Q3 2022 UDR Inc Earnings Call
Greetings and welcome to Udr's third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
It is now my pleasure to introduce your host senior director of Investor Relations Trent true Julio. Thank you you may begin.
Welcome to Udr's quarterly financial results Conference call, our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website IR Dot UDR dotcom.
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.
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.
Thank you Trent and welcome to Udr's third quarter 2022 conference call.
Presenting on the call with me today are senior Vice President of operations, Mike Lacey and.
And President and Chief Financial Officer, Joe Fisher, who will discuss our results.
Senior officers, Andrew Kantor, and Chris Van Ens will also be available during the Q&A portion of the call.
To begin we continue to see exceptional results and are in a healthy multifamily operating environment highlights of the third quarter include the following.
Sequential same store revenue growth.
Up nearly 5%.
Year over year same store revenue grew almost 13% and NOI was nearly 16% higher.
And we continue to capture additional accretion from our 2021 acquisitions.
These results translated into 18% year over year growth in <unk> per share and drove our third guidance raise this year, which Mike and Joe will discuss in further detail.
To date, the financial health of our resident has remained strong.
Employment growth continues to demonstrate resiliency.
Wage growth remains robust.
Traffic is healthy rent to income levels of incoming residents has not deteriorated.
Cash collections continue to improve.
Sessions are almost nonexistent across the portfolio.
And the regulatory environment has been stabilizing.
These factors combined with our favorable relative affordable versus alternative housing options and reasonable new supply expectations create a positive near term outlook for multifamily.
In short main street has shown incredible resiliency.
Moving on all in we continue to believe UDR is well equipped to manage whatever macro environment. We face based on what we know right now and what we can control.
First our customer remains financially sound.
Second our jump off point for 2023 has never been better as our same store revenue Ernie and it's roughly 5%.
Is effectively locked in at this point.
Third our continued focus on innovation and culture should continue to enhance our margin growth.
Sure.
Prior F F O a per share headwinds like development lease ups become tailwind in 2023 and.
And last our balance sheet remains highly liquid with over 1 billion of capacity.
That said, we're fully aware of growing concerns over where the macro environment is trending and the challenges our business could face moving forward.
Two areas to highlight include.
First elevated inflation, we like most every business are feeling the impact of inflation across our expense structure.
Thus far we've been able to pass these costs onto our residents in relatively short order given our standard 12 month lease structure.
Specific to the third quarter, a portion of our elevated expense growth was anticipated as we continue to push rental rate growth, which resulted in higher turnover and elevated repair and maintenance cost.
However, building a better 'twenty 'twenty three rent roll at the expense of short term cost pressures as a value, creating trade for a 70% margin business like ours.
And second our cost of capital.
Our cost of capital has increased materially since the first quarter as such we pivoted to a capital light strategy and pared back opportunity opportunistic external growth.
Our balance sheet remains fully capable of supporting all planned capital uses and with less than 2% of consolidated debt maturing over the next three years, our interest rate risk is minimal.
Moving on we continue to build on our position as a recognized global ESG leader with the publication of our fourth annual ESG report.
And our five star designation from grasping the highest ESG rating possible.
Our grasp survey score of 87 was the highest in our history and an achievement that all UDR stakeholders should be proud of.
Yeah.
In closing I remain optimistic on Udr's future prospects.
We have a highly talented experienced team with a track record of performance irrespective of the economic environment combined with our culture that fosters collaboration and innovation mindset.
We will continue to advance UDR and our industry.
To my fellow Associates I Express my deepest gratitude for all that you do.
With that I will turn the call over to Mike.
To begin strong sequential same store revenue growth of 4.7% drove year over year same store revenue and NOI growth of 12, 7% and 15.5% on straight line basis.
This was an acceleration of 150 and 110 basis points respectively.
Compared to our second quarter results and were better than expected.
Key components of these results and our demand drivers included.
First year over year effective blended lease rate growth remained firmly above historical norms at 13, 1%.
We traded a nominal amount of occupancy to achieve this rental rate growth.
It also improved our 2023 rent roll and locked in more of our approximately 5% 2023 or <unk>.
This will be the highest earnings in our history by at least 200 basis points.
Second our in place residents are increasingly paying rent on time.
Collection rates improved sequentially in the third quarter and the number of long term delinquent residents in our portfolio continued to decline with reduced our bad debt reserve and accounts receivable balances.
Third portfolio wide rent to income ratios remain consistent with history in the low 20% range.
Employment and wage growth remains strong and we have seen no evidence to date of residents choosing to double up.
Fourth traffic and applications remain above typical seasonal levels, allowing us to continue to push rate growth.
Fifth concessions are de minimis across our portfolio with exceptions being one to two weeks on average in specific Submarkets of San Francisco, Washington, D C and Boston.
And last due to rising mortgage rates renting an apartment is approximately 50% less expensive than owning a home versus 35% less expensive pre COVID-19.
During the third quarter only 7% of residents that moved out did so to purchase a home. This is the lowest level, we have seen and is 35% lower compared to a year ago.
In total we believe demand for apartments remains broad based.
We continue to monitor the financial health of our residents for signs of potential distress across our portfolio.
But the U S consumer and our residents have proven resilient, thus far and we've yet to see any meaningful cracks in our forward demand indicators.
Moving onto expenses.
Quarterly same store expenses rose seven 2% on a year over year basis.
This is higher than usual.
Our margin continues to expand as we operate a 70% plus margin business.
Some of this expense growth was in our control while the remainder was not.
First what was in our control.
We continued to push rent growth, which resulted in 450 more unit turns and a year ago.
Positively we re lease these homes at 22% higher average effective rate or 900 basis points above our average renewal rate for the quarter.
In addition, we regained 200 homes from long term non payers combined this negatively impacted R&M and N M. During the quarter by $1 6 million, but should generate approximately $7 million in incremental revenue over the next 12 months how.
Had we not made these trades are year over year same store expense growth would've been approximately five 7%.
Utilities also contributed to our above trend growth as energy costs increased.
However, as we were typically reimbursed by residents for approximately 70% of this line item same store NOI was not meaningfully impacted.
Next well, we cannot control higher real estate taxes, which comprised 40% of all expenses grew by over 5%.
Pressure points consisted of Texas, and Florida, where valuations increased in New York City, where the burn off of our for 'twenty. One abatement continues.
Insurance, which is a relatively small expense for us also increased dramatically due to higher premiums and claims.
Looking ahead to the fourth quarter, we saw the return of typical seasonality and market rents after labor day.
This factor combined with our pricing strategy to drive rate growth drove a quicker capture of our loss to lease.
October blended lease rate growth is expected to be roughly 7% to 8% comprised of new lease rate growth of four 5% to 5% and renewals of approximately 10% for the fourth quarter, we expect blended lease rate growth averaged 6% to 7% with the sequential deceleration due to toughening year over.
Year comps.
Taken together, we increased our full year 2022 same store revenue and NOI guidance ranges for the third time this year in conjunction with our release yesterday, we now expect to achieve 2022 same store revenue and NOI growth of 11, 5% and 14, 4% at the midpoint.
Straight line basis, or an increase of 50 basis points and 38 basis points respectively.
Finally, we are continuing to drive forward on innovation with the intent of further expanding our 325 basis point controllable operating margin advantage versus peers.
Initiatives underway are expected to generate roughly $40 million in incremental NOI by year end 2025, and it will be increasingly focused on revenue upside first expense controls. These include first launching building wide Wi Fi that allows whole building connectivity.
We must set up at move in for new residents and enhanced control over smart hubs to reduce energy consumption and improve scope three emissions.
UDR has made a capital investment in equipment, which provides improved economics and more control over the scope of the project versus traditional bulk deals.
We believe this initiative could generate more than $20 million in incremental NOI once fully rolled out by 2025.
Second leveraging advanced resident leaves and virtual leasing technology to better generate qualified leads and tracked prospects optimize marketing activities closed leases faster and enhanced real time pricing.
Third simplifying our move in process to reduce vacant days, while simultaneously offering a better tool to sell other income initiatives, such as renters insurance parking and storage, thereby increasing our share of wallet.
Fourth improving our dynamic work order scheduling through enhanced vendor management tools, which should reduce vacant days through the turn process, while improving asset management to better assess the repair versus replace decision.
And fifth expanding the number of communities, we are able to operate without dedicated onsite personnel from 25 today to 35 over the next 12 months. This approach whereby leasing and resident service activities conducted virtually improves our margin helps mitigate inflationary costs.
Today, we have increased the number of apartment homes managed per associate by 60% versus pre COVID-19 levels.
Blast a special thanks goes out to all our teams for their ongoing dedication, but especially our teams in Tampa and Orlando natural disasters, especially those of magnitude of hurricane Ian are unpredictable and I applaud your round the clock efforts to safeguard our communities protect our residents and return our properties to normal.
And now I'll turn the call over to Joe.
Thank you Mike.
So I will cover today include our third quarter results and our updated outlook for full year 2022.
A summary of recent transactions and our capital markets activity.
And our balance sheet and liquidity update.
Our third quarter <unk> as adjusted per share of <unk> 60.
The high end of our previously provided guidance range and was driven by strong same store revenue growth and further accretion from our 2021 acquisitions.
For the fourth quarter, our <unk> per share guidance range of 60 to.
The 62 cents or a 2% sequential and 13% year over year increase at the midpoint.
This was supported by continued strength in sequential same store NOI growth, partially offset by increased interest expense given rising rates.
These same drivers led us to increase our full year 2022, <unk> per share and same store guidance ranges for the third time this year.
We now anticipate full year <unk> per share of $2 32 to 234 with a 233 midpoint, representing a two penny or a 1% increase versus our prior full year guidance and a 16% increase versus full year 2021.
The guidance increase is driven by an approximate two penny benefit from improved NOI.
And then approximately half a penny benefit from lower G&A.
Offset by approximately half a penny of higher interest expense.
Next a transactions and capital markets update.
First in alignment with our shift towards a capital light strategy earlier in 2022, our third quarter external growth consisted solely of the previously announced $102 million DCP investment into our portfolio of stabilized communities at an 8% return.
Cuz recapitalizations of stabilized assets have lower risk profiles. This is a relatively lower return versus our typical DCP investment.
We funded this investment with $100 million of proceeds from the settlement of approximately 1.8 million shares under our previously announced forward equity agreements.
Next during and subsequent to the quarter, we repurchased a total of 1.2 million common shares at a weighted average price of $41 14 per share for a total consideration of approximately $49 million.
These buybacks were executed at an average discount to consensus NAV of 24% at.
At a high 5% implied cap rate, representing a very accretive use of capital.
Finally during the quarter, we entered into an agreement to sell one community in Orange County, California for approximately $42 million.
This transaction is scheduled to close during the fourth quarter.
Speaking more broadly to the transaction market pricing on the majority of multifamily transactions suggest cap rates are probably 75 to 100 basis points higher than at the beginning of the year.
Depending on market and asset quality.
However, volume has been lighter than expected so additional price discovery is made it.
All told the ongoing volatility in the macro environment and an elevated cost of capital relative to earlier in 2020 to keep a selective in our capital deployment.
We are fortunate to have a variety of external growth levers, we can continue to pull to create value and drive earnings accretion.
Finally, our investment grade balance sheet remains liquid and fully capable of funding our capital needs.
Some highlights include <unk>.
First we have only $115 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities and our commercial paper program.
Our proactive approach to managing our balance sheet has resulted in the best three year liquidity outlook in our sector and the lowest weighted average interest rate amongst the multifamily peer group at three 1%.
Second we have $1 $1 billion of liquidity as of September 30th which is comprised of approximately $900 million of capacity on our line of credit.
And nearly $200 million of unsettled forward equity agreements, providing us ample dry powder and strikes.
Third our leverage metrics continued to improve.
Debt to enterprise value was just 29% at quarter end, while net debt to EBITDA was six times down more than a full turn from seven one times a year ago.
We expect a year end debt to EBITDA and fixed charge coverage will further improve to the mid five times range, given our capital light external growth strategy and continued NOI growth by.
By year end 2022, both metrics should be approximately half a turn better versus pre COVID-19 levels.
Last our approximately $370 million of developments in lease up had been a drag on 2022 earnings but are expected to benefit future earnings by approximately <unk> five per share based on a six 5% weighted average stabilized yield.
Stabilization of these developments should improve our run rate EBITDA and further enhance our leverage metrics.
Taken together our balance sheet remains in excellent shape, our liquidity position is strong.
Our forward sources and uses remain balanced and we continue to utilize a variety of capital allocation competitive advantages to create value.
With that I will open it up for Q&A operator.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
As a reminder, we ask that you please limit to one question and one follow up.
A confirmation tone will indicate your line is in the question queue. You May press star two if he like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Nick Joseph with Citi. Please proceed with your question.
Thanks, Joe you talked about the cost of capital changing leverage trending down in the buybacks in the quarter and I guess in October as well.
Talks a bit below kind of the average costs you've been acquiring at let's see appetite and how would you think about funding additional share buybacks from here.
Hey, Doug Thanks for the question. So yeah, we did a pivot a little bit as we move throughout the year, obviously, so where the equity issuance back at the end of <unk>. It up in the high Fifty's and as cost of capital has changed you've got price discovery has been occurring we've pivoted over and shifting some of our development plans back into next year, and then obviously shifted to the buyback so.
At this point in time I wouldn't say there is a set dollar target that we're going after we do really like the economics in terms of discount to NAV the.
The implied cap up in kind of the high fives, and a pretty compelling IRR on that purchase.
But we're going to continue to monitor what's going on in the macro environment, what's taking place with our cost of capital on the price of the stock what's going on with sources and uses and I would say sources and uses that in a pretty phenomenal place at this point given we still have almost 200 of equity available from that our issuance in March plus a disposition that we mentioned here that should close in the fourth quarter.
And then free cash flow against a relatively smaller development commitment schedule. So we have the capacity so what kind of continue to monitor those factors, but no set target today.
Thanks, That's helpful. And then just on the D. C. P program, how do you monitor the credit profile and obviously there was that defaulted in the in the supplemental but are there any changes or indication from additional stress in that portfolio.
Hey, Nick this is Andrew.
We regularly interact with our different partners throughout the process, we're getting regular reports from them, we have third party consultants.
During the construction period, and so you know we're regularly interacting with them as it relates to $15 32, and we think this is unique to our D C portfolio.
The perfect Storm, we had an early bankruptcy with one of the key subs followed by delays by other subs as well as Covid, which caused a two year delay of the delivery of that building them between the delay in the COVID-19 impacts.
Added to the cost of the building and resulted in the senior loan interest and depressed accrual eating through the equity and.
And the economics of the deal for the developer so when the senior loan finally matured we were in a situation where the developer was unable to refi are due to the lower NOI, which resulted in the in the default and then we stepped in per the terms of the agreement and bought the loans from the bank we've initiated foreclosure.
The building leased up there is doing a high obviously concessionary environment, obviously rents fell a lot in in San Francisco, It's one of the markets that there was probably impacted the most by Covid.
But overall, we feel comfortable with the with the portfolio, it's very diversified across all our DCP investment as ladder, it's across the country and we see this as a one off circumstance driven by delays by the development of the building and in the Covid market San Francisco.
To date, we've done 2007 deals over the last nine years of almost $900 million monetize 12 of those are about $400 million.
With a weighted average unlevered IRR of 11% to 12, So we've had great success and it can be.
Doing it for a long time.
Thank you.
Our next question comes from the lineup seed Sochua with Evercore.
Thanks, Good morning.
I guess, maybe I wanted to start with Mike on just operations in you know it sounds like you're still you know pushing pretty hard on rent increases and occupancy has been very strong and just trying to get your thoughts on kind of some of the looming dark clouds and potential slowdown in end reduction in job growth I guess.
How do you think about a potential pivot and you know what are the sort of early warning signs you'd be looking to you know take your foot off the gas on on rent increases and focus more on occupancy.
Hey, Steve that's a great question and you're right. We've been focused on this for a while now.
Q3, Q really driving our momentum as we move forwards, where you're going to see a little bit more than a month.
Rent renewal increases going on that 9% to 10% range through December at this point they feel like they're sticking we're not seeing a lot of negotiations at this point the leverage will be on the market rent side, and we'll see where that shakes out so to your point on kind of those warning signs.
That in my prepared remarks, we see a lot of green lights still today. The one thing we're watching that's outside of that is just the cancels and denials, we have seen that increase.
And that's one of those warning signs that we'll watch closely but again, we're seeing occupancy in that 96, 5% to 97% range. So we feel comfortable about pushing right now and we think that we have more tailwind as we go into next year with that.
Okay, and then maybe one for Joe on just thinking about your cost of capital changing obviously stock prices are down bond yields are are up significantly I'm. Just wondering how much have you changed your development hurdles.
You know on new deals that you might put a shovel in the ground automated you know how I guess, how difficult is it to get a new deal to pencil in today's market.
Yeah, I think theres still quite a bit of unknowns out there obviously with <unk>.
Price discovery, taking place okay. In the prepared remarks talked about cap rates being up maybe 75 to 100 basis points up into that plus or minus high fours range. That's kind of what we're hearing today, but obviously transaction volumes are off fairly materially. So I think we're still going to go through a period of time here, we get price discovery and so.
When you really need that to settle out before you can start to look at development in terms of that typical 150, plus or minus basis points spread that we need. So this way I wouldn't say, we've pegged a required hurdle for development, we need the price discovery on transactions first what we have done is you've heard us talk about about a $185 million development in northern Virginia.
Throughout the year, that's a densification play that was supposed to start here in the third quarter, but we have delayed the start of that pending evaluating cost capital price discovery et cetera. So I don't I can't say that we have a hurdle today other than we want to see where prices settle out.
Yes.
Right that's it thanks.
Thank you.
Our next question is from Austin, <unk> with Keybanc capital markets.
Great. Thanks, guys.
The three markets that you have.
Concessions I guess, how broad based are those and is there anything that concerns you like you know slowing traffic rising vacancy et cetera that would lead you to expect that concessions could increase further.
And those locations as we move later into the year or even into early next year.
But as of right now locked in those same markets are the ones. We've mentioned previously we've seen anywhere from one to two weeks on average across the board. There. So it hasn't really grown and there hasnt shrunk and again occupancy is still a great place traffic still coming into those markets and our blended growth rate as you see in the supplement.
Very high in those markets.
Got it and then Tom maybe for you I mean, you referenced a difficult macro backdrop that we're operating in and you guys have a really diversified portfolio across various regions and price points submarket locations et cetera, and I'm just curious what segments of the portfolio you're most concerned about you know in the current environment.
Just any thoughts there would be appreciated.
Yeah, Austin I appreciate the question.
When I was referring to macro we tend to look at it in two lenses one what's happening on main street with our residents.
And Mike alluded earlier, we're not seeing any cracks in fact, we have a very healthy healthy resident profile no doesn't diminish in if you will of their credit their quality their payment patterns. They are doubling up all of that so main street seems very strong and when you.
Look at my Explants in October a 10, and a five on new and renewal.
As I would've taken that in my 30 year career 29 years that would be a great number.
So that side of the equation is really strong and we'll see how it really plays out and that's going to depend on employment and we feel good about the employment picture looking down the horizon.
With respect to the macro environment. The capital markets you know obviously the fads the banks everyone's trying to push down inflation with every tool they've got in the box and they are going to succeed.
And they're raising the cost of capital you see our stock price you see any other lending situation all being challenged by that in and so that's out of our control.
<unk> in that market observe it and it influences us we don't know where it's going and we will rates continue to rise while they plateau well they succeed in bringing down inflation and that's going to be a lot of 'twenty. Three is our dialog on every one of the calls every investor meeting will be what is the capital markets environment. It.
<unk> like a capital markets recession.
Is it going to be shallow or is it going to be deep how long.
And no one really knows I mean that is a case that will influence our capital light program.
I think we've positioned ourselves well, there and it will create opportunities and so how do we pivot to those opportunities when they present themselves and so we tend to think of it what we control what we interact with and what opportunities we can generate and you see it in our operating numbers really strong.
We expect those to continue and we will wait and see what cracks occur.
I appreciate the thoughts.
Our next question comes from the line of Nick <unk> with Scotiabank. Please proceed with your question.
Yeah. This is dance or cargo with Nick Good afternoon question on your Renter profile do you have a high level or regional level breakdown of your tenants by occupation now whether that's tax finance professional and other services and any differences between your West Coast East Coast and a sunbelt tenants.
You know Dan we don't have that I don't have it in front of me obviously when somebody comes in and we get an idea of where theyre coming from but we don't have that an aggregated level at the market in front of me today.
But what you can say is our average residents' 34 35 years old.
So well in their career.
Probably have some financial acumen and capability to manage their expenses and income levels what.
On an average.
So you know that's.
More that's not 10 years ago, when we're renting the 25 year olds right out of college.
And they're making 60.
So.
They seem to be very durable during this and still when you look at banks and the information they are giving about spending savings credit.
That part of our resident profile looks pretty strong.
Yes.
Appreciate the time thanks, guys.
Our next question comes from the line of Jeff Spector with Bank of America.
Great. Thank you. Good afternoon I just wanted to confirm first are you seeing any price sensitivity in any of your markets.
Hey, Jeff I think when you think about the price sensitivity first and foremost what we're seeing is seasonality.
Well I have mark array of last year's levels share in some markets Submarkets you have some cracks here and there and that's where we see some of these concessions popping up but for the most part it's been pretty strong I'll tell you kind of fast forwarding looking at <unk> versus <unk> I do see a little bit more of a T cell. If you will in the sunbelt.
And just coming off of obviously very high numbers still going to be very strong and the culture right now loss to lease a little bit higher market rents are a little bit higher.
Tailwind if you will going into next year.
Great. Thank you and then one follow up for Joe on on your comment on cap rates are 75 to 100 bps and again appreciate the comment that we need more transactions for price discovery, but I guess, where do you think values are then you know where how much our values down do you think.
Let's say versus peak pricing at the beginning of the year.
Yeah versus peak pricing and you're probably off 10% to 20% is going to really depend on which type of asset and market right. So there was some more high flying markets got very compressed from a cap rate perspective.
Based on forward growth potential. So we're the sunbelt markets that are probably come off a little bit more you also have more of a b and C.
Kind of Levered asset play that's come off a little bit more and then you have some unique circumstances, where maybe you have in place debt that is assumable, where that asset price hasn't moved as much. So I think 10% to 20% for the time being is a fair range to utilize.
Great. Thank you.
Thanks, Joe.
Our next question comes on the line of Brad Heffern with RBC capital markets.
Hey, everybody I appreciate some of the detail you gave on the 15 and 32 default already I was just curious it's a little difficult to tell exactly what the outcome is with that asset as it is this still sort of a go down come from the standpoint of you were able to buy the loan at a discount and you're sort of getting access to this building below replacement cost or can you walk me through any of the math on how are you.
That to turn out.
Yes, so just a little bit on the process for spreads.
In terms of the outcome because the outcome is it necessarily a certain death right. We've we purchased the senior loan we intend to move forward with the foreclosure process, but that's expected at <unk> 23, so the outcome isn't necessarily a certain.
What I would say is that from a economics perspective.
You look at replacement cost for this asset.
Our basis is probably plus or minus $87 million, which equates to about 640 other door replacement costs as well in excess of 100, given the development cost today, so up in probably the 800 plus or minus range. So relative to replacement cost very good outcome from a yield perspective, the yield on our cost on a cash basis.
It's probably in the mid fours.
Based off that basis on a fully accrued basis include into crude prep somewhere in the mid threes, but I'd say that the sub market rents here still 10 plus percent below where they are at pre COVID-19. So I still think there's room to run on that front, yeah, the market with quite a bit of a decrease in supply coming at you so less of.
<unk> pressures going forward and then Youre just coming through the lease up phase. So we got to burn off a lot of those concessions. So there should be pretty good growth on a go forward basis.
Okay. Thanks for that and sorry, if I missed this did you guys give a loss to lease figure.
So we did not so we're right now you can tell obviously with our strategy. It's been our intention all along to try to drive this down right and right now we're sitting in that low to mid single digits and again this can fluctuate quite a bit over the next couple of months, but again, our intention is to continue to drive this down obviously bill.
Our earn in for next year, you can see it in our bonds today, you can see more of that as we move forward.
Yeah, Brad this is toomey I would emphasize the die a couple of things together I mean, Mike.
Mike has done a fabulous job with respect to capturing the market rent that's there.
And you can see it in our numbers on a sequential basis with four almost 5% revenue growth.
Again, no demonstration in the occupancy. So it was just trying to roll the rent roll up as strong as possible for 'twenty three.
When you walk into 'twenty, three and say 5%.
Already booked.
We feel like we're in a really good strong position.
And of that 23 window of no issues with the resident issues.
Issues in the capital markets, Yes.
Okay. Thank you.
Our next question comes out a lineup Adam Kramer with Morgan Stanley .
Hey, guys I. Appreciate the question I just wanted to first ask one of your peers put out kind of a 2% market rent growth forecast for 2023, recognizing that you guys. You guys clearly are guiding here, but would love to just kind of hear your thoughts about that 2% rent growth forecast for 'twenty three.
Obviously, you guys have a different market than the map here would love to just hear your thoughts about kind of that number.
I'm not gonna seems given your portfolio.
Yeah, I think all we can really speak to is what we're seeing today. So I think to that last question on what are we seeing from blends and our loss to lease and our R&M perspective of covered part of it I think what's important to us that the decrease in blends is not coming from a decrease in underlying market rents. We've seen market rents continue to increase on a year over year basis commenced.
With historical averages and historical average has been typically you see market rents grow 3% to 4% throughout the year. So recent trends and the strength of the consumer tells us that.
That could continue now if you go into a recession, maybe you see a lower number but I think Mike is going to continue to try to capture every dollar we can on that and try to drive that drive that loss to lease lower and those blends hire and then.
And we're going to continue to focus on the innovation side I think theres a lot that we can do there from a share of wallet or other income perspective, as well as what we're doing on vacant days and pricing engine to hopefully drive some above our peer relative grow. So I think it's too early to start talking 'twenty 'twenty three forecast, but that gives you some of the building blocks that we see today.
That's great really helpful and just on.
On the occupancy side.
I recognize and appreciate kind of the transparency I think you guys have had in your strategy and kind of talking openly about.
Willing to sacrifice a little bit of occupancy to kind of maximize same store revenue growth.
They'll look at 30, 30 bps kind of occupancy decline quarter over quarter, but love to just kind of here I guess kind of how we're talking to losses too much right and kind of when does that strategy about kind of maximizing same store Rev.
Occupancy when does that strategy, maybe kind of shift right and kind of what what would kind of be up maybe not occupancy Florida.
Cause you to maybe shift and maximize occupancy a little bit more.
Yeah.
Sure I think as you look at it and you think about the fourth quarter, obviously, we have lower lease explorations right now.
A little bit more ability to push it back up so we got as low as around 96 six to 96, seven I think youll see us hover between that 96, 7% to 97 going forward through the fourth quarter and then we'll have pricing power with that once you start going below 96, five for us It may cause a little bit of a pressure point. So we're trying to.
Boy that that being said, it's how you get there right. So the way we think about it is that our vacant days and for a little bit more efficient on how we turned the units and moving people in faster it shouldn't really comment of course on the rent side of the equation.
And Mike how much of Iraq.
It relates to the long term evictions and that the 700 going down too.
Yeah, that's a great point in time, so you've heard us talk about some of our long term delinquents in the past we were upwards of around 750 of them now we're closer to about $4 50, and historically speaking we run between 202 hundred 50, So we're about halfway to where we need to be.
Less than 1%.
And the benefit.
Yes benefit over time.
I made a comment in the press release about an increase in our collection expectations. So we picked that up about 15 basis points relative to prior expectations continue to trend in the mid 98% are collected relative to build revenue historical averages were 50 basis points of bad debt. So there is a 100 basis points total to go after that are realistic.
Really we're looking at maybe half of that is a possibility given some of the rules and regulations that have been put in place by different municipalities primarily on the coast.
Hey, Thanks for all the color really appreciate it.
Our next question comes from the line of John Pawlowski with Green Street.
Thanks, Andrew I wanted to go back to your opening comments on the M. D. C. P program. So just trying to get a sense for the strain in the debt service coverage across the rest of the D. C. P book can you give us a sense in terms of the watch list of ongoing projects if rates stay where they are.
Today or even in chapel about that or there could be other shoe to drop.
Hey, John I think it's too early to say at this point, so Andrew mentioned, the well ladder maturity profile that we have within these deals and so there's only a couple of deals coming up to maturity in the next 12 months. So over the next couple of quarters, we'll see how they approach the disposition versus refi process I know they will probably kick that off in the neck.
<unk> quarter, or two and so we'll wait and see how that develops but right now I can say nothing in default.
The way, we originally underwrite as we make sure that we underwrite in a stress scenario in terms of asset value as well as coverage ratios to make sure to account for some variability obviously rates today much higher.
Where they are at 12 months ago, I think six months from now we could be in a very different environment as well. So all I can kind of speak to today is no issues today, and we'll continue to monitor and work with the equity partners.
Okay, and then just in terms of broader market trends in terms of inbound deal flow from people not able to line up.
Particularly on the capitalization recapitalization side finance gains how are you guys seeing a meaningful increase in inbound deal volume.
Yeah, Hey, John It's Andrew Yeah, we're definitely seeing an increase in the number of of both developers looking to capitalize their deals as a result of lower proceeds from the bank and as well recapping completed development deals in the market and as you know we've taken advantage of a few of those deals.
But right now with our capital light, we're doing a lot of review of those deals, but haven't put out any term sheets, but we continue to be.
Monitoring the market.
Okay, Great last one for me apologies, Mike just quickly three 5% new lease growth in Seattle.
[noise] unusual this quarter or is that market becomes a lot softer.
John That's a good question I don't think it's become that much softer, but we're also included with our exposure. There. So I can tell you Bellevue still feels very strong for us. The one thing that does stand out is we had some shorter term kind of in turns that we're leaving the market. So we had a little bit more exposure over the last 30 to 45 days.
And we since repriced those so I think some of that is just a short term to long term leased phenomenon, but the market today for us feels pretty good.
Thanks.
Our next question comes from the line of Sean Trade Lewisville with Goldman Sachs.
Hi, Thank you for taking my question.
About the back half.
Back half expenses and compare that to what you provided.
Timber how much of the delta from that update what you see what was the surprise.
Uh huh.
And that's probably where it talks about being above 5% in the back half of the year. Yeah. We're above seven here in the quarter I think when we get into <unk>, we'll be back into that five plus or minus range youre kind of talking about 6% blend versus our prior commentary above five.
So you're really lucky yeah, so you're really looking at about 1%.
Has that been more surprised some of thats due to the success, we're having from a both eviction process and moving out some of those long term delinquent. So that's been driving up some of our turnover as well as the cost to turn.
Those are units. In addition, you've got higher utilities R&M coming through so a little bit probably half of that was a surprise, yeah and I would say just to size that you have about $100 million in the quarter and expenses. So 1%, it's only $1 million from some of that frankly was just surprises on the insurance side, we do still have some claims on that.
Out of the house as well.
About $1 million is equal to 1%.
Sean This is Tony I appreciate the question.
My perspective on this is it's actually a good thing why.
Because I'm getting 200 plus units that were zero income to me. So that's $6 million a year I got those units back during the quarter and a window that I could lease them at.
And the cost was $1 million and higher repair and maintenance type aspect of it. So it's a pleasant surprise for us to spend a million dollars turn the unit and turn them back into 6 million revenue for next year and I'll make that trade every day and if told Mike just keep pressing.
We'd like to get that delinquent number down Joe mentioned, the long term impact towards our AR reserve aspect. So it's a win situation for us and I know a lot of people go all expenses and inflation, yes, we are fighting those but I think the innovation that we have has a lot of avenues to beat the cost.
Structure and hold it and contain it and we do operate in a 75% margin business. So it is more about the revenue potential of the organization and how we unleash that.
And then.
All of the expense containment aspects of it.
Very helpful. Appreciate that detail and as a follow up you know if you could provide any color in terms of what you're seeing from a supply standpoint, you know in your coastal markets, whereas the sunbelt markets are there any markets that why are you more of any specific geographies that would be very helpful.
Yeah, I think as we look out to 2023 and beyond a couple of comments. So 2023, clearly a better line of sight I would say broadly speaking more concerned when you get into the sunbelt markets.
Sunbelt.
Depends on the Mark you were looking at you could see growth in supply upwards of 30 plus percent, so somewhere above three plus percent of stock in a number of those markets be it.
Austin Nashville Charlotte.
Phoenix some of those markets and so definitely some concerns are related to that.
On the West Coast, we do see supply starting to come down so some of the markets like Northern California think supply comes down quite a bit.
East Coast, New York seems to be coming down on a forward basis, and so near term a little bit of an increase supply, although I would say our submarkets generally are about half of the overall market supply expectations, so feeling a little bit better there I think when you get into the 24 and 25 picture.
We do expect to start to see some of that supply come down given the financing market that exists today, the unknowns around where cap rates settle out.
And of course cost inflation that we continue to see we are seeing a lot of developers struggled to lineup additional financing or equity partners to start new transactions. So we would expect over the next six to 12 months to start to see starts come down quite a bit.
So 24 25, guys start to get a little bit better story on that front.
Thank you appreciate the detail.
Our next question comes down a line of Wes Golladay with Baird.
Hey, everyone.
More of a macro question probably want to look at Tom 30 years of experience, but what we're seeing with a lot of the tech stocks you know a lot of the the stock comp is not being what it was supposed to be and would you expect any pressure to filter through it may be a lag as we look into next year.
Boy, that's why I'm in the apartment business.
It's a little bit simpler than trying to figure out the mapping of that type of dynamic.
What I would tell you is.
I've gone through the tech rack, but we have is a completely different environment with respect to technology.
<unk> seen a decade of everybody trying to figure out how to automate their businesses and so I think that will continue those strong companies that are the core of the tech industry are amazingly strong and resilient. So I don't see and I look at our experience for hiring tech people theyre going into.
Find jobs and.
And be paid very well, so I don't see that part of the exposure I do worry a little bit about the homebuilding aspect the construction and the financing markets whether in a capital markets.
Tight recession and and.
And we look through our employment base excuse me our resident base.
And I think Mike has taken that into account when he's looking at his pricing and looking for cracks in that so hard for us to extrapolate the broader employment picture.
Into our portfolio all we can try to do is set around the room as we do each week and say where do we think this thing's cracking do we see anything.
And to be very very transparent, we see no cracks in our resident.
In any shape or form at this time.
Okay. Thank you for that and then if you go back to the D. C. P. You do have the new arm. When you do the recapitalization you. Obviously know some of these assets very well would you participate in recap your existing preferred equity allows if the developer has some equity but not the full amount.
Yeah, I think we're always looking for opportunities to deploy capital Accretively and on a risk adjusted basis. So if one of our existing equity partners comes to us and.
We like the economics and the risk we'd absolutely participate on a go forward basis with a recap either within our existing position or even more of a senior loan format. So it's something we'd consider but at this point in time, there's really nothing on the table.
In terms of the upcoming maturities to speak to.
To me I would add the color on that.
I think Harry and Andrew have been very very transparent and clear we've always looked at the asset and said boy is it one close to ours is in an asset that makes sense someday that comes to market, we'd love to buy it and.
And.
And we will still continue to do that and believe that that is the right Avenue to think about this is just another avenue of investing in real estate that we know.
Great. Thank you for that.
Our next question comes down a line of one Santa Maria with BMO capital markets.
Hi, Thanks for the time I'm curious on what the potential lead indicators looking back historically it would be.
Ive seen people began to gobble up our game roommate.
And just more broadly.
Thinking about some of the literature out there on on.
How strong the housing market has been in and the macro factors that exist.
Do you think that maybe we pulled forward some.
Creation of households.
Because of the pandemic and somebody unique dynamics, there that maybe normalizes over the next couple of years here or what's what's your guys view on just general household creation.
Yeah, I think it's fair to say that pandemic did pull forward. Some of the household formation demand. It also pulled forward a little bit of a shift into single family over multifamily and.
Single family clearly had a tailwind at their back for the last 24 months relative to multi dose part of the reason you have that pretty large disconnect between cost of owned versus cost of rent.
What we're seeing now today and you definitely see it within our move out stats are move outs to buy are down roughly 35% going from kind of low double digits into mid to high single digits now at this point. So we're seeing that in terms of our turnover stats I think we are shifting back more towards a renter ship society. So homeownership rate should stay still.
<unk> come down, which obviously benefits us in terms of more demand from any incremental household formation and so I think we're good on that front. It's one of the tailwind we have going into next year and then just coming back to the consumer I think you were talking about some of the warning signs of things, we're looking at and when we see traffic still up on a 10% on a year over year basis, we see a cash.
Collections in the month continuing to improve even here in October and we are not dependent on government assistance on a go forward basis. Those are residents that are actually paying that rent on time and so cash collections are looking better youre not seeing the doubling up.
So overall really not seeing those cracks and ultimate I think household formation, probably benefits other ownership side a little bit more.
And then just a quick follow up on property taxes.
Some surprises some of your broader resi peers about what we're seeing in some of the sunbelt market.
Any sense of what we could expect in 'twenty three given some.
Some of the appraisals will lag what's going on in home prices generally and what we should be thinking about.
Yeah, I'd say, so number one we arent necessarily immune to some of the surprises, but the diversification that we have in the portfolio, obviously insulates us. So when you look at some of the expense growth that we've had in our sunbelt markets that is being driven primarily in Florida, and Texas by the real estate taxes, increasing as well and higher turnover.
Those markets so.
We're seeing it this year and still expect to see it next year I think when we look at preliminary outlook for next year on real estate tax, we're looking at plus or minus 5% overall, that's going to be lower when you go out to California with prop 13, and then go to the mid Atlantic and northeast, where we expect kind of low to mid single digits when.
If you get down into our Sunbelt markets I think you're going to be looking at high single digits to low double digits for markets, like Florida, and Texas and Nashville for Us.
Thanks, Joe.
That's one.
Our next question comes on a line of handheld St. Joseph with Mizuho. Please proceed with your question.
Hey, good morning out there.
First I guess as a follow up on bad debt.
We've seen a number of your peers reported uptick in the third quarter some of the bad debts, taking a bit longer to resolve but you guys saw an improvement here. So I guess I'm curious, what you're maybe seeing or doing differently.
Are there any reasonable price point distinction and am I right to infer from your comments to an earlier question that you expect that.
<unk> next year.
Thanks.
Yes.
Burton.
<unk> on that one so we do expect improvement over time going from the mid 98, plus or minus collected unbilled revenue I can't say necessarily is that going to occur next year I think on the margin. It should because we are having success and whittle down those long term delinquents. So we've got a pretty active process on that of that excess kind of long term.
What we have today, let's say, 75% of them are somewhere in the eviction process, although eviction processes instead of being perhaps a 30 to 60 days.
Cases are more like four to six months and so we think we will continue to whittle that down and collection should improve and hopefully become more of a tailwind.
In terms of the bad debt statistics.
Sequentially within that four 7% sequential revenue number may be a slight positive I E 10 to 20 basis points, but not a big tailwind.
So our collections are getting better in the quarter and the months.
But we don't really have that much volatility I think we talked about it last quarter. The way we approach bad debt reserves, we do try to be pretty specific in terms of estimating what we think collections are ultimately going to be on each resident I think we've done a very good job of doing that so we've eliminated a lot of that volatility of when the cash comes in it's a surprise or when it doesn't surprise me.
<unk> I think we've been pretty spot on and how we've been able to evaluate bad debt and forecast.
Thanks, that's all I had.
Thank you.
Our next question comes from the line of Tayo Okusanya with credit Suisse.
Hi, Yes, good morning out there just sticking to the world of technology.
Any update on kind of prop tech initiatives at the company.
In order to try to reduce operating expenses going forward, especially as kind of giving general operating expense headwinds.
Yes. Thanks for the question I think probably the biggest one on one we're most excited about is just becoming a little bit more efficient as it relates to maintenance. So we do have some technology that's going into place here in the very near future. It does allow us a little bit more visibility into decisions around repair versus replace.
It allow us to turn a unit a little bit quicker, we'll have more visibility into what our vendors are doing they'll have more visibility into what we're doing so we think that we can compress our time that it takes to turn a unit just knowing when they are coming in how we can schedule a little bit more efficiently and again driving down those making days. So that's probably the biggest one aside from that.
Just given what we've rolled out previously and you've heard us talk about it we have 25 properties today that our unmanned we do plan on taking that closer to 35 and again a lot of that has to do with some of the technology that we've already put in place.
Great. Thank you.
Okay.
Our next question comes from the line of Neil Malkin with capital one securities.
Thanks for keeping it going I appreciate first one.
Mike.
You talked about I think about $40 million by 2025 looks like half of that is the whole building.
Heart system Wifi, but maybe can you talk about the other portions of that what is it what is the incremental you know of that you know well.
Here at zero today or at the beginning of this year you know what are you at at the end of next year or 'twenty four.
You know should we assume like some sort of a ramp up or how do you see those things kind of playing out in <unk>.
Of your operating performance.
That's a good question Neil I think what Youre going to see this first and foremost with extreme and the fact that we're rolling out the bulk internet that is something that's going to take some time. So we are currently rolling out about 10000 apartment homes by the end of this year. We expect another 15000 by the end of next year and then the rest of the portfolio in 2024.
So it does take a little bit of time to start seeing that revenue roll through we do expect that that will be a run rate $20 million when its all said and done.
So that's the biggest one aside from that I, just spoke a little bit about some of the technology, we're putting in place that will help us with the efficiency around turns that'll help out we're continuing to.
Find ways to do a better job on our pricing, obviously going out there and creating more zones.
Buyers of shoppers if you will.
A lot of efforts going in there and then obviously our customer experience project. We're very excited about that the data that's going to come from that and then obviously where that transpires a lot of that is going to come in 2023 on the revenue side, followed up with 2024 with another chunk of that money coming out at us.
Yeah ill just just the size of the numbers real quick for you of that $40 million associated with those over 60 projects. We've got about $6 million of that in the 2022 number that we've already been able to realize through the initiatives that we started over the last 12 18 months I think as you fast forward into 'twenty three anywhere from five to upwards of 10 plus million dependent on.
Some issues with the supply chain around our bulk internet rollout as well as some other constraints, but we're moving as quick as we can there. So it gives you a range there and then in 'twenty four and 'twenty five you'll capture the rest of that number.
Yes, and sitting here, saying another fab you can potentially are in in 'twenty three right is that what you're saying correct. Yes, that's correct okay.
Last one last one I guess, maybe Tom or.
It really wherever you know a lot of a lot of supply coming in the Sun belt, whatever and that's been happening forever demand, killing it so.
Sure it'll be fine, but but to that end because there is a lot of supply that's going to be coming and D. The debt market is uncertain, particularly more onerous terms for permanent financing.
Yeah I'm sure you guys are well aware of that do you see that as a potential opportunity to broaden your diversification or brought in your sunbelt exposure.
Now I'll take a cut at it one.
One there is a lot there to assume and adjust for.
What will stabilize mortgage rates and proceeds stabilize out at.
How much does that supply replacement cost and exposure towards the future. So I think it's going to be continue to monitor and see what comes to the market how it prices out.
But the days of three and a half caps in the Sun belt don't seen on the horizon anytime soon there moved up and we will look and as Joe has articulated many times and very well.
Monster, our cost of capital and look for accretive opportunities.
If they present themselves in the Sunbelt thats, great if they present themselves somewhere else that's great too.
Just going to go where the best risk adjusted returns are.
And.
I think we'll keep playing that booked it works well.
Yeah. Thanks, Neil when you look at it you know we've talked about predictive analytics in the past.
Pretty well diversified in terms of its buy rate and celebrated markets. Today I mean, yes. There are some sunbelt markets, some east coast and West coast its legs as well as the inverse theres some markets and each one of those regions that it does not like as Tom said cost of capital today is prohibitive in terms of deploying new what we've done historically is obviously focused a lot more on that deal next door and what.
With our platform and so as you think about near term deployment I'd say, our top three priorities at this point, we talked about one of them already with the stock buyback, which is us buying into a diversified stabilized portfolio the.
The other two are really renovation, which you saw five additional renovations added to the portfolio. So the way in lower risk small dollar solid return on investments on that front and then you get into innovation, which Mike touched on where that is.
Blown a lot of personnel resources as well as our capital dollars into that part of the business. So I think that's the playbook for now to keep focusing on that and hopefully at some point cost capital comes back and we can get back to our external accretive growth.
That's helpful. Thank you guys.
Thanks, Jeff.
There are no further questions in the queue I'd like to hand, the call back over to chairman and CEO , Mr. Toomey for closing comments.
Let me begin by thanking all of you for your time and interest in UDR.
And I do want to be respectful I know you have other calls to follow after this but let.
Let me reiterate.
Our strategy remains sound.
And we will stick to it.
We understand this current market environment has changed and as you can see we've pivoted our tactics to adjust to it.
We're very bullish about the apartment business and what we can control and have very good transparency and theyre doing executing very well on that we also recognize that the broader market has cycles and that those come and go and you can take see our tactics and our actions by refinancing but that.
Majority of our balance sheet at record low rates.
With very few maturities through 'twenty five.
And that we have adjusted to a capital light environment and accordingly are underwriting to present day cost of capital and taking appropriate actions.
With that we do believe we have the right strategy and have a great outlook for the future and we look forward to seeing many of you at NAREIT in a couple of weeks with that take care.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Today's conference has ended please disconnect your lines at this time. Thank you.