Greetings and welcome to the UDR’s Fourth Quarter 2018 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.

Welcome to UDR’s quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Moving to the question-and-answer portion, we ask that you be respectful of everyone’s time and limit your questions and follow-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to UDR’s Chairman and CEO, Tom Toomey.

Thank you, Chris and welcome to UDR’s fourth quarter 2018 conference call. On the call with me today are Jerry Davis, President and Chief Operating Officer and Joe Fisher, Chief Financial Officer, who will discuss our results, as well as senior officer, Harry Alcock, who will be available during the Q&A portion of the call. The five topics I will cover today include a short recap of 2018; our high level 2019 macro outlook; UDR’s 2019 strategy; capital deployment opportunities; and the senior executive promotions announced early in January. First, we again produced strong results across all aspects of our business during the quarter and for the full year. Like many REITs, our stock took a wild ride in 2018, but macroeconomic forces remained supportive of apartment fundamentals and our best-in-class operations, diversified portfolio and disciplined capital allocation allowed us to take advantage. We produced sector-leading top line growth, twice raised same-store and earnings guidance ranges and finished the year at the top end of our FFO adjusted per share range. I would personally like to thank all of our associates for a great 2018. Second, from a high level perspective, we expect 2019 to be relatively similar to 2018, that is solid economics, demographics and fundamental backdrop, accompanied by bouts of share price volatility throughout the year. UDR tends to perform well in this type of environment. In 2019, we again expect to be near the top of the group in same-store growth with better flow-through to the bottom line as our large developments move towards stabilization and we take advantage of embedded opportunities like the option asset purchases completed subsequent to year end. Should we encounter a different 2019 economic environment, I am confident that UDR is setup well for success on a relative basis. Third, we do…

Thanks, Tom and good afternoon everyone. We are pleased to announce another quarter and full year of strong operating results. Fourth quarter same-store revenue and NOI growth rates were 3.7% and 3.4% and full year 2018 growth rates were 3.5% and 3.4% respectively. For the quarter, our sector leading results continue to be driven by first, a widening blended lease rate spread that averaged 110 basis points above last year’s comparable period; robust occupancy averaging 96.8%; year-over-year annualized turnover that declined by 130 basis points; other income growth of nearly 12%; year-over-year controllable expense growth that has declined by 1.2%; and the continuation of positive trends and move-outs to home purchase and rent increase, both of which remain low at 11.6% and 5.4%, respectively. Moving on the primary 2019 macroeconomic assumptions that underpin our outlook are national job growth of approximately 170,000 per month with wage growth above 3%. This compares to 2018 job and wage growth of 220,000 per month and 2.8% respectively. Next, this is set against a relatively flat year-over-year delivery forecast after potential slippages factored in. And last, B quality suburban properties are expected to generally outperform A quality and urban assets. 2019 UDR-specific assumptions, which are driven by the macro forecast we utilize and by community-specific ground-up assumptions are as follows: our operating earn-in was approximately 40 basis points higher versus last year; overall pricing power in the form of blended lease rate growth will be better than 2018; occupancy is expected to remain in the high 96% range; other income should continue to grow at high single digits but not as robustly as in 2018; controllable expense growth is forecast to remain in check due to ongoing efficiency initiatives and the preliminary implementation of operating platform improvements; non-controllable expenses, such as real estate taxes…

Thanks, Jerry. The topics I will cover today include our fourth quarter results and forward guidance, a transactions update and a capital markets and balance sheet update. Our fourth quarter earnings results came in at the high-ends of our previously provided guidance ranges. FFO as adjusted and AFFO per share were $0.50 and $0.46. Fourth quarter FFOA grew 5% year-over-year driven by strong same-store and lease-up performance and accretive capital deployment. Next, I will provide several high level comments on our 2019 guidance, the details of which can be found on Attachment 15 of our supplement. Full year 2019 FFOA per share guidance is $2.03 to $2.07 and AFFO is $1.87 to $1.91. Primary drivers of the $0.09 of growth between our 2018 FFOA of $1.96 and our 2019 $2.05 midpoint include: a positive impact of approximately $0.08 from same-store stabilized JVs in commercial operations; a positive impact of approximately $0.05 from development, DCP and other transactional activity; a negative impact of approximately $0.01 each from higher G&A and the timing drag associated with the recent equity issuance; a negative impact of approximately $0.02 from higher incremental financing costs, inclusive of higher LIBOR expectations. Moving on as Jerry indicated in his remarks, our full year 2019 same-store growth forecast is 3% to 4% for revenue, 2.75% to 3.75% for expenses and 3.25% to 4.25% for NOI, with forecasted occupancy of 96.8% to 97.0%. For the first quarter of 2019, our guidance ranges are $0.48 to $0.50 for FFOA and $0.46 to $0.48 for AFFO. Next, transactions, during the quarter, we sold Circle Towers, a 46-year-old, 604-home community located in the Fairfax County submarket of Washington, D.C. for $160 million. Subsequent to quarter end, we completed numerous transactions. First, we exercised purchase options on Parallel, a 386-home community located in the…

Thank you. [Operator Instructions] Our first question comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Thanks. What’s the guidance for ancillary revenue growth in 2019 and what was it in 2018 and then how much will it contribute to same-store growth this year versus last year?

Hi, Nick, this is Jerry. Last year, we came into the year expecting other income to contribute or to grow at high single-digits and it came in just under 12% at 11.5% this year. As we go into this year once again, we think it’s going to be high single-digits with the hope but not the expectation that it could go higher. It’s all based on increased penetration in some markets. And when you look at the contribution it made to total revenue last year, it was in that 80 to 100 basis point range and this year it’s expected to be probably in the 50 to 60 basis points of revenue growth.

Thank you. Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Hey, good morning guys. Maybe just following up on Nick’s comment there, it looks like at least for the companies that we cover you have peer-leading same-store revenue growth and same-store FFO growth. In the past, you have had pretty attractive same-store revenue growth, but the FFO growth has been more in line. So I am curious what’s driving that FFO growth in 2019 and then maybe you could breakdown the other income, is it development, is it sort of your lending program, how should we think about that?

Yes, hey, Rich, it’s Joe. Couple of things in terms of what’s driving it this year, obviously, the core growth as well as the joint venture in commercial is contributing to that year-over-year growth number. But as we came through it last year, remember, we had $800 million pipeline on the development side that was really going just into the lease-up phase. So, it kind of came off of cap interest took on full expense load, but we are working up on the occupancy and revenue side. So there is about $0.01 drag last year to our run-rate FFO numbers. This year, we think it’s probably about $0.02 accretive. So you can add a $0.03 swing if you will year-over-year. In addition, if you go to that DCP pipeline, you look at what Harry and team have been able to do on that front in terms of continuing to deploy capital, that’s been accretive for us as well. And then on the financing front, while rates continue to tick higher, we have tried to get out ahead of some of the prepayment and refi activity and lock in lower rates on that front, which has helped us well. So overall, you kind of have core driving $0.08 of it, transaction activity driving around $0.05 and then you have interest coming off $0.02 as well as G&A and the equity raise being about $0.01 each.

Great. Very helpful color. Thanks, Joe.

Thank you. Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Hey, guys. Just touching on the Brooklyn acquisition, I mean, we have seen many of your peers reduce exposure to New York City recently. So you are clearly taking a contrarian view here in adding exposure. And I guess I am just curious, what gives you the confidence in the market I guess both near-term and longer term given some of the supply challenges we have seen? And then also curious, when you underwrote the transaction if you underwrote it with the L train being fully shutdown I guess over the near-term?

Hey, Austin, this is Joe. I will probably start it off and then Harry might be able to speak to some of the specific attributes on the asset submarket returns, but overall, with New York, you are right. It is a market that we can look at both Leonard and our 10 Hanover redevelopment. We are looking to get more dollars put to work in that market. While it has lagged of late from a regular standpoint given the supply picture, we are starting to see that come off. New York will be probably a little bit higher next year in terms of supply, but this is not a 1-year trade for us. We are thinking about the next 5 to 10 years. And so while supply has dampened that rent growth, when you look at the underlying economic kind of drivers of that market meaning job growth, income growth, population growth and as well as the diversification of the employment base clearly getting more technology focused and diversifying away from just kind of the fire type of jobs. We think we are setup to see kind of mean reversion on the rent growth over the next 5 to 10 years. So that’s what got us positive on that front. So, I’ll kick it over to Harry, and he can probably talk a little deal specific.

Sure, this is Harry. The property just, first of all, is we think, is very well located in the North Williamsburg area of Brooklyn. It’s a block from McCarren Park. It’s really in an established residential neighborhood, even though the property is only 3, 4 years old. Away from the glut of new supply in downtown Brooklyn and the Williamsburg Waterfront, it really is very difficult to get density in this neighborhood. The property has been fully occupied for 2 years, has a 25-year tax abatement, fully abated until 2036. And you mentioned the L train, when we contracted put this property under agreement, the L train was still supposed to be taken offline entirely. During the due diligence process, you saw the news that there will still be the L line, L train will still continue to run. So, the there is our initial underwriting contemplated the L train stopped entirely. Today, we are well aware of the circumstances which should be positive.

Great. Thanks, guys.

Thank you. Our next question comes from the line of Trent Trujillo with Scotiabank. Please proceed with your question.

Hi good morning and congrats, Jerry and all the other team members on recent promotion. Just thinking about other markets, you also recently commented on attractiveness of Philadelphia and how you’re looking to expand your presence there. So since we’re coming off the NMHC conference, I’m curious if you’ve surfaced any opportunities to act on this.

Yes. It’s Joe. We did do the DCP deal that we talked about last year, 1300 Fairmount, for around $52 million or so. It is a market we want to continue to gain more exposure to for some of the reasons we’ve talked about in the past. Coming out of NMHC, there’s always plenty of deal flow coming out of that. But we have been looking, not just on the DCP side, but we’re looking at development opportunities there to try to rebuild that pipeline. We’re looking at acquisition opportunities as well. So, to the extent that we can find something that we think is going to be accretive, not just near-term but to longer-term growth, and then also have the ability to lay on the operational platform that Jerry spoke to in his opening remarks and also put in some more initiative penetration, I think there’s an opportunity for the platform to drive outsized revenue growth there as well. So, we are looking. I think the good thing about the equity offering that we did in December, it created a lot of optionally for us around transaction so that we can consider instead of just using dispositions or moving dispositions from the plan, we now have the opportunity to try to figure out how to drive some additional FFO growth for the platform going forward.

Okay, great. And just a quick follow-up, in the prepared comments, I think you mentioned that you expected B quality assets to outperform A in 2019. Can you maybe talk about the magnitude of that performance gap, how it compares to 2018 and if you expect that gap to trend in a particular way during the year?

In this is Jerry. In 2018, I think across our portfolio, it was probably 75 to 100 basis points of outperformance. So, I think as you go into this next year, we would expect it to be roughly that same magnitude maybe a bit tighter, but not materially different.

Thank you very much. Appreciate it.

Thank you. Our next question comes from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.

Good afternoon guys. Jerry, when you were putting together your same-store revenue range for ‘19 which markets you and your team think had the widest band of likely outcomes for 2019 and if one market falls short of your ‘19 expectations when we are speaking a year from now, which market do you think that’s likely to be?

Probably the ones with the largest ranges are the ones that have the heaviest amounts of supply. But what we’re really looking at that determines the ranges is job growth in those markets. So, 3 that really jump out are Seattle, New York and San Francisco. We expect Seattle to be a good-performing market this next year, but a lot of it is contingent upon a continuation of job growth. Same is true in San Francisco. New York, while it’s going to be one of our lower-performing markets, we still expect it to be almost 100 basis points improved revenue growth from last year. So, we’ve been encouraged recently. Joe was going through some of the attributes that we saw in the Brooklyn deal. As we look at more recent rent growth there, as you see in our supplement on Attachment 8(g), new lease rate growth in the fourth quarter was 1.5%. That compares to a company average of 1%. And actually, in the month of January, new lease rate growth was 1.3%. So, we’re encouraged by New York today, but we are cognizant that dependent on job growth, it could change. And then the fourth market that you have significant amounts of new supply, none of it’s not much is in our backyard, is LA. LA, I would say, just always has a little bit of risk for us on the same-store side because 3 of our 4 same-store assets are located in Marina del Rey. So, when you have that kind of a concentration, if the development that is coming at us goes a little crazy on lease-up concessions, it can affect us. I guess, if there was one, I look at that could surprise to the downside and this is probably just looking more at conventional opinion, Seattle. We feel like our Seattle portfolio, while it’s heavily located in Bellevue and Bellevue is – West Bellevue is not going to have that much new supply. If you do feel concessionary problems come from both Redmond where supply is going to be heavy or downtown, it could affect us.

Okay. Thanks guys.

Sure.

Thank you. Our next question comes from the line of Rich Hightower with Evercore ISI. Please proceed with your question.

Hi, guys. How are you?

Hey, Rich.

Good. I am going to do a quick question here on the smart home technology investment you described in the prepared remarks. I am just curious how you guys think about that investment and given the plethora of options probably available to a company like UDR and how you pick among vendors and think about potential obsolescence over the next several years as new technology comes down the pike? And then also, how did you get to the $20 to $30 rent premium you described, how do you measure that exactly?

Yes, Rich, it’s Jerry. I will tell you we did look at a lot of vendors and we participated with one that we have a lot of confidence in. He is the company has success with other installations historically most predominantly in the single family home industry. When you look at the return, we measure the return and it’s about a 12% to 13% IRR based on about a 6, 6.5-year life on this investment. We think there is also as I said in my remarks benefits on the expense side. One of the key features of this is leak detectors. And as you know, in high-rises as well as garden communities, water damage can be very expensive, so catching it early drives down insurance cost as well as R&M. We think by having these electronic locks, it saves our maintenance teams time in responding to service requests as well as just having to change out locks, and it also cuts down on overtime because we don’t have to come out and do lockouts for residents. So, there’s quite a bit of it on the expense side, too. When you look at the $20 to $30 premium, we’re going to add that to the rent. So, we will be able to measure what our spread in rents was before and after installation compared to the market to ensure that we’re getting that benefit. I can tell you, as I said in my opening remarks, we’ve installed almost 2,000 of these. The response from the residents has been very positive. I think a lot of them already had things like Amazon Echoes in their apartments that they’re tying into the system to help make it work. I think they see the convenience factors, especially on the locks, to be able to open them remotely from their mobile device when they have friends, dog sitters, people like that coming to their houses. I think for our single parents that, or parents in general, that have school-age kids that get home from school, you get a notification when the door opens. So, it gives you that kind of calmness that your child has returned home. Overall, we think it’s a big benefit for the resident. We think there is a significant benefit to us. We realize that technology does change, but we think this technology is cutting edge and should last at least for 6, 6.5 years before we have to reinvest.

Okay. No, that’s helpful color. Let me ask another question. So UDR I think has at least among your public peers as far as we can tell, has been, I don’t know if you want to call it at the forefront, but fairly active and rigorous in pursuit of sort of the data analytics side and how you select markets for investment in the future. And New York is a market that you guys have described as maybe being a contrarian play. Philly, I think, was one that screened well in your according to your methodology as well. But are there other markets out there, and I don’t want to you to give away the playbook, but other markers that sort of screen well from a contrarian perspective versus what the consensus view on that given market might be today and where you guys might differ?

Yes. Hey, Rich. There definitely are other markets that we are actively looking in and trying to deploy capital into. So, I think as you look forward to our actions over the, call it, the next 12, 24 months, you’ll probably see the fruit of those labors. So, I think you’ll see where we’re trying to go. From a sourcing standpoint, yes, there’s markets that may not screen as well for us. But keep in mind, there’s always asset-specific, submarket-specific, tax-specific as well as CapEx reasons that you may want to sell an asset. So, I’d say, our disposition strategy is probably a little bit less focused on the portstrat work. We’ll still use it as a factor, but there are a lot of other factors that come into it, whereas the deployment of focusing personnel resources and capital resources is a lot more focused across the board.

Okay. Thanks, Joe.

Thank you. Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

Thank you. Good afternoon. Just maybe if we could start with the macro, I heard Tom say that the macro remains supportive and we are getting lots of incoming calls, questions on just the macro. From again just to confirm from what you are seeing, whether it’s web traffic right now, I guess all indicators are showing that in your markets, the macro environment remains stable, good?

Yes, this is Jerry. I would tell you, when you look at total income growth for our markets, it’s screening higher than it is for the country in general at over 6% total income. We expect job growth. When you look at how we have built up some of our budget and plan expectations, we do see job creation coming down somewhat to probably about 170,000 jobs per month, but we do see an increase in wage growth in our markets. So, you’ve got that. Then on the supply side, I don’t think we’re seeing a whole lot different in our peer set. I think overall, we see a slight increase in supply next year and it deviates market by market.

Hey, Jeff, this is Joe. Maybe just a couple of other things as it relates to capital allocation, thoughts too, on that front. While we do see positive macroeconomic backdrops, you have seen a lot of activity out of us in the first quarter as well as the intent to kind of rebuild that pipeline on the development side to roughly half of where it’s been most of this cycle. I don’t want you to take away from that, that we are overly bullish or risk-on from a cycle standpoint or that we have adjusted our underwriting or discipline around that by any sense. It’s really just a byproduct of a couple of things. Those being one, timing in that you have seen the two options from Wolff that started back in 2015 coming to fruition. The Union Market land was started 3 years ago, Denver was started over a year ago. So, some of this activity is just simply a byproduct of timing of a lot of these deals coming to a head at once as well as the optionality that we talked about that the equity offering give us to kind of go out there and think about where we can deploy capital that supports the grow rate. So, don’t take our comments on macro and the recent activity to think that we are overly bullish on where we are going and that we are switching to a risk-on posture.

Jeff, that being said, we have got January in the books. And when you look at new lease rate growth in January, it was at 0.9%, which is comparable to what it was in the fourth quarter, and it’s about 120 basis points on the new lease side, higher than we were last year. So, you’ve got that on top of 96.8% physical occupancy. So, we are off to a good start this year.

Great, thanks. All very helpful comments. And then just one other question on expenses, I know you said real estate taxes of course will continue to pressure overall expenses but the rest remain in check. Can you confirm the predictive analytics that you are referring to are you using that for the expense controls, because you seem to be doing a better job than your peers on that front?

No, we are really not utilizing the predictive analytics. So, I think on the expense side, what you’ve seen is us really get a start on this operating platform that we discussed in the prepared remarks. And I think when you look at how we’ve done in the fourth quarter, our controllable expenses, which are everything except real estate taxes and insurance, we’re down 1.4%. You’re going to see an increase in repairs and maintenance but a pretty good decrease in personnel. And that’s really a function of us outsourcing more pieces of our business to more efficiently drive down the total cost structure. So, I think a lot of what we’ve done so far is related to outsourcing and centralization of certain functions to become more efficient. I think we’ve improved some of the analytics we use on the marketing side. I think we’ve, on the utility side, done a very good job of putting in more energy-efficient lighting and other tools. And I think you’re doing to see those continue. So while we’re still expecting real estate pressures next year, it will come down somewhat from what it was this year. But our expectation is those controllable expenses stay in check, probably close to flat as we look out into 2019. And I think as we continually drive down our margin through this new operating platform, it’s going to help our existing portfolio, but more importantly, it’s going to give us a platform so that when we’re looking to make other investments in the future, whether it’s acquisitions or developments, you are going to see better flow-through on those and more value creation.

Great. Thank you.

Sure.

Thank you. Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

Great. Thank you and wonderful job. I am just trying to drill down a little bit more on the CapEx spend. If I look at the Attachment 14, you are at about $2,300 a unit for capitalized expenditures on consolidated homes. If you add tech spend to that and maybe you have already, what’s your tech spend per unit for the next few years? And then if you look at redevelopment, a good run rate of the redevelopment, which isn’t adding to your unit count but is just a major overhaul of a project, how much whole dollars should we expect to spend or you expect to spend on technology as well as redevelopment?

Hey, John, this is Joe. Just on the return as web enhancing, that $2,300, that does not take into account these spends for the new platform. So, the spend that Jerry has referred to on that front for the technology spend will be separately categorized from this, and we’ll provide that guidance. You can see back on Attachment 15 where we provide overall guidance for the platform spend of $25 million to $35 million this year. That’s for both the technology spend as well as the smart home spend that he referred to. So that’s going to be separate from this. What we’re trying to show you on Attachment 14 is really the recurring CapEx required for the business to drive that NOI, so that’s what the recurring number should be.

And then on redevelopment, you have got $25 million to $35 million, how many units is that? And are you adding any units when you redevelop spend $25 million to $35 million on redeveloping existing properties?

Yes, there is a couple of different buckets in there and Harry or Jerry can probably go into some of the details, but the $25 million to $35 million, yes, it’s not a set level that we try to get to each and every year. It’s opportunity-dependent, as those opportunities come along. So, in this case, we talked about Hanover as well as Garrison. That is embedded in this, but that’ll be a multiyear spend. So, it’ll drag over a couple of years. And we’ll provide more disclosure going forward as those deals start about what the total expectations of spend are, the completion dates, et cetera. In addition to those larger type of products – or projects, you’re going to see densification opportunities, unit additions, creative things that we’re trying to do to take advantage of underutilized space, so taking underutilized amenities or garage space. We’re trying to add units into the projects, so that spend will be embedded in it as well.

Great. Thank you very much.

Thank you. Our next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.

Thanks. Jerry thanks for the comments on 10 Hanover and Garrison impact to same-store, could you provide the same-store revenue and NOI impact for all changes, net additions and subtractions to same-store in ‘19?

That’s pretty much what it is. When you really looked at the other additions and there weren’t many, it really didn’t have any effect on it.

Okay. And then on property taxes outside of California and New York where there is pretty good visibility, what regions you are expecting the most pressure on property tax growth rates in ‘19 versus ‘18?

There is probably the same ones that we are going to see the pressure and that would be Florida, Texas, Seattle would be the heaviest pressure points.

Alright. And last one for me, Joe, I understand you are comfortable with the credit metrics, if GSE reform becomes more real, at any point would you try to get to improved credit rating to try to get your unsecured costs down?

Hey, John. I would honestly say that the GSE reform aspect and our credit rating and desire to move up in credit rating are probably independent of each other as we’ve traditionally been a, unsecured borrower and had very competitive cost to capital on that front as a BBB+. And so, we’ve gone through that whole analysis of if we tried to upgrade on rating, what we’d have to give up in terms of a deleveraging and what the dilution would be to that. And to date, we have not been able to make sense of upgrading and trying to offset that with multiple as we don’t think our multiple has been impaired due to our credit profile. I do think if the GSEs do tend to reform and/or go away, like the important considerations are when you look at us as a public company, like you said, we do have a lot of different sources of capital. In addition, when you look at our asset base, which is a higher quality asset base, which is typically not as levered in the private market, we are probably more insulated as a public company relative to the private market from any impact of the GSEs.

Okay, thank you.

Thank you. Our next question comes from the line of Tayo Okusanya with Jefferies. Please proceed with your question.

Hi, yes, good afternoon. Most of my questions have been answered, but I just had one quick follow-up. A comment you that you made earlier on about the development being close to physical stabilization, but it will be several years before they hit economic stabilization. I was wondering could you talk a little bit about that, I would have thought things like what’s called what am I thinking about discounts and things like that, that kind of come off fairly quickly. I am just surprised you are talking about there is a big time difference between physical stabilization and economic stabilization?

Well, this is Jerry, Joe may want to jump in or Harry. When you think about physical stabilization, you complete the project, obviously, and then you start to lease up throughout. But frequently, that first year of lease-up, you’re offering anywhere from 1 month, maybe 1.5 months of concession. You also have extensive marketing cost during that time frame. So that’s physically stable, but not economically stable. As you get to that next year, the next turn of leases, typically, the concessions go away or for the most part go away and the marketing spend comes down dramatically that’s when you start getting more of that full stabilized yield.

Okay, that’s fair enough. Thank you.

Thanks, Tayo.

Thank you. Our next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Please proceed with your question.

Hey, good morning out there. Just two questions. First, on the JV same-store pool, the KFC and the Hanover or I guess MetLife, the same-store NOI has been was negative last year. And I am just curious is this I know a few years ago, you spoke about the rent levels of those properties being high-end maybe it was a problem pushing rents, but can you just talk about the performance of those assets and do you think that they will start to match your overall same store trends or you think that there is just something specific about where they are, where they are positioned in the market that they will continue to underperform?

Yes. I think at least in or in 2019 our expectation is revenue is probably going to be about 100 bps lower than what our same-store pool would be, so call it 2% to 3% and that’s predominantly because they are in urban areas with high A+ products. So, they are competing more than our average portfolio against new supply. The expense growth is going to be more elevated too, more in the 4% to 5% range predominantly due to real estate tax issues that are affecting that, but you should have this next year positive NOI somewhere in the 1% to 2% range. So, they will not do as well as our same stores.

Jerry, are you thinking about keeping those longer term or those are future assets to sell?

I will start then these guys can jump in. I think this is just a temporary issue as we go through supply absorption. We have been going through it for the last year or two, but we like these assets. We like the locations and the product type. It’s just the time – it’s a time in the cycle where new supply has come into those more urban submarkets. So, it’s not making us want to flee those assets.

Okay. And then on the second question, Wall Street Journal Article B7 today highlighted that a number of municipality states contemplating different rent measures, including here in New York. That looks like it could target all apartments, not just the rent-stabilized. What are your thoughts on some of these proposals, especially here in New York? And are with these proposals, are they affecting the way that you think about underwriting the markets? Or in your view, this is all of normal course? And as you’ve operated in markets over time, there’s always this stuff, and it’s just something that is part of the underwriting mix? Or is something shifting this time, as you guys observe?

Alex, this is Joe. I would say, first off, from a national basis, and it applies to New York as well, when we think about the affordability issues that exist out there, we continue to not believe that further regulations or compression on rents or caps on rents is probably the appropriate path forward to try to get new supply and new affordability out there. So hopefully, we get to a point where we can all work kind of collectively as constituents and get to a better place, but given our desire to be in New York, that’s independent of the rent control issue or rent stabilization issue that’s out there today. We have spent a lot more time thinking about this, going through and looking at the rhetoric that’s out there, some of the commentary as well as looking back at past attempts at regulation to understand where this could potentially go, going forward. I do agree that we’ve seen a couple of comments out there of market-wide rent stabilization talks, mainly from Julia Salazar. But I think most of the other rhetoric out there is really target the rent-stabilized piece. And so, when we look at that, when you kind of look at New York overall, it’s important to keep in mind a couple of facts, which are: 50% of the market is market-based units, where the other 50% is effectively rent-stabilized and a small portion that’s rent control. For our portfolio, pro forma for the Leonard acquisition, we’ll be about 80% market rate and 20% rent-stabilized. So, I do think to the extent that anything happens on the rent-stabilized side, it will stand to benefit the market rate. So, we should see better rent growth, better forward rent growth valuations, just given supply will probably back off a little bit. The other thing for the rent stabilized piece, whether something happens there with better oversight of legal rents, CapEx, rent stabilized or preferential rents, you likely do still have a economic return and probably a lower volatility return. So, it’s something we are focused on, something we are thinking about. We factored it into a downside underwriting for Leonard to try to think about what could be a worst case scenario if we went very draconian and we still thought given the probability of that happening, it made a lot of sense moving forward with that deal.

Okay, thank you Joe. Helpful.

Thank you. Our next question comes from the line of Hardik Goel with Zelman & Associates. Please proceed with your question.

Hey, guys. Thanks for taking my question. I actually just wanted to ask you about the progress you’ve made on the expense side and what we can expect in the future. As you look across the different lines, Jerry, you talked a little bit about how the platform investments over time will help with the cost structure as well. Do you see that more on the repair and maintenance side or the personnel side? Are you able to be more efficient with the number of employees per building or things like that? Just some more color on those items.

Yes, it’s exactly what you said. I think you’re going to see the blend between R&M and personnel. I think we’re going to be able to continually run at either flat to slightly negative, just like we did this year, as we create more efficiency, both on the cost structure as well as the workflow. So, but I would guess as you look forward to next year, you’re going to see R&M probably inch up a little bit higher, but you’re going to see personnel costs come down, even though you’re going to have wage inflation across our markets of 3 plus expense. Our expectation is a natural attrition. We’ll look for opportunities to be more efficient and outsource or centralize. And I think you are going to see the personnel come in probably lower than most of our competitors.

Also on the utilities line, do you think there is potential especially with buildings becoming more amenitized as we go through at least from a newer product that there is potential for these sensors and other technology and investments to kind of reduce those costs as you manage utilities for the amenitized or common spaces better?

Absolutely. I think when you look at common area, electric or gas and the temperatures that are in hallways or other common areas, we definitely have room for improvement there within our company. And I think when you look at that as well as again LED light fixtures, we are looking at solar, I am not sure if we will move forward with that. But we are looking at all kinds of opportunities to reduce any of the cost structure on the business that doesn’t impact our residents.

Got it. Thanks so much. That’s very helpful.

Sure.

Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Please proceed with your question.

Hey, there. I am sorry if I missed this, but did you mention specifically what the real estate tax growth outlook embedded in your 2019 same-store expense range is? And I guess as part of that how much of an assumption is embedded specifically from the 421-a tax abatement pressures in your New York portfolio and how long or approximately how many years of a headwind should we expect these tax abatements to be?

Hey, Haendel, for real estate tax next year, we think it’s probably got to come in somewhere in the 7% to 8% range. If you look at what’s really driving that, Jerry mentioned a couple of the markets already, but specific to 421 and I will expand that to redevelopment impact too from View 34. The 421, we just have 95 Wall in the same-store pool going forward next year. It’s about a $700,000 impact on real estate taxes, which with over $100 million you are kind of in that 70 basis point type of range for impact. In addition, when you look at View 34, the big redevelopment that was completed several years back, the impact of that is flowing through into the valuations and therefore the real estate tax on a 5-year average basis. And so that one has cost us another call it 150 or so basis points on real estate taxes as well. So if you are kind of at 7.5 midpoint, our true unadjusted number is probably more in that kind of 450 to 500 basis point growth range.

Okay, appreciate that. And then it sounds like we are at the front-end of the tax abatement headwind curve, approximately how long should we expect this to be a headwind approximately?

Yes, across the platform, we really only have two large 421 projects, that’s 95 Wall and then 10 Hanover. As we have talked about in the past, I think last year, it was about $1.3 million. The collective impact this year will be about $1.8 million, and then we actually peak out in 2020 at just over $2 million. So we are actually coming up into the kind of 421 headwind and then it will start ramping down from there.

And Haendel I am not sure if you, this is Harry, if you were asking about the new acquisition in Brooklyn, but that has a 25-year tax abatement. It’s fully abated until 2036 and then there is a 5-year bleed in.

Okay, that’s helpful. Thank you. And then a follow-up on the ancillary revenue, I guess I am curious how much more of an opportunity is there. It sounds like maybe I am wrong, but should we infer from the deceleration in this year that the opportunity has been pretty much maxed out and will be on the wane going forward and maybe you could perhaps share some thoughts on perhaps the additional ancillary income levers beyond maybe the in-home technology that you are looking into that you can pull that can be incremental to your revenue over the next few years?

Sure, Haendel. And I would say this that the technology won’t go into ancillary income that will be added as rent growth and when you look at the impact of the smart homes, it’s probably 10 to 15 basis points of our revenue growth this year, but it’s going to be more in the rents. But when you look at the ancillary income again last year it grew at call it, 11.5%. This year like I said we expect it to be high single-digits, although we wouldn’t be surprised if it got back up to low double-digits depending on success of continuation of parking as well as the short-term furnished rentals. So we are still growing that at multiples above what rents are growing. So, while it’s slowing a bit or expected to slow a bit, it’s still going to be a strong contributor. One other avenue that we started getting some traction on last year that we expect to grow this year are renting out to third-parties our common areas that are underutilized frequently, especially during daytime hours, to businesses. Last year, it was a modest contribution of call it $0.5 million. We think that this year is going to at least double and we think it’s a platform that we have started out in the West Coast and it’s moving eastward. So I think there is potential for that to grow. And I will tell you we are constantly looking for additional avenues to grow other income through pieces of our real estate outside of our core apartment units. So, while those are the items that are on the list today, I am confident over the next couple of years, we will continue to reload.

Great. Thank you for that.

Thank you. Our next question comes from the line of Daniel Bernstein with Capital One. Please proceed with your question.

Hi, good afternoon. At NMHC, there was a lot of talk about co-living, co-working and so I just wanted to understand maybe what new issues you have on those and how you are incorporating that into your business model over the next couple of years?

Yes, we have looked and talked to people about co-living. We really haven’t implemented anything. To-date, we haven’t had occupancy pressures where we felt it was something that was necessary, but it is something we will continue to study. I do think when you look at the economic reasons that certain individuals move into co-living situations as well as social side of it, I think it’s something that you could see progress and Harry may want to talk a little bit about one of our DCP deals in Philadelphia where they are actually going to have some co-living space. So we are seeing examples of new developments that are being actually built for co-living and not just converted existing apartment units. And I think by us being an investor in this deal, we will be able to actually watch it and see the benefits and some of the cons as they do their lease up and managing this. So Harry, anything you would add?

Yes, the DCP deal he is talking about is in Philly. It’s near Temple University, about 25% of the 400 plus units are allocated to co-living and they kind of created a separate little area within the building, within the property to accommodate these. So we will see how that plays out over the next 18 to 24 months as the developer completes construction and we go through lease-up.

Okay. So it’s not – if you are looking at it, it’s not playing a huge role yet within the construct of your properties?

I would say, right now, it’s not playing any role but it is something we are screening.

Okay. One last quick question if I could. Predicting job growth is probably like predicting the weather, I am not going to hold you to the 170,000 a month, but I was trying to understand within your guidance to occupancy and rate growth. Is there some range of job growth you are contemplating? And historically, if you look at – back at the real – or the economic cycles, there is some place 100,000 jobs a month, 50,000 jobs a month where you start seeing some more impact on occupancy if the economy doesn’t look out so?

Yes. Hi, Dan. So when we go through kind of the overall budgeting process, it’s a dual kind of two-legged approach from top down and bottom up. So bottom-up in the field is really based off of what do they see as competitive supply, what are the recent rent trends that they have and what’s going on from a demand side within their market? So that’s really how you get to the midpoint. And of course we overlay what we see coming from an overall top down supply and demand standpoint. We make sure that we feel comfortable with those forecasts as well and work with them on kind of refining it, but then the ranges around it, there isn’t any easy one-to-one type of relationship that you can kind of come up with and say if 50,000 jobs down, here is what it does to revenue because it is so micro-oriented in terms of the submarket adds, etcetera. So we really don’t have math that kind of takes you up and down to the high-end where we can say 170,000 is base case, but if we went to 120,000 here is where it goes.

Okay. Very good.

Thank you. There are no further questions in the queue. I would like to turn the call back over to Chairman and CEO, Mr. Toomey for closing remarks.

Thank you and a quick wrap up. First, thank you again for your time and interest in UDR. We started off the call with a recap of 2018, which was a great year for us as well as our view of 2019, which we anticipate to be very similar to 2018. And we are off to a very good start. It’s been a very good rewarding 45 days into the year. And with that, I would like to again thank all our associates for all the hard work they have put in and continue to do every day. Take care.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.