The UDR's Second Quarter 2023 Earnings Call has begun with an introduction by Vice President of Investor Relations, Trent Trujillo. The press release and supplemental disclosure package have been distributed and posted to the Investor Relations section of the website. During the call, forward-looking statements may be made and a discussion of risks and risk factors is included in the press release and SEC filings. Tom Toomey, UDR's Chairman and CEO, is presenting on the call with President and Chief Financial Officer, Joe Fisher, and Senior Vice President of Operations, Mike Lacy. Senior Officers Andrew Cantor and Chris Van Ens will also be available during the Q&A session.

The multifamily business is continuing to show strength, with positive net absorption and FFOA per share growth of 7%. UDR is taking advantage of this strength by engaging in strategic transactions such as joint venture partnerships and portfolio acquisitions. Additionally, UDR has a strong investment-grade balance sheet with over $1 billion of liquidity, allowing them to take advantage of accretive transactions if their cost of capital improves. UDR is optimistic about the prospects of job and wage growth and interest rate clarity.

UDR's second quarter same-store revenue and NOI grew at strong rates of 7.6% and 7.7%, respectively. Demand remains relatively healthy and the financial health of residents appears robust due to wage inflation keeping pace with rent growth. Move-outs due to rent increases totaled only 8%, down from 10% last quarter and 18% a year ago. UDR is confident in its ability to benefit its stakeholders and associates, and capitalize on the strength of the multifamily industry.

In the second quarter of 2023, mortgage rates are around 7%, making renting an apartment approximately 55% less expensive than owning a home. The market rent growth of 3% over the last four months is above the pre-COVID average, and July blended lease rate growth was mid-2% with occupancy in the mid-96% range. Loss to lease at the portfolio level is 3-4%, with the largest upside in New York, Boston, Washington D.C., Seattle, and San Francisco. With this backdrop, there is confidence in the ability to drive further sequential same-store revenue growth in the second half of 2023.

Resident turnover has improved, resulting in revenue and expense benefits. Sequential same-store revenue growth is expected to be 2-2.5% in the third quarter of 2023 compared to pre-COVID averages of 1% or more. This growth is expected to be achieved through a 5% earn-in, 2.5% blended rate growth, 50 basis points from other income initiatives, and flat year-over-year occupancy. Positive momentum has been seen on the East Coast in the Northeast markets of New York and Boston.

UDR achieved a high occupancy rate of 97.2% in the second quarter, with 9.4% year-over-year same-store revenue growth and blended lease rate growth of nearly 5%. The West Coast occupancy remained consistent, while Seattle had a 70 basis point acceleration in blended lease rate growth. Sunbelt markets are facing headwinds in the form of new supply and increased skips, leading to negative new lease rate growth. UDR is currently under contract to acquire six communities in Texas, which have in-place controllable operating margins 800 basis points lower than UDR communities in the same markets, allowing for potential value creation through existing and ongoing innovation initiatives.

Mike thanked the teams for their ability to execute strategies and innovate with new technologies, then Joe took over the call to discuss second quarter results, 2023 guidance, recent transactions and capital markets activity, and a balance sheet and liquidity update. The second quarter FFO was in line with expectations and the full year guidance was narrowed. The third quarter FFOA per share guidance is a 5% year-over-year increase at the midpoint, and the fourth quarter guidance reflects a 3% sequential increase. The quarter also saw the completion of a $507 million joint venture with LaSalle.

UDR entered into a joint venture with a partner and acquired six communities for $402 million, which was funded through $173 million of UDR operating partnership units and nearly $210 million of debt at a 3.8% weighted average coupon rate. This was slightly dilutive to FFOA per share in the near term, but expected to be accretive in the future. UDR also addressed three upcoming DCP maturities by funding $39 million and achieved stabilization on one development community for $102 million at a high 5% yield.

Mike Lacy reports that the company has been successful in leasing up their recently completed developments and expects them to contribute significant FFOA accretion. The balance sheet is liquid and strong, with only $113 million of consolidated debt due by 2024, $1.1 billion of liquidity, and a low weighted average interest rate of 3.2%. Leverage metrics are also strong, with debt to enterprise value at 27% and net debt-to-EBITDAre at 5.5 times. Market rent growth is expected to be positive in the back half of the year.

Mike Lacy is discussing market rents and loss to lease. He explains that market rents have risen 2% in the last few months and they expect to see similar growth. Loss to lease is around 3%, 5-6% on the East Coast, 3-3.5% on the West Coast, and flat in the Sunbelt. Price adjustments were made to induce demand from delinquent tenants, which impacted blended spreads in the Northeast and Sunbelt. He also notes that there are varying definitions of blends.

Mike Lacy states that the Sunbelt is weaker than expected due to supply issues in certain areas such as Cedar Park and Addison in Dallas, as well as the number of skips experienced in the region.

Joe Fisher discussed the aggressive renewal growth they have been pushing over the last couple of years, which led to a decrease in occupancy and market rent. However, skips are slowing down and occupancy is at 96.5% with no concessions in New York and Boston. Other income is doing well and they are feeling confident about occupancy and can be more aggressive on rents. In regards to supply in the Sunbelt, it is expected to remain stable into 2024 and beyond.

Sunbelt rental markets are seeing more pressure, with 4% of stock running up in certain markets like Nashville. Total housing stock is falling off due to decreased starts, but it is still relatively stable year-over-year in '23 and '24. Demand and household formation in the Sunbelt is still strong, but there are signs that permits and starts are off 10% from peak. The Architectural Billings Index is also off significantly.

Joe Fisher is monitoring the start activity within their internal business plan and is waiting for the right moment to jump into their existing development pipeline. He is keeping an eye out for investment opportunities in the land side, such as merchant builders scaling back their development teams and selling land parcels, which may provide potential starts for '24 or '25.

The eviction process is still ongoing, but there is no distress in the multifamily space due to the GSE backstop and developers being well-capitalized. The market is seeing plus or minus 5% cap rates and unlevered buyers are looking for 7-plus-percent unlevered IRRs.

Joe Fisher is feeling positive about the long-term delinquent picture, as the number of longer-term delinquents is close to the long-term average. In the first half of the year, there were 600 additional delinquents due to evictions and skips, which came faster than expected and cost the company a few cents in occupancy and pricing, as well as fee income, higher turnover, legal and marketing costs. Despite this, gross AR and AR continue to trend down and collections are trending higher, so Fisher feels good on the trajectory.

In the second quarter of the year, occupancy levels were expected to increase, while lease rate growth was positive. Bad debt is expected to improve in the second half of the year, and expenses are expected to remain relatively static. Development lease-up NOI is expected to increase from 2Q to 4Q, with an annualized yield of just over 1%. In 2Q, lease rate growth was around 3-3.5% in the first part of the quarter and 2.5% in June.

Mike Lacy and Joe Fisher are discussing the potential for lease growth in July and August, which they expect to remain similar to June due to the high numbers from last year. They expect September to start to take off, with market rent growth of 3-3.5%. Joe Fisher adds that the loss to lease occurring in the coming months is expected to be offset by better market rent growth and easier comps in the fourth quarter and first quarter of next year.

Joe Fisher explains that the JV is expected to be accretive in the first year, contingent on the deployment of dry powder. He explains that the accretion will come from asset management and prop management fees, as well as operating upside from the platform. The OP unit transaction is dilutive for the company, but the JV should bring in accretion over the next 12 months.

This portfolio transaction is self-funded with low-cost assumable debt and equity issuance, and the controllable operating margin is 800 basis points below the margin in the Dallas and Austin assets. The debt carries a rate of 3.8%, which is 150 basis points lower than market rate, and the CapEx profile is half of the legacy portfolio, resulting in a 25 basis point improvement to the cash cap rate. This portfolio is bought at a 4.5% NOI yield, and with 200 basis points of margin upside, the yield is 4.75%.

Joe mentioned that the team is excited to get their hands on these assets which have a controllable operating margin of 75-76%. The team expects to capture a good chunk of this margin in the next 6-12 months and the majority of it after two years. This will be achieved through personnel efficiencies, positive in-unit amenities, and parking initiatives such as package lockers which can bring an additional 150 basis points in the next 12 months.

Joe Fisher believes that there is minimal variability in the non-ops lines such as interest expense and G&A. However, there is variability in the OP unit transaction and joint venture which could lead to positive or negative results. The most upside is expected to come from the same-store occupancy.

Joe and Mike discussed how the company is feeling confident about their blocking and tackling, with 4.5-5% renewals in October and market rents bouncing back. They are also looking to innovate with Internet installation in 9,000 units, unmanned sites at 20%, and a customer experience dashboard.

Joe Fisher states that expenses in 2024 are expected to remain similar to 2023, with a 4-5% growth rate. He mentions that real estate taxes, insurance premiums, and wages will continue to be an area of pressure, but does not see a scenario where they will be materially higher.

Joe Fisher discussed the potential cost of long-term delinquencies and the benefits of the Care Benefit in terms of personnel reimbursement. Mike mentioned going to fewer headcount over time and the maintenance technology suites that improve efficiency and resident communication. Tom Toomey added that public companies have a distinct advantage with their sophisticated operating models and cost of capital advantage, which will enable them to continue to grow and make investments in their operating and innovation platforms.

Tom Toomey and Michael Lacy discuss the Sunbelt region and the supply of housing. Toomey believes that the Sunbelt will have an equilibrium in the long-term, as it has attracted a lot of jobs at higher paying ratios. Lacy adds that the Sunbelt has experienced stretched affordability, which is more specific to what they experienced with skips in the Sunbelt compared to evictions in the coast.

Michael Lacy and Joseph Fisher discussed the pressure that the Sunbelt market experienced due to people skipping rent payments and opting for lower rent in the area. They also discussed the potential impacts of the end of student debt relief and the recent strikes in LA on their second half expectations. Fisher noted that 20% of households in the US have some form of student debt with a medium payment of $200.

Mike Lacy reports that the Los Angeles market is doing well, with positive new lease growth and renewal growth in the 5% range, and occupancies hovering around 96.5%. He notes that without some of the evictions and skips, revenue growth would have been closer to 1-1.2%. He does not expect the gap in new lease rent growth between the East and West Coast and the Sunbelt to widen much in the back half of the year.

Mike Lacy discussed the acquisitions that were announced and the occupancy of the assets. He stated that they were slightly lower than what they usually run, at 95.5%-96%, and in the Sunbelt area they are closer to 96.5%. Mike Lacy also mentioned that they offer four to six weeks of concessions, and that they are leasing at double the rate of their mature portfolio.

Joe Fisher discussed the value creation UDR typically achieves through acquisitions from 2019 to 2022, which was a 10% lift in margin excluding rent growth. He also noted that this particular acquisition had more potential for margin improvement than usual, as it was managed by a mom-and-pop shop rather than a third-party property manager. Finally, he commented on the state of the average private developer, noting that they may be getting a lot of recruitment interest and that cap rates have increased while NOI has also increased.

Joe Fisher discusses the potential losses that developers may experience when dealing with the three assets in question. He states that although the original expected returns may not be seen, there is still some equity in the assets. Fisher explains that they have been careful not to push their lending or equity partners too far, as there are plenty of opportunistic lenders who charge higher rates and terms. He believes that the best option is to refinance with the relationship lenders and do a pay down, as this will result in a mid-9s return on the new capital invested.

Joe Fisher explains the reasons why DCP partners are not yet marketing their assets for potential disposition. He states that the NOI trajectory is improving in certain markets, but there is still a lot of uncertainty around the Federal Reserve, rates, and buyers' ability to underwrite the assets. As such, the partners are holding onto the assets in the hopes of a better environment in the future.

Mike Lacy and Tom Toomey of an unnamed company discuss how they are not utilizing many concessions in the Sunbelt and East Coast markets, but are seeing some two-week concessions to drive demand. They also comment on how their residents are not showing any signs of stress, and that the strong employment picture, good wages, and lack of consumer stress has been a reality when looking out 90 days for renewals and turnover.

Mike Lacy and Tom discussed the seasonality of their portfolio and how they anticipate higher rent growth in the first and fourth quarters due to their aggressive comps in the middle of last year and lower renewals in the back half. Anthony Powell asked if they were confident in the rent growth in a lower foot traffic environment and Mike Lacy replied that they were confident based on the current tracking and the health of the consumer.

Mike Lacy and Jose Fisher answer questions about rent pressure in Sunbelt markets, with Lacy noting that the company has been more aggressive with rent increases in the last few years. Fisher notes that the company's current Sunbelt portfolio is largely suburban and B quality, and they are looking to diversify their holdings away from where new supply can be built.

Joe discussed the new development rents and their insulation from the activity. He also discussed the quality of the six assets that they are podding and how Dallas has been performing better than other Sunbelt markets. Lastly, he discussed the joint venture with LaSalle and the market selection process, noting that there were no Sunbelt contributions in Boston, DC, or Seattle, and that there is capacity for the JV to grow.

Joe Fisher explains that when selecting partners, the general goal was to achieve a low to mid-7s IRR on an unlevered basis with a typical 2.5%-3% growth number. He also notes that they had the potential to capture outsized IRRs if they bought at market pricing and put better than market operations onto the asset. He also mentions that they tried to make sure the portfolio was diverse and that Sunbelt was not a red line market, but would come down to market submarket and assets.

The JV has $250 million of dry powder for future growth, and the partners are excited about the potential to grow the JV with their preferred partner. In the interview process, they found a partner with a similar mindset of diversification, operating acumen, and ability to continue to grow the assets over the long term. They are targeting assets with the goal of expanding margin through operations and innovation. Lastly, they discussed the headwinds of the insurance market.

Joe Fisher discussed the insurance program and how they are locked in through mid-December with the existing program. They experienced a 20% premium increase last year, but have seen a decrease in claims due to people staying home more and preventive maintenance and ROIs. Going into next year's renewal, there may be a 20% increase in premium. They traditionally had a $4.5 million retention and added $5 million of self-insurance risk, bringing the total to $10 million.

Tom Toomey, the Chairman and Chief Executive Officer of UDR, thanked everyone for their time and support of the company. He expressed his enthusiasm for the apartment business and the company's ability to deliver above-average growth in total shareholder return, citing their number two or three ranking in cash flow growth. He concluded the call by inviting everyone to upcoming events and wishing them the best for the rest of the summer.

This summary was generated with AI and may contain some inaccuracies.