Trent Trujillo:

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 Web site ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Mike Lacy:

Thanks, Tom. Today, I'll cover the following topics; our second quarter same-store results, early third quarter operating trends, our improved full year same store growth guidance, including underlying assumptions and regional operating trends. To begin, second quarter year-over-year same store revenue and NOI growth of 2.5% and 2% respectively were slightly above our expectations. Quarterly sequential same store results also outpaced initial forecast. These results were driven by, first, 2.4% blended lease rate growth, which was driven by renewal rate growth just shy of 4% and new lease rate growth of 50 basis points. New lease rate growth improved by 300 basis points versus the first quarter as concession stabilized and demand increased, which resulted in improved pricing power. Second, 47% annualized resident turnover was 300 basis points below the prior year period and our best second quarter retention in more than a decade. This has enabled us to increase renewal rate pricing through at least August and has led to more favorable blended lease rate growth. Third, occupancy remained strong at 96.8%, supported by healthy traffic and leasing volume. New York, Boston, Washington, D.C. and Seattle, which collectively constitute 40% of our same store pool or standouts, averaging higher than 97% occupancy during the quarter. And fourth, other income growth was nearly 9% and was driven by our continued innovation along with the delivery of value add services to our residents. Shifting to expenses. Quarterly year-over-year same-store expense growth of 3.7% came in better than expectations and was primarily driven by reduced repair and maintenance costs as well as insurance savings. Repair and maintenance growth of less than 1% was partly due to our improved resident retention and having 500 fewer unit terms than a year ago while insurance savings of nearly 5% was driven by lower claims activity. Moving on, core operating trends have remained resilient in July and key metrics have largely followed typical seasonality. First, July blended lease rate growth is expected to be in the mid 2% range, which is slightly higher than June results and follows normal historical sequential rent growth trends. New lease rate growth is slightly negative on average while we have had success increasing our renewal lease rate growth closer to 5% from 4% in the second quarter. In terms of relative performance, the East Coast is showing the most strength with blended lease rate growth of approximately 4%. This is followed by the West Coast at 3% on average and the Sunbelt at approximately negative 1%. Based on current trends, we expect East Coast leadership to persist through at least the remainder of the third quarter. Second, resident retention continues to compare well against historical norms and July will represent the 15th consecutive month our year-over-year turnover has improved. Relative affordability compared to other forms of housing is a benefit to the apartment industry in total. Given the level of home prices and mortgage rates, the average cost of owning a home across UDR markets is nearly 5,500 per month. By contrast, the average rent for UDR apartment home is approximately $2,500 per month, thereby creating annual shelter cost savings of $36,000. This disparity has led to a record low level of our residents moving out to buy a home. Furthermore, because of our ongoing customer experience project, our resident retention over the past year has improved by approximately 210 basis points relative to the peer group average. This is a testament to our team's focus and execution on our innovative data driven approach to customer service. Ultimately, improved retention should drive better pricing power, higher occupancy, increased other income, reduced expenses, lower CapEx and margin expansion. We are still early in the innings of capturing these benefits but believe the incremental opportunity is in the $15 million to $30 million range. Third, occupancy remains high but has trended slightly lower to 96.2% to 96.3% in July due to elevated new supply coming online and typical seasonal operating trends. Markets facing heavy supply, including Nashville, Dallas and Tampa, 16% of our NOI, have seen occupancy decline by approximately 100 basis points on average compared to the second quarter. Conversely, occupancy remains in the mid to high 96% range on average across markets facing less supply, such as New York, San Francisco and Orange County, which make up 26% of our NOI. Strategically, we anticipate regaining portfolio occupancy later in the third quarter as we tactically adjust our operating approach ahead of a seasonally slower leasing period. And fourth, other income continues to grow in the high single digit range in July, similar to what we achieved in the first half of the year. As a reminder, other income constitutes roughly 11% of total revenue. We remain pleased with the trajectory of other income initiatives, such as the rollout and penetration of building-wide Wi-Fi as these contribute significantly to incremental same store revenue growth. Based on our results for the first seven months of the year, we raised our full year 2024 same store growth guidance in conjunction with yesterday's release. We are encouraged by the resiliency of various forward demand indicators such as year-to-date job growth and wage growth, but we remain somewhat cautious given there’s potential for macroeconomic volatility in an election year combined with elevated supply deliveries in the back half of 2024. To provide details on our guidance increases, starting with same store revenue growth, we raised our midpoint by 50 basis points, resulting in a new range of 1% to 3%. The primary building blocks to achieve the 2% midpoint include the following. First, our 2024 earning of 70 basis points. Second, portfolio blended lease rate growth is forecast to be approximately 130 basis points in 2024. This represents a 60 basis point increase compared to our initial guidance. Given blended lease rate growth of approximately 180 basis points through the first seven months of the year, this implies a deceleration to 60 basis points on average for the remaining five months of the year. Using a midyear convention, our full year blended lease rate growth expectation should add about 65 basis points to 2024 same store revenue growth, reflecting a 30 basis point improvement versus our prior expectations. Underlying our full year blended rate growth forecast are assumptions of 3.5% to 4% renewal rate growth and approximately negative 1% new lease rate growth. Third, we expect the combination of occupancy and bad debt to be roughly flat year-over-year in 2024, in line with our prior expectation. And fourth, innovation and other operating initiatives are expected to add 70 basis points to our 2024 same store revenue growth, which is an increase of 25 basis points versus our prior guidance. The bulk of this growth should come from the continued rollout of property-wide Wi-Fi initiatives along with a variety of other property enhancements. 3% of high end of our same store revenue growth range is achievable through improved year-over-year occupancy, additional accretion from innovation, higher blended lease rate growth or a combination thereof. Conversely, the low end of 1% reflects full year blended lease rate growth of approximately 50 basis points, some level of occupancy loss and the moderation in other income generated by our innovation. Moving on to same store expense growth. We lowered our midpoint by 25 basis points to 5% with the full year range now at 4% to 6%. The improvement was primarily driven by constrained insurance and repair and maintenance expense growth. As a reminder, same store expense growth of 7.5% in the first quarter was elevated due to comping off of a onetime $3.7 million employee retention credit we realized at the beginning of 2023. Absent this factor, we would expect normalized same store expense growth for the full year to be in the low 4% range or approximately 80 basis points lower than our [updated] midpoint. Turning to regional trends. Our coastal results have exceeded our expectations while our Sunbelt markets are largely in line. More specifically, the East Coast, which comprises approximately 40% of our NOI, was our strongest region in the second quarter, and Washington, D.C. was our best-performing market driven by strength in Northern Virginia. Second quarter weighted average occupancy for the East Coast was 97.1%, blended lease rate growth was 4.7% and year-over-year same-store revenue growth was 3.8%. With continued healthy demand and relatively low new supply, we expect this region to be our strongest throughout the rest of the year. The West Coast, which comprises approximately 35% of our NOI, has performed better than expected year-to-date but stabilized somewhat in the second quarter following tremendous momentum in the first quarter. We are encouraged by various employers more strictly enforcing return to office mandates as well as increased office leasing activity from technology and AI companies but are also cognizant of corporate relocations that influence job and wage growth. Absolute levels of new supply remain low at less than 2% of existing stock on average across our West Coast markets, which we expect will lead to a more favorable supply dynamic in the coming quarters. Lastly, our Sunbelt markets, which comprise roughly 25% of our NOI, continue to lag our coastal markets. Year-to-date performance was in line with our original expectations through the beginning of June, at which time we began to see some pricing deterioration due to elevated new supply and the concessions that came with it. We tactically decided to hold grade to best set up our rent roll for future quarters, which resulted in occupancy drifting lower. While our Sunbelt markets broadly have more robust job growth than our coastal markets, we remain cautious on the region in the near term, given the very high absolute levels of new supply coming online. To close, our coastal markets, which comprise 75% of our NOI have performed above initial expectations. While our Sunbelt markets, which comprise 25% of our NOI, are largely in line with expectations. Our diversified portfolio enables us to be surgical with regard to how we operate each market and each asset, allowing us to leverage the strong fundamentals of our industry. This, coupled with continued innovation that will further expand our operating margin over time, maximizes revenue and NOI growth. My thanks go out to our UDR associates nationwide for your dedication towards meeting the challenges we face head on as we continuously innovate to drive strong results. I will now turn over the call to Joe.

Operator:

[Operator Instructions] Our first question is coming from Eric Wolfe from Citigroup.

Mike Lacy:

So let me try to capture all that. First and foremost, one month is not a good trend line. I tend to look at it over 90 days. During peak leasing from May to June through July, we actually averaged right around 2.5% blend, which was 100 basis points over our original expectations. Second to that, May was so strong for us that we actually pushed our market rent, pretty much double compared to what we see pre-COVID, right around 2% versus 1% on a month-over-month basis. So very strong trends led us to push our rents that led us to pushing our renewals higher through 3Q, which is helping to offset new lease growth. So to that point, I spend a little bit more time just on our renewal strategy and how it's playing out before I give you some of the numbers. But we are sending out about 5% through September at this point. We typically achieve between 20 and 30 basis points of what we send out. And I'll tell you our strategy around getting more aggressive by about 100 basis points from the first half of the year was really stemming off of our customer experience project, just given the fact that we've had closer to 900 fewer move outs through the first six, seven months of the year and our turnover were down 3% year-over-year, along with the fact that we change the trajectory of our relative basis versus our peer group by over 200 basis points. We wanted to test that pricing strategy and right now, it feels like it's playing out. To your point on the occupancy, we did lose a little bit of ground over the last 30, 60 days. We've seen that stabilize as of [late] and I think it's important to size it for us. When you have, call it, 10 bps lower occupancy, that's 50 homes, which is approximately $100,000 during the month. So while it's down a little bit, it's not material and we're starting to see it stabilize into August. To your point just on some of the stats around the regions, what I would tell you is the East Coast in July still hovering around 96.5%, the West Coast and the Sun Belt, a little bit lower, right around 96.%. But on the blends, we are still seeing 4% growth on East Coast, 3% growth on the West Coast and the Sunbelt is -- had somewhat stabilized in that negative 1% range similar to what we saw in May, June and throughout the second quarter. So overall, trending kind of as expected.

Joe Fisher:

Maybe just to lead off to how we approached it. Versus original guidance, we had taken kind of consensus estimates, layered in our bottoms up forecast to come up with that initial forecast. I think, since that period of time, we've clearly seen jobs coming better, wages coming better, GDP come in better, supply has been about as expected with developers acting fairly rational from a concessionary perspective. And then the relative affordability piece, I think, is one that has been clearly a nice tailwind for us from either a move outs to buy or just capture rate on new household formation. So that's really what's driven kind of our year-to-date market rent growth. We're seeing an effective market rent growth on a year-to-date basis, up about 4%, which is under 200 basis points better than we expected originally. So that's what drove those blends in the first seven months. So as we approach kind of back half of the year and full year guidance, the way we did it was really just take what was put in the bank for the first seven months. So what we knew it happened here through July updated guidance for that impact, and we really want the back half assumptions alone. And so the implied number for the last five months of the year is only about 60 basis points in blended lease rate growth. Obviously, Mike mentioned where we're sending out August renewals. We'll talk to the street once we get more visibility on news as we go into September, but we have factored in some conservatism on that front under the view that you still have supply out there, still have unknowns on the macroeconomic front and on the election front, and we typically see some degree of seasonal slowdown anyway on blends as you go into the back half. So everything we're seeing to date tells us we have continued momentum with that kind of mid-2s blends, but I think it's still prudent to be a little bit conservative on that front as we approach guidance and then update as we move into the back half of the year.

Unidentified Analyst:

This is Sanket on for Steve. We had a question around -- I think you guys raised the guidance for DCP funding from 0 to $15 million. Can we expect more on this front in the back half of the year?

Andrew Kantor:

As it relates to the DCP activity for the quarter, Vernon, which is a DCP deal that we have in the Astoria West neighborhood of New York, originally funded it in June of 2022, we had a partner that was originally pari passu with us in that transaction who had invested $15 million next to our $40 million. At the time of the redemption, their accrual was $10 million and their entire amount was fully refunded. So $25 million, that's in addition to our $17 million that was refunded. And as Joe said, this is now a -- this is a recapitalization of a completed and stabilized development. The property is 95%, 96% occupied. And then on very similar situation we had on the Portland DCP recap where we invested in four stabilized assets, one of which will close shortly but that as well as in both of these new DCP investments are about two thirds of our accrual will be paid current.

Austin Wurschmidt:

I wanted to hit back on the July, more specifically, new lease rate growth trends. Mike, you had highlighted that Nashville, Dallas and Tampa had -- were primarily driving down occupancy. But I'm curious if these markets also drove the moderation in new lease rate growth or were there other markets or regions that have seen a similar degree of new lease rate growth moderation into July versus what you saw in May and June?

Joe Fisher:

Just to follow up on that, too, as you think about the occupancy number, a little bit of insight beyond just the pricing strategy that Mike has talked about. We've talked a lot in the past about our fraud prevention efforts and kind of the $25 million to $50 million opportunity that bad debt represents for us over time. We've talked about starting to roll out in pilot some new AI platforms on both income and ID verification. We're also trying to be a little bit more robust and disciplined on our deposit strategies on our credit scores around the portfolio. So as we continue to ramp up that we are seeing some of our denial rates increase, which will temporarily does impact occupancy to the negative. It's not necessarily reflective of traffic, which still continues to be good, apps continue to be good. It's just that we're kicking more of those individuals out of the system, taking the hit today on occupancy. But we do believe longer term that's going to get us better residents in place that stay with us longer and continue to pay. So it's a longer term trade off to take the occupancy hit today, get the better numbers in the future. Although, I'd say for bad debt, we have not factored that into our numbers. We're still assuming in guidance that we’re plus or minus kind of flat on a year-over-year basis, even though we're trending slightly ahead at this point in time.

Mike Lacy:

Austin, I think that's a really good point. I think just stepping back a little bit, just thinking about the consumer and how healthy they are, a few stats that we typically look at in addition to concessions, I would tell you, first of all, not seen doubling up. So we still have 1.8 residents per home. We've seen the single occupant go up about 1.5% to 42% of our homes. And we're seeing a stable rent-to-income ratio across the board at 22%, with places like Boston, Dallas, DC, San Francisco and Tampa, even down a little bit, where places like Seattle are up just slightly, given the fact that we've been able to push rents so much. But to your point on concessions, we're right around half a week today, which is pretty consistent where we were pre-COVID. It's kind of normal steady state today, obviously, with the Sunbelt being a little bit higher and then the Coast being next to nothing.

Josh Dennerlein:

Mike, I just wanted to follow up on some comments you made in one of your answers to a question. It sounds like you feel more confident on pushing rate because of your platform initiatives related to like data on the customers. I guess, when did you kind of start pushing a little bit harder than you would have in the past? And then how do you think about the ability to kind of continue pushing like rate -- renewal rate even harder from here in the future?

Josh Dennerlein:

And then just -- what is it you're above peers on or you were below and now you're above? What was that?

Operator:

Next question is coming from Jamie Feldman from Wells Fargo.

Mike Lacy:

Jamie, that's a good question. I'll tell you where we're feeling pretty good today and you could see it in our guidance. Expenses, and I'm seeing across the board. It's not just on our controllables, it's also on the noncontrollables. And so when we went into the year, we had a midpoint of around 5.25% and today we're closer to 5%. Based on everything we're seeing with the customer experience, the fact that turnover is down, we're getting a little bit more aggressive with our turn vendors, people on site that do a lot of the work for us. We're able to sharpen our pencil there. So we're continuing to see strength on that line item. And so I'd say that's probably the biggest one for me.

Jamie Feldman:

And then, I guess, just kind of sitting where we are in the cycle, everyone's talking about very low level of starts. I guess that means a stronger '26, '27 across all markets, rates pulling back a little bit. We'll see what spending looks like from the different candidates out there if rates stay low. But you talked about how strong your balance sheet is. How aggressive do you feel like you need to be right now on the investment front to kind of catch the early part of the cycle or do you think you can be patient? And just what does the landscape look like, whether it's from your perspective or competing buyers' perspective on the macro picture and putting capital to work?

Andrew Kantor:

As Joe mentioned, we're going to continue our capital light strategy. We're focused on underwriting deals and presenting those to our joint venture partner. But for the most part, what we're seeing in the market today is many of the large heavyweight firms have signaled that the markets have bottomed out. Cap rates today are plus or minus 5% based on location. The thing that we're seeing that's a little different than we have in the past is that rates have normalized across different markets, and those with higher growth are trading lower -- or trending lower, and those with slower growth are a bit higher and we're seeing that across the board. We're also seeing investors make decisions based on discount to replacement cost in the markets where there's a large disconnect between the cost to build and the cost to buy. We're seeing increased activity in certain buyer groups and that's also helping on the IRR as many investors are able to push reversion values down -- push cap rates down and the reversion to push values up, and their IRR up as some of these markets have substantial discounts to replacement cost.

Andrew Kantor:

I mean, I would say that cap rates are anywhere from 4.75% to 5.25% for the majority of the assets that are trading today. And so in markets where you don't have a discount to replacement cost and you have low growth, you're obviously going to have to -- those assets are trading at the higher cap rate and then where markets where you have high growth people are willing to push harder for that and that pricing is going to be at the lower cap rates.

Daniel Tricarico:

It's Daniel Tricarico on for Nick. A question for Mike. With respect to the incremental 60 basis points rental rate growth for the year versus the initial guide. Could you put some numbers around how that changed between your different regional exposures?

Joe Fisher:

And relative to kind of first half, that 60 bps pickup that we saw, we continue to see Sunbelt operating about as expected. The positive surprises have really been coming on the Coast. And I think as we talked about before, DC has been a nice positive surprise for us as well as, San Fran and Seattle picking up on the West Coast. So it's really been the coast of driven the upside to that improved blended lease rate expectation for the full year.

Mike Lacy:

I'd tell you, first, what we're seeing there, just size of this market, D.C. has been doing tremendous over the last 60, 90 days. And again, this is 15% of our NOI market. So a very important market for us. We're 40% urban, 60% suburban. Occupancy is in the 97% range today and blends were 5.9% during the quarter compared to 3.4% in the first quarter. So DC has been a strong performer for us. Expectations as we move forward, we're going to have a little bit more supply down around the 14th Street corridor also along the Navy Yard. So we'll continue to see a little bit of pressure there. As it relates to just demand and job growth there, it's too early to tell kind of how that shakes out. But right now, we feel good about that market.

Operator:

Your next question is coming from John Kim from BMO Capital Markets.

Mike Lacy:

John, it's kind of across the board. Like I was saying, when you go from May to July, we saw a little bit more deceleration in the East Coast and now it's probably more specific to a place like Baltimore. New York, DC, they were humming right around 5% to 6% growth. So they've come down a little bit. But for the most part, it's been across the board in terms of new lease growth. And at the same time, we're seeing renewals actually a little bit higher than the Sunbelt today than we were seeing back in May as it relates to some of the coastal markets, upwards of -- we're pushing around 4%, 4.5% in July versus sub-3% back in May in the Sunbelt. And then I'll tell you for the coast it's up closer to 50 to 70 basis points. So a little bit weaker on the new lease side, a little bit stronger on the renewal side and the Sunbelt right now.

Joe Fisher:

So from a development yield perspective, I think the absolute yields that we're seeing available in the marketplace today are actually quite compelling relative to history. The challenge is a little bit was a spread investor relative to either where cap rates are that 5% or our own cost of capital, that's what keeps us a little bit cautious still from a new start perspective. But what we're looking at on those deals is generally on a current basis kind of in that high 5s type of number and then obviously trending higher. So day one, you're kind of looking at a plus or minus 75 to 100 basis point yield differential versus comparable cap rate in that market for that product type and then growing over time. So that's kind of how we're thinking about that piece. We are thinking about, as we've done over time, I think one of the good things about our platform is by investing in a lot of different areas, be it development, DCP, acquisitions, joint ventures, into the platform and to read out whatever it may be, we do tend to pivot and flex those within reason. And so we are looking across DCP and acquisitions as we compare and contrast the returns on the risk. That said, the acquisition side, we are trying to allocate capital there with our joint venture partner, which, as you know, has been a little bit slower. DCP, I'd say, we're a little bit more in that steady state part of the business, that's kind of just under 3% of enterprise and earnings right now. So we feel comfortable with it there. So that's probably more of a recycling piece. So a little bit less of a pivot and compare and contrast amongst DCP and development.

Rich Anderson:

So just a broader question from me. When you think about the challenges that lay out -- I know you're kind of laying out some conservatism in your numbers for the back half of the year. But when you think of the compounding impact of supply, some stuff that's delivered but 40% or 50% finished. Other stuff that's just getting delivered now is maybe 10% occupied. Are the challenges ahead tougher than they were in the rearview mirror or do you feel like you're kind of past the worst of it right now, when you consider some of the jobs numbers you mentioned and income growth and all that sort of stuff? I'm just curious where your mind is from that standpoint.

Tom Toomey:

It's a very provocative question. And it really depends on the time horizon you're trying to look through. And my perspective, the last five years we see more volatility and challenges in the business that we'll probably see in the future. And this feels a lot more like fundamental blocking and tackling type business, which is going to benefit the companies that have diverse investment base and diverse value creators. So as we think about the future, it looks like interest rates are going to settle around about 5%, we're going to continue to print deficits. And that's a very financeable product, meaning multifamily. Supply demand fundamentals always in a shortage. Can you time out the window when you get into a market and when you get out? I think we've been pretty darn good at that. And then at the core, can you operate it better than anybody else in the space, and we're really focused on that aspect. So we think all the value creators that we have built over time have an opportunity in the future. And we've got to be smart about pivoting to it. The window in the short run, seen supply quite a bit bigger than this in market basis. It just takes time to absorb threat, price it, adjust. There will be opportunities in those markets. And then it is United States. It is a resilient, capable country that always finds a way to grow. So I'm encouraged about the future. Grateful for the last five years were kind of in the rearview mirror for us.

Tom Toomey:

I think it's an interesting question. Joe probably have a lot more thoughtful answer. We like our balance to present. I like what Chris and the team have done when they look at it on an analytical basis and trying to uncover cities of the future, if you will. If you realized 10 years ago, Nashville was kind of a warehouse of capital for us and turned out to be a dynamic city that grew tremendously, Austin, the similar type aspect. So trying to find the next wave of cities that will prosper in a new economy, I think it's really kind of where we're thinking about. We like the base that we're starting with. We certainly like the theory of buying the one next door where we have a low risk, high success rate. So I like the platform as is. We'll always look at kind of what markets we need to grow to and which markets we need to shrink. But that's a dynamic aspect that we sit back and look at three year windows, five year windows and 10 years.

Adam Kramer:

Just looking at the same store revenue guidance range, it looks like it's a 200 basis point kind of range low end to the high end. If I compare us to the peers or compare that to even kind of your own guidance range in the past and in the second quarter, I think it's a bit wider than those. So just wondering, thinking about kind of your comments earlier, too, about kind of an unchanged view with regards to the second half relative to your guidance earlier in the year. Wondering kind of what drives that wider range of potential outcomes for kind of the second half of the year?

Adam Kramer:

And then just kind of maybe tying back to your answer, Rich, from a couple of minutes ago. Just thinking about kind of the cadence of deliveries, you mentioned this fall, obviously, into next year. And then again, not asking you for a specific month or maybe even a specific quarter here. But just thinking about kind of when pricing power will return in the Sunbelt, right, kind of given the cadence of deliveries. When do you think you'll be able to kind of push pricing kind of push market rent growth again kind of above and beyond the typical CECL curve?

Operator:

The next question is coming from [Indiscernible] from UBS.

Joe Fisher:

We do not have that. To be honest, I don't think any of us really provide full and absolute disclosure on methodologies. I think all of us try to utilize the methodology that's most appropriate and what we believe best represents kind of the existing residence base and AR that we have. And so we've been very consistent throughout on our approach. I don't think we have necessarily the same volatility that perhaps others do as you have residents go in and out of the different pools. But I think it has worked for us, I'd say we're roughly 50% reserved today on our total AR balance, which really is meant to cover what those individuals are that are in eviction at this point in time that we don't think they are going to be collectible. The rest is due to our typical slightly late payers or payment plans that may be out there. So we feel good about where we're at today. We continue to see long term delinquents come down in the portfolio. So we had been stuck at kind of 250 or so long term delinquents. I think a lot of the activity that we've had from a screening perspective, from a credit standard perspective, process improvements, we've gone under 200 on that front, so that's helping whittle down some of that AR and the need for reserve. And cash collections, obviously and versus that, they continue to improve a little bit on the margin. So we've seen first half bad debt come in a little bit better. So maybe it's help in the numbers plus minus 10 bps year-over-year. We believe there's more to come in the second half as we get these long term delinquents down in some of the screening we talked about earlier. So hopefully, that is a upside to our numbers as we go forward, but it's hard to say what peers would be at.

Alexander Goldfarb:

I'll just ask one question. There's a lot of discussion over this early peak of June versus is there going to be a double peak. You guys have obviously talked about the nuance and what's going on leasing East Coast, West Coast, Sunbelt. But it really seems like we're splitting hairs. I mean most of the percentages are within a few points of each other and generally almost seem like normal seasonality volatility like normal course. So is your view that what you guys are talking about and what we're hearing from peers is really anything other than normal seasonality and normal variances or are there truly specific things that you're seeing that give you true pause?

Operator:

Next question is coming from [Ann Chan] from Green Street.

Mike Lacy:

I would tell you, with some of these regions, you do have some markets that have a little bit more volatility. And for us, I think we have Monterey Peninsula where we do have migrant workers that come in and out of that market. So that's typically higher on the turnover. But for the others, it's been pretty consistent. We've seen a decrease pretty much across the board. And while some of this has to do with the fact that we have just far fewer people moving out to buy homes pretty much across the board, a lot of this has to do with all the things that we put into the customer experience project. And again, we think that this will continue to pay dividends. But Joe just mentioned it again as well, we do want to test our rents as well. And so we'll look at different levers to see what we can drive through this initiative. But so far, so good. But again, West Coast, you have to really dive into some of the markets and I think a lot of that was driven by [Salinas].

Linda Tsai:

Just one question. Sunbelt market from where you sit today to see new lease growth hit flat or slightly positive soonest?

Operator:

Our next question is coming from Mason Guell from Baird.

Andrew Kantor:

So if you look at the numbers that are in the supplement for the maturity dates on those different investments, those are without extension options. So currently, all of the DCPs that are maturing within the year have some form of extension option available. So we're talking to those developers, those developers are looking at different opportunities to either recap their asset, to sell their assets or to extend their asset, but each is a different conversation.

Tom Toomey:

Thank you, operator. And thank you all for your time, interest and support of UDR. We look forward to seeing many of you at the Evercore ISI and Bank of America Conferences in September and other upcoming events and tours. So with that, enjoy the balance of your summer. Take care.

2024 is off to a very solid start. Due to better fundamental backdrop than initially expected and the operating strategies we continue to employ to outgrow competitors in our markets. Positive fundamental drivers for industry include:

first, year-to-date employment creation of approximately 800,000 jobs has already exceeded initial full year economist consensus growth expectations.

To begin, first quarter year-over-year same-store revenue and NOI growth of 3.1% and 1.2%, respectively, and 0.4% sequential same-store revenue growth were slightly above our expectations. These results were driven by:

first, 0.8% blended lease rate growth, which resulted from nearly 4% renewal rate growth and new lease rate growth of negative 2.5%. New lease rate growth improved 260 basis points versus fourth quarter results as concessions decreased by approximately half of a week on average.

Joseph Fisher:

Thank you, Mike. The topics I will cover today include our first quarter results and our updated full year guidance, a summary of recent transactions and capital markets activity and a balance sheet and liquidity update. Our first quarter FFO as adjusted per share of $0.61 achieved the midpoint of our previously provided guidance and was supported by same-store revenue and NOI growth that was slightly above our expectations. The modest sequential FFOA decline was driven by an approximately [ $0.015 ] decrease from same-store NOI, primarily due to higher expenses attributable to seasonal patterns and approximately [ $0.005 ] decrease from higher interest expense and G&A.

Operator:

[Operator Instructions]. Your first question comes from Nick Joseph with Citi.

Michael Lacy:

Nick, it's Mike. I'll take the first crack at it. What we're looking at, and as a reminder, we had 70 basis points of blends for the year. And I would tell you, our blends right now in the first quarter, running about 20 basis points higher to start the year. But April, May trend even higher, I'd say, about 100 basis points higher than what we had in our original business plan going into the year.

Nicholas Joseph:

That's helpful. And how about on the occupancy and the other income side relative to initial expectations?

Michael Lacy:

Mike, again, good question, Nick. Right now, we're sending out around, was around [ 3.8% ] through June on renewals. And then in July, we just sent out about 4.5% growth. So we are getting a little bit more aggressive on renewals, but at the same time, we're really pushing our market rents. So we're trying to compress the new and renewals. And I think what you saw from us in the first quarter was about a 600 basis point difference between new and renewal. My expectations -- that's going to come down to around 300 to 400 basis points as we move throughout the second quarter. And that's really setting us up to drive total blends, which is equating to total revenue growth a little bit ahead of our expectations.

Austin Wurschmidt:

Mike, you commented -- I want to hit back on the leasing trends about May, lease rate growth improving versus April. You talked about how things have kind of trended. I think, through the first quarter into April relative to expectation. But which markets are really driving that improvement into May? And maybe where are you becoming a little bit more aggressive on the renewal rate growth. And then do you think you can kind of keep retention or keep occupancy high while pushing a little bit harder?

Michael Lacy:

Yes, Austin. That's been getting a lot of questions on the Sunbelt. So maybe let me step back a second, just give you a little bit more color. And as a reminder to the group is, that's about 25% of our NOI. And to your point, we know supply is -- it's a certainty. And it's in front of us. Peak deliveries are still right around the corner, but at the same time, it's during peak demand. So that's a positive, and we're seeing stronger job growth as well as demand is a little bit stronger. And a lot of that has to do with record absorption. So overall, while it feels good, we're cautiously optimistic just given that supply is still coming.

Michael Lacy:

We were between 5% to 7% growth on our other income line. And again, we're holding around 10% today. So that's a 200 to 300 basis points improvement from what we originally expected.

Steve Sakwa:

Mike, I appreciate all the comments on some of the trends by market. I'm just curious in the Sunbelt, given that we've got heavy deliveries coming over the next 4 quarters. Is it your expectation that the better trends continue? Or has this maybe been either a little bit of low in supply or maybe stronger demand? And like, I guess, how are you thinking about those concession trends maybe over the next several quarters?

Tom Toomey:

Steve, this is Toomey. Just to add some more color, and I think we had it in our prepared remarks. The record absorption in the first quarter, high for 2 decades. The jobs number, I think, has surprised us all through the balance of the year. If that continues, the Sunbelt has a pretty good path, if you will, and absorb it. I'm not sure betting on the jobs market, going into an election cycle is a very strong bet on that piece of equation.

Joseph Fisher:

Yes. Steve. So I'd say number one, balance sheet remains in a phenomenal position. So liquidity-wise, maturities sources and uses all look to be in a really good position. So we're able to kind of sit back and be in this capital environment and wait to pivot to offense. I'd say opportunity wise, the transaction market was finding -- footing there in terms of agreement on where cap rates were and buyers and sellers were coming together. Obviously, this recent surge in rates creates a little bit more of an unknown in that environment. And so we're kind of sit back trying to see where valuation starts to settle out here a little bit.

Operator:

The next question, Josh Dennerlein with Bank of America.

Michael Lacy:

Yes. Josh, I would say, first and foremost, you have to remember the CARES, we're anniversarying off of that. So as a whole, that had about, call it, 350 basis point growth rate. So if we didn't have that, we would have been 4% overall. But specific to some of these markets, Seattle, as an example, we had taxes go up about 9%. So that drove a little bit more growth there, a place like Monterey Peninsula, utilities were up 7%. So you have some of these other factors that are in play in addition to what we're anniversarying off of given the CARES Act. So that's driving some of the higher growth if you will.

Joshua Dennerlein:

Okay. I appreciate that. And then back on other income, just kind of curious what's driving the outperformance in the other income line? You mentioned the building-wide WiFi. Is that like people can sign up any time? Or I kind of thought is that like lease renewal or when there's a new lease signed. So any color there would be great.

James Feldman:

I was hoping you could talk a little bit more about how Class A versus B is performing across the markets, across your portfolio?

James Feldman:

Okay. And then you talked broadly about the Sunbelt, but can you just get a little bit more granular on the trends? You mentioned Texas, but as Dallas different than Austin and then even Florida, Tampa, Orlando and then Nashville, which, of course, it's not Florida. But can you just talk more granularly about those markets? Or are they all pretty much doing exactly what you said in your broader Sunbelt comments?

Operator:

Next question is Anthony Paolone with JPMorgan.

Michael Lacy:

Yes. Tony, what we're seeing today is a loss to lease right around, call it, 2% to 2.5%. Typically, that grows as you go through the demand period over the next 3 to 6 months, and then it starts to trail off towards the end of the year. But right now, our loss-to-lease is hovering right around that 2% to 2.5% range today.

Joseph Fisher:

One, just one other thing, too, in terms of kind of that momentum and that loss to lease question, I think probably one of the things we're most excited about on a year-to-date basis, when you look at the combination of our gross rents and that concessionary number coming down since the start of the year, we're actually up plus or minus 3% on effective rents on a year-to-date basis, which through the first 120 days is a really good result relative to historical averages. Obviously, that's being led by East and West Coast doing a little bit better. But even Sunbelt, as Mike talked about, we're seeing market rents move higher there. And so when you worry about that gain to lease, the fact that market rents continue to move higher at the same time that we're pushing our blends both on renewal and new base is higher. We feel pretty good about that trajectory in terms of -- as a forward indicator.

Joseph Fisher:

Yes. So when we put together guidance, we had assumed a flat year-over-year number from '23 to '24 for bad debts. Most of that really being due to the fact that we think we did a really good job of assessing the AR balances historically and knowing kind of what we are going to receive over time. And I'd say that's continued to play out.

Operator:

Next question, Michael Goldsmith with UBS.

Michael Lacy:

Yes. Let me give you a little bit of color on all of them. I think first, starting with Seattle and San Francisco because we do get a lot of questions regarding those markets. First and foremost, performing better than we would have expected. And a lot of this has to do with things that are unique to our portfolio. So I'll give you an example. Seattle for us, we're not located down in Seattle. So we're not facing as much of the supply pressure as some others are. We're more located in Bellevue and then out in the suburbs. And what we're seeing in a place like Seattle is Amazon's return to work has really helped demand.

Unknown Analyst:

Great. And then a quick question on the other income. Improving turnover is certainly positive both for the revenue and expense side. But I'm hoping that you can provide some examples of what sort of that experiences you're seeing that you think that you can do better on from a resident experience side? Like is this, people complaining about loud trash removal or their neighbors or how do you think that you can do better on these items?

Nicholas Yulico:

I guess first question, Mike, sorry if I missed this, but -- did you give the new lease rate growth, how that's looking in April for the Northeast? Could you also just explain why that number was a little bit weaker than some other markets in the portfolio in the first quarter.

Nicholas Yulico:

Okay. Second question is maybe for Tom or Joe, in terms of -- it seems like you have the policy of not revising same-store guidance in the first quarter. And I know you talked about you still want to see the leasing season in the spring play out, and there are some reasons to be cautious in some instances, but you are, it sounds like you are trending above the guidance. So I guess I'm just wondering what is the reason at this point to have that policy since a lot of your peers do adjust in the first quarter. And in fact, I'd say much of the broader REIT market is willing to adjust guidance in the first quarter. So if you could just remind us sort of why you feel strongly about that policy? Or if this is just an instance of situation on the ground. There's still a reason for caution, Sunbelt supply, whatever it is driving that decision.

John Kim:

I don't think anyone's asked it yet, so I'll give it a shot. Your Attachment 8(E), you no longer provide the market detail on new and renewal spreads. And I was just wondering why decrease that disclosure. I found it very helpful in the past.

John Pawlowski:

Okay. Got it. Joe, you also mentioned on the DCP, the watch list remains at $50 million over 3 investments. It didn't move despite the favorable resolution of 1,300 Fairmount. Can I ask what investment got added to the watch list and what's the likelihood of consolidating when these assets are among these 3 investments?

Joseph Fisher:

No, that's -- yes, it's a great question. I should have clarified that. Thank you. Now the upgraded guidance took the downside risk from the Philadelphia out of the equation. So no FFOA risk related to that or the other 3 that we see this year. The next maturity for one of those is January of '25. And thereafter, the other 3 are in mid-'26 generally. And so we have time on all of those. I'd say if you wanted to bracket the potential downside, if all 4 of those transactions, that $150 million, if we had to go off of the accrual and buy in at the lower yield, it'd probably be about $0.03. But between now and 2 years from now, obviously, we expect upside on NOI from those assets. And so we don't see that full risk into fruition, even if all 3 of those did eventually have to be taken back at their maturity.

Adam Kramer:

Just wanted to ask maybe a little bit more of a high level, maybe theoretical conceptual question. You talked a little bit about the kind of robust job growth we've had so far this year, and I think it's something to certainly focus on when it comes to apartment demand. Maybe just walk us through, is there any kind of -- I don't know if it's a rule of thumb or a way that you guys think about for x number of new jobs created. How many apartment renters are created or what that does in terms of kind of quantifying apartment demand for you guys?

Michael Lacy:

Adam, I'll kick it off and kick it over to Joe. I'll tell you what we're seeing on the ground, and as you can see it in our numbers, concessions have been coming down. And I think, this is due in large part to the fact that a lot of these deliveries are coming at a time where you also have demand picking up. And that's the big difference between what we experienced back in 3Q of last year. You had a lot of deliveries coming when -- very demand was starting to go the other way. And so there's a big difference there. There's still more supply to come. So we're, again, cautiously optimistic of where this is headed. But from what we can see on the ground today, concessions have actually come down a little better.

Operator:

Next question, Alexander Goldfarb with Piper Sandler.

H. Andrew Cantor:

Alex, this is Andrew. I'll take the first question and then pass it off to Chris for the second one. As it relates to DCP opportunities, we're always open to underwriting any transactions that we see in the marketplace. To date, we haven't seen anything yet. But we evaluate each opportunity based on its merits. And if it's the right deal, then we'll move forward. So at this point, there's nothing we're working on, but it's not [ red bind ] by any stretch.

Alexander Goldfarb:

Okay. And then the second question is, you guys have spoken about a pretty strong operating environment echoing your peers. It's interesting because on the office front, there's still a sense of corporates outside of maybe Midtown Manhattan still being hesitant to lease or to take space. So what are your property managers seeing is driving the demand? Is it really -- is it just a lot of small businesses hiring and there's a disconnect? Or are they seeing a lot of corporate jobs that are coming in to rent -- employees renting apartments and therefore, that's -- you guys are indicating a sign that the corporates are going to return in a growth mode. Just trying to understand the disconnect between what the apartments and you guys are saying about healthier-than-expected demand versus some of the comments from other REIT sectors.

Alexander Goldfarb:

Right. But Mike, across all markets that you guys are in, you're seeing a similar dynamic. It's just people wanting to live in the different markets, not necessarily meaningful job growth? I'm just trying to understand the difference.

Joseph Fisher:

And I'd say too Alex, just as it relates to the demand. I mean, we talked about jobs and wages both coming in ahead of expectations. The consensus is well over 1 million jobs at this point in time. And so while we focus a lot on the multifamily supply picture as we should, and kind of that national picture of, call it, 600,000 or so units being delivered this year. Keep in mind, the lion share housing is over on the single-family side, which has seen minimal increase on a year-over-year supply basis at around 1.1 million units. You're also seeing from an existing supply perspective, really no homes being sold, you're back to kind of GSE lows. And so you kind of do get into this environment where what's available for all those jobs that are being created and therefore new households that are being created.

Operator:

Next question, Linda Tsai with Jefferies.

Michael Lacy:

It's pretty consistent. Again, what we're seeing is a lot of these actions that are put in place from what we're doing with the customer experience project. And so I'd say relatively consistent across the board. The only difference I would tell you is in a place like the Sunbelt, historically, what we would have experienced is call it, 20% of our move-outs were leaving to buy a home. Today, that's closer to 10%. And so significantly less people moving out to buy homes in places where it was historically more affordable. But other than that, a lot of this has to do with the actions that we're putting in place through our innovation.

Michael Lacy:

Yes, Linda, that's a fair point. That's something we've experienced as we transition from, call it, Platform 1.0, where the intention was to go to that self-service model, and we reduced our headcount by about 40%. We have found that there are cases where you have to add bodies back that will drive value in the long term. And so we've been going through that over probably the last 12 months or so. And we're still trying to find opportunities where we can run what we call the unmanned sites. And today, we're around 20% of the portfolio. We are adding back from the customer service type positions in the field to make sure that we're acting all these items that we mentioned earlier as it relates to how you change that trajectory and retention.

Operator:

Next question is [indiscernible] with Baird.

Joseph Fisher:

I don't think, as we kind of look through it, obviously, we go through the peak delivery cycle here over the next couple of quarters. And so 2Q, 3Q is kind of your peak, but it's not a dramatic drop off. It's going to take a while to work through the lease-up of those deliveries. But even into 2025, when you look at overall deliveries coming that year, it's going to be a pretty normal year in terms of relative to long-term averages with the Coast actually coming in a little bit lower as they start to see it drop off a little bit quicker in terms of new starts and permits activity.

Tom Toomey:

Thank you, operator, and thanks to all of you for your interest and support of UDR. And we look forward to seeing many of you at the Wells Fargo conference next week and NAREIT in June. So with that, we'll close this today. We're always available to take your follow-up calls and take care.

Trent Trujillo:

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

Joe Fisher:

Thank you, Tom. The topics I will cover today include our fourth quarter and full year 2023 results, including recent trends and transactions, the 2024 macro outlook that drives our full year guidance, and the building blocks of our 2024 guidance. First, beginning with Slide 5. Our fourth quarter and full year FFO as Adjusted per share of $0.63 and $2.47 achieved the midpoint of our previously provided guidance ranges. On the bottom half of the slide, you can see that during the quarter, we shifted to a more defensive operating strategy and build occupancy going into 2024. Occupancy trended sequentially higher for each month during the fourth quarter, resulting in a 20 basis point sequential improvement versus that of the third quarter. As anticipated, this occupancy pivot resulted in lower blended base rate growth versus original 4Q expectations, but it was the right decision to place our portfolio in a position of strength given elevated new multifamily supply in 2024. For January, operating trends have improved. Market rent growth turned sequentially positive and is following normal seasonal patterns thus far. Blended lease rate growth improved to positive 0.2% with new lease rate growth of minus 3.6% and renewal lease rate growth of plus 4%. Concessionary activity continued to trend lower, and occupancy increased further to 97.2%. One month does not make a trend, but we are encouraged by these results. Moving on, as detailed on Slide 6, during the quarter, we executed a variety of transactions that both enhance our liquidity and set us up well for future accretive growth. These include

Tom Toomey:

Thank you, Mike. And as summarized on Slide 18, when we consider our potential 2024 growth trajectory, I come back to the key components of running a successful business. First is to understand your customer. Our residents have healthy rent-to-income ratios and relative affordability continues to favor apartments over other forms of housing. So we view the effect of elevated supply as transitory and expect that the demand versus supply dynamics will revert to our favor sometime after 2024. In terms of resident satisfaction, we can measure success through our customer experience initiatives and how they translate into greater retention, which has improved for 9 consecutive months. We expect this trend to continue. The second component is the understanding of your associates. Through frequent discussions, surveys, and town halls, we have created an open dialogue and a culture that fosters engagement and innovation. UDR is proud and recognized leader in corporate responsibility as well. And third characteristic is to listen to investors. We are highly engaged, conducting roughly 500 investor calls, meetings each year. We are confident that we have a good read on what investors think we are doing well and where we can improve. From these interactions, we have created a company we believe is a full cycle investment and maximize value creation for our stakeholders regardless of the economic outlook. In 2024, we plan to focus on what we can control, namely, this means leaning into our operating platform and innovation, developing talent, nimbly adjusting our operating strategy in the face of supply and taking a capital-wide approach to maintain liquidity and balance sheet flexibility. Taken together, we believe we can successfully navigate whatever macro environment we face moving forward. With that, I’ll open it up to Q&A. Operator?

Eric Wolfe:

Hey, thank you. Can you walk us through the math on how you get to the $0.025 of dilution from taking ownership of the two DCP assets? And I think in the past, you’ve talked about a third asset that might see a similar outcome. So just help us understand if there is likely any incremental impact beyond what’s in the 2024 guide?

Eric Wolfe:

That’s very helpful. And then maybe just quickly, the Oakland property, Lake Merritt, I guess, why not just try to sell it, take the small loss. You mentioned some of the struggles in Northern California. So I guess the question is why sort of increase your exposure there versus just selling it today, putting into more accretive uses in the near-term?

Eric Wolfe:

Got it. Thank you.

Austin Wurschmidt:

Great. Thanks. Mike, you guys averaged 60 basis points of blended lease rate growth in the second half of last year. And you mentioned the 70 basis point lease rate growth assumption in guidance assumes lower growth in the first half of this year and then kind of picks up a little bit in the back half. Is it fair to say that you think that lease rate growth bottoms in the first half of ‘24, and we see continued improvement in the back half and then into 2025?

Austin Wurschmidt:

Okay, great. So it sounds like the lease rate growth should inflect, I guess, comparing spreads year-over-year in the back half of this year. The Sunbelt markets have been kind of the most challenging for your portfolio. And I’m just wondering sort of how that stacks up versus the portfolio overall this year and how you’re thinking about inflection or further deterioration across the markets that you’re in? Just any detail you can provide on how you’re thinking about the cadence for that 25%, 30% of the portfolio.

Austin Wurschmidt:

That’s all very helpful. Thank you.

Brad Heffern:

Hey, thanks, everybody. Occupancy in January was about 50 basis points above the ‘23 level, but guidance assumes flat occupancy. So I’m just curious is the expectation that you plan to trade that occupancy for rent growth in the spring? Or is that just a conservative assumption?

Brad Heffern:

Okay, thanks for that. And then how are you treating the DCP book going forward as you take back assets and redemptions come in? Do you plan to shrink the book just based on recent experience? Or do you plan to reinvest in DCP and kind of keep it at the same size that it always was?

Brad Heffern:

Okay, thank you.

Joshua Dennerlein:

Yes. Hey, guys. Appreciate the time. Mike, I just want to explore your guidance assumption for 3% renewal rate growth in 2024. Are there specific markets driving that lower? Or is there just some kind of split the difference between conservatism I think you said recessions are 2% versus maybe more normal years, it’s closer to 4%, just trying to engage in where you guys are coming from?

Joshua Dennerlein:

Okay. And then maybe just one follow-up on that. Does that imply the second half renewals like 2.5% or the spreads 2.5?

Joshua Dennerlein:

Thanks. Appreciate, guys.

Jamie Feldman:

Great. Thank you. So I guess just thinking about Slide 10, more than 250 basis points above historic average markets. I mean, how do you even guide in those markets – excuse me, right now? I mean, what do you – like what gives you – can you just talk about how you think about visibility in terms of like where rents could really go? What gives you comfort giving any kind of numbers on those, whether it’s historic cycles or maybe the numbers you’re seeing from third parties or however else you’re thinking about it. Really, just a question on kind of visibility in the highest supply markets.

Mike Lacy:

If I could just add. I think for us, we spend a lot of time doing both a top-down and a bottom-up approach and whether it’s coming from the field and they are telling us how the supply is impacting them directly versus all of our third-party data that we’re able to look at here in Denver, we triangulate around a range of outcomes, and that’s why we’ve provided that by region here and again, we feel pretty good to start the year and we will see how it plays out, especially as it relates to moving into the leasing season.

Joe Fisher:

Hey, Jamie, it’s Joe. I guess maybe just stepping back first as you think about the sector versus broader commercial real estate. I do think it’s important to think about multifamily, maybe a little bit differently than some of the headlines that are out there. A lot of that bank stress revolves around other sectors because the reality is that when we have Fannie Mae and Freddie Mac in the multifamily space, they do take the majority of the financing for our space. And so the banks end up having to go heavy some of those sometimes more risk factors. So you got to delineate between those two to start and the fact that in a needs-based business, but plenty of capital still flowing through it or wanting to flow into it, you typically don’t see that same level of distress within multi. So I think I’d keep with a little bit of what we’ve talked about in the past, which you’ll see some distressed developers for sure. So to the extent that you have pro forma NOIs that are below expectations, obviously, higher interest rates and cap rates or delays, as we talked about earlier, you are going to see some of these developers that feel distress just like on this Modera Lake Merritt deal that we are talking about. That said, do you see distressed pricing on the other side is another discussion, and with well-priced capital from the GSEs and availability of that capital, yes, you’re still seeing quite a big demand for multifamily. Andrew Cantor and team just spent a ton of time out at NMHC, meeting with a lot of different partners, brokers, capital providers. And I’d say the general consensus was cap rates plus or minus 5% at this point in time. There is still going to be a little bit of a meeting of the minds with some of the risks that are out there between buyers and sellers. But it still seems like we’re in that plus or minus 5% cap world. So that really doesn’t feel like distress, I’d say, as a buyer.

Joe Fisher:

I don’t think it makes us rethink the suite of options that we have. I think that’s one of the powers of the platform, obviously, in terms of diversification of markets but also diversification of ways we’ve been deploying capital. We’re really not a one-trick pony. And so I don’t think it changes at all our thoughts on what we continue to deploy into DCP like investments. Those over time have provided solid returns for us. It’s a good way to pivot at certain points of time when other capital decisions may not make sense. So I really don’t see that being a pivot for us. We will continue to go into all forms of capital.

Jamie Feldman:

Okay, great. Thank you for your thoughts on that.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my questions. Can you talk a little bit about the pace of recovery trending from Northern California and Seattle? And when you look at your Slide 16, you have a top and bottom growth markets on the West Coast as a whole. So how wide is the gap between these cohorts? And then can you just talk a little bit about the trajectory of some of these markets and when we can start to see them improving? Thanks.

Michael Goldsmith:

Thanks for that. And then my follow-up is you’re including 45 basis points of benefit from innovation and other income in your same-store revenue guidance for the midpoint of – what are the current opportunities for further revenue generation and cost savings from the platform?

Michael Goldsmith:

Thank you very much.

Adam Kramer:

Hey, guys. Thanks for the question. Just wanted to ask a little bit about the sequential move in January versus December and blended rate growth and I guess, kind of the occupancy build as well. And looking at Slide 9, it looks like there was kind of decent drop-off in 4Q in terms of deliveries in your market. Wondering, did that kind of play a factor in maybe in kind of the January results with the December and January results? And then maybe how you are thinking about kind of, I think some of the further sequential improvements that you guys kind of talked about here in new lease in February versus January. And kind of in the months going forward relative to the fact that there is kind of that the pre-material step-up in deliveries, it looks like in 2Q, I guess in 3Q ‘24 in your markets?

Joe Fisher:

Yes. And Adam, just to kind of close out there on the kind of midyear spike, if you will. What we are showing here on Page 9 is based off third-party forecast. And I think we all kind of know and accept that there is always going to be some degree of slippage, and so even with that spike, you are only running maybe 7,500 units a quarter above where we have been kind of in the back half of last year in terms of this year. So, it’s not a big number. There will probably be some slippage, but you are having that slippage and that higher delivery schedule into a typically seasonally a better period of time, which we would expect. And when you have got roughly 8 million units in our collective markets and you are only talking about maybe another 7,500 units a quarter, yes, it really isn’t a big number. We are cognizant of the risk it creates, obviously. So, given that risk and some others, I think it’s appropriate for us to be balanced in our approach and try to be cognizant of that and not get too far ahead of ourselves in terms of what we think could come on pricing power and guidance.

Joe Fisher:

Yes. So, after kind of a challenging first part of ‘23 when we had the excessive level of long-term delinquents, the last six months of last year really leveled out. So, we are pretty consistently getting to, call it, 98.5% collected during that period of time. And that’s really our base case assumption as we go into 2024. And so those higher turns that we saw in the first quarter last year those help out in terms of thinking about stress on occupancy, on expenses, on potentially rates. But because we had reserved those individuals at an appropriate level, there is really no year-over-year implications for bad debt. And so we have taken an assumption that we basically stay at the same level. That said, I think Mike started to go into some of those actions that we are taking. And so we haven’t really assumed those actions benefit us in terms of who comes in the front door and the possibility of fraud and delinquency. Subsequent to that, be it through kind of those AI-based income and ID verification efforts, we are reevaluating a lot of our deposit and credit thresholds, taking a look at some of our processes related to move-in monies and other aspects to ensure that we continue to try to limit the front door because it really has become a cottage industry in terms of creating fraud and try to get in and take advantage of landlords at this point in time. But for now, flat year-over-year assumption, we hope there is some upside over time.

Operator:

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

Mike Lacy:

John, they are all pretty close, probably within 100 basis points of each other. We are experiencing a little bit more pressure just on personnel in a place like that, just given the supply. Aside from that, we do have more of our rollouts on the WiFi today. So, we are incurring that expense. But we are seeing the offset again in other income because that’s double of what we are seeing in the portfolio as a whole. So, slightly elevated in the Sunbelt, but not materially different.

Mike Lacy:

Yes. I will give you a little bit more color on our expectations at the midpoint for the Sunbelt. We are coming into the year with, call it, negative 20 bps on our earn-in and that would imply about negative 2% expectations on full year blends, but the contribution from that will be closer to about 100 basis points negative.

Operator:

Thank you. Our next question comes from Rich Anderson with Wedbush Securities. Please proceed with your question.

Rich Anderson:

Sorry. Thanks Joe. Here, I am. So, I find it interesting that the blended number – excuse me, the renewal number is still 3% or 4% or whatever it is and people are sort of confident that they – even though they know they can get two months or three months free across the street, they are sticking around, to avoid the inconvenience of moving. And that tells me something about what the swing factor is for your guidance going forward. It really is you got this blob of supply cholesterol on the system that perhaps will go away over the time. But if we get an economy in the future that avoids any kind of material drop-off. Isn’t this guidance really sort of realistic in today’s present tense view, but also designed to be beaten if we get an economic picture into the middle part of this year that is resilient – continues to be resilient and so on. So, is that the swing factor here to the upside, pure economic activity and the demand side of the equation?

Joe Fisher:

I think too Rich, the only thing to add, Rich, just on your comment there on renewals and why are individuals jump in for those concessions. Keep in mind that those concessions are not a market-wide concession. Those are concessions that you are seeing some developers offer in very distressed sub-markets, so maybe two months to three months in certain locations. But when you only have, call it, 2.5% of stock delivering across our market, that implies a lot of units that aren’t offering those distressed levels of concessions. So, it’s not as if every resident has the opportunity to jump ship, avoid that 3% renewal and go get three months. So, it creates a little bit of a stickiness, not just the fact that they don’t want to move and it’s costly to move, but also there is just not that abundance to jump to. And we are starting to see that a little bit. Nobody has asked it yet. But last quarter, we talked a lot about the A versus B continue in terms of in the Sunbelt, some of our B renters jump into As for the concessions. We are starting to see a shift in that dynamic after the last couple of months of seeing concessions start to ratchet down a little bit. We are seeing that continuum start to shift back to a more normalized approach to the B renter and staying in the B location.

Joe Fisher:

Yes. I think Camden and team are spot on that in terms of seeing more of a capture for the rentership side of the equation, be it multi or the single-family rental side. But when you have affordability pretty much as distressed as it has been at any point in the last 30 years, 40 years with single-family, typically, when you see that, you see the pendulum swing the other way. And so you have started to see signs of that with home ownership rate kind of peaking out to plus or minus 66% over the last year or 2 years, you start to see that tick down a little bit. So, I think on the macro side, definitely agree on that. We expect that to be the case in terms of the macro backdrop for our guidance. And then when you look at what we are actually seeing on the ground, you look at our move-outs to buy activity, it’s still significantly below what it used to be. And so we are keeping more and more people in the renter pool, which obviously helps on the retention side and helps on the pricing side. So, we are in 100% agreement with Camden on that.

Tom Toomey:

Thanks Rich.

Haendel St. Juste:

Hey there. Two quick ones for me. Good afternoon. Mike, I wanted to follow-up on your comments on San Fran and Seattle. I don’t think you mentioned it. So, perhaps can you share specifically what concessions you are seeing in those two markets today and what you are offering in your own portfolio and then maybe also outline where concessions usage is – concessions are being used more broadly and more prevalently in the portfolio? Thanks.

Haendel St. Juste:

Okay. Thank you for that. And back to I think comments you guys have made on capital deployment here, it certainly sounds like there is a conservatism as you wait for perhaps to see better return versus not necessarily not having an interest. So, I am curious if you could talk a bit more about how hurdle rates – your hurdles rates have changed here and what you would need to see to get more active with on [Technical Difficulty] and perhaps more DCP deployment. Thank you.

Operator:

Thank you. Our next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Joe Fisher:

Yes. So, in terms of cash pay versus accrual, majority of these, by definition, because they are developments are going to be accrual-based. So, just the same way that the senior loan is going to have an interest rate reserve to help fund their portion, we are going to have an accrual on ours. And so over time, as those assets migrate to cash flowing and operational, at that point, they will start to generally pay the senior with cash flow, but will typically accrue. So, we will probably follow-up offline and get you a little bit more specifics on which ones have some degree of cash flow, but for now, I would assume majority are accruing as you think about it. In terms of the years to maturity, do you want to delineate between our maturity and senior loan maturity. Sometimes those are not coterminous. And so what we disclosed there in the supplemental on 10-B that is our maturity for our pref position and/or mezz position. And so typically, they are going to have extension rights built into those. So, that’s really all you are seeing there is exercise some of their extension rights that they have. That said, in terms of senior maturities, we talked a little bit about the asset in Philadelphia coming up with the maturity here in 2Q. Beyond that, our next maturity starting ‘25 and ‘26, so we really don’t have much in terms of senior maturities upcoming, which typically trigger some type of the capital event.

Mike Lacy:

Yes. So, right now, they are in a state of emergency. So, there are price gouging efforts in place. So, there is a maximum of around 10% that we can charge at any given time. Right now, just in terms of how it’s impacted us, we have – happy to say it hasn’t been a huge impact. We do have probably 10 units or 12 units that are currently facing some leaks, but overall, it hasn’t been a big impact for us.

Robin Haneland:

Thank you.

Linda Tsai:

Hi. Just one question, back to innovation and other income, you have highlighted the $5 million to $10 million contribution in ‘24. I think back at NAREIT in L.A., there was a slide showing $40 million from innovation over the next 24 months to 36 months. So, $13 million a year conservatively, the $5 million to $10 million you are guiding to this year is less. Did anything change in your outlook versus back at NAREIT?

Joe Fisher:

Yes. And I think as it relates to that $40 million, a big component of that, call it, $15 million to $20 million was related to WiFi and still is. But as Mike talked about, that’s kind of $5 million to $6 million incremental. So, a lot of that lift comes in the coming years as we continue those rollouts and then you mature through the leasing cycle at each asset once we get that installed. I would say, too, just a little bit of context to that 45 or so basis points that we talk about innovation. That number is explicit to what I would say is very concrete ideas where things like WiFi or parking or storage where you can charge an explicit fee. We know what the rollout schedule is. That’s really componentized within that 45 bps. When you look at some of our biggest opportunities that Mike mentioned, when it goes to customer experience, when it goes to fraud efforts, those were not captured within that $40 million that we talked about, but those are also outside of other income. Those are pretty big implications as it relates to occupancy, pricing power, expenses, capital, etcetera. And so those are opportunities above and beyond that, but are very soft in nature because they are harder to quantify in terms of explicit timing by resident. And so those will come over time, but aren’t embedded in our guidance.

Joe Fisher:

We do think there is an opportunity in ‘24. Mike mentioned we captured the kind of 1% of reduced turnover from customer experience. That adds a little bit to our ‘24 number, plus or minus $3 million on a year-over-year basis. But we do think there is a lot more opportunity above and beyond that to continue to push that customer experience and move detractors into supporters and start to continue to renew with us. Similarly, on the fraud side, we assumed no improvement year-over-year on bad debt. But in totality at that 1.5% number, that’s $25 million of revenue right there, and the real cost is usually about 2x that when you factor in upstream, downstream costs, expenses return, capital return. So, that’s a $50 million opportunity of which we are going to be going after a portion of, obviously, as we move to the future years and roll out some of this fraud prevention.

Operator:

Thank you. Our next question comes from the line of Anthony Powell with Barclays. Please proceed with your question.

Mike Lacy:

Sure, Anthony, this is Mike. Just to give a little background, New York, 8% NOI market for us is mainly down in the financial district. And I will tell you, prior to the team this year, we are going to end up with the top revenue amongst our peers in that market, so they have done a really good job. But I will tell you from what we have experienced, we were coming off some pretty big highs. And we are obviously running 97.5%, 98% of occupancy. And then we started going to the more seasonal slow period of time, I am happy to see that in January, our blends did actually increase from December. They are up about 150 basis points, and they are roughly flat today. So, some of it’s probably seasonal, some of it’s coming off of a high, but we are anxiously are hopeful that things are going to continue to improve there.

Operator:

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

Operator:

This concludes today’s teleconference. You may disconnect your lines at this time.

Trent Trujillo:

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 expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Mike Lacy:

Thanks, Tom. Today, I'll cover the following topics; our third quarter same-store results; early fourth quarter 2023 results and how they factor into our updated full year 2023 same-store growth outlook; and an update on operating trends across our regions. To begin, third quarter year-over-year Same-Store revenue and NOI growth of 5.3% and 6.1%, respectively, as well as sequential same-store revenue growth of 2.3%, met our expectations. Similarly, quarterly Same-Store expense growth moderated primarily due to favorable real estate tax outcomes in Texas and fewer insurance events. Thus far in 2023, a variety of demand and profitability indicators have benefited our business. These include stable occupancy, improved revenue retention and renewal lease rate growth holding above 4%. However, since mid-September, some challenges have emerged, including weaker traffic, lower leasing volume and new lease rate growth decelerating beyond typical seasonal norms. Combining all of this, we have seen a demand environment that continues to hold up well but one that has been overtaken by growing concessionary pressures from elevated apartment deliveries as we entered the seasonally slower period of the year. In short, the consumer seems okay right now, but in place and prospective residents can choose among more options at a discounted price in many of our markets. Buyers have become shoppers, which has pressured blended lease rate growth and occupancy across the industry. And ultimately led us to reduce our full year straight-line same-store revenue and NOI guidance ranges by 75 basis points each at the midpoint. Nevertheless, our revised guidance still remains above the peer group average. To provide a little more context. When we reported second quarter results in July, we were aware of the elevated new delivery forecast through the back half of 2023. At the time, we saw a resilient consumer elevated supply with developers offering approximately one month free and not competing with our predominantly B quality product and easier year-over-year comps in the fourth quarter. This dynamic persisted through early September until things begin to change. The financial health of our consumer was and still is okay, for lease-up concessions in many of our markets increased rapidly and began to compete directly with B quality product. This was something we did not expect and place our brands in occupancy under more pressure than originally anticipated. EDR typically does not use many concessions, but as a result of more direct competition, our average portfolio-wide concessions have increased threefold from half a week to 1.5 weeks. This equates to approximately 2% lower blends or the difference between the 3% to 3.5% fourth quarter blends we thought we would achieve back in July versus the roughly 1% blends we are currently realizing. We expect this concession-heavy dynamic to continue throughout the fourth quarter and into 2024. Looking ahead, and based on this revised outlook, we are forecasting a 2024 same-store revenue earn-in of approximately 1%, slightly below our historical norm. We will provide official 2024 guidance in February, but two initial considerations include

Operator:

Thank you. [Operator Instructions] Our first question is from Eric Wolfe with Citi. Please proceed.

Joe Fisher:

Hey Eric, it's Joe. I think it's probably helpful to look at attachment 8G, because I think will Sunbelt does get the predominance of the focus in terms of supply. The reality is that supply as a percentage of stock is increasing above long-term averages in all three of our regions. And so while in an absolute sense, clearly in the Sunbelt up at the four-plus range, it is higher than the other two regions. But even in the East and West Coast, we do have pockets of supply throughout those markets where you have kind of high-ones, low-twos as a percentage of stock by each region. And so what we've really seen is a ramp-up in supply in the back half, they'll probably continue into the first half of next year. And it's degrading the growth rates and blown all three of those regions. And so they're all coming down at a pretty similar rate of change. It's just that East Coast dealing with a little bit less supply is doing a little bit better than the others than the West than the Sunbelt. And so I do think it really is a supply story. When you look at the consumer side of the equation, look at our dashboards on that front, we're really not seeing anything to the negative in terms of collection trends, doubling up, trading down anything of that nature. In fact, we're actually seeing the B-Quality Resident in some cases, actually jumping up and paying more and taking some A-Quality product, because of the fact that concessions have come up pretty materially in some markets and so, not seeing anything on the consumer side yet. And so demand's trends are still good. It's just really fighting through these pockets of supply.

Joe Fisher:

Yeah. I think it's a good question. Hopefully, we have a similar and/or good answer as last call. So I think there's definitely reasons to be optimistic as you think about 2024 from an Industry and from a UDR perspective. I think we all know about the elevated levels of supply that are coming on kind of ramping here into the back half and then the first half of next year before it starts to dissipate a little bit. But we still do have from a total housing perspective, supply is coming off overall. When you look at the reduction in single-family starts and deliveries that are expected in next year, it sets the tone in terms of total supply, I think also when you look at the relative affordability component, clearly, affordability is a stretched to the spend going back to the GFC, you can see the repercussions of that when you look at existing home sales going back to levels we haven't seen since the depths of the last crisis. And so in terms of closing the back door at least and capturing any incremental household formation, think rentership remains in a really good position on that front. We still expect to see positive demand overall. If you look at third-party forecast going to the next year, when you look at third-party expectation job growth, wage growth, et cetera, that looks positive. So it really just comes down to the supply picture and the fact that renewals remain pretty sticky overall, as you saw in the third quarter and throughout this year. I think most of us are still sending out renewals in the four-plus range, and pretty sticky. So I think there's reasons to be optimistic that we could say positive as a whole. That said, when you do have a little bit less demand and clearly a little bit more supply going into next year, we do think next year is a below average trend in terms of blended lease rate growth and revenue. What we're going to be focused on is clearly on the innovation and other income components and trying to drive some relative performance as we set up for 2025, which we do think starts to get a little bit better and become the light of the end of the tunnel as we work into the back half of next year.

Operator:

Our next question is from Jeff Spector with Bank of America. Please proceed.

Tom Toomey :

Yes, Jeff, I appreciate the question. In the opening comment, here's what color I would add to it. I haven't seen the Bs have this much impact from a concessionary A type marketplace ever. And what's driving it? I think the Internet and transparency on pricing and the shopper or in essence, our customer has more options available for them. And so they're looking at their renewal or a new move-in number and just going down the street and saying, I can get more out of a new A product after they lay in the concessions of one month, two months, they're walking in the door and saying, I get a lot more. So I mean that gives us some comfort that they're trading up out of Bs on a concessionary and not down, which would be the normal concern we would have in a slowing economy. So that says a lot what Joe just commented on. The consumer seems very healthy. just enabled a lot more than they have been in the past to shop for value and they're doing it. And I think Mike can add some more color on ASPs and this what we call a shopping phenomenon that we hadn't seen before.

Jeff Spector:

Great. Thank you. Very helpful. My follow-up is, I just want to clarify when you believe we'll see peak supply pressure. I know that's probably difficult to forecast right now, but how should we think about the supply into 2024, what's estimated into 2025? And again, when there might be peak supply pressure. And I don't know if it helps to discuss by region? Thank you.

Operator:

Our next question is from Nick Yulico with Scotiabank. Please proceed.

Joe Fisher:

Yeah. Hi, Nick, it's Joe. So good question. One, we've obviously spent a bit of time on here in the last 30 to 45 days. So it's probably helpful to go back a little bit to July when we last confirmed guidance and talk about kind of what we had been experiencing at that point in time as well as kind of what we expected here in the second half of the year. And so yeah, in terms of experience, we're sitting there in July with six-plus months of sequential rent growth kind of up 4% through the first part of the year. That was pretty normal with historical trends in both in terms of absolute level, but also seasonality. We are seeing increased levels of supply, but we are still seeing pretty normal concessionary utilization. We still have pretty sticky occupancy, sticky renewals. And so we had a pretty stable environment, it felt like even in the elevated supplies we were sitting there in July. And so back half of the year, we expect a kind of a continuation of that in terms of yes, we do supply was going to keep picking up, but we thought that developers will continue to act rational and we wouldn't see a material increase in concessionary activity. We definitely thought that the first half performance of our Bs in those more heavy supplied markets. We're going to keep outperforming days, which Mike talked to that reversal a minute ago. And we really did believe that given we've seen normal seasonality in the first half of the year, that easier comps when we went into that September time period that we talked about previously, we thought we were coming up on the easier comps and that would definitely help as we move into 4Q. So when you kind of rolled it together, we expected plus or minus 3.5% blends coming here through 4Q. What we talked about upfront was we're starting off the first part of October at around 1%, which we hope kind of continue at that level through 4Q. And so we end up with about a 2.5% divergence that 2.5% on our revenue is roughly $0.02. That's kind of two-thirds coming from the broader supply commentary across all markets. And so just to increase concessions East, West and Sunbelt and about a third of it is kind of the AB phenomenon. And so it kind of breaks up the change that occurred. Obviously, we're not happy about it. We've got a really good track record historically of consistently delivering on the guidance that we put out there. So it's probably a little bit on this room here on the call of we were a little bit too optimistic 10, 12 months ago when we put that together. That said, definitely don't want it to mask what the operations team is doing and kind of track from what our goal here is, which is relative results. And I think, at least to date on third quarter, when you look at the five of us that put out results, I think Mike and team and the rest of the ops team should be really proud of what they've done in a relative sense. Yes, you look at revenue, I think in the quarter, we're number one sequentially and year-over-year, year-to-date. I think we're number one or two on both revenue and NOI. We're number two on year-over-year AFFO. And so overall, I think the relative piece still holds. We're proud of what we're doing on a relative basis. And I know blends get a lot of focus to. And we've seen deceleration in blends on an absolute basis, we're probably slightly lower than some of the peers, maybe 50 bps, 100 bps, but it does mask a little bit of the occupancy strategy that we've had because our occupancy has been holding better than peers, keeping that relatively static. At the same time we're driving other income, which is why those revenue numbers look good. So it kind of gives you a summation of where we are at, where we're at today, but also want to refocus everybody on what we're doing on a relative basis.

Joe Fisher:

Yes. So kind of the update for this year is roughly 2% on blends down from that $2.5 million, so that 50 bps kind of for the full year equates to that kind of 2-plus percent delta that we're seeing in 4Q from 3.5% to down 1%. And that as it relates to 2024, the comment really has to do with we're seeing decent earn-in as we go into next year, approximately 1% earn-in as we head into 2024. So, slightly below the long-term average, but still a pretty good jumping off point. We do expect other income as it typically is to be additive to the number. But we do expect that, all else equal on the third-party forecast on demand, which, obviously, those can move around. But at this point in time, it looks like demand may be a little bit weaker next year at the same time that supply on the margin is a little bit higher. And so blends will probably be a little bit below the long-term average, if they're typically plus or minus 3.5%. This year, we're putting up 2%. So, we've got 75 days to kind of work towards that, see what the market gives us on the supply and the demand front and then come out with guidance next year, but we don't expect it to be an above average year as it relates to revenue growth.

Austin Wurschmidt:

Great. Thanks. Do you guys expect any of your markets to have negative market rent growth next year, maybe more importantly, negative blended lease rate growth? And then on the flip side, any regions or markets you think could exceed that long-term average of 3% in 2024?

Austin Wurschmidt:

That's fair. And then how far along are you in backfilling kind of the skips in the VIX? And I guess I'm just curious how you kind of shape up the additional risk in the quarters ahead. Some of your peers have recently started discussing some similar issues that they're seeing.

Austin Wurschmidt:

Got it. And then just sneaking in one quick one, I'm curious how the level of concessions portfolio-wide compare versus that, I think it was 2016, 2017 period where coastal markets were negatively impacted supplies. Could you just compare those two periods? Thanks.

Operator:

Our next question is from Jamie Feldman with Wells Fargo. Please proceed.

Mike Lacy:

Jamie, this is Mike. They're pretty sticky in nature. A lot of this has to do with things like parking and different fees that we've applied, whether it's package lockers, smart homes, things like that. So these things tend to be pretty sticky. In addition to that, it's incremental in nature. So things like short-term furnished, we still have premiums there. We're still doing things with our amenity rentals. And the newest thing was just rolling out our Internet program. We're starting to achieve those $50 increases. And again, that's – that's looking pretty good. The earnings for next year on that alone is going to be pretty significant to continue to drive, call it, that 50 basis points of other income growth. So overall, everything feels pretty good today.

Joe Fisher:

This is Joe. I'll take it. I guess, number one, we feel really good about the liquidity and balance sheet position. So clearly, going into this period of time with position of strength, if you will. So we've got a good optionality. As you go down to kind of that pick list, I'd say we would start with the dry powder that we reserved for our joint venture and so we did that seed portfolio earlier this year, source some capital in the low 5s effectively. Today, cap rates are in kind of that mid- to high 5s range based off a limited transaction volume that is out there in the market. So we'd like to be able to transact with our partner. We're showing them transactions. We think we can transact at that level. But just as importantly, we can go out there and layer on the platform and get the additional kind of 10-plus percent upside in NOI on top of that, plus that recurring fee stream both on asset and prop management to make the effective yield pretty compelling relative to where we source that capital. And so we and our partner are very focused on that right now to drive the forward accretion and take advantage of the market the way it is right now. I'd say on the DCP side, the good thing is we're really not seeing that many opportunities, which tells you that any development starts is going to be taking place. And so while we do think that market comes to us over time, and we would be interested in potentially adding to our portfolio there. At this point in time, looking at the capacity being utilized over on the JV and waiting for more opportunities to come our way. And then lastly, you mentioned just development. Development is pretty challenging right now. We've got some assets coming through lease-up that are doing well and will clearly drive some additional FFO accretion here in 2024 and 2025. But in terms of new start thresholds, we'd want to see at least mid-6s on a current basis, most likely given current cost of debt, where cap rates are and where our cost of capital is, we're not there at this point. But I would say we're getting some benefit potentially over time from the cost side. We're starting to see costs level out, if not come down. And so, I think if we're patient there and just keep building up optionality and making sure that we got all our land ready to go, there's going to come a point in time when we go pretty aggressively when all the market signals point us to go that way.

Michael Goldsmith:

Good afternoon. Thanks a lot for taking my question. You talked about that the demand has been holding in there pretty well. But I was wondering if there was any change in how the consumer is approaching the cancellation processes given that there's a lot of options out there, we've talked quite a bit about the As and Bs. Are they walking in signing a lease and then regretting their decision and backing out? Just curious of the trends within that?

Michael Goldsmith:

Just to clarify the factor that's related to lease renewals, correct?

Michael Goldsmith:

Got it. And then as my follow-up question, just going back to the As and Bs, is this an issue in relative pricing in that the relative -- the gap between As and Bs have come down as new supply as get to concessions, or is this like more of an absolute issue where As have come down to the price, where at a certain price that there's more utility at that price and sort of like the gap between the As and Bs is less relevant. And just at that price, there's more interest in that new supply. Just any thoughts around that?

Operator:

Our next question is from Steve Sakwa with Evercore ISI. Please proceed.

Joe Fisher:

Yeah, we did do the buyback when we had identified source of capital locked in at that lower level. And so it's generally been our MO in the past is to do it and smaller scale if we have that identified source. I think right now, we will take a look at exposing additional assets to the market to see where they price over the next several quarters. Just to continue to shore up liquidity, present ourselves with some more optionality and of course, look at redeploying into some opportunities, be it the JV, DCP or potentially buybacks. But I think right now, the priority definitely is trying to find JV opportunities instead of the buyback side of the equation. And while -- if we're trading in the mid to high sixes that may seem like a wider spread versus a mid to high fives, on the acquisition market. I think when you capture that upside that we can get from a below average operator, if you will, and bringing it onto our platform, plus throwing that recurring fee stream on and then adding scale to the enterprise versus shrinking scale from the enterprise. The delta really isn't that wide in terms of, call it, the final NOI yield or stabilized FFO yield between the two options. So we'd prefer to deploy with our JV partner in this environment.

Joe Fisher:

Yes. That's a fair question. I'd say, number one, we are definitely on pause on that front. So I wouldn't expect anything here, definitely not the rest of this year and even probably at least through the first part of next year. Maybe by the time we get later into the year, if dynamics change, then we'll be able to take a much harder look at what is the required yield relative to what the source of capital is that we have at the time. I'd say that 6.5% right now on current that should stabilize out higher than that if we were able to start a 6.5%, because usually we're looking at current rents and stabilized cost. And so that 6.5% becomes a 7% over time as we lease that up. That 7% would compare to that 5.5% to 6% cap rate in the market today. And so you get a brand-new asset stabilized at, call it, 125 basis point spread to the source of capital or market cap rates. And so that's why we think it makes sense if we get to that point in time. We're not at that point in time yet where we have starts available at those levels. And I think we're still in a macro environment where we want to wait and see and stay capital-light.

John Kim:

Thank you. Other markets, your other markets have been a drag on lease growth rates. And when you look at some of the markets that compose this, it doesn't seem like they have a lot of supply pressures. I know, Joe, you mentioned that supply is broad-based, but can you just remind us, are these assets typically older in nature, or is there one particular market that's kind of dragging down this performance?

John Kim:

Okay. And Mike, you mentioned in your prepared remarks, the focus on improving retention and that you've identified that 50% of turnover is controllable. At the same time, it's been mentioned many times on this call that people can price shop and make more information to move around. I guess, my question is how much confidence do you have that you could improve retention meaningfully in this market?

Joe Fisher:

Hey, John, just to add on to that because I think embedded in your comment a little bit is in an environment where there's concessions or better rent opportunities, if you will. Want that overwhelm their desire to stay or go. The reality is when we went and look back at the last 10 years of that controllable performance on turnover, only one of the top 15 factors actually had to do with rents. And so it has a lot more to do with their move-in experience and then what's their experience subsequent to move in. So it's both at the property level when you're dealing with things like crash and pet waste or noise or parking and how do we remedy those. And/or at an individual level, how do you remedy certain circumstances that they're having related to perhaps service calls the maintenance issues, some of the appliance issues, maybe noise next door. Just are we responsive in meeting their needs. And so there's a lot of property and individual level controllable factors. Have nothing to do with rent that we think we can take care of, to hopefully give them a better experience and therefore, a stickier resident at the end of the day.

Haendel St. Juste:

Hey, guys. Just one left on my list here. Joe, was hoping maybe you could add some light on why the bad debt reserve was up. I think about $9.2 million here, up 10% versus last quarter. And I know you guys are contorta bit differently, but maybe you can remind us what's embedded in your full year '23 guide from a bad debt perspective? Thanks.

Haendel St. Juste:

Appreciate that. And then broadly, within the guidance for bad debt near-term expectations, growth the motivation.

Operator:

Our next question is from Adam Kramer with Morgan Stanley. Please proceed.

Tom Toomey:

Hey, Adam, this is Toomey. It's always hard to judge if people are being rational irrational. But my experience says this, I think the developers are being rational about it because they're looking at their maturing loan and trying to say, I need an extension. I need a debt service coverage ratio and they're mostly going to pro forma one month free. And they'll stretch during slow periods of time to two months for to try to get there. Capitulation is when they go to three months free. Then they are immediately calling their lender and saying, "We need to start negotiating a paydown and/or an extension." So you're right to connect. What is the ultimate goal is to get to that refi and hold on to the asset as long as possible. And I'm not sure that there'll be irrational. What I think has caught us by surprise is the customer, that's sitting in that B Apartment, paying $2,200 a month and looking at the A down the street at 3,000 and saying two months free, I don't have to pay any rent, even though I can't afford the three most likely. I'm going to stretch for it and hope for a better day or a raise. And frankly, a lot of them are getting those raises. So that's the surprise to us is the jump from B to A in a lot of these markets. And I wouldn't expect that to -- I'm not sure I hate this forecasting stuff all the time. But the truth is, that doesn't seem very rational to me on the consumer side, jumping that way and putting themselves further in underwater, if you will, at a time of higher rates, higher credit card balances. So we may see that reverse. No evidence of it yet. But that's the surprise. We're speaking. The developers, not so much, not really surprised. They don't seem desperate yet. We're not seeing any market with a three-month free flag hanging out there. And when we do, I think that will be some very, very interesting times.

Operator:

Our next question is from John Pawlowski with Green Street. Please proceed.

Joe Fisher:

Yeah. It's definitely in blend a fluid situation. As you mentioned, I mean, -- cap or not cap rates, borrowing costs were up by 100 basis points just since our last call. So it is pretty fluid. I'd say majority of these deals did have built-in expectations of 30-plus percent value creation relative to cost. And many of them, if you think about when they started to where they're at today, they had NOI exceeding their pro forma numbers. So there have been some challenges where there’s been a greater pocket of supply, but by and large, I'd say the majority of these deals are actually exceeding their expectations. And so I don't know specifically how to get into individual deals or overall, I would say if you look on Attachment 11B, just to point out the time lines that we have to potentially figure out when that equity comes due. We got some questions on those first four up in the pref equity stack, showing that years' to maturity. Just want to remind everybody that down footnote four, that years' to maturity is actually for our pref position. That's not always co-terminus with the senior loan. So, those first four deals, which look like they're coming to do a little bit sooner. Those are actually mid-25 to mid-2026, type maturities. So those are not coming due. The next deal up for us is actually down in the loan section, 1300 Fairmount, that's coming due in January 24. And so that's the only one that we have due in 2024, that we're going to be working through and trying to think about how does that refi look and what does the capital stack look like. So I think by next quarter, we'll have some more to talk about on that transaction. But overall, I think most of these are exceeding their initial pro forma. It's just trying to figure out where cap rates and values stabilize ultimately.

Joe Fisher :

Yes. I guess I don't want to get into specific transactions. I'd say, most of these -- they're kind of in that 9% to 10% NOI yield. These deals that are kind of in the bottom two-thirds of the page, because of the fact that their pro formas have been exceeding expectations. So that's kind of a 6% to 7% yield to our pref position, which a mid to high 5s cap environment feels pretty good. I think what we've got to be able to get to with these is, yes, SOFR has increased materially. And when you're sulfur plus 300, that becomes painful from a coverage perspective. The reality is that the GSEs are very much still alive and well and have liquidity available. And so you got to balance the liquidity and then the rate and coverage. And so if you're doing GSE debt, you can get nice cash flow coverage on many of these deals once they get to refi. They're just trying to manage when do they want to go to that refi window and do they want to lock in longer duration debt. So I'd say at this point, nothing to speak of in terms of impairments or takebacks of any of these assets given the duration that we have on the senior loans, but we'll continue working with the senior partners and equity partners over time to figure out where those discussions need to go if they have to go somewhere.

Operator:

Our next question is from Connor Mitchell with Piper Sandler. Please proceed.

Joe Fisher :

Yes. I guess, I'd say, first off, we're very pleased that we got that joint venture done. Obviously, it's a little bit different debt market at that point in time. So fluctuating that transaction and the pricing that we did, very pleased with and then being able to pull out those cash proceeds deploy them into basically CP paydown in a non-dilutive manner was clearly a nice trade there for the time being as we got stockpile that liquidity, if you will, until we redeploy. I think from an underwriting standpoint, we're going to meet the market in terms of where cap rates are if we find the right opportunities. So today, you're seeing kind of that mid- to high 5s caps. You are seeing that on a very limited transaction volume. So there's not a lot of sellers out there in the market. And you do have a number of buyers that are in the market to kind of help that pricing. So you've got a number of closed-end funds that have capital available that they've already raised. You have family offices, high net worth type of money, then, of course, the 1031 buyers out there. And so the market right now, while those pricings are beneath where current borrowing costs are with that limited amount of transaction activity, there's enough of a buyer and seller pool to actually get that done. I think going forward, the underwriting is not necessarily going to change in terms of forward growth expectations over an extended period of time. We're going to really be focused on what can us and our partner find together that can maximize what we can do from an operating platform perspective. And so that's always what we're focused on. So I don't think there's much in terms of change in underwriting on a go-forward NOI growth perspective.

Joe Fisher:

Yeah. I think over time, the diversification has clearly served us well when you look at having diversified price points, diversified submarkets and, of course, the 20 plus or minus markets that we're in provides a pretty good foundation from which to insulate ourselves relative to volatility and cash flow, but also kind of pivot the sources and uses. So I think we want to remain balanced. We're a little bit more B biased, obviously, throughout the portfolio, which has worked well for us over time. have a kind of a solid B that you can redevelop when you see upside rent potential and the markets are going well, but also helps insulate it during downturns is pretty nice. So I don't see any material shifts taking place to the overall portfolio strategy. We do typically like to try to find Bs to buy because as allowed for more opportunity to get a little more meat on the bone and/or more margin upside when we bring those on to the operating platform. So you do typically see us kind of buy that B to A range typically. And then the improvement in portfolio quality really comes through our development arm that does a great job of bringing on high-quality developments for us.

Tom Toomey:

Well, thanks for all of you and your time and interest and support of UDR. I want to highlight again relative performance in my closing remarks. In particular, I think during the quarter, Mike out of the five peers that have reported, finishing number one in revenue, expense and NOI, it matters what we get to the bottom line. And it starts with operations, and I take my hat off to the team for that level of performance and it's a testament to their efforts and the platform, which are key points of future differentiation and growth potential. With that, we look forward to seeing many of you at NAREIT in Los Angeles and in a couple of weeks at other upcoming events. And enjoy your holiday/Halloween and take care.

Trent Trujillo:

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 the risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO Tom Toomey.

Mike Lacy:

Thanks, Tom. The topics I will cover today include our second quarter same-store results, early third quarter 2023 results and how they factor into our full year 2023 same-store growth outlook, and an update on operating trends across our regions. To begin, year-over-year same-store revenue and NOI grew at strong rates of 7.6% and 7.7% respectively, in the second quarter. Similar to the first quarter, we continue to recapture apartment homes that were previously occupied by long-term delinquent residents. This temporarily high-level of baking units pressured pricing and increased repair and maintenance expense relative to what was in our initial guidance. There's still some work to do on this front, but we believe these disruptions are now largely behind us, as long-term delinquents have reverted to near our pre-COVID levels and in the month collections continue to improve. Next, we continue to see favorable fundamental trends to start the third quarter. First, demand remains relatively healthy. Year-to-date job growth has been stronger than most anticipated which is supporting solid levels of traffic. Second, the financial health of our residents appear robust as wage inflation has largely kept pace with rent growth in most markets, resulting in steady rent to income levels in the low-to-mid-20% range. Second quarter move-outs due to rent increases totaled only 8% down from roughly 10% last quarter and 18% at its peak a year ago. Third, relative affordability remains in our favor with mortgage rates hovering around 7% and low single-family home inventories bolstering prices, renting an apartment is approximately 55% less expensive than owning a home versus 35% less expensive pre-COVID. Only 6% of move-outs in the second quarter were due to home purchase which is 50% less than our historical average. And last, concessions remain minimal and average approximately half a week on new leases across our same-store portfolio. The concessions we've been offering remain, primarily concentrated in certain submarkets where elevated levels of new supply are being delivered. With this backdrop, we have confidence in our ability to drive further sequential same-store revenue growth improvement in the second half of 2023. First, after a slow start to the year sequential market rent growth of 3% over the last four months is above the pre-COVID average of approximately 2% over the same timeframe. July blended lease rate growth of mid-2% and occupancy in the mid-96% range are similar to our June results and are anchored by the most difficult year-over-year comparisons we face, given June, July and August 2022 blended lease rate growth of 15.5% on average. As the year progresses, our comparisons to 2022 results ease. This, when combined with our strong loss to lease and rent growth momentum should result in acceleration in both new lease rate growth and blended lease rate growth throughout the year. This would benefit not only 2023, but also positively contribute to our 2024 earn-in. Second, our loss to lease at the portfolio level stands at 3% to 4%. Much of this is related to leases signed in the fourth quarter of 2022 and first quarter of 2023, due to greater than typical seasonality during those periods. New York, Boston, Washington D.C., Seattle and San Francisco which are collectively half of our same-store NOI have the largest upside with a weighted average loss to lease of approximately 5%. And third, resident turnover is improving, which has both revenue and expense benefits. During the first half of 2023, we had approximately 600 more unit turns from resident skips and evictions compared to the first half of 2022. This impacted our occupancy, turn costs, repair and maintenance expense and administrative expenses which collectively reduced our earnings by approximately $0.01 to $0.02 per share. Now that we are closer to the pre-COVID norm for long-term delinquent residents we expect less pressure on turn costs, a reduction in vacant days and improved pricing in the second half of 2023 and into 2024. In all, we have positive operating momentum as we begin the back half of the year and expect to produce sequential same-store revenue growth of 2% to 2.5% in the third quarter, which compares favorably to pre-COVID averages approximately 1% and above levels seen a year ago. Relating this to full year 2023 guidance recall that the building blocks we've provided to achieve the midpoint of our same-store revenue growth guidance included

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Mike Lacy:

Hey, Eric, it's Mike. We're seeing some pretty positive trends. So just to kind of put it in perspective over the last few months, we've seen market rents rise about 2% in the back half of the year. We expect to see something similar. So right now market rents, we've got some tailwinds if you will.

Mike Lacy:

Yes. It's different by region obviously. What we're seeing today is loss to lease in that 3% range. We're probably closer to 5% to 6% on the East Coast around 3% to 3.5% on the West Coast and then our Sunbelt's roughly flat today. So we do expect to capture a lot of that in the back half. And just as a reminder when we were going into the back half of last year into the first part of this year, we had a lot of headline news if you will just around tech layoffs the banking issues put a little pressure on our market rents, but we expect to gain a lot of that back this year. So that's part of our confidence in where we're headed with both new lease growth and renewal growth as we move into the rest of the year.

Mike Lacy:

Sure. I'll give you a little color, but I think we've gotten a few questions on this. So let me just back up a little bit and provide a few other points. I think it's important just to remind everybody there's varying definitions on blends out there right now. And as a reminder, we include everything first and foremost. And when we think about blends right now over the last three to four months and really thinking about last year, we were about 200 basis points higher than the peer average. So we were really driving our loss to lease. We are pushing our renewal growth. And we've got a tough comp right now. As we think about it going forward, just getting rid of some of these long-standing delinquents the fact that they're more or less behind us, we're starting to see that momentum in market rents. That goes to what I said with what we expect going forward especially in those coastal markets. And that's truly what's going to drive that rent growth trajectory as we move forward.

Operator:

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

Mike Lacy:

Yes, Jeff, again, this is Mike. I would tell you, we do experience a little bit more weakness in the Sunbelt than we would have expected. And as I said in my prepared remarks, I think, it's twofold. It's partially due to some of the supply that we have in some of our submarkets, specifically what we're seeing in the Cedar Park area of Austin as well as Addison in Dallas where we have more exposure. So I think that's part of it. The other piece of it was really the skips that we experienced down there. So, as you all know we've been pushing renewal growth pretty aggressively over the last couple of years, we experienced about 250 to 300 skips in that part of the country and that put a little bit of pressure on our occupancy, which obviously in turn has pressure on your market rent. That being said skips are starting to slow back down at this point. And going forward it feels like the Sunbelt's relatively stable. Today we're in that 96.5% occupancy range not really seeing the concession levels pop up as much and market rents are holding steady. So, as we move forward, we expect that we'll see probably blend similar to what we just experienced in 2Q in the Sunbelt. That being said, we did see more growth in the coast, specifically the East Coast. We didn't expect New York, Boston, even D.C. to do as well as they have. And again, those are other markets where we're running close to 97% occupancy today. Concessions are basically nonexistent in New York and Boston, still a little bit to some degree in the 14th Street Quarter of D.C., but pretty strong growth on just top line rent. In addition to that other income is doing really well. We feel pretty confident about where total occupancy is today. We think we can get a little bit more aggressive as we move forward on our rents and we're seeing a lot of success return in some of our other initiatives that relate to other income as we move forward too. So, overall a positive outlay as we go forward too.

Joe Fisher:

Hey Jeff, it's Joe. I'd say, overall for our portfolio as well as Sunbelt, I think we've remained pretty stable when you go into '24. So you see a pretty big ramp here in '23 relative to '22 in terms of deliveries taking place. So we're kind of up 30% really that kind of 2.5% of stock number overall within our portfolio. It's a little bit less than that within our submarkets here this year. But you do have Sunbelt running up in the 4% range as a percentage of stock and even higher in certain markets like Nashville and some others. So they're facing a little bit more pressure. When you go into '24, it looks like it's going to remain pretty stable. There's not a lot of volatility either this year or next year as it relates to first half second half stats. So I think you're kind of stuck with Sunbelt staying a little bit higher here through this period of time. I would say though from a total housing stock perspective, you've seen single-family completions coming off fairly dramatically as starts have really fallen off a cliff in the last six to 12 months. And so total housing stock picture looks quite a bit better. And generally it's stable on a year-over-year basis in '23 and likely into '24. Plus you got the relative affordability piece which is clearly in multis favor. So I think generally Mike's comments on stability feel pretty fair in terms of -- as long as we continue to see that demand in household formation in the Sunbelt, I think we'll be in a pretty good place there. As it goes into a little bit longer you're kind of alluding to is that tail going to get stretched out? You're starting to see the early signs on the census data in terms of permits and starts coming off maybe 10% from peak. I would say anecdotally we believe it's off quite a bit more than that. Just talking to developers in the space talking to lending partners that we work with obviously looking at DCP projects that honestly we really not seeing much come through our pipeline. You look at the Architectural Billings Index which is off pretty dramatically. So, a lot of good forward indicators that tell us it's about to fall off. Similarly, if you look at some of the third-party data and go away from census-based data which is a little bit spotty from a survey perspective at times and somewhat lagged. If you look at third parties like QAxio and their stat data which is traditionally been very well correlated with overall starts they're up as much as 50% from peak already in the last 12 to 18 months. So I think somewhere in between the down 10% and down 50% is probably closer to reality but we are seeing that supply come down which bodes well for '25.

Joe Fisher:

Thanks, Jeff.

Steve Sakwa:

Thanks. I guess good morning out there. I guess Joe to kind of follow-up on that question. I'm just curious, are you seeing any maybe early signs of any distress or investment opportunities maybe on the land side? My understanding is a number of merchant builders are starting to scale back the size of their development teams and maybe looking to sell some land parcels. So I'm just curious, is there anything that's come up or you think it's shaken loose over the next six to nine months that might be a '24 or '25 start for you guys?

Steve Sakwa:

Great. Thanks. That’s it from me.

Austin Wurschmidt:

Great. Thank you. Just stepping back for the total portfolio, can you just give us a sense how far along you are in that eviction process? And how you expect to be able to backfill some of the vacancy you highlighted due to skips and evicts. I mean is that a 2023 event? Could you get back to the high 96% range later this year? Just trying to get a sense of how that trends and then also what you're assuming to get to that 2% to 2.5% sequential revenue growth for the third quarter?

Austin Wurschmidt:

A lot of helpful detail in there. It sounds like some occupancy pick up but maybe not back to the high 96% range you were at. So as we think about then this improvement in lease rate, can you just give some detail around how new and renewal lease rate growth trended month-to-month in 2Q, so we can get that picture of how things are trending into the back half now that the skips in evics are further behind you?

Austin Wurschmidt:

Just to clarify, when you say start to take off, is that sort of back to the 3% to 3.5% level, or do you think it could get better than that?

Austin Wurschmidt:

Very helpful.

Austin Wurschmidt:

That’s a good detail. And I appreciate the insights.

Derrick Metzler:

Hi. This is Derrick Metzler on for Adam Kramer. I appreciate the comments on accretion for the JV and the subsequent property acquisition in the opening remarks. If you could talk any more about expectations for timing to deploy the dry powder that you mentioned in the JV? And any other puts and takes you can talk about after the subsequent property acquisitions. So net-net, how should we think about accretion for these transactions? Thanks.

Mike Lacy:

Yes. Let me just add a little bit more color around that controllable operating margin. Joe mentioned, the team is very excited to get our hands on these assets. He mentioned, 75%, 76% controllable operating margin. We run our properties in the same markets closer to around 84%. So we do believe in the next six to 12 months we'll be able to capture a good chunk of that. And obviously after two years we'll be able to capture the majority of it. A couple of things just to give you more specifics around it. Four of these assets are basically in our backyard right next door to one of our wholly-owned assets. So we intend to get a lot of efficiencies just as it relates to just the personnel side of the business and we expect to capture that again in the next six to 12 months. Aside from that we do have some positive in-unit amenities that we're able to get in there day one and add such things as smart homes washer dryers on a couple two or three of these deals were able to get in there and do that. That's really good return for us. And in addition to in-unit amenities, there's also everything that's on the outside. So things that we've done in the past with parking initiatives, the fact that they do not have package lockers were able to order those and get those installed in the next few months, a lot of low-hanging fruit. And we believe between the end unit and the amenity areas, there's probably 150 basis points alone in the next 12 months. Aside from that, more innovation on WiFi over the next six months we'll assess that and try to go hard on installations and then just our revenue management alone. The fact that we can get in there and do more of our surgical pricing on in-units, we think there's a lot of upside. So I think it's safe to say that call it 700, 800 basis points will be captured in the next 12 to 18 months.

Operator:

Thank you. Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.

Joe Fisher:

Yes. I think when you go to the non-ops lines, we generally feel pretty dialed in as it relates to interest expense variability. We're running at maybe 6% floating rate debt plus or minus in the back half of the year. So minimal variability there. G&A feels pretty well dialed in. DCP, we did the $40 million of additional investment there. We'll have some additional fundings on a couple of other deals as we fulfill commitments on a couple that are just working through construction but minimal variability that we see on the DCP side. I think a couple of variability aspects of on the OP unit transaction just as we integrate maybe you see a little bit of either positive or negative. Same with the joint venture if we redeploy quicker those cash proceeds. We could start to earn those fees a little bit sooner and start to capture some of that upside. But I think most of it is going to come through on Mike's side on the same-store piece. And so we do expect to see some upside in occupancy. We've talked about that pickup in blend starting in September of the year although that ends up being a little bit more of an earn-in in 2024 story at that point given how many months are left. So I think that's your big variability. Real estate tax is pretty well dialed in at this point. We know 80-plus percent of those, I think personnel R&M especially given that we have gone through a lot of the high turnover, pretty well dialed in on the expense side. So we feel we're pretty tight. That's the reason we end up going right back to the midpoint as overall we're tracking to where we expected to this year.

Jamie Feldman:

Okay. Thank you. And it sounds like you'll see some acceleration in the back half of the year on same-store and earnings. Rolling into 2024 on the expense side, what do you think your growth rates look like there, if you think about the major line items at least from the visibility you have today?

Jamie Feldman:

Do you see a scenario where it's materially higher?

Jamie Feldman:

Okay.

Jamie Feldman:

Thank you.

James Feldman:

Yes. No that makes sense. I guess Tom just like you have the mic I mean the whole Sunbelt debate I mean it seems like this quarter some portfolios have acted a little weaker than people thought. Some have acted better. I mean what's the big picture on Sunbelt's supply in your mind?

James Feldman:

Okay. All right. Thank you.

Juan Sanabria:

Hi. Thanks for the time. In the opening remarks, you made some comments about maybe some stretched affordability in the Sunbelt. So I was hoping maybe you could provide a little bit more color on where those levels have gone from and to and how that compares to kind of the other markets or close to part of your portfolio please?

Juan Sanabria:

Maybe a dumb question here but how do you determine if something is "skip" versus just a normal course move out?

Juan Sanabria:

Got it. Okay. And then just second question. How are you guys thinking about the potential overhang from the end of the student debt relief and the strikes in LA related to the Hollywood business the writers, actors any impacts you guys are incorporating or thinking about with regards to your second half expectations?

Mike Lacy:

Yes. Specific to L.A. I think, it's always important to note, this is really just a 3%, 3.5% of our NOI market. A lot of our exposure is in Marina del Rey. And I'll tell you the market has done well where we continue to see positive new lease growth renewal growth still in that 5% range and occupancies hovering around 96.5% today. More concessions are downtown where we have our JV assets. But overall L.A. feels good. I have gotten a couple of questions around just our sequential growth. And I think it's important to note that without some of the eviction that we saw there as well as some of the skips, we would have been closer to about 1% to 1.2% sequential revenue growth without bad debt. So again this market feels pretty good to us today. Not really seeing a big difference in traffic. And I think we're in a good position as we move forward.

Operator:

Thank you. Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Mike Lacy:

Not much. So what I would tell you is again in the back half of the year we think there's more opportunity in the coast just because that's where we have the greatest loss to lease. And again that's where we had some of the depressed market rents last year. So I think you'll see that continue to show well in the back half. But what we're seeing with the Sunbelt today is we've got through a lot of these skips it did put pressure on us. We do expect that it to be somewhat stabilized going forward. It's not going to widen. So maybe the coast gets a little bit better, but I don't expect the Sunbelt to get materially worse.

Mike Lacy:

It's been very rational. We see in some cases where concessions are going to four to six range, but we're not seeing people go as far as eight anything past that. So overall it feels rational. Sunbelt today minimal concessions. And then I think there's just pockets where you have developers offering a little bit more, but overall we feel pretty good. I mean we have a couple lease-ups of our own and we offer right around four weeks to six weeks and we're ahead of schedule in terms of leasing. They've been leasing at about double the rate of what we see in our mature portfolio. So overall promising.

Operator:

Thank you. Our next question is from Nick Yulico with Scotiabank. Please proceed with your question.

Mike Lacy:

They're a little bit lower than what we would run. So we see around 95.5% to 96%. And again in the Sunbelt area we're closer to 96.5% today. So just slightly under where we typically run them.

Mike Lacy:

That's right.

Operator:

Thank you. Our next question is from Wes Golladay with Baird. Please proceed with your question.

Joe Fisher:

Yes. Typically when you go back Wes and look at from 2019 to early 2022 we did $3-plus billion of transactions usually the controllable margin differential that we saw on those was around 400 basis points. So back then we buy and we can typically get 10% lift excluding any market rent growth. And so that would be capturing that 400 basis point, plus you're going to put on some occupancy upside rev management. You can do other topline initiatives like parking and package smart rent and Wi-Fi and all that that will help drive topline as well as expense piece helps the margin. So, it's usually 10% lift. We can contact to the bank when it's managed by a typical third-party. In this case this is not managed by third-party property manager. It's really more of a mom-and-pop shop. So there's a little bit more meat on the bone there with 800 basis points of margin than we typically see.

Joe Fisher:

I think you're definitely going to see some developers lose assets to cycle and lose capital. In this case, with these three assets, definitely not going to tell you that they're going to get the returns that they originally expected when they went into these transactions. But from a capital stack perspective, the cap stack on these was basically they were built for $360 million. After these paydowns, the senior loan is at about $175 million. Our position is about $160 million. So, we're kind of going to 50% to low 90% loan to cost on these assets. Obviously originally they expected these to be worth substantially more than cost. But even if you use cost as a baseline there's still some equity in there. In terms of the distress for those developers we talked a lot internally about how to approach these over the last kind of three to six months. Ultimately, we didn't want to push either our lending partner or equity partner to the brink on this to find out was there going to be capital available from the equity or force them into the position where there are plenty of opportunistic lenders out there. The challenge with them is they charge much higher rates. You'll have points on the way in and on the way out potentially interest rate reserves and just general terms that we as a pref-equity partner, don't really want to have sitting ahead of us in the cap stack. So, we like the idea of doing the refis with the relationship lenders keeping them in place and just doing the pay down which for us doing it that 50% to 60% loan to cost is effectively where we're investing that new capital at a mid-9s that felt like a pretty good return for assets. We know the assets that are still going through their stabilized NOI phase they're 90% leased less occupied but NOI trajectory looks good on those. So, overall, felt good about them. But yes, there probably will be some distress out there at some point in time for certain developers.

Operator:

Thank you. Our next question is from Alan Peterson with Green Street Advisors. Please proceed with your question.

Joe Fisher:

I just think timing-wise when you look at the environment that we're in today, they're coming through lease-up. These markets specifically relative to a lot of the rest of are owned or DCP portfolio have been more challenged. When you look at the Oakland market that has faced a lot of supply. Santa Monica has been a little bit more challenged. And even Philly it is in a pocket where there has been a lot of delivered recently. So, from an NOI trajectory, there is a belief that is you work through that that you going to see rents continue to lift those NOIs will stabilize and you'll have a better number here in a couple of years to either refi off of and look at a different refi environment to potentially sell into or recap them to. At the same time, you've got a lot of unknowns around where fed has been where rate is going to stabilize and where buyers can actually underwrite these assets too. So, today while they have equity they don't have the equity and returns they wanted. And so holding on for a potentially better environment makes a lot of sense to them and we're happy to be along for the ride as we like where we're at in the capital stack.

Mike Lacy:

Hey. It's a very good question. I'll tell you again, just to remind everybody, we have been giving out less than half a week on new leases. So we're not really utilizing a lot of concessions on stabilize. That being said, in the Sunbelt, we have seen a few more people offer maybe two weeks here and there just to try to drive a little bit of demand but nothing that's thrown us off. And I'm not really seeing a lot on stabilized assets in some of the coastal especially East Coast markets.

Alan Peterson:

Appreciate, those comment. And thanks for taking my question guys.

Anthony Powell:

Hi. Good afternoon. Maybe one more on the seasonality here, it sounds like you're saying that the first and the fourth quarters will be the highest for lease spreads and market rent growth which is the inverse of a typical seasonality. So is that the case? And do you think that's unique to your portfolio, or is that an industry-wide phenomenon we'll see adjusting for markets in geographies?

Anthony Powell:

Got it. So you're pretty confident you'll see that higher rent growth even in a lower foot traffic environment kind of in September, October, November given the comps and given what you're seeing on renewals, and given the strong costumer?

Anthony Powell:

Great. Thank you.

Alexander Goldfarb:

Hey good afternoon out there. So two questions and first your comments around the Sunbelt and the rent pressure certainly poke a lot of holes in the folks who would want to say that these pricing systems control the market, clearly not. My question is, when you guys were pushing rents aggressively and I think you said you ended up with a bunch of skips in the Sunbelt, what went into the process on pushing the rents so aggressively? Presumably, your leasing team knew about the competitive supply nearby. So I'm just trying to understand better, the strategy of pushing rents, if you in fact knew that you were facing the supply pressure down there?

Alexander Goldfarb:

Okay. And then the second question is supply in the Sunbelt definitely seems to be more of a submarket issue because it's not uniform. And you guys obviously just bought -- committed to buy more product down there. What are you guys doing as far as diversifying away either older -- buying older product or buying more in the suburbs or diversifying your holdings such that and this by the way I guess applies to the coastal infill markets as well so that you diversify your product away from where people can build new supply.

Alexander Goldfarb:

Okay. Thank you, Joe.

Haendel St. Juste:

Good afternoon, up here. My first question is a follow-up on the JV with LaSalle. I guess three parts. But quickly firstly how do the IRRs on the assets you're buying and underwriting compare with what you're selling into the JV. Second, can you discuss the market selection process involved? I understand that the assets that were contributing to the JV there were no Sunbelts in Boston DC Seattle. Was that a deal breaker for the partner? Do you not want any Sunbelt? And then lastly you mentioned, there's capacity or desire to contribute further assets. So curious how much larger this JV could become?

Tom Toomey:

Haendel, this is Toomey. What I'd add that probably hasn't been said enough, is in the interview process with finding a partner, it was finding someone that thinks about the business the way we do. And what we found was a very unique partner that looks at it and says, diversification operating acumen and ability to continue to grow these assets over time. So in targeting assets, you could see what we contributed but what we're also looking at is buying assets over a 15-year cycle, that have a couple of opportunities to redevelop continue to expand margin through our operations and innovation. And so, they're looking at it from that standpoint, and not just target a market and hope it rebounds, but who can actually drive cash flow growth over time and expand the investment because of their footprint. So, it comes in as a very good partner, who looks at the world a lot like we do.

Joe Fisher:

Yes. Thanks, Haendel. So yes on the insurance program, so I'd say, number one, we are locked in through mid-December with the existing program. So I feel good about the kind of go-forward rest of year insurance money or forecast. The big driver of the number being down on year-to-date ,we did see about 20-plus percent premium increase last year. What we've seen though is that year-to-date claims have come off dramatically, part of that is because we came through 2021 and 2022 off a very inflated number of claims activity, as individuals simply happen to stay home more. We also put in place a lot of preventive maintenance and ROIs to help drive those claims down. So we feel pretty good about the number this year. I think going into next year's renewal no doubt, we're going to see continued pressure on the premium side. I wouldn't doubt to see a plus or minus 20% number, again. But I think by next call, we'll have a lot better sense for what that number is. We just got to do our best to either constrain that or continue to focus on claims through more ROI and preventative maintenance. On the self-insurance side that you mentioned, we've traditionally had a $4.5 million retention above and beyond our deductible that we have to eat through first. And then over time, we play with the different layers and evaluate what's our historical loss ratio relative to the premiums being charged. Last year, we took another $5 million of self-insurance risk and the primary $10 million from where we were at previously. And the thought process there was really I think the premium, we're going to be charged for that $5 million was something like $4 million for the year versus a loss ratio of maybe $2 million over the prior 10 years. So over the long-term, it should be a net positive for us. So each year, we'll look at which layers are potentially priced inefficiently, and see what decision we want to make.

Operator:

Thank you. There are no further questions in the queue. I'd like to hand the call back over to Chairman and Chief Executive Officer, Mr. Toomey for closing comments.

Operator:

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Trent Trujillo:

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. When we get to the question-and-answer portion, we ask that you be respectful of everyone’s time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Mike Lacy:

Thanks, Tom. The topics I will cover today include

Operator:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Eric Wolfe with Citi. Please go ahead.

Joe Fisher:

Hey Eric, it's Joe. Maybe I'll kick it off and then kick it over to Mike to talk about some of the trends we're seeing down there. But we've talked about seeing a pretty decent increase in supply as it comes to the Sunbelt. I do think our portfolio is a little bit more insulated when you look at supply growth within our submarkets. We have a little bit more of a B quality and suburban price point down there so a little bit more insulation. But overall I think Sunbelt for us has seen about 3.5% of stock. And so while demand has held up relatively well in recent years depending on the macro outlook if that does start to fade a little bit you probably have a little bit more risk there as supply comes on. So Mike can probably give you a little bit more on what we're seeing down there.

Eric Wolfe:

That's helpful. And then unrelated question but you're always thought of as being forward thinking on the technology front. And to that end I was just wondering if you'd consider using your platform to help manage the back office of other companies' portfolios like one of your peers announced recently.

Eric Wolfe:

Okay. Thank you.

Jeff Spector:

Hi, good afternoon. Thank you. Just taking a step back again, it's pretty amazing the quarter you've had. We've been talking about this recession coming for over a year now, and then just some of your comments on latest conditions and the health of the tenant. I guess from your seat on this recession, how are you thinking about this, just big picture? And is it possible that apartments or UDR's portfolio could be more resilient than what we've seen in the past during recessions? In particular, we're seeing a lot of white-collar job layoffs.

Jeff Spector:

Thanks, Tom. And then, if I can ask and I apologize if I missed this, did you discuss how April leasing rates are doing so far, what you're seeing in April in various markets?

Jeff Spector:

Great. Thank you.

Austin Wurschmidt:

Yes. I was just curious Mike, which markets saw the biggest moves in month-over-month improvement on new lease pricing April versus March? And then specifically on New York, I mean how long do you think the momentum you saw -- how long do you think the momentum could continue I guess versus, how it performed in the first quarter?

Austin Wurschmidt:

That's very helpful color. And then as it relates to potential joint venture, I guess what's the latest update around the interest from potential partners and timing of announcements? I guess has there been any change in sort of your initial expectation on pricing as it relates to just contributing those assets?

Austin Wurschmidt:

Great. Thanks for the time.

Tony Paolone:

Yes. Thanks. So just following up on that, because I think you just mentioned cap rates maybe in the 5s. I think last quarter you said maybe the bid/ask was something in the high 4s to mid-5s. And so, just wondering if you can talk a bit more about just what you're seeing out there in the transaction market and what your crystal ball looks like on how that evolves over the balance of the year.

Tony Paolone:

Okay. Nice. And then, just second one on the DCP book, I guess, somewhat related to allocating capital. I mean, what's the comfort level and desire to kind of keep it at this level versus either seeing more opportunities out there to do more, or even get paid back on what you have?

Tony Paolone:

Okay. Thank you.

Jamie Feldman:

Great. Thank you. Can you talk more about what you're seeing in terms of urban versus suburban performance and the A versus B assets across the different markets?

Jamie Feldman:

And then what about like your urban assets versus your suburban assets?

Jamie Feldman:

Okay. Thank you. And then for my second question, what would you say is the key downside risk in terms of your same-store expense guidance whether it's taxes insurance R&M? And where do you feel like you have the least visibility right now?

Joe Fisher:

Yeah. And just to follow-up on that Jamie a couple of comments. We've been asked a few times about kind of cadence of expenses. And so if you go back to 2022, first half of the year was about 4% growth, second half 7%. So we're actually coming up on easier comps when we go into the second half of the year. A lot of that was driven by one, it was very difficult to place personnel in the first half of 2022 given the labor environment so we had a lot more open positions that we're comping against here in the first part of the year. In response to that we did do a lot of midyear raises throughout the portfolio and so we'll be anniversarying against that by the time we get to the second half. Mike mentioned the turnover piece and we started to have more success with long-term delinquents in the second half of the year last year as well as definitely here in the first quarter and I think second quarter so we'll start to see hopefully that mitigate to some degree. And then Mike mentioned the real estate tax insurance piece. Real estate taxes today we generally know about 70% of that number for the year at this point, so don't expect a lot of volatility there. And on the insurance side we do our renewal in mid-December. So premiums are relatively locked in here for most of the rest of the year at kind of a 20-plus percent number. The claims can be volatile. Claims making up about 50% of the insurance number. And so that's why you see insurance in first quarter actually being down on a year-over-year basis. Premiums were up but claims were down 30-plus percent as 2021 and '22 were both running at pretty significantly elevated levels relative to history. So we're starting to see that come back to a more normal run rate.

Joe Fisher:

Thanks, Jamie.

Adam Kramer:

Hey, guys. Thanks for the question. Just wanted to ask about capital allocation recognizing kind of the capital-light strategy or the shift you mentioned earlier I think you guys have been really -- have a really good chart in your deck and have shown a really kind of ability over time to kind of issue equity when you're trading above NAV and kind of sell assets to buy back shares when at a discount. Wondering how you're thinking about the buyback in that context. I think buyback was not mentioned in the supplemental. Just wondering how you're thinking about buyback kind of in current environment and at current levels.

Adam Kramer:

Great. That's super helpful. And just maybe switching gears thinking about affordability. Maybe just talk a little bit about that. I know you guys have had some really good numbers in your slide deck historically. Maybe just whether it's the latest moving data affordability there, and maybe even tech tenants or tech employed tenant exposure is there any numbers around that you're able to quantify? I think that would be helpful as well.

Joe Fisher:

No.

Operator:

Next question, Chandni Luthra with Goldman Sachs. Please go ahead.

Mike Lacy:

It's a good question. I've received a few of those lately. I'd tell you again the West Coast feels pretty much in line with what we expected. And I'll break it down a little bit for you starting with the Pacific Northwest. Seattle for us we're not really utilizing any concessions. That being said market rents have been a little bit weaker than we expected going into the year. Market rents are starting to pick up as of late. And our occupancy is still in that 96.5% range. So Seattle feels good. I think specific to some of our submarkets, Everett, Kirkland places like that, we saw around 10% 11% growth. So we're seeing a little bit more strength out in the suburbs. Bellevue today still relatively strong, no concessions about 5% to 6% growth. So that's the landscape of Seattle. In terms of San Francisco, SoMa is still doing really well for us. We saw almost 14% growth during the quarter and we're still seeing about a two-week concession. That seems pretty average. We've had two weeks for about 18 months now and it's just kind of par for the course if you will. When you start to go down the peninsula, not really offering concessions today. Occupancy is in that 96%, 97% range. And we're still seeing pretty decent blends. So traffic is starting to pick up in San Francisco. Down along the SoCal if you will LA has been very strong for us. This is a 3.5% NOI market, so relatively small and our exposure is mainly limited to Marina del Rey. We've had a lot of success there. Occupancy is in that 97% range, no concessions to speak of and market rents continue to move up. So I feel pretty good about LA. And then Orange County's been just steady as it goes, occupancy 96% to 97%, no concessions. Market rents continue to improve as we move into the seasonal part of the year. So right now SoCal feels pretty good for us.

Christopher Van Ens:

Hey, Chandni, it's Chris. I can help you out with that. So when the county eviction moratorium went away at the end of March, we had about 70 long-term delinquents in the portfolio. Once again as Mike said, it's a pretty small market, it was 3.5% of NOI. But of those 70 about 40 came in and paid us right away as far as April rents. So they still have a balance that's due but they paid us April rent. Probably two to three people came in paid April rent and paid off their entire balance. The remainder of, them are either under eviction sued -- served a payer quit notice something like that. So we're working through that process right now.

Chandni Luthra:

Thank you to both.

Juan Sanabria:

All right. Thanks for the time. Just on the investment side, notwithstanding, your capital-light strategy today and maybe the cost of capital not where you want it exactly but, curious what markets would look the best. With your kind of forward-thinking data analytic approach sometimes it's a bit contrarian. Just curious, as you look out a couple of years where you see the best opportunities across your opportunity set.

Juan Sanabria:

Thanks for that. And then just on renewals you mentioned kind of the spread blew out between the new and the renewal spreads over the quarter. Just curious on, how we should think about that for the balance of 2023 maybe just how you're thinking about that in your own budget and where the May and June renewals have gone out at present.

Juan Sanabria:

Thank you very much.

Michael Goldsmith:

Good afternoon. Thanks for taking my question. Mike in your opening remarks you described traffic is in line with last year but also commented the demand is relatively healthy. So does that imply that conversion is lower or something else is weighing on demand despite similar traffic?

Michael Goldsmith:

Got it. And then Tom in your opening remarks you talked about that the geographic diversity of your portfolio allow you to allocate capital in the markets that are most advantageous. You've kind of shifted to this balance sheet-light strategy where your active development pipeline includes Dallas and Tampa. So should we interpret that as these are the markets where you see the most opportunity? Thanks.

Michael Goldsmith:

Thank you very much

Dan Tricarico:

This is Dan Tricarico with Nick. First question Mike you may have said new lease rates in the Sunbelt have been a bit weaker than expected. So I'm curious if you could expect a relative softness there in relation to how you view the occupancy rent trade-offs entering like the peak season.

Dan Tricarico:

Sure. Okay. And then I guess switching to the other Coast. So in your Northern California and Seattle portfolios, do you have a sense of what percentage of your tenants are employed by tech or big tech companies? And have you seen any increase in move-outs quoting job loss as the reason, or do you think there's been sufficient rehiring to mitigate that given the job market strength that you quoted?

Joe Fisher:

Hey, Dan, it's Joe, maybe a couple of things to add to that too. Just I know those two markets get a lot of focus given some of the headlines around the tech layoffs. But a number of individuals that are on this call have done some pretty extensive analysis on the warrant notices. We do our own analysis as well on that. And typically you see maybe about 20% of those notices actually reside within California and Washington for those tech layoffs. So it is pretty well dispersed around the country. I think when you look at our blended lease rate activity in those two markets both of those markets actually saw acceleration from 4Q into 1Q. So I think it gives you a sense that the layoffs are pretty diversified. Supply is actually coming down in Northern California. And from what we're seeing on the ground, we're actually seeing pretty good traction.

Operator:

Next question, Anthony Powell with Barclays. Please go ahead.

Mike Lacy:

Sure. The 2Q, when we've referenced 3% that is anchored towards our initial guidance. So, it's still early in the quarter. Again, April looks a lot like 1Q. It all will hinge on what's going on with new lease growth. So again, if we're sending out 5.5% to 6% renewals through the remainder of 2Q, expect to see a little bit of improvement in new growth going into May and then we'll have to see what June has to offer. But today things are trending slightly better than that.

Mike Lacy:

I think that's where you see the spread between renewals and new leases. We are taking advantage of it today and we have been probably in the last 18 months or so. Typically we're sending out renewals about $100 to $130 over market. And so that's why you have basically a 5% spread between new lease and renewals today. So we feel like we're aggressively pricing that but also trying to keep in mind retention is a key factor for us and obviously helps drive new lease growth as well.

Operator:

The next question, Alan Peterson with Green Street. Please go ahead.

Mike Lacy:

Yes Alan. What I would tell you, it's been kind of more of the same. Similar again, in April we're seeing similar trends. We're still offering concessions in those pockets. It's in San Francisco, parts of D.C., and it's extremely minimal in cases down in the Sunbelt. Right now what I would tell you April, again, looks very similar. I don't expect that we're going to go up more than call it a week per new lease and going forward into the season. Demand is still strong. We still have plenty of visits coming to the property. We're going to continue to balance that. I don't expect concessions to be much of a drag on us.

Joe Fisher:

Yeah. Hey Alan, just I'll give some context on that. I mean I think you're right to focus on the near term. We get questions on this leading up of the call as well as last night kind of trying to understand if there's any stress in the system. I'd say number one as mentioned earlier it's only 2% of enterprise value. And when you look on Attachment 11b, clearly fairly well diversified, not just by market but also maturity schedule. And so, we've got a couple of questions on capital stack, so I'll kind of address that here as a part of your question. If you look at the overall capital stack for our DCP book, and I'm going to kick out the portfolio recap deal as well as the Portland deals, which we're also operating recaps, so a little bit different risk profile so just looking at more of the development deals. We've got about a $1.6 billion cost for that development portfolio. There's about $950 million of senior loan, so call it, 60% loan to cost. Our commitment was about $350 million on those deals so 60% to 80% and then you had about $300 million of equity behind us. So a pretty good amount of equity sitting behind us on all those transactions. When you focus on these upcoming maturities, you got one in Philly Santa Monica and Oakland. Those are about $360 million of total cost. When you look at the capital stack within those you've got a senior loan that's about $215 million. You've got commitment from UDR for the portion of about $90 million, and we had about $55 million of equity originally behind us on those. Now we've continued to accrue up our interest income. So our basis today on an accrual basis is a little bit higher than that initial but still pretty sufficient equity behind us. So at this point in time, yeah, we haven't taken any impairment's on those. We are of course starting to have the discussions with our equity partners as well as lenders trying to think through what their plan is in terms of do they want to restructure, do they want to exit through a sale do they simply want to extend with the senior and see what happens on a go-forward basis. So, no stress to speak of right now, but not to say it won't develop over time depend on where refi rates are and fundamentals.

Joe Fisher:

Thanks, Alan.

Flora Tong:

Good afternoon. Thanks for taking my question. I guess the acquisition volume remains unchanged at zero. And I wonder, if you're seeing more distressed opportunities coming into the market. And separately, are you seeing a big slowdown in new starts or planned starts from maybe some of the competitors and the merchant builders? Thanks.

Tom Toomey :

Flora, this is Toomey. Just one thing to add to your calculus when you're thinking about this the multifamily industry enjoys the benefit and partnership with the GSEs provide a stable capital flow that helps the transaction market continue to flow the refi market continue to flow. And so there's not this historical just everything's got to be sold and there's no capital so it's vulture time if you will that occurs in the multifamily industry as long as we have the GSE. So it's a unique animal for us and very beneficial through periods like this as I mentioned earlier capital markets recession.

Joe Fisher :

We have seen that. We've actually rolled out AI chat text and call across the portfolio over the last 12 months. And so that's already being utilized throughout our portfolio. There are going to be additional opportunities that we think going forward. We've already started to kind of sketching those out in terms of how do you provide the customer kind of individualized responses, how to give them more automated responses but feel like they are addressing their specific questions they understand their specific history, what their issues could be. So there's definitely going to be an opportunity for that in terms of the customer experience and providing them a better customer experience but also from a cost perspective, how to bring our cost structure down. So we are looking at it I think it's pretty early days other than what we've done on the AI chat side.

Flora Tong:

Great. Thanks. That’s all from me.

Alexander Goldfarb:

Hi. Thank you. Good morning So just really quick two quickies. First, Joe on the insurance front is there opportunity for you guys to increase the amount that you self-insure to try and mitigate some of the large premium increases or some of the carriers or reinsurers pulling back?

Alexander Goldfarb:

Okay. And then the second question just quickly, you guys mentioned the Sunbelt being weaker, but you also mentioned that your B portfolio isn't really being impacted by the supply. So just sort of curious if that was sort of a relative because East Coast is performing better than you thought maybe you expected better out of Sunbelt or if you're just saying more Sunbelt broadly but not really about your assets in particular?

Alexander Goldfarb:

Awesome. Thank you.

Operator:

Next question Tayo Okusanya with Credit Suisse. Please go ahead.

Mike Lacy:

Thanks, Tayo.

Tom Toomey:

This is Tom again and thank you all for your time interest and support of UDR. We've established ourselves as a full cycle investment that delivers above-average growth and total shareholder return across a variety of macro environments. We remain very enthusiastic about the apartment business and believe our operating capital allocation and innovation advantages should deliver relative outperformance versus peers in 2023 and beyond. . And with that we look forward to seeing many of you at NAREIT conference in June as well as upcoming individual events. With that take care.

Trent Trujillo:

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 assurances that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone’s time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR’s Chairman and CEO, Tom Toomey.

Mike Lacy:

Thanks, Tom. The topics I will cover today include our fourth quarter same-store results, early 2023 trends, our full year 2023 same-store growth outlook, including factors that could drive results to either end of our guidance range and an update on our continued innovation and operating efficiencies. To begin, strong sequential same-store revenue growth of 2% drove year-over-year same-store revenue and NOI growth of 12.1% and 14.5% in the fourth quarter. Results were driven by

Operator:

Thank you. [Operator Instructions] Our first question is from Anthony Paolone with JPMorgan. Please proceed with your question.

Mike Lacy:

Yes. Hey, Tony. How you are doing? It’s a good question. I think probably starting at a high level you have heard us talk a lot about just the convergence of trends over the last few months as it relates to both the Sunbelt and the Coast. So let me start there. I think with the Sunbelt, you have heard us talk a little bit about that earn-in. We are right around 6% going into ‘23, the Coast, for us, just over 4%. And when you think about it, East Coast was around 4.5%, the West Coast around 3.75%, the difference in what we are seeing today though, is we are seeing higher market rents as well as a higher loss to lease in the Coast. So we are seeing a little bit more forward strength and leading indicator there, if you will. And what we are experiencing and expect to see is the Sunbelt will probably have higher blends to start the year, and a lot of that is driven due to renewal growth and what’s been sent out in the foreseeable future. That being said, we do think the Coast, given the market rent and locales, could catch up and potentially surpass that sometime midyear. But what it’s coming down to is what we are doing differently. And a lot of this has to do with what we have done with the pricing system, the fact that we are able to see current demand trends coming through the door. We are able to price a little bit more efficiently there. But we are also utilizing a lot of feedback just in terms of what the customers are saying, what our teams are saying. And we think that this is going to continue to drive outperformance as it relates to our customer experience project. So a lot of exciting things to come on the innovation front that will continue to differentiate us.

Joe Fisher:

Hey, Tony, it’s Joe. We did not. We took a relatively conservative approach on guidance as we typically do when it comes to sources and uses. So we really look strictly at what do we have identified in terms of development, DCP, redevelopment NOI enhancing spend and then have that funded primarily with free cash flow plus potentially some disposition in the DCP repayment. So pretty conservative on that front. I’d say, as we kind of go through this period of price discovery in the broader market, a number of our team were down to NMHC last week and you still do have a bid/ask spread out there, call it, 10% or 15% with sellers kind of looking for that mid-4s type cap rate, buyers kind of looking for more in the high-4s. So they are still going through this period of price discovery, but I think as we potentially stabilize with debt costs really kind of start to come to an end on the Fed Fund side and then spreads compressing and getting more towards the high 4s, low 5s borrowing cost, we could see more of that price discovery moving forward. If that occurs, I’d say, in terms of uses of capital, where we have been leaning into more so, I think the developer capital program continues to be a great place to put capital to work in this environment, both on new projects within development, but also within potential recap opportunities. So those present a good return, several hundred basis points higher than what we had been doing previously, but also a lower attachment point in terms of loan to values and loan to cost. So we expect us to try to remain active there if we have capital. On the redevelopment side, we’ve got a pretty big redevelopment pipeline that we continue to build up that has a good opportunity to achieve pretty good returns as well as refresh assets and take advantage of the markets as they start to come back. So those are probably the two bigger pieces. To get there, we are exploring disposition activity in this market. So as always, we are exposing assets to market, including looking for potential JV partners, both on the operating development and developer capital program side. So if and when we have something there to discuss, we will bring it back to the market and talk about it, but we are looking at alternative sources to help us grow in this environment.

Mike Lacy:

Thanks, Tony.

Nick Joseph:

Thanks. You touched on the blended rent growth and kind of on the market side, but just from the data you’re collecting and I recognize it’s a lower traffic time period so maybe we can go back for the past few months, is there anything you’re seeing change from a migration trend perspective? Obviously, we’ve seen some better growth in the Sunbelt on that side, but wondering if there is anything changing in the data?

Joe Fisher:

Yes, I’d say two other things. It’s kind of demographically and you mentioned traffic as well there, Nick. Demographically, one of the big macro tailwinds that I think we have going into this year and help support kind of our outlook is homeownership rate overall. We do expect that to come down. So given the relative affordability dynamic between single-family housing and multifamily housing, we think we do have a tailwind there. So that’s going to help on the demographic or household formation side for multifamily. The other thing, just you mentioned the low traffic period. 4Q was a lower traffic period. I think our traffic got down to about flat year-over-year. So perhaps a little bit less demand in fourth quarter. That said, as you look at year-to-date, I think we’re up 7% or 8% in terms of year-over-year traffic coming here through January and February. So we have seen us kind of come through that typical lull that we see seasonally and seeing traffic come back quite strong at this point.

Joe Fisher:

Yes. It’s – overall, if you look back to what we are doing in terms of the fixed coupon transactions on a typical developer capital program deal over the last several years, that was typically in that 11% to 12% type of targeted return. Today, that’s going to be several hundred basis points higher, so call it 13% to 14% returns on that paper. One of the big differences, though, is where we’re attaching in terms of the risk profile. So if we were in the 80% to 85% loan-to-cost previously, we think there is good opportunities in this market to actually be down in the 75%, up to 80% loan to cost. So you’re getting more return while taking less risk. You are also seeing some of the preeminent developers come back and look for this type of capital. And so you may get better sponsorship within those investments as well as potentially better assets within those investments. So across the board, I think having capital for that bucket in this environment, you’re going to be a little bit more selective and pick and choose pretty good opportunities.

Operator:

Thank you. Our next question is from Nick Yulico with Scotiabank. Please proceed with your question.

Thomas Toomey:

Yes. I mean, first, I’ll call out to Chris Van Ens in the data analytics team in creating a wide range of predictive models for our business and help drive our decisions. I think the baseline midpoint of our assumption assumes about 1 million job loss for the year on a national basis. And then they try to really drill down to four or five more factors, which is really income growth and employment picture that drive our business and pricing power. And through that, back testing it, I think they have come up with about an 83% confidence weighted model that points to the midpoint of our scenario that we’ve outlined for guidance. Joe, Chris, anything you’d add to it, pat on the back?

Daniel Tricarico:

Great. Thanks for that. A quick follow-up. So you look at new versus renewal pricing in the fourth quarter. It’s a noticeably wide gap for most markets. And, Mike, you gave helpful sensitivity in your opening remarks for 2023, but at what point do you see renewals converge to new lease pricing or is there an expectation maybe to meet in the middle as new lease pricing accelerates? Any thoughts on that dynamic and how you see it playing out for the year?

Daniel Tricarico:

Great, thanks.

Austin Wurschmidt:

Yes. Thanks, guys. Just want to touch a little bit on the model. And I was curious if there were any specific periods that you’d point us to where you back tested the model where you saw some significant or notable job losses, but during a period of still attractive wage growth that resulted in market rent growth holding positive?

Austin Wurschmidt:

That’s helpful. Appreciate the comments. And then, Joe, going to your comments on kind of evaluating joint venture opportunities, would you characterize these as more one-off opportunities? Or are you guys looking to – or would you consider something more significant like you did historically with MetLife or maybe other partners in the past?

Austin Wurschmidt:

Appreciate. Thank you.

Michael Goldsmith:

Good morning. Good afternoon. Thanks all for taking my question. The breakdown of the range of same-store revenue guidance was helpful. Can you break down the expense growth guidance of 4% to 5.5%? Where are you seeing pressure? And then how much more savings can you see from your centralization and property headcount reduction efforts?

Joe Fisher:

And I do think, too, if you take kind of the what’s next piece and look at revenue, Mike talked about the 50 basis points that’s additive to our guidance expectations this year. I think that’s a big differentiator when you look at what we’ve seen from others put out there in terms of other income expectations. I think just given a little bit more concrete facts behind it as we do have identified projects with that. So that’s a lot of our bulk Internet, our package lockers, third-party parking, tenant deposit, insurance, things of that nature, that’s very well identified. So it’s not a hope that we get that 50 bps, I think it’s a known. And I think that’s a key differentiator for us as we go into ‘23. But also as you look back into ‘22, just to give Mike a pat on the back, we think when all said and down here in fourth quarter, we’re shaping up for the number two overall same-store revenue growth this year, which is a phenomenal outcome given the diversified portfolio that we have. We don’t have as much Sunbelt as some of the others. So coming in number two, I think a prideful fact that’s driven by market selection, submarket selection, everything that’s taken place on the innovation front. So more to come on that for sure.

Joe Fisher:

I think, usually, what you see from a psychology perspective is that home prices come down even as affordability improves. You do see a delayed response in terms of that affordability. So when we had the kind of ‘07, ‘08 crisis and that shift to rentership, that was a shift that developed and took place for the next 7 years or so. And so you do have a different psychological impact that sticks with you a lot longer. So I’d expect that trend to stay with us throughout all of 2023.

Joe Fisher:

Thank you.

Joshua Dennerlein:

Hey, guys. Thanks for the time. I noticed in Seattle, effect of new lease growth in 4Q is down 7.4%. Just kind of what are you seeing in that market? And I guess, what’s your expectation built into 2023 for Seattle?

Joshua Dennerlein:

Okay. I appreciate that color. And then just – appreciate all the info you provided on the same-store revenue guide, just wanted to kind of clarify? I don’t know if I heard it, the occupancy assumption at the midpoint in the high, low end of the range?

Joshua Dennerlein:

Okay. That’s across the range you assume the flat or was there...

Joshua Dennerlein:

Okay, appreciate that. Thanks, guys.

Steve Sakwa:

Yes. Thanks. Good morning. I realize you’re not providing sort of quarterly cadences, but, Mike, could you maybe just talk about how you think revenue growth progresses throughout the year? And I guess I’m just trying to get a sense for maybe where the exit velocity might be as we get sort of towards the end of the year and into ‘24?

Thomas Toomey:

And Mike, how much of your revenue is built in by April?

Steve Sakwa:

Got it. Okay, thank you. And then second question, I guess, Joe, coming back from NMHC, I mean how are you guys thinking about new development starts? And I know you own a bunch of land parcels. I guess where would you today be penciling out new development? And if those yields don’t really work for you, how much higher do the yields need to be in? Is that a function of cost coming down, rents going up? Obviously, it could be a combination of both, but just how do you see development starts maybe unfolding over the next year or so?

Steve Sakwa:

Great. Thank you.

Adam Kramer:

Hey, guys. Really appreciate all the kind of the color earlier, just framing the high end, low end and midpoints. I was just wondering kind of given the strong renewal growth, even with kind of a new lease decel, where does that loss to lease stand today? And maybe just kind of framing out, could that shift to a gain to lease if renewals kind of do stay in this elevated range with new kind of modest growth?