.

Operator

Our next question comes from the line of John Guinee with Stifel.

John Guinee

I was looking at your development summary and I noticed, with the exception of Dallas, you really turned off the development spigot pretty aggressively a couple of years ago. So my first question is why. And then when I look at your land position, it looks like, excluding Dallas, you really only have 200 or 300 units, Boston and Dublin, California, of entitled land ready to go. And so I'm sort of wondering, I understand the land focus, but I also know that hard costs are going up greater than rental rates, yield on development is coming down, land prices haven't yet adjusted down. Are you optimistic that you can refill the land bucket and start up your development anytime soon?

Harry Alcock

John, this is Harry. I think as I mentioned earlier, our goal strategically is maintaining our development pipeline between $900 million and $1.4 billion. However, we'll do so while maintaining a disciplined underwriting approach. We're going to maintain our target 150 to 200 basis points spread to market cap rates. And so what you see is that our development pipeline has come down a bit. I think we'll end the year a little over $800 million. We're actively looking to backfill for 2018 and 2019 starts, but my expectation is that given the opportunities, that our pipeline will fall below the low end of that $900 million to $1.4 billion for at least the next several quarters.

John Guinee

Do you think maybe 150 to 200 basis points spread is too aggressive?

Joseph Fisher

You mean, in terms of you think we're being too conservative, which I don't think we'd agree necessarily that we need to adjust our underwriting standards just to maintain a strategic view of development pipeline. The pipeline is going to be an output of wanting to accept our cost of capital. So if returns impress we can always walk away and it's only what we have to do, and development is not something that we absolutely have to do. We can pull back on dispositions and not move forward at the bottom line. So I think maintaining on this on underwriting is probably the appropriate path forward, not necessarily driving the main development pipeline.

Operator

Our next question comes from the line of Pete Peikidis with Zelman & Associates.

Pete Peikidis

Jerry, I appreciate the market-level detail on leasing trends in the supplement. Could you just share or speak to new lease and renewal growth trends for October in New York and what you're seeing heading into November?

Jerry Davis

Yes. In New York, new lease rates currently are, for October, are right around negative 2%. So it's dropped off from the quarter, just following typical seasonal trending that we've seen over the past couple of years where you see a downward threat from third quarter into fourth quarter, so it's not overly surprising.

Pete Peikidis

And just given the relative strength in Orlando and Tampa? And understanding that you expect supply to moderate in Orlando next year, are you expecting the pricing to keep pace through the end of the year? And are there any risks that rising rents to your assets start becoming more competitive with the overall market in newer product? Or is there still a sufficient buffer there?

Joseph Fisher

Hey, Pete, could you just step back a second? You kind of broke up there at the beginning of your question and we missed that. Could you just repeat the first half?

Pete Peikidis

Just given the relative strength in Orlando and Tampa, I guess I was just looking for some further color on pricing expectations here through the end of the year and sort of if there's a risk that pricing of your asset start become more competitive with the overall market. Or is there still sufficient buffer there in Tampa and Orlando?

Jerry Davis

I would say this, as you look at where October is in Orlando, we've actually seen new lease rates go north of 6%. So Orlando has improved. I think some of that is potentially due to the influx of people affected by the hurricanes. Tampa, however, it's seen more normal seasonal trends. New lease rate growth in Tampa, so far this quarter, is a little bit under 2%. So as far as rates, if your question is are they competing with new supply, I think they're still an adequate spread between our B assets, which is what we typical, for the most part, have in our Florida properties, to the A assets there. Job growth has slowed a bit or wage growth has in Orlando, job growth is still strong. But I think those properties will continue to do well, especially when you factor in what I said earlier about some of those Florida markets are showing less deliveries next year than we have this year.

Operator

Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Alexander Goldfarb

First question is on the Developer Capital Program, how do you guys incorporate or mitigate the growing delays in construction so as to not impact the returns that you guys hope to achieve?

Harry Alcock

Alex, its Harry. We have no schedule or cost for it still. Any overruns are borne solely by developer. That includes schedule or a cost. And to the extent there are delays, the net impact really is that that we continue to collect our coupon, our 6.5% for longer.

Alexander Goldfarb

Okay. Okay. Then that's helpful. And then the second question is, Denver, I don't think I heard you guys talk about it before, but clearly, it's a new favorite market for the apartment REITs. You guys obviously took down Steele Creek. Can you just talk a little bit about your home market and your expectation for investment? Do you see the same opportunity there or across others of your market? Do you see better opportunity elsewhere?

Harry Alcock

Alex, it's Harry. I'll start to talk about investment. Maybe Jerry can talk about the sort of operating environment. As I mentioned before, with -- our goal is to continue to focus our investment activity, whether its development, DCP or acquisitions in the markets where we've been investing in the recent past, the large coastal markets, but also Denver, Portland, Nashville and then Dallas with Vitruvian Park. So we view Denver as an attractive investment market. Again, we invested in Steele Creek back in late 2013 and now in 2017, have completed the acquisition. So it continues to be a market that we like, along with the other markets that I mentioned.

Jerry Davis

Yes, I would just add, Alex, now Steele Creek, for the people who are not familiar, is in the Cherry Creek neighborhood of Denver, which is probably the top neighborhood in the whole city, really irreplaceable location directly across right the Cherry Creek Mall. As Joe stated in his prepared remarks, exceptional first floor retail there. I'd point out it's got a walk score of 95, so it is definitely the place to live. You're looking at rents that are pretty high for the Denver market, at about $330 a foot. They're large floor plans.

Average square foot is about 955 to 960 square feet, so average rents are north of $3,000. But right now, whether it's downtown Denver or over in Cherry Creek, you're going against a pretty significant new supply. I think that's because they're building in areas where most of the people in Denver would prefer long-term to live. And I think when we get through this supply. This deal is going to be even better than it is today. But again, exceptional location, quality product and it's a product that we've been running for the last 2 years, so there's probably little surprises that we're going to find out about.

Alexander Goldfarb

So Jerry, does that mean once the supply comes down in Denver, you guys may ramp up? Or are you looking to increase investment even while there is the new supply wave going on?

Harry Alcock

Again, the -- our investment activity within our target markets is heavily influenced by the opportunity set. So we clearly would invest in Denver, either in development DCP or acquisitions, to the extent the opportunities presented themselves. As we mentioned, Steele Creek, in an irreplaceable location, Jerry just went through some detail. And again, I think from a pricing standpoint, Steele Creek compares favorably to sort of the cap rates that you're seeing on the suburban product that's trading in Denver, just as we talked about earlier, partially a function of these high-end core products being relatively out-of-favor with the capital that's chasing the assets compared to the flat fee product.

Operator

Ladies and gentlemen, our question-and-answer session will resume momentarily. Please stand by. [Technical Difficulty]

Operator

Our next question comes from the line of John Pawlowski with Green Street Advisors.

John Pawlowski

Jerry, the pace of deceleration in renewal growth in the past few years has been quite modest, so the gap between renewals and new leases has widened. Do you expect the pace of deceleration to pick up in '18 for renewals specifically?

Jerry Davis

At this point, I don't see any evidence that would happen. Like you said, a year ago, when I look at what renewal rate growth was in October, it was 5.1%. So right now, we're high 4s. So it really hasn't dropped dramatically. And again, at this point, I think rent growth has continued to go up modestly for the REITs. If you look at Axiometrics' studies, it shows that we're going up about 1% compared to about 2% on a national basis probably because of the quality and locations of our assets. But you're seeing rent to income levels stay steady. For us, it's about 24%. So I don't see it compressing at this point, but we're going to have to see what happens as the year progresses. But it really has remained stable, as we mentioned, over the last couple of years.

John Pawlowski

Okay. What specific markets are you seeing the most strain on pricing power due to affordability reasons, either move out to rent increase or move out to buy homes?

Jerry Davis

Really, on the rent increase, it's typically been places like San Francisco where you'll feel some of that pressure. It's not as acute as it was a year or 2 ago as rents haven't gone up at that level. But really, mostly there, there's not a lot on move-outs to rent increase that jump off of the page at the outside of those locations. The move-outs to home purchase, really, there's only 3 markets that we have right now over that we're about to give that as the reason for leaving: Boston, Richmond and Portland. When you get over 15%, you're moving into the Sun Belt markets. But when you get into the rest of the coastal markets, move out to home purchase is under 10%.

Operator

Our next question comes from the line of Rich Hightower with Evercore ISI.

Rich Hightower

So I don't know if I missed this earlier, but can you, guys, give a really quick rundown of October to-date data? I know you've talked about it with a couple of markets, but just maybe a little bit deeper in that sense.

Jerry Davis

I think instead of giving a detailed rundown of October by market, we can give you that after the call individually. But when you -- overall though, I will tell you that we went from the 1.1% for the third quarter, that's on new lease rate growth, and it's slightly positive so far in October. We haven't fully closed out our books yet. And then when you look at the renewals in total, they went from 4.8% in the third quarter. And right now, they're just a hair below that.

Rich Hightower

And then just on New York, looking at the last couple of quarters with your portfolio, I mean, it's still weak relatively speaking, but there's a little bit of stability maybe versus what we might have expected 6 to 9 months ago. I mean, is that -- and I know you've talked about a better concessionary environment versus a year ago. I mean, is there anything to that that's specifically driving that? Or we're still all sort of expecting New York to be a weak market through 2018? I mean, just what are some of the high-level thoughts there?

Jerry Davis

Yes. I don't think New York is going to, we would still say, New York is going to continue to struggle next year. When you look at the employment information right now, it looks like it's, this year, producing about 100,000 jobs. Next year, it's going to go down to about 87,000 jobs, so down a bit. Wage growth is 2%, 2.5%, which is not too far off from national average. When you look at the supply that's coming into New York, it's most prevalent in Long Island City as well as Brooklyn and Midtown West. When we look at how we're doing in the city, we've got 5 assets borne in our same-store pool. We're definitely feeling the most effects, a bit our Upper West Side MetLife JV property, where revenue growth during the quarter was a negative 2%. As you go through either our Chelsea property, our downtown properties or our Murray Hill property, they're all plus or minus between 0.4% positive and 1.6%. So fairly tight range for that B asset that we have in New York City other than the, again, A+ deal we have up in Columbus Square.

Operator

Our next question comes from the line of Rich Anderson with Mizuho Securities.

Rich Anderson

Joe, you mentioned $140 million of current investment that's going to go up in the DCP program and then a $300 million self-imposed limit. I'm curious if that's a temporary self-imposed limit in such that you see others kind of play itself out and kind of learn from it a little bit and then maybe becomes a greater percentage of your overall development program at some point in the future if it continues to be successful? Is that a fair way to think about it?

Joseph Fisher

Yes, Rich, I think that's fair to keep it a little bit open-ended depending on the opportunity set that's out there, so not to say we wouldn't go above $300 million. If risk-adjusted returns kept coming our way and it became more disconnected from acquisition and development returns, perhaps we'd look at increasing that limit. But we also got to be cognizant of where we source that capital fund and how much of that is available. And then earnings-wise, this is accretive to earnings, so we have to be cognizant of the fact that at some point, if the opportunity set dissipates over the next 4 to 5 years as these kind of long-duration investments burn off, you want to make sure that you don't have a cliff in any one given year. And so we do try to keep it under 1% or 2% of net earnings so that doesn't become a negative thesis to the street, but we'll continue to evaluate. So as opportunities keep coming our way, then not to say we won't go above that limit for a period of time.

Rich Anderson

Sure. Perfect. And then second question, this whole supply slippage phenomenon that's happening to you and everyone as well as maybe the elevated difficulty finding financing for development in general, do you feel as though that, that is kind of resonating with the broader developer community and will maybe contribute to a protracted decline in supply growth in '19 and beyond? Or is it just too soon to make that call at this point?

Tom Toomey

I think you've got the right pieces. Rising interest rate, rising cost, NOI trends, where they're pointing, banks still remaining disciplined, all shape up to a potential to expand the program in the years ahead. And so in hence, we don't want to burn all our fuel right now on this piece of it. But we'll play it out, and I think the discipline that the team has is critical at this juncture and we're going to take '18 one opportunity at a time and make sure that we're cognizant of the overall risk profile of the company and the economy overlaid on that.

Operator

Our next question comes from the line of Neil Malkin with RBC Capital Markets.

Neil Malkin

I mean, your stock price is at pretty good levels, and we've heard commentary from your peers that maybe '18 in particular is going to be a good time to actually acquire, go on the offensive. You have a lot of merchant builders who are bringing their product to market and need to recycle in order to keep going and maybe you have the opportunity to buy below market or get in at a good time, especially given your operational savvy and particularly because you have among the highest leverages -- leverage levels among the multifamily peers. Have you thought about raising equity and in tandem with maybe a big purchase in some markets you're focused in?

Harry Alcock

I'll start. And I know Joe is going to want to step in as well. This is Harry. I think like any other investment, we'll consider sort of buying, as you say, merchant-build deals that are in lease-up. And we'll consider that in the context of other uses of capital, specifically DCP and the amount and cost of capital sources, which Joe will talk about in a second. In terms of the opportunity set, we think it's possible there's going to be some opportunity here as construction loans approach maturity for developers who want to monetize their position.

However, I will tell you that there's very little distress in this market, which I believe will limit the opportunities. Many of these deals are funded with institutional equity. So while the developer may be motivated to sell as the value of their position declines over time, the institutional equity can be much more patient, and we're seeing quite a few deals where the equity is actually buying out the developer so the deal never hits the market.

Joseph Fisher

Just your comments regarding share price, cost of capital and leverage. I guess starting with cost of capital. From an equity standpoint, the share price has been acting okay, but I would say that we've had multiple times this year that we've traded at a decent premium to consensus NAV and you haven't seen any activity out of us. So when we built the plan around sources and uses, we made sure that it was built around not needing to access the equity market. And if we do, it's going to be for a use that's going to be accretive in nature and adds to NAV overall. So while we've been at premiums, we've chosen not to act thus far this year.

In terms of the deleveraging, I guess I would look at solid BBB+ investment grade credit rating and the fact that earlier this year, we were issuing 135 over, in line with our other BBB+ peers. So I think our debt investors are pretty happy with the leverage level and kind of where we're at. We've stuck to the plan overall that we laid out in the 2-year in terms of trying to keep relatively static metrics on debt-to-EBITDA, debt-to-enterprise, fixed charge, et cetera, and really focusing more on the composition of our leverage, meaning focusing on increasing the unencumbered pool, increasing duration, reducing floating rate and some of the items around that as opposed to absolute leverage.

So at this point as has been contemplated the idea of a deleveraging or equity to fund external investment, given the needs that we have.

Neil Malkin

I appreciate the color. And then last one for me is in San Francisco last year, you saw a lot of irrational concessions. I'm wondering if you started to see that kind of knee-jerk reaction back up to market levels as those burn-off. I'm wondering if that's actually making renewals or new leases stronger than you expected and if you think that will continue into next year.

Jerry Davis

Yes, Neil, this is Jerry. You're right, we did see that irrational pricing in, specifically, San Francisco last year. We're seeing this year, as you really look at turnover, it's down quite a bit, both year-to-date. And then when you look at it for the most recent quarter, it's also down about 300 basis points.

So I'm really not seeing any more difficulty getting people to stay when you look at the renewal rate that we had in the month or in the third quarter. It was just a little under 4%. So I'm not having any more difficulty than I would say normal to do that even though we are giving away some of those higher concessions last year. So not seeing it and I don't think the irrational pricing has come back to San Francisco. You'll still have some properties into some area that are offering 6-plus-weeks concessions, but it's nothing like it was a year ago.

Operator

There are no further questions. I'd like to hand the call back over to President and CEO, Mr. Toomey, for any closing remarks.

Tom Toomey

Well, again, thank you for your time today. And in closing, I'd just say this. This quarter checked all the boxes. I thought it was a strong quarter for operations, capital allocations, the discipline remains very solid, and we increased guidance. And with that, we look forward to seeing you at NAREIT in a couple of weeks