Q3 2019 Earnings Call
Greetings and welcome to Yours third quarter 2019 earnings call.
At this time all participants are in almost only mode.
Question answer session will follow the fall presentation.
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As a reminder, this call is being recorded.
It's now my pleasure gets reduce your host Vice President Chris.
Thank you Mr. Bennett you may now be it.
Welcome to UTI, our quarterly financial results Conference call.
Yes, releasing a supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website.
Our yard Dot com.
In the supplement we've 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 FCC.
We did not undertake no duty to update any forward looking statements when we get to the question and answer portion we ask that you'll be respectful of everyone's time.
And limit your questions and follow ups management will be available after the call for your questions that did not get answered on the call I will now turn the call over two years, Chairman and CEO Tom Toomey.
Thank you, Chris and welcome to UTI, our third quarter 2019 conference call on the call with me today are Jerry Davis, President and Chief operating Officer, and Joe Fisher, Chief Financial Officer, who will discuss our results as well as senior officers Warren troupe, and Harry Alcock, who would be available during the Q and eight.
Portion of the call.
Uh huh.
Our robust third quarter results highlighted by same store NOI growth of 3.9%.
And at that FFO as adjusted per share growth of 6% continued to demonstrate strong execution across all aspects of our business.
2019 has been a very active and productive year for UTI are.
First we accretively grow our business grew 1.8 billion and completed or announced acquisitions that have significant operational and investment upside in markets targeted for expansion.
These were funded with premium priced equity and low cost debt.
Second we continued to make great progress implementing our next generation to operation platform.
That has and will continue to drive controllable margin expansion by fundamentally changing how we interact with our current and prospective residents why also creating efficiencies throughout our cost structure.
Third we simplified our business by winding down the K FH, JV and announced an agreement to have our relationship with Metlife, the an accretive asset swap.
And fourth we de risked our enterprise by proactively taking advantage of low interest rate environment.
Repay high cost debt extend our consolidated pro forma duration so.
To over eight years and reduce aggregate maturities to just 5% of our total debt over the next three years.
In short the team has done a great job in 2019 of executing on all aspects of our value creation capabilities, which will set up 2020 for continued strong in Hawaii and cash flow growth.
All of which.
Fits into our strategic objective of being a full cycle investment.
Last we received good news on the E.S.G. front with our public grads Beast disclosure score improving today.
This compares favorably versus our comps that and further exhibits our commitment to consistently improve our E.S.G. framework.
With that senior management team would like to extend a heartfelt. Thank you to all UTI our associates for our continued hard work and for making 2019.
Very special year, I will now turn over the call to Jerry.
Thanks, Tom and good afternoon, everyone.
I'm pleased to announce another quarter of strong operating results with the same store revenue and expense and then NOI growth of 3.7%, 3.1% and 3.9% respectively.
Before delving into the quarterly details, let me take a moment to comment on how we view operations from 10000 feet.
We prioritize cash flow growth, which is primarily driven by sustainable and consistent operating margin spansion and accretive capital allocation.
Over the coming years, we expect that the ongoing implementation of our next Gen operating platform well not only satisfy our customers desire for self service.
I will also drive the majority of our margin expansion by limiting controllable expense growth through a variety of efficiency initiatives and technological solutions.
To sum up we're somewhat agnostic as to how margin expansion has achieved given that drivers that expansion will oscillate overtime, but we care deeply about achieving that.
We think about revenue growth similarly lease rates occupancy and other income are the primary variables and our revenue growth equation at different points throughout the year and the real estate cycle.
The importance of each variables contribution to our revenue growth fluctuates as such our goal each and every quarter is to optimally manage these variables to maximize revenue growth not fixate on a specific component of revenue growth.
And the third quarter, we continued to run and occupancy first strategy and harvest above trend to other income growth both of which offset new lease rate growth that was impacted by tough year over year comps and elevated supply levels and some for high rent markets such as the San Francisco Bay area.
2019 deliveries have been back half loaded across the majority of our markets and we saw some impact during the third quarter.
For at least the next couple of quarters, we expect that this dynamic will continue to play out.
Positively we have not seen widespread irrational pricing on this new supply absorption has remained strong our 5.3% renewal growth during the quarter was just 30 basis points below that of the second quarter and third quarter resident turnover would have declined by 60 basis points.
During the impact of move outs from our short term furnished home program all of which reinforce that the lower than expected new lease rate growth was not a demand issue.
At the market level.
Monterey Peninsula.
Seattle.
And the San Francisco Bay area, which represent 26% of our same store NOI performed well generating weighted average revenue growth of 5.9% in the quarter.
Demand occupancy and other income contribution from items, such as parking short term furnished rentals and rentals of common areas spaces generally remained strong in these markets. Although as previously referenced supplied did impact new lease rate growth in the Bay area.
Conversely, New York, Orange County, and Dallas, which comprised 23% of our same store NOI continued to lag our portfolio growth with weighted average revenue growth of 1.7% primarily due to competitive supply, Although new York continues to incrementally improve versus the past couple of.
Gears.
Moving on the ongoing implementation and execution of our next Gen. Operating platform continues to drive the expansion of our controllable margin through initiatives that are and will reduce expense growth, thereby dropping more dollars to our bottom line.
Year over year, our same store controllable margin grew 40 basis points due to controllable expense growth of just 1.2% and the third quarter.
And 1.4% year to date.
On a normalized basis, we would expect these costs to be growing at an inflationary rate somewhere in the 3% range.
More specifically the combined growth rate of personnel and repairs and maintenance expenses during the quarter was negative 2.1%.
Solid achievement and representative of how limiting controllable expense growth will continue to expand our operating margin.
As a reminder, once fully implemented our nexgen platform will fundamentally change how we interact with our customer and operate our portfolio. This will occur in stages and includes or will include first gaining efficiencies through process improvement outsourcing of certain noncustomer facing tasks and let's say.
[noise] realization of sales operations.
Second the installation of Smart home Tech. We are currently over 27000 homes into this program.
Third a push towards self service by a smart devices. This will include self touring of our properties as well as a wide variety of other tasks. The residents used to have to visit our site office for such as adding a pet to a lease.
And fourth.
Using big data and machine learning to drive revenue growth and greater efficiencies throughout our operating structure.
Finally, with regard to this topic to achieve our goal of expanding controllable margin by 150 to 200 basis points by year end, 2022, or $15 million to $20 million, an incremental run rate and Hawaii, we need to write team and the right culture in place.
Over the years, our operating teams have accepted and supported the wide variety of other income initiatives, we have implemented and our strong same store growth results of reflected that all advancements like smart home Tech are fully replicable by any multifamily competitor willing to spend the necessary capital and operating team that in.
Braces consistent evolution and a culture thrives on it or not we have both.
Taken together.
We tightened our full year same store revenue growth guidance range and reduced our same store expense growth guidance by 15 basis points at the midpoint combined these increased our full year same store NOI growth guidance range by 7.5 basis points at the midpoint.
Last our 1.8 billion dollar in year to date completed or announced acquisitions are performing in line with underwritten expectations.
Nuts, and bolts operating improvements Capex investment and historical operating initiatives are all in the initial phases of implementation.
Well this level of growth has at times stretched our teams in the field and at the corporate office, we have a deep bench at UTI, our which allowed many of our outstanding associates to advance their careers by way of our expansion.
We are extremely excited to overlay UTI ours best in class operating platform onto these acquired properties and look forward to creating value over the next several years through the implementation of our Nexgen platform.
In closing I would like to thank all of our associates in the field at corporate for producing another quarter, a robust operating growth while also continuing to embrace the future by our next Gen operating platform.
It has been an extremely eventful year and I'm immensely proud of all of you.
With that I'll turn it over to Jeff.
Thank you Gerry.
Next I will cover today include our third quarter results and updated full year guidance.
Hey transactions and capital markets update.
And the balance sheet up that.
Our third quarter earnings results came in at the midpoint to above the high ends of previously provided guidance ranges.
FFO as adjusted per share was 52 cents approximately 6% higher year over year, driven by strong same store in Lisa performance.
Accretive capital deployment and lower interest rates.
Next our full year guidance update.
We raised our full year FFO as adjusted guidance range by half a penny at the midpoint to 207 to nine driven by solid operations interest expense savings and capital deployment.
A full guidance update including sources and uses expectations. The same store updates Gerry referenced and fourth quarter guidance ranges is available on attachment 15 of our supplement.
Moving onto transactions and capital markets.
We have continued to drive long term value creation, and FFO accretion by remaining disciplined and our capital deployment and simultaneously match funding with low cost equity and debt capital all while pivot end of the best available risk adjusted returns.
During the quarter, we acquired three apartment communities located a Norwood, Massachusetts.
Inglewood, New Jersey, and Washington DC.
Closing of the latter 13, a onetime a circle fully wound down RGB relationship with Kevin.
The three communities were acquired at an all in valuation.
$541 million.
Our weighted average your won an award yield of 4.9% moving to the low fives in year two.
In August we announced a 1.8 billion dollar transaction with our JV partner Metlife that further simplify the IDR structure will cut in half our JV exposure to just 5% of total NOI.
We'll be accretive to future cash flow growth.
Increased exposure to target markets.
And replaced lower multiple management fee income with higher multiple real estate income all while minimizing cash needs.
Structured we are under contract to acquire the approximately 50% interest we did not previously owned and 10 DDR Metlife JV operating communities.
One community under development and for development land sites.
Cumulatively valued at 1.1 billion EUR $557 million UTI our share.
And we will sell approximately 50% interest and five JV communities valued at 645 million or $323 million UTI our share to Metlife.
After accounting for the assumption of in place debt, our net cash outflow to complete the asset swap is expected to be approximately $105 million.
The transaction is expected to close during the fourth quarter subject to customary closing conditions and closing price adjustments.
Our year to date completed and announced acquisition acquisition activity now totals $1.8 billion, including land for future development.
These transactions are maybe accretive.
I have ire ours that exceed our weighted average cost of capital.
Were partially funded with a $962 million of equity issued in the last year at a weighted average 6% premium to consensus that maybe.
And we'll be accretive to AFFO per share growth rate in 2020 and beyond.
In addition, the acquired communities all have significant operational and investment upside.
Primarily located in targeted expansion markets and fit well with our next Gen operating platform.
In September we entered into a forward sales agreement under our ATM program for approximately 1.3 million common shares during the quarter.
Expected proceeds are earmarked for another transaction, which we will provide additional information on at a future date.
The final date by which share sold under the forward sales agreement need to be settled as March 30, Onest 2020 as currently structured.
Moving on to debt, where we continue to take advantage of the low rate environment.
During the quarter and subsequent to quarter end, we issued $800 million of long duration unsecured debt.
The weighted average effective rate of 3.1%.
300 million of this debt qualified as a green bond and represented our first use of this SG friendly product.
Proceeds have been or will be used to prepay $700 million of higher cost debt with a weighted average effective rate of 4.23%.
Once completed we will have only 5% of our debt coming due over the next three years and our consolidated weighted average years to maturity will be eight years versus the 6.9 years reported at the end of the third quarter.
Please see our third quarter earnings press release and supplement for further details on our transactional and capital markets activity.
Last the balance sheet.
At quarter end or liquidity as measured by cash and credit facility capacity net of the commercial paper balance was 1.1 billion.
Our consolidated financial leverage was 31% on Undepreciated book value and 24% on enterprise value inclusive of joint ventures.
Our consolidated net debt to EBITDA or.
Was 5.5 times, an inclusive of joint ventures was 5.8 times.
We remain comfortable with our credit metrics and don't plan to actively lever up or down.
With that I'll open it up for acuity.
Operator.
Thank you at this time will be conducting a question and answer session.
So let me address questions for as many participants as possible. We ask you. Please limit yourself to one question and one follow up five additional questions. You may requeue time permitting those questions will be addressed.
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Thank you and our first question is from the line of Nick Joseph with Citigroup. Please proceed with your question.
Thanks, Jerry I appreciate the operating strategy color.
What you guys helps explain my blended lease rate growth was flat year over year versus pause that the first two quarters when you compared to current environment, making your comments on supply you expected to remain roughly flat going forward for the next few quarters or is there anything, indicating an acceleration or deceleration from here.
No I think.
It's going to be dependent market by market, we do have several markets.
Specifically, San Francisco, Los Angeles Orange County.
And Orlando, where new supply has.
Driven down new lease rate growth compared to where it was last year, where we had strengthened those markets.
On the opposite side.
Got strength then.
New York City.
Orange.
The inland Empire in Seattle, So, it's all going to be dependent on the effects of that new supply.
Currently we see in the fourth quarter, new lease rate growth is probably going to be down.
Compared to where it was last year, when we look at renewal rate growth, which this quarter was at 5.3% that's the highest.
Level. This these past couple of quarters since it's been in 2016, I think it's going to continue to be strong. The other thing we looked at neck is when you look at the next quarter.
Over the last four years, it's averaged probably about.
0.3% you know 2016, it was very low single digits 2017, the fourth quarter was actually negative 0.5.
It rebounded the following year in 2018 to a one one and this year, we expected to be somewhere closer to the average so it will be less than it was last year, but I think thats more indicative of the effects supply had back in 17, which kept new lease rate growth down. So when you anniversary Dolphin 18, it was elevated.
And now we are seeing that supply hit us in a couple of markets and we're also comping against.
Tougher numbers from last year.
That's helpful. Thanks, and then you've been active on the capital raising front in terms of equity doing a handful different ways.
Assuming you have a use how do you think about executing going forward between marketed deals the ATM and then on a forward basis.
Yep and act as a Joe.
I think a critical part of that you referenced there is assuming that we have the years no weve endeavored over the last 12 months to make sure that wouldn't be do raise capital on the equity side. We do have a match funded use teed up for it. So we haven't done, especially a lot of equity that we said on and then force our transaction seemed to go other execute upon.
I think you will continue to see that from that front from a pipeline standpoint, Harry may have some comments here, but I think our pipeline today is probably a little bit lighter than we've seen at any point in the last 12 months.
But if we do go out there again, we're going to make sure that we have premium cost to capital relative to any maybe from your standpoint make sure. It's on our target markets make sure that we can deploy creatively you're wondering on a forward basis and make sure that assets have either operational investments or a platform story with him to keep driving 2020 growth and beyond so.
If we have more to talk about on that front, we'll obviously come back to the market.
Thanks.
Our next question is from the line of John Kim with BMO Capital markets. Please proceed with your question.
Thank you.
Up on the leasing spreads.
Which were healthy but down sequentially and then.
Like the fourth quarter will be down year over year, how should we think about.
The translation of that and just same store revenue next year and then also with leasing spreads this quarter in line with your projection.
Leasing spreads in third quarter were down a bit from the original projections, mainly because we didnt fully anticipate the effect that new supply specifically in places like San Francisco, we're going to have on our on our new lease rates on a blended basis again they were they.
Were down eight bed.
Not as much as on the new because the renewals were higher.
But we're not currently ready to give any indication or any numbers on 2020 were in the midst of the budget process right now I can tell you when we look at supply next year, it's probably going be slightly higher than it was this year specific to a few markets that we operate in we think Boston.
We will be a little bit more impacted by supply.
We're going to have Los Angeles, continuing to be affected by supply I think the San Francisco supply issues that I've talked about earlier on this call I think they probably persist through the first half of next year.
But I think you see a little bit of relief and in New York.
As well as.
In Orange County, next year, and I think Seattle ill will feel some supply I think the demand side to the equation should stay strong there.
Yes, John This is Joe just beyond as you ask about 2020, obviously going through the fundamental side of equation, but what we've really been focused on this year when you look at.
Activities that were taken for 19 to try to impact 20.
What we've been doing on the balance sheet front to improve quality of the balance sheet and also drive accretion all the transactional activity trying to drive accretion there and then the all the platform work the Jerry talked about his opening remarks trying to drop more cash at the bottom line next year on on a go forward basis. So we're still working through on the fundamental side, but I think on a relative basis, that's doing everything we can to set up.
The portfolio platform to be in a better position next year.
Okay, and then Joe with your cost of new debt declining by 140 basis points over the past year.
Can you quantify how much that change the yields you're willing to take on investments, including both acquisition and.
And mess that.
Yes, they got on the Mezz debt side, I think the compression and yields that you've seen out there actually to some degree of work against us maintain the developers on other capital constituents.
Have you there more access to capital at lower rates or the competition for deploying that capital gets a little bit more difficult.
So you've seen us do a little bit less on the DCP side.
That said you do see in guidance on attachment 15, we did take up.
Our guidance range for developer capital program I do want to point out. However, at this point that as a speculative transaction nothing has been signed so theres no guarantees that gets to the finish line.
Nor any guarantees on the exact timing.
But I do think it's important to note that is not a typical DCP deal for us maintain its more of a bridge loan.
With the ability to access to the asset in about 12 months upon stabilization. So the yield we will receive on that if in fact, we get that Don is going to be decidedly lower than what we've done on other DCP deals. So just from a modeling standpoint keep that in mind.
Aside from that the cost of capital coming down and improving on both the debt and equity side clearly has allowed us to be more competitive.
Out there with a external growth signal that we have received and so yes, we're still trying to make sure we'd make good deals we don't pay beyond market and the every deal has a story to it whether it's the target markets or the operational upside to go with it so.
So I wouldn't say, it's given us just a free pass to go out there and be overly aggressive just because our cost apples come down we still got to be disciplined on that front.
Thank you.
Next question comes from the line of surely with Bank of America. Please proceed with your question.
Well.
Sure.
I was just wondering.
Hello.
Regulation, so, particularly on California.
And.
What you're thinking about that.
Todd.
Hello.
Back.
Are you.
Yes.
I'll start with the effect of maybe 14 82, we went back and looked at it and I think everybody snow year with it but it.
It said four properties over 15 years old that renewal rates will be increases will be kept it.
5% plus CPI. So when we went back and looked at the effect to next year, it's probably somewhere in that 250 to $350000 range, which for our.
California portfolio would impact 2020 same store revenue growth by call it seven or eight basis points, so not overly material.
But can you repeat what your second question was.
We heard from yet.
So does that have you guys talked about it.
California.
Yes, Hello, it's Joe.
Yes, just from an overall portfolio standpoint I.
I think it's fair to assume that all markets are going to go through their micro cycles, whether its demand supply or regulatory environments. So it's clearly going to be something that we take into effect, when we think about transactions and California.
I continue to believe that anything that restricts economic or rent growth or economic value creation as probably not the right solution to affordability.
But it's a qualitative factor the plays into our process as one of the benefits of having the diversified portfolio that would there that we don't end up over exposed to anyone regulatory environment and gives harry into more degrees of freedom from which to transact overtime.
But I would say, it's not as simplistic and binary as.
Blue States Bad Red States. Good given that there is a second derivative impact on capital flows and capital formation. So if capital does shift from say, a california to a red state or non rec control stage.
You may see more development in those states and therefore less rent growth and so we're trying to factor all those pieces together, but it's not quite as easy of a binary decision as somebody thinks so its something were contemplated and thinking about.
Got it.
Thank you.
The next questions from the lender rich Hightower with Evercore. Please proceed with your questions.
Hey, good morning out there guys.
Good morning.
Joe I want to.
Digging a little bit to these the two big JV deals during the quarter. So.
It's it's pretty clear from a strategic in a financial perspective, why these are beneficial just maybe walk us through the Genesis of of the transactions unwinding, one and significantly reducing the involvement of the other is there anything related to the the partnership or to the timing of.
Sort of a finite life sort of agreement just walk us through this maybe some of those other elements as to why why this happened at this at this moment in time.
Hey, Rich this is Tom Toomey, let me try to address those questions with respect to the Ks page.
Although the JV had run 10 years and cafe, each one and to explore what the market value of it was.
And we expose the assets to the market and as you can see over this year two of them were sold in one of them, we purchased and on a net cash basis, not a lot of capital.
And.
So I think it's that's not more complicated Matt with cafes on met.
For 10 years as partners and we've done a lot of business with met over the years and it's a constant dialogue about how we create win win situation.
Rather adds a development acquisition, our swapping assets are selling them and that dialogue.
Started up probably late in 2018 and.
Just takes time.
No strategic rationale other than a constant dialogue with a good capital partner and one that we hope will continue to do a lot of business with in the future. So very grateful for them as a partner and I think we've always done when when transactions with them and they think the lot about.
Real estate the same way, we do a long term operating business that creates a lot of wealth and value over time so.
Good good group of people.
Okay.
Thats helpful. So so.
There is nothing specifically related to sort of simplicity as a strategy for you to yarn in that sense I mean, there's an equal chance.
Other.
Around of Jvs could form you know at some point in the future is that is that what you're also hinting at there.
No I am not hitting in anything I'm, giving you kind of the facts as we see them with respect to our JV footprint and the future of it.
And I think Jvs are always.
What problem, our you're trying to solve or what skilled as someone bring to the enterprise or to the relationship that can help you grow UTI are.
And.
We've got good cost capital, we've got a growing capable enterprise that has a lot of different ways to add value.
If we felt that someone could help us enhance that certainly we would be back into a joint venture.
Right now I don't see any needs.
Don't see any part of the organization that we would like to grow faster or more so I think we're right now probably.
Not overly engaged by joint venture activity as much as you can tell from the activity. This year got a lot of value creation mechanisms in the enterprise.
We're playing them all they're all doing well and really looking forward to 2020 and the continued growth the ops platform.
Got it thanks, Doug.
Thank you. Our next call lies in the line of Austin Wurschmidt with Keybanc. Please proceed with your question.
Hi, good morning, everyone.
Jerry I guess with some of the softening in market rent growth hitting your markets and some new lease rates pulling back have you guys pulled back at all on the smart Ellen spend.
ER revenue enhancing enhancing capex.
And would you consider pulling back I guess next year, because maybe the returns aren't as attractive today in light of.
Some of the supply near term supply headwinds.
Yeah, I guess, starting with the smart home spend.
So as we said were about 27000 units then and just to remind you were doing smart homes are few reasons, we're not doing it purely to get rent growth out of the residents. We do think they value. It we think it's part of what's helped drive our outsized.
Renewal growth so far this year, but the primary purpose of doing it has some of the expense reduction capabilities that gives us first of all it.
It has benefits on.
Leak detection. It also makes our maintenance guys much more efficient, but one of the big things or does it sets up this operating platform that we're building.
To allow us to two more actively and efficiently do self guided tours, which we plan to rollout more through automation.
This year, we've been doing self guided tours, but it's an old school, we will pay per maps, we see throughout next year, we'll get much more automated and we think the ability for prospective residents to be able to access units through a smart home rather than through a hard physical key is going to be beneficial.
So.
While we underwrote it based on rents there was plenty of extra juice on the expense side and what we expect get on the operating platform that would enhance that so I would tell you.
We haven't finalized our budgets for next year of how many smart homes, we will continue to add but I would expect.
That you will see a continuation of the program.
Into 2020 as far as revenue enhancing spend which over the last couple of years has been at that $40 million range. Yes. We still think you get paid for that on incremental dollars. It really isn't overly affected by market rents. We we underwrite these things to get an IR, our that's at least one.
Hundred 50 basis points of our whack.
Theres a discipline to doing this.
We look to do it in markets that show strength over the next four to 10 years not just over the next year. So.
Long term looking at ways to increase the value of our real estate.
By by deploying this capital and I wouldn't expect next year for the total spend to change much.
Great appreciate your thoughts and then Joe.
Just curious why why include the speculative DCP investment in guidance today, if conditions are more competitive I think you reference returns are quite as attractive.
And why not just use that available dry powder to fund the transaction that you referenced.
You have good line of sight on.
That you intend to fund with kind of the forward equity.
Yeah, the transaction that I referenced in my opening remarks is in fact that DCP transaction. So the forward equity commitment that we made there of 64 million, we raised that with the intention and desire and hope that we get that transaction to the finish line on the DCP side and that will ultimately takes care of the majority of that funds.
And our capital plan. So those are one on the same so don't consider the DCP as a speculative on known transaction. It's known we're working towards getting that papered and hopefully have something to talk about in the coming months.
Okay got it that's kind of what I was looking for thank you.
Our next question is from the line of Trent Trujillo with Scotiabank. Please proceed with your questions.
Hi, good morning.
Every one of your peers spoke about piloting an amenity light model is that something you'd consider particularly in the context of your recent commentary of renting out common area and many of these spaces.
Yeah, I'll start then I'll, let Harry or Tom jump in.
We havent talked.
Definitively about any of this but we have looked at what what amenities do residence value and we've actually gone out in the last year too and looked at our properties that we felt were somewhat over amenitized and we've been able to convert some of those amenities into an apartment homes.
One of the Vitruvian Park assets avoidance avoid too we converted three common areas into five or six.
Rental units and we do look for those types of opportunities, but I think at the high end of the market.
You do get paid for amenities, but I do think in some places.
People are just looking for a and then expensive place to live and they're probably as a product that fits that.
Harry you can talk to whether you've really been looking at that for future development opportunities I think it it really gets into sort of a return on investment type analysis, where.
The whatever the customer will pay in rents as determined by the location of the product.
The quality of the finishes in the quality of the amenities. So when we look to buy an asset when we look to develop an asset or what we look to convert these.
Types of amenities spaces into units.
Were entirely rational and our approach I think for for certain assets.
In certain locations I think it's an interesting model.
But again, we look at each asset on its own merits.
Okay. That's fair so I guess for those Vitruvian assets. This avoid what were you underwriting for those.
Yes.
You know, it's again, it's five or six units and I think we underwrote those at about a I think seven 8% return.
Yes.
Okay, and just maybe one quick follow up on that same similar subject under the current operating model how would you characterize the resident perceptions, having the current space utilized by non residencies have there been any complaints are disruptions or is it fair to say that you can continue to generate incremental income from running out that space.
I guess I'd start with saying you have there been any complaints yeah. There have been a few I think.
Percentage wise to the number of actual rentals, we get on these third party common area rentals, it's it's de Minimis.
We are very cognizant that the predominant use of those amenities as for residents. So we do not over book them.
A lot of the bookings Happing happened during the day for businesses when most of our residents aren't at home, but they're probably have been a few times, we've over utilize day, a rooftop type amenity or a large common areas space and we've we've heard back from the residents and Weve ratcheted back down that being said.
Do I think it can grow yes, definitely do I think it it has a lot of prominence in urban areas.
Hi take rate.
On the West Coast, I think it's migrating slowly to some of the east coast markets.
I think over time, you'll probably see the west coast grow at a moderate rate and I would expect to see I mean, the west coast grow at a more moderate rate and probably more of the growth on the commentary rentals happened in the east coast as it becomes much more known in the.
In the marketplace that you can comment rent those common area spaces from.
Multifamily operators.
Great appreciate the color. Thank you.
Sure.
The next questions from the line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.
Hi, guys, Jerry the Dallas weakness you alluded to the fact that supply driven is that weakness across basically all the sub markets or is it submarket specific and how does it sort of trend by price point.
I will tell you. It obviously is not as weak at the lower price points, we have some old legacy.
Assets in our Vitruvian park location that are doing well.
Our product up in legacy village, though Plano is is battling new supply both in north Plano.
But probably a little bit more and fresco so while there's good job growth up there it's been it's been.
Going head to head on new supply you also have supply pressures that are one property down in uptown.
That is feeling it.
You know our newer assets that are in the met JV and Vitruvian Park.
They're doing better than that same store average, but they're still also battling new supply. So I would tell you supply is tends to be.
Yes occurring or being delivered up and down the tollway and our entire portfolio is up and down the tollway. So we may be feeling that more than some of our peers, but it's definitely more at the high end the b b minus properties that we have in Addison, though are doing much better than a product its price.
Probably a couple of several hundred basis point differential on revenue growth.
Okay, and then Joe given all the capital raise is factoring in the Metlife settlements the other obligations on this potentially new.
DCP deal you want to do how much capital do you have available to invest today in properties other DCP deals et cetera, and stay comfortably within your target leverage levels without having to raise incremental equity I mean apparent comes in with a 500 million dollar portfolio, our 1 billion dollar portfolio.
Do you have to issue equity for that at this point or where is that sort of threshold today for you. After all of the capital raises and various other things are set and Don.
Hey, Thanks, Rob.
No throughout the year, we've done a lot of activity is incrementally improve balance sheet in terms of extending weighted average duration.
Continue to improve the through your liquidity profile, where we have minimal debt maturities coming due next couple of years and then trying to stay relatively stable on things like that EBITDA fixed charge debt to enterprise and all those have improved slightly relative to 2018 levels keeping us at a very solid triple B plus so.
We probably have a little bit of capacity today.
I wouldn't say nearly on the magnitude of you referenced even a half billion.
100, 200 million, if we want to utilize it.
But it's also good to have that for a rainy day and keep that capacity in the back pocket. So.
Well continue evaluate do we want to utilize it for additional.
Acquisitions, DCP et cetera, or do we utilize dispositions free cash flow.
Equity, so well keep looking at it.
Okay. Thanks, guys.
Our next question comes from the line of Rich Anderson with SMBC. Please proceed with your question. Thanks Good afternoon.
Hi, So Gerry on the you know the margin expansion initiatives.
Looks like you can get to controllable margin of 85 ish percent in a couple of years.
I'm curious, if theres any incremental more or less impact on the total margin.
In the kind of 70% range does that go up at a faster rate because of all this effort or slower rate.
This is controllable.
Okay.
Okay.
I think it's probably going to go up at roughly the same rate.
Well the chance maybe at maybe a little more elevated but.
You are really doing.
Taken effect to everything except real estate taxes and insurance. So I guess it would be slightly more elevated than it would be on the controllable side.
Okay, and just thinking about the math.
On the Flyer and then.
You know maybe for Joe on the DCP side.
And it's kind of.
Going back and forth Chris on this while we're talking but you have yes 264 million of investment.
In the DCP program.
I know you can't really have a pinpointed number but what does that represent roughly in terms. If you were to take out everything and own. It all 100% what is 264 million mean in terms of incremental.
Spend to get them all in house.
Yes, if we wanted to bring all of those in house, you're looking at a asset value are clearing a $1 billion, we already have 260 plus million of that stack.
If you think about what our typical leverage profile would be the to 60 would be a portion of our equity stack.
So you're probably looking at a four or 500 million dollar check you also have participation on three of those transactions, which.
Got it on if we buy or if we sell either way, we're going to participate and the upside on those so.
The good thing as though we stacked goes up as a typical debt maturity profile. So some coming do 20 to 20 120 to 23.
So you don't have a whole series of decisions coming out your one point in time by design. So that we aren't in a box in terms of not having a cost capital, but wanted to own all of those assets. So we'll make the decisions overtime.
Okay, sorry, if I could.
Okay, Tom I'd I'd, just add one thanks for hanging on for the hour and 10 minutes.
Second part of that is.
Really.
Anything that we would look at a 10 31 option would be one avenue to pursue.
Within the marketplace and all of the Dcps have always been entered under the premise of an asset that we would like to own at the right price at the right time.
So it's very good question and I think we'll play amount as those Joe is highlighted the come do every year, one or two deals and we'll look at them at that time.
Right, but it is DCP DCP is your sort of development Avenue of choice now just looking at the disclosure I guess is that correct.
Oh I don't know if it's over choice I think we always look at the Rainbow of complete opportunities and you can see from the acquisition opportunities. We took advantage of this year. They were clearly assets that we thought were next store down the street Undermanaged. There was some value add beyond just our CFO .
Third operating platform, but the platform of the future or a capex infusion that could write the ship.
I think as we look down the road towards development.
We're going to stay disciplined about our underwriting aspect to that.
It's been hard the last three plus years to make things penciled right way and you've seen it shrink.
This quarter, we announced one deal.
We've been working on it for three years to get it to that point.
Finally numbers came in at something that worked and we announced it.
Im not sure that I could say all development, it's going to expand or shrink I think we just stay disciplined across all spectrums, whether its DCP acquisitions or development and.
The fact that we can do all three.
Doesn't put us pressure to only grow one channel.
Yes, okay gastric thanks very much.
Thanks questions from the line of Rich Hill with Morgan Stanley . Please proceed with your question.
Hey, guys.
Taking a step back high level question for me.
I'm thinking about some of the commentary you've said in the past about predictive analytics and focusing on underserved markets.
I was struck by how well Baltimore did in this quarter.
Wondering if you could maybe just expound upon your predictive analytics and.
What that's telling you about what markets you should be and maybe what markets you shouldn't be an.
Hi, Thanks rich.
Baltimore, obviously is not a large market for us today, so not a high number of property. So.
Addictive analytics is really intended to drive decisions over the next board of 10 years.
Longer duration hold periods.
So the fact that it's working this quarter may not mean, it works again next quarter.
But what we're trying to do is be to some degree can turn from the heard in terms of.
Following what the underlying demographics and economic drivers are telling us relative to rents or Philip affordability in those markets.
By the markets tend to get overheated.
And the capital tends to follow.
That excitement we're trying to go a little bit of a different route with that go more contrarian.
You've seen a through our actions Baltimore been example, we've been active their active in Philly New York.
Very active up in Boston and down in Tampa So.
Submarkets that you probably don't see a lot of the private and public capital flowing into as aggressively.
We also like southern California, though so it's not purely a east coast bias that we're looking at.
Hopefully that gives us a little bit of a leg up in addition to the transaction team that really has to find the right submarkets and assets.
Operation to him that once given the asset can outperform with everything they're doing on the initiatives and platform side.
Okay. That's helpful.
Think thats all it from me I'm sure we'll follow ups.
Thanks Rich.
The next questions from the line of hard to go out with Zelman Associates. Please proceed with your question.
Hey, guys. Thanks for taking my question.
I have a more general like operations based question I guess.
We've seen turnover go down.
Year over year for a while now I think it's been a trend the cycle pretty much.
You have your turnover basically stable this quarter.
Can you think that's just an aberration or it's just a shift and try and obviously overall LTM, but still very low but just wondering how you see that change or are you seeing something in the market.
Is different from the rest of the cycle.
No I don't think we're seeing different I think what you're seeing with all of us.
No.
Seen turnover go down its few things one I think all of all of.
The REIT peers are listening to the residence better doing a better job on customer service and.
Resident ratings second I think you've seen predominantly rational pricing of lease ups over the last couple of years. So it's not enticing people to leave.
Multifamily.
And jump ship for two months free.
One thing it makes us a bit different than the peers is we've got the short term furnished rental program that has grown quite a bit year over year.
And this year, it's up about 50%. So if you backed the effect of short term furnished rental move outs and these things usually stay occupied for 80 or so days. So it elevates our turnover rate, but if you backed it out with both years, we would have actually been down 60 basis points, and then I guess, a third point on People's.
Hey, how low can it go I think part of it is what level of renewal increase are you going to send out and I think when you look at the renewals we have been sending out in Twoq and Threeq you both north of 5%.
We look to maximize revenue, we're doing that while still maintaining occupancy at that 96.9% level, which was 10 bips higher.
Then it was last years.
Third quarter. So I think you gotta look at it at the entire revenues stream and not just whats turnover whats rate growth and we try to balance all of those factors Hardick. This is toomey just to add a couple of things that come to mind for me.
And I look at the last decade, and our average resident has gone from 28 years of age to 38.
People in there.
Thirtys fortys not inclined to just move at a high turnover rate, they're pretty established in state.
Second do you look at their income level and third I think about the product that we're offering them in a variety of amenities lifestyles service levels.
That have grown over the last decade.
And I think that combination of just a better place to live a stage in life.
And.
Higher service level have combined to drive that number down and I don't see a particular reason why I would see it revert back to the norm.
For the past if you will so I think we're just doing a better job and we've got demographics and our customer on our side.
Thanks, that's really thoughtful response, Jerry just one quick follow up.
You mentioned, excluding furnished housing down 60 basis point.
What percentage of the leases that turned ultrasensitive turnover is furnished housing.
So I have a rough sense.
Okay.
Once you get back to Yeah, let me get back to you on that I don't have that I don't want to make a gas will get back to lower number.
Sure.
Our next question comes from the line of drew Babin with Robert W. Baird. Please proceed with your question.
Hey, Thanks for taking my question.
I wanted to touch on the acquisitions during the quarter briefly.
It was mentioned Theres, some capex opportunity or some under management at these properties.
Just curious.
With regard to 150 years old.
Capex, probably part of that story.
Those amount in the release include the potential capex going into them to get the yields that were discussed.
Sure, Yes, I think the general sense you might be helpful. Can you elaborate on them.
Great.
How you view this acquisition from a core value add standpoint kind of what the unique opportunity.
Hey, drew this is Joe I'll take it really quick and then kick it over to Jerry inherited talk a little bit more about the dynamics of the transactions, but the numbers referenced in the release on attachment 13, and within our guidance are not inclusive of any initial capital expenditure budgets that we intend to put in place over the next year.
Year to two to improve properties or can be use or smart homes or anything of that nature. So you'll see that spend come through overtime. What you see on there on the attachment 30, and it's just simply the price that we paid for that acquisition.
And I guess I'll give you a little bit of insight on comments at Windsor Gardens drew.
First it's a 30 minute train ride.
Into Bostons back Bay, and the train stop is on our property rents or 50% or less of what Boston rents are so it's a good price point for a short commute.
On the Capex spend there are about 200 of the.
914 units that have never had their interiors and renovated meaning that has original kitchens and bathrooms.
We see opportunity to invest some.
So money and knows and get a rent increase somewhere in the 250 to $300 range.
The property has not been sub metered.
So we're going through the process of scoping that out and ideally, we'll get a sub meters installed over the next several months and be able to start.
Recouping some of the cost of our water sewer utilities.
We expect to put smart homes into this property, which will make it much more efficient to manage plus give the property more of an update.
And then we're going to spend some money.
Just getting some of the systems back up to speed.
And upgraded so that the our NIM spend that's been occurring over the last five to 10 years is reduced after you do that I think the entire UTI, our operating platform that you've heard us talk quite a bit about.
Fits perfectly with the property like this you know it's it's a good size at 900 units to probably gain even more efficiency and we would on a typical 300 units deal. So this one definitely has some capital upgrades and then on the operating side, we think theres lot of pricing opportunities where the prior owner.
Did not give any locational premiums so being close to the trained versus being a 15 minute walk from the train stop the price was the same no pricing differential between being on the third floor in the first floor or near the amenity buildings.
So I think Theres a lot weekend also accomplished there.
Currently there is no.
Theres no charges for parking spaces, there and as you know over the last several years, we've been able to implement that and see good growth. So lot of things we've done over the last five years I think we'll be able to lay over on to this property. Then I think again when you look at the operating platform as it gets rolled out.
Throughout UTI over the next couple of years Windsor Gardasil participate in that also it can drew this is very I guess I'd just layer on and I'd, probably step back from a more macro standpoint, as we've talked about.
Most of our acquisitions. This year have had some sort of operational the capital upside.
I think Joe mentioned that the first year cap rate for.
This year's portfolio of acquisitions is somewhere around 4.9%, however year to seven and a half or 8% higher than that we're talking about something around five in a quarter to fivethree than the third year is.
Incrementally better than that as the.
As the sort of operational platform initiatives and the capital spend talked starts to manifest itself in the in the yield.
That's great detail. Thank you just one follow on for Jerry as you look at the Metlife assets that are being bought in wholly owned.
I presume that your ability to asset manage those increases.
Ownership.
And I guess, what what do you find kind of most opportune are most excited about being able to kind of fully control those assets and get in there and apply the strength of the platform.
I think some of it is going to be in revenue enhancing capex spend several these assets are hitting that 10 to 12 years old level, and we think a refresh will help them better compete against new supply in.
That incremental spend we still think we can get and.
Our return in excess of our wax. So I think thats one of the components I think some of these properties are very proximate to existing UTI. Our product for example, the one and talison as directly across the street from a wholly owned property and to be able to manage those somewhat together and share staffing.
And other cost.
I think we'll make both properties more efficient.
Some of the other things we've done historically, whether it's common area rentals or short term furnished I think given more leeway, we maybe able to garner more benefit there too. So I think it's a little bit on the capital side, a little bit omni.
Operational side, and as you know with initiatives and some on the efficiencies of sharing team members.
Great. Thank you Goldman.
Our next questions from the line of Alexander Goldfarb with Sandler O'neil. Please proceed with your questions.
Hey, good morning out there I'll be quick that's been a long call. So two quick ones first for Joe.
The S.G. bonds that you referenced before.
Did you guys get any pricing advantage with those or is it more.
Sorry, a check the boxes for marketing purposes have sort of an S.G. issuance out there.
It's it's hard to tell whether or not we got a explicit pricing advantage I will say when you look at the composition of the investors on that offer and about 25% of them did come in from a SG focused fund and so having obviously a bigger orderbook helps drive pricing at the end of the dice I'd like to believe.
But there was some benefit although it's very hard to quantify was actually benefit us.
Okay and then the second one is for Jerry on the.
Mobile initiatives that you know the self help initiatives that you guys are rolling out do you think that you'll still be able to get sort of the rent premiums that you expect for your properties or you know as Avalon noted on their call. There, yes, there may be properties, where you get a lower rent, but the tradeoff is that you have less operating expense and that you're better.
I will tell you the things we're doing it's more on the service side, it's not that we're taking away in a minute t. So we believe our residents prefer self service.
I think its enhance service when you look at you look at what we've done so far this year and I mentioned at Mike My.
Prepared remarks, you look at our repairs and maintenance and personnel cost combined year over year growth was slightly negative it should be growing at probably at least 3%. So a lot of people and say Wow. That's a reduction in service now is just a reallocation of how we provide service and that was predominately down through outsourcing and centralization.
That same time as we drove those costs down our NPS scores went up 10% to a 34 are as we noted earlier our turnover if you back out the effect of short term furnish rentals.
Down 60 basis points, we're running at 96, nine which is.
10 basis points Iron last year, and I think you look at the revenue growth that we put up three seven its sector, leading so I think when you factor all of those then it's clear that when we're doing this.
The intention is to improve customer service not take it down but to make a more efficiently run organization through this either through outsourcing centralization. We're automation. So our intent is it will not be a reduction in service and it will not driver and slower.
Okay. Thank you.
Sure.
Thank you. The next question from the lender Neil Malkin with capital one. Please proceed with your question.
Hey, guys. Thank you my questions.
Couple of years ago, the Bay area saw some.
Significant supply that caused market rents to go down quickly.
Pretty significantly I'm, just wondering kind of alluding to your supply comment I think San Jose as a fair amount of supply coming.
Are you doing certain things to sort of get ahead of that in terms of.
Increasing occupancy.
Anything with rents to just sort of de risk that as as a supply rolls into those markets.
Hey, Dan Ellis Gerry.
No I wouldn't say, we're doing thing.
Explicit on the pricing side I mean, we we definitely believe at this time in the cycle, we want to keep occupancy high so we're not being excessively aggressive pushing occupancy down. So we are an occupancy first mode. Today, I think you're right several years ago, San Francisco as or the Bay area supply chain.
And hard where there was down.
San Jose Santa Clara or in Selmo, It did heavily impact.
Market rates as concessionary levels got elevated we're not seeing quite as much of a concessionary effect today, we are seeing supply come.
As we look at supply next year, you know it is going to come down and affect us San Jose.
It's also going to affect mountain view, a little bit more than it did this year, but I think it's predominantly back half of this year end first half of next year loaded I think when you will get job growth, it's happening, especially in that Soma as wells Mission Bay area, I think I think it should absorbed fairly well and I think when you look at what new.
Lease rate growth is today a lot of that is based on how strong the market was a year ago, because there was limited supply coming in and there was great job growth. So I don't see it quite being or being what it was several years ago. I just think we're having to work our way through some supply pressures over the next.
Nine to 12 months, but on the demand side I think things still look strong.
All right Neil there to me I would add a little bit too that I think one thing Mike in Jerry are always focused on is the concessionary level in the marketplace.
Because at one month.
Free rent on a lease up that generally gets the new customer in the marketplace in doesn't impact our renewal environment and you can see that in the numbers today and you heard it in our commentary earlier and you alluded to San Francisco and as I recall that market went to two months to three months free rent and that really.
The upsets the cart on the renewal process and we lose a lot of pricing power on that side of the equation.
So as long as where one month free kind of concessionary market and that's what we anticipate is coming at us in some of these markets.
I think our revenue streams will hold up pretty strong because of low turnover and we're not enticing that long term resident to just move out so.
One thing I've I wish the sell side would track more of is the concessionary market, because it's probably a precursor to real pricing power or price it exposure.
Oh, yes.
That's helpful. I appreciate that Tom.
Well one for me is I was reading that you guys are participating in that program called Ryan Our service called Rhino, It's basically.
You know debt to forgo a circular security deposit the tenant would pay for some sort of.
Insurance program is that something that has been successful.
Are you planning on rolling that out more and any color on that.
I would be helpful.
Yeah. This is Jerry I would say we are talking to right now we have not engaged.
You know, we think there product may have legs.
Something that we're trying to compare us some programs that have some similarities that weve used in the past and we're trying to.
Get more comfortable that some of the negatives as the prior program don't replicate themselves, but it's something we're looking at I. I think anytime you can look at opportunities that can help your resident which this product seems like it could because it's less cash upfront to move into apartment and protect us on the.
Collection side, if it's a win win just like a lot of initiatives, we rolled out in the past.
We would probably be in favor of it but we're still in the exploration stage have not piloted any of it yet.
But it's something we're looking at.
Hi, Thanks.
Sure.
Thank you My final question today comes from the line of handle things used with Mizuho. Please proceed with your question.
So it's a one hour in 10 minutes into the call I'm just kidding.
So Jeff.
Okay. Last question first question for me is on margin I guess I'm curious, if you've talked about before but.
What type of margin improvement or expansion do you think you can generate on the assets you're buying in from Metlife now that you completely owned and controlled Ballparkish.
Thanks.
You look at those.
Thank you know, it's probably a couple.
It's a 100 150 basis points, most likely higher than we're at we've looked at it more on the next couple of years.
So we haven't gotten excessively specific there are multiple programs that we add on the cost structure that we had already rolled into the UTI our wholly owned platform.
Previously and in addition to that when you look at what we've indicated we expect to get from the next Gen. Operating platform of 150 to 200 basis points I think you get a little bit more juice out of those and then you now the second part is on some of this capex spend we're going to have we should be able to drive revenue up but.
Probably we've looked at it more on a return basis, but I don't have the exact margin expansion off the top my head.
But handhelds Tony.
I would add as you look at the upper the acquisitions that we've done.
In particular, the Boston, one where we might look at it today and we think somewhere six 700 basis point expansion when that fully implemented in the office platform is available and and so the key is not going to be.
What we can do to our portfolio wealth excuse me it is going to be a key but what we can do with the potential acquisitions from private market operators, who won't have the platform or the technology and then that leads to.
A real lift in our growth rate when we can buy at market are below market and then overlay the platform on top of it and get that type of margin expansion.
So the story is not just what we can do to ours, but what we can begin to the industry.
And the potential said it leads to.
Helpful. Thanks, Tom.
Well I have you I guess.
I was then you make long term investment decisions that your and also that you're on your market predictive model also helps you make.
Capital portfolio strategy this isn't over longer term period, but I want to go back Dallas Once again rehab center NOI in the market that seems to have been a regular underperforming here the last.
Couple plus year. So until then apply them in uptown from the challenges throughout the members, but I'm guess I'm curious if you are or should you be considering calling your exposure there or are you pretty happy and playing the long long term get.
Yes, and no overall, we are fairly happy with the portfolio there.
Finally, we increased it within the Metlife JV and so.
I'd say two thirds of the Metlife JV that we acquired we feel very good about and assets that we let go.
We're not necessarily in target markets. So net net we came out ahead in terms of target markets. The good thing we get with control Vitruvian. In addition to everything Jerry said from existing operations as if you look at Vitruvian West one and the lease up in the yield that took place there relatively quickly so for 400 units and a yield in the mid sixs or in Vitruvian Wes.
Two right now and three will be on the docket mixed those will be six plus percent yield so getting access to land that allows us to go other accretively develop as one of things we liked about value creation of the access to better than that transaction.
Okay.
Thank you.
There are no further questions in the queue and I'd like to hand, the call back over to chairman and CEO Mr. to me for closing comments.
Well, thank you and.
First let me. Thank all of you for your time and interest in UTI are.
Second you as you heard throughout the call today.
During 2019, the team has executed on all aspects of our value creation capabilities.
Which I think will set up 2020 for continued strong in a wide growth and cash flow growth.
And again lastly, these these results are really achieved through the efforts of our exceptional associates.
And our continued effort everyday as well as our culture of constantly trying to find a way to do it better every day.
So with that we look forward to see many of you. It may read and a couple of weeks take care.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.