Q2 2023 UDR Inc Earnings Call
Greetings and welcome to the two U D. Our second quarter 2023 earnings call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host Vice President of Investor Relations Trent Trujillo.
Thank you Mr Hill, 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 dot com in the supplement we have reconciled all non-GAAP financial measures to the most directly.
Comparable GAAP measure in accordance with Reg G requirements statements made during this call which are not historical may constitute forward looking statements. Although we believe the expectations reflected in any forward looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met.
A discussion of the risks and risk factors are detailed in our press release and included in our filings with the SEC, we do not undertake a duty to update any forward looking statements.
When we get to the question and answer portion we ask that you be respectful of everyone's time and limit your questions to one plus a follow up management will be available after the call for your questions that did not get answered during the Q&A session. Today I will now turn the call over to Udr's, Chairman and CEO Tom Toomey.
Thank you Trent and welcome to Udr's second quarter 2023 conference call.
Getting on the call with me today are President and Chief Financial Officer, Joe Fisher, and senior Vice President of operations, Mike Lacey, who will discuss our results.
Senior officers, Andrew Kantor, and Christiane and will also be available during the Q&A portion of the call.
To begin the multifamily business continues to exhibit strength in the second quarter the industry experienced positive net absorption Devin.
Demonstrating the health of the consumer and the attractiveness of the apartments versus alternative housing options.
Despite pockets of elevated supply deliveries.
Our results reflect the strength a few highlights.
One our second quarter year over year same store NOI growth of almost 8% led to year over year F. F O a per share growth of 7%.
Both of which we expect to be near the top of our peer group.
Too early.
Early third quarter trends, including traffic other income and collections have accelerated our June results.
This supports our expectations of sequential same store revenue growth above historic norms and F. F O a per share acceleration in the second half of 2023 as indicated in our guidance.
Three the joint venture partnership and portfolio acquisition of six communities, we announced align with our strategic goals and demonstrates the strength of our operating platform.
By attracting capital from a sophisticated global institutional partner, while finding a unique opportunity to deploy capital and grow the company.
These transactions provide future cash flow accretion enhanced aro for investors and offer additional scale and efficiency benefits for our operating teams.
And for our investment grade balance sheet remains strong with over $1 billion of liquidity. This provides both safety and the ability to execute accretive transactions should our cost of capital improves.
Looking ahead, we are encouraged by the continued job and wage growth combined with the prospects of additional clarity on the direction of interest rates.
Regardless of the economic path toward UDR is well equipped to succeed based upon our diversified portfolio.
Capital allocation and our leading operating an innovative platform all of which should help us outperform.
His peers.
Collectively the actions we are taking are poised to benefit our stakeholders our associates.
And the communities in which we operate.
With a highly engaged group of associates and future utilization of innovative technologies I'm confident in udr's ability to capitalize on the strength of the multifamily industry and expand our advantages.
<unk> public and private peers.
With that I will turn the call over to Mike.
Thanks, Tom the topics I will cover today include our second quarter same store results early third quarter 2023 results and how they factor into our full year 2023 same store growth outlook.
And an update on operating trends across our regions.
To begin year over year same store revenue and NOI grew at strong rates of seven 6% and seven 7% respectively in the second quarter.
Similar to the first quarter, we continued to recapture apartment homes that were previously occupied by long term delinquent residents.
This temporarily high level of vacant units pressured pricing and increased repair and maintenance expense relative to what was in our initial guidance.
There's still some work to do on this front, but we believe these disruptions are now largely behind us as long term delinquents have reverted to near our pre COVID-19 levels and in the month collections continued to improve.
Next we continue to see favorable fundamental trends to start the third quarter first demand remains relatively healthy year to date job growth has been stronger than most anticipated, which is supporting sound levels of traffic.
Second the financial health of our residents appear robust as wage inflation has largely kept pace with rent growth in most markets, resulting in steady rent to income levels in the low to mid 20% range.
Second quarter move outs due to rent increases totaled only 8% down from roughly 10% last quarter and 18% at its peak a year ago.
Third relative affordability remains in our favor.
With mortgage rates hovering around 7% and low single family home inventories bolstering prices renting an apartment is approximately 55% less expensive than owning a home for 35% less expensive pre COVID-19.
Only 6% of move outs in the second quarter were due to home purchase which is 50% less center of historical average.
And last concessions remain minimal and average approximately half a week, a new leases across our same store portfolio.
The concessions we've been offering remain primarily concentrated in certain submarkets were elevated levels of new supply being delivered.
With this backdrop, we have confidence in our ability to drive further sequential same store revenue growth improvement in the second half of 2023.
First after a slow start to the year sequential market rent growth of 3% over the last four months is above the pre COVID-19 average of approximately 2% over the same timeframe.
July blended lease rate growth of mid 2% and occupancy in the mid 96% range are similar to our June results and are anchored by the most difficult year over year comparisons we face given June July and August 2022 blended lease rate growth of 15, 5% on average.
As the year progresses, our comparisons to 2022 result, ease this when combined with our strong loss to lease and rent growth momentum should result in acceleration in both new lease rate growth and blended lease rate growth throughout the year. This will benefit not only 2023, but also positively contributed to our 2020 for earnings.
Second our loss to lease at the portfolio level stands at 3% to 4%.
Much of this is related to leases signed in the fourth quarter of 2022 in first quarter of 2023 due to greater than typical seasonality during those periods.
New York, Boston, Washington, D C, Seattle, and San Francisco, which are collectively half of our same store NOI has the largest upside with a weighted average loss to lease of approximately 5%.
And third resident turnover is improving which has both revenue and expense benefits.
During the first half of 2023 we had approximately 600 more unit turns from residents skips and evictions compared to the first half of 2022.
This impacted our occupancy turn costs repair and maintenance expense and administrative expenses, which collectively reduced our earnings by approximately one to two pennies per share.
Now that we're closer to the pre Covid norm for long term delinquent residents, we expect less pressure on turn costs a reduction in vacant days and improved pricing in the second half of 2023 and into 2024.
In all.
We have positive operating momentum as we begin the back half of the year and expect to produce sequential same store revenue growth of two to two 5% in the third quarter, which compares favorably to pre COVID-19 averages approximately 1% and above level seen a year ago.
Yeah.
Relating this to full year 2023 guidance recall that the building blocks, we provided to achieve the midpoint of our same store revenue growth guidance included one or 5% earn in two full year blended rate growth of two 5% with the contribution to twenty-three being half of that or 1.25.
<unk> three.
<unk> 350 basis points from other income initiatives and for flat year over year occupancy.
Thus far better realized year to date blended lease rate growth versus what was in our original guidance has been offset by 50 basis points of occupancy headwind from quicker than expected success, removing long term delinquents.
We will continue to take a balanced approach between pushing rate and maintaining occupancy to maximize revenue and NOI.
Turning to regional trends the positive momentum we have seen on the coast has continued.
On the East Coast, our northeast markets of New York, and Boston, our portfolio Standouts well you do.
Average second quarter occupancy was 97, 2% and we achieved nine 4% year over year same store revenue growth.
Robust levels of traffic and minimal competitive new supply continue to support pricing power with blended lease rate growth of nearly 5% during the quarter.
On the West Coast occupancy has remained consistent in the mid 96% range with stable concession usage.
Seattle was a standout in the second quarter with a 70 basis point sequential acceleration in blended lease rate growth compared to a 30 basis point deceleration for the entire portfolio.
Return to office mandates for various large employers in the region, coupled with new jobs created by artificial intelligence companies has enhanced both traffic levels and pricing power.
Lastly, the sunbelt continues to face a pair of headwinds that has led to negative new lease rate growth in order to maintain occupancy levels first is the relatively high level of new supply deliveries, which we would expect to continue through 2024.
Second is an increase in skips to nearly twice the prior year level attributable to compound in rent growth over the past few years outpacing income growth and affecting affordability for certain residents.
Because of these factors, we expect pricing power across our various sunbelt markets to remain constrained in the near term.
We continue to believe in the long term growth prospects.
Finally, I'm excited to operate the six communities in Texas.
We are under contract to acquire our acquisitions team identified properties with in place controllable operating margins that are approximately 800 basis points on average below UDR communities in the same markets.
By bringing these acquisitions onto our best in class operating platform, we can drive compelling upside and create value through our existing and ongoing innovation initiatives.
In closing thanks to our teams for your ability to execute our strategies as we continuously innovate and adopt new technologies to drive strong results I will now turn over the call to Joe.
Thank you Mike.
Capex I will cover today include our second quarter results and third quarter and full year 2023 guidance.
A summary of recent transactions and capital markets activity.
And the balance sheet and liquidity update.
Our second quarter <unk> as adjusted per share of 61 cents achieved the midpoint of our previously provided guidance range and was supported by strong year over year same store NOI growth.
The approximately 2% sequential increase was driven by incremental NOI from same store joint venture and recently completed development communities.
Year to date results are largely in line with our initial expectations.
Operations are trending to the midpoint of guidance and potential accretion from the Lasalle joint venture is offset by near term dilution from the announced Dallas and Austin acquisitions.
As such we have narrowed our full year 2023 same store growth and I thought for weight per share guidance ranges.
Looking ahead for the third quarter, our F. A four way per share guidance range is 62 to 64 cents or an approximately 5% year over year increase at the midpoint.
The two penny or 3% sequential increase is driven by a combination of higher NOI from same store and recently developed communities.
The implied fourth quarter F away per share guidance of 65.
It reflects another two penny or 3% sequential increase.
This was driven by an increase in revenue from blended lease rates occupancy and other income initiatives.
Additional lease up NOI from developed communities.
Higher income from D C P investments.
Sequentially lower expenses.
And improved bad debt trends.
Next a transactions and capital markets update.
First during the quarter, we completed the formation of a $507 million joint venture with Lasalle on behalf of an institutional client.
UDR contributed a seed portfolio of four communities totaling more than 1300 apartment homes at a low 5% yield.
With a $245 million in proceeds we've reduced our commercial paper balance, which carries a mid 5% interest rate.
We plan to grow the joint venture alongside our partner by targeting acquisitions with operating upside that are located proximate to other UDR communities to increase operating scale Densification and the earnings accretion.
This transaction is expected to be accretive to cash flow and ethical way per share once dry powder has deployed and will enhance our future growth profile.
Second subsequent to quarter end, we entered into an agreement to acquire six communities totaling 17, 153 apartment homes for approximately $402 million.
In addition to the operating upside Mike discussed we were able to finance the transaction through roughly $173 million of UDR operating partnership units issued at $47 50.
Setting a 2% premium to consensus NAV.
Furthermore, we assumed nearly $210 million of debt at an attractive weighted average coupon rate of three 8%.
Due to negative noncash mark to market adjustments related to the below market debt rate assumed.
The transaction is expected to be cash flow neutral and slightly dilutive to <unk> per share in the near term.
However, we expect to drive accretion once operations captures the significant margin upside.
Third during the quarter, we addressed three of our upcoming D. C. P maturities by funding a total of $39 million to pay down and extend the maturity dates of the can.
Senior construction loans.
These fundings will earn a projected initial contractual weighted average return rate of nine 4%, while having our first dollar exposure started in the low 50% LTV range.
And fourth.
During the quarter, we achieve stabilization on one development community totaling 292 apartment homes for a cost of $102 million at a stabilized yield in the high 5% range.
We continued the successful lease up at our two other recently completed development communities, which also had an expected weighted average stabilized yield in the high 5% range and will contribute significant F away accretion in the second half of 2023, and then into 2024.
Finally, our investment grade balance sheet remains liquid and fully capable of funding our capital needs.
Highlights include the.
First we have only $113 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 the sector and the lowest weighted average interest rate amongst the multifamily peer group at three 2%.
Second we have $1 $1 billion of liquidity as of June 30th.
And third our leverage metrics remained strong.
Debt to enterprise value was just 27% at quarter end, while net debt to EBITDA was five five times down 0.7 times from six two times a year ago.
More than a half a turn better versus pre COVID-19 levels.
We expect these metrics to remain stable throughout 2023.
And all our balance sheet remains in excellent shape.
Liquidity position is strong.
We remain opportunistic in our capital deployment with balanced forward sources and uses.
And we continue to utilize a variety of capital allocation competitive advantages to drive cash flow and earnings accretion.
With that I will open it up for Q&A operator.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you.
Our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.
Hey, guys, maybe I missed this in your remarks, but where do you expect probably around close to go in the back half of the year.
Eric It's Mike we are we're seeing some pretty positive trends. So just to kind of put in perspective over the last few months, we've seen market rents rise about 2% in the back half of the year, we expect to see something similar yourself right now market rents. We've got some some tailwind if you will.
Yeah, It's a market rents you said, 2% blended rent would be a bit higher than that given like a loss to lease.
Yeah, it's different by by region, obviously, what we're seeing today is loss to lease in that 3% range, we're probably closer to 5% to 6% on the east coast around three to three 5% on the West Coast and then our Sun belt roughly flat today. So we do expect to capture a lot of that in the back half and just as a reminder, when we are going.
Into the back half of last year into the first part of this year, we had a lot of headline news. If you will just around tech layoffs, the banking issues put a little pressure on our market rents, but we expect to gain a lot of that back. This year. So that's that's part of our confidence in where we're headed with both new lease growth and renewal growth as we move into the rest of the year.
Understood and then just one quick follow up on that I mean in your remarks, you said that you needed to adjust pricing to induce demand from some of the delinquent tenants that left earlier than expected, which obviously is a.
The good thing.
But when I look at you know where blended spreads went down the most it was in the northeast in the Sun belt, which is where I would think you would you would see the least amount of time.
So I would think it would be on the west coast. So just maybe help us understand sort of how much you think you know that was sort of delinquent tenants the pricing adjustments impacted your spreads tightened during the second quarter.
Sure I'll give you a little color, but I think we've gotten a few questions on this so let me just back up a little bit in and provide a few other points I think it's important just to remind everybody. There's varying definitions on planes out there right now and as a reminder, we include everything first and foremost when we think about blends right now overlap.
Three to four months.
And really thinking about last year, we were about 200 basis points higher than the peer average. So we were really driving our our loss to lease we were pushing our renewal growth and we've got a tough comp right now as we think about it going forward just getting rid of some of these long standing delinquents. The fact that there are there more or less behind.
And us we're starting to see that momentum and market rents that goes to what I said with what we expect going forward, especially in those coastal markets and that's truly what's going to drive that that rent growth trajectory as we move forward.
Got it thank you.
Yeah.
Thank you.
Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.
Great. Thank you good afternoon.
My question is focused on the Sunbelt are is it fair to say that the.
The Sun belt is a bit worse than expected. So far this year I know you've been flagging it supply issues, but I guess, how would you characterize the sunblock sunbelt and.
And if you could be more specific on no is it certain cities is it urban suburban we're getting a lot of questions on the Sun belt today. Thank you.
Yeah, Jeff again this is Mike.
I'd tell you, we do experience a little bit more weakness in the sunbelt than we would've expected and.
I said in my prepared remarks, I think it's twofold I would say, it's partially due to some of the supply that we have in some of our submarkets specifically, what we're seeing in the Cedar Park area of Boston as well as Addison in Dallas, where we have more exposure. So I think that's part of it. The other piece of it was really the skips that we experience down there. So as you all know.
We've been pushing renewal growth pretty aggressively over the last couple of years, we experienced about $2 50 to 300 skips and that part of the country and that put a little bit of pressure on our occupancy, which obviously in turn has pressure on your market rent that being said skips are starting to slow back down at this point and going forward it feels like the Sun belt.
Really relatively stable today were in that 96, 5% occupancy range and not really seeing the concession levels pop up as much and market rents are holding steady so as we move forward. We expect that we'll see probably blend is similar to what we just experienced in Q2 in the sunbelt.
That being said, we did see more of a draw with the coast specifically the East Coast. We didn't expect New York, Boston, Even D C to do as well as they have and again those are other markets, where we're running close to 97% occupancy today concessions are basically nonexistent in New York, and Boston still a little bit to some degree.
The 14th Street corridor of D C, but pretty strong growth on just top line rent.
In addition to that other incomes doing really well, we feel pretty confident about where total occupancy is today. We think we can get a little bit more aggressive as we move forward on our rents and were seeing a lot of success returned some of our other initiatives that relate to other income as we move forward too. So overall positive outlay as we as we go forward.
Thank you and just to clarify I know you had some comments on supply in the Sun belt in 'twenty four.
I guess.
No. Some of the data is showing that might remain elevated beyond 'twenty four.
Any any any information or any color you could provide there on kind of that Sun belt supply you were talking about 224 potentially into 'twenty five.
Hey, Jeff It's Joe.
Overall for our portfolio as well as Sun belt, I think we remain pretty stable. When you go into 'twenty. Four so you see a pretty big ramp here in 'twenty three relative to 'twenty two in terms of deliveries taking place we're kind of up 30% really at that time, 2.5% of stock number overall within our portfolio, it's a little bit less.
Not within our Submarkets here this year.
But you do have some belt running up in the 4% range as a percentage of stock and even higher in certain markets like a Nashville, and some others, so they're facing a little bit more pressure.
When you go into 'twenty four it looks like it's going to remain pretty stable, there's not a lot of volatility either this year or next year as it relates to first half second half stats. So I think you're kind of stuck with sunbelt staying a little bit higher here through this period of time.
I would say, though from a total housing stock perspective, you've seen single family completions coming off fairly dramatically as starts have really fallen off a cliff in the last six to 12 months and so total housing stock picture looks quite a bit better and then generally stable on a year over year basis in 'twenty, three and likely end of 'twenty four plus you got the relative affordability.
Piece, which is clearly in multis favor. So I think generally Mike's comments on stability feel pretty fair in terms of as long as we continue to see that demand in household formation in the Sunbelt I think it will be in a pretty good place there.
If it goes into a little bit longer you were kind of alluding to is that tail gonna get stretched out youre starting to see the early signs on the census data.
In terms of permits and starts coming off maybe 10% from peak I would say anecdotally, we believe its off quite a bit more than that yes, just talking to developers in the space talking to London partners that we work with obviously looking at D. C. P projects that are honestly, we're really not seeing much come through our pipeline.
You look at the architectural billings index, which is off pretty dramatically. So lot of good forward indicators that tell us it's about to fall off. Similarly, if you look at some of the third party data and go away from census, based data, which is a little bit spotty from a survey perspective at times and somewhat lagged.
If you look at third parties like axial when their stat data, which has traditionally been very well correlated with overall starts they're off as much as 50% from peak already in the last 12 to 18 months. So I think somewhere in between the downtown and down 15 is probably closer to reality, but we are seeing that supply come down which bodes well for 25.
Very helpful. Thanks, Joe.
Thanks, Jeff.
Thank you. Our next question is from Steve Sokolov with Evercore ISI. Please proceed with your question.
Thanks, I guess still good morning out there I guess, Joe to kind of follow up on that question. I'm. Just curious are you seeing any maybe early signs of any distress or investment opportunities maybe on the land side that you know my understanding is a number of merchant builders are sorry.
The scale back the size of their development teams and maybe looking to sell some land parcel. So I'm. Just curious is there anything that's that's come up where you think get shaken loose over the next six to nine months it might be a 'twenty four 'twenty five star for you guys.
Yeah, I'd say number one just kind of thinking about the starts activity.
Within our internal business plan, we had plus or minus six projects that we.
We had to kind of pencil than to start either this year or next year and just given our capital light strategy the cost of equity the cost of debt work Austin rents are in the in place yield yeah. We are kind of sitting on those and just building on the optionality, so that either when rates come down cap rates down stock price up and go into yields up will be.
Ready to really jump into our existing development pipeline and so we have delayed that which obviously helps sources and uses and is prudent I think to kind of sit back and wait.
On the distress side be it land acquisitions, we really arent seeing distress within the multifamily space I think there are sectors that have become much more capital starved and or have different fundamental profiles, but and multifamily with the GSE backstop theres always liquidity available and it is a preferred asset class.
As we've seen good performance going through Covid and coming back out the other side so yes.
I'd say if you go to some of the tertiary land parcels, maybe they're traded off as much as 20, 30%.
If you go kind of main and main core parcels, you're really not seeing anyone willing to transact as the developers are generally pretty decently capitalized and not in a rush to transact at potentially discounted prices. So nothing on that front and honestly it really nothing on the acquisition front, you know commentary really hasn't changed much from last quarter in that.
When you look at current NOI, we're still saying plus or minus 5% cap rates on the deals that we've been taking a look at.
We've shown a lot of deals to our new joint venture partner.
It had been working through kind of those assets and see in the market and what the returns are there we're still seeing a lot of unlevered buyers out there.
Sovereign high net worth closed end vehicles.
That are looking for kind of that seven plus percent unlevered IRR. So we kind of think we're in that plus or minus five cap world right now so not seeing much distress out there.
Great. Thanks, that's it for me.
Yes.
Thank you. Our next question is from Oscar Schmidt with Keybanc capital markets. Please proceed with your question.
Great. Thank you just stepping back for the total portfolio can you just give us a sense how far along you are in that eviction process and how you expect you'll be able to backfill. Some of the vacancy you highlighted <unk> Gibson of VIX I mean is that a 'twenty three event could you get back to the high 96% range. Later this year, just trying to get a sense of how that trends.
And then also what you're assuming to get to that two to two 5% sequential revenue growth for the third quarter.
Yeah, Hey, Austin, it's Joe So I'd say overall, feeling really positive as it relates to that long term delinquent picture, we're down to plus or minus 250 is kind of longer term delinquencies at this point in time, which really isn't materially different than our long term average. It's just that they are sitting there with a little bit higher balances because they've been able to stick around.
Quite a bit longer than history would have allowed them to do so we're.
We're feeling pretty good there we've gone from kind of 750 912 months ago down to that number I think as Mike said between the evictions and scripts as we worked through that process. We saw about 600 incremental in.
In the first half of the year, which definitely came at us quicker than we expected we thought it may take a little bit longer either due to eviction moratoriums that used to be in place and or eviction diversion programs that has elongated the process. So we did get them back quicker as Mike mentioned, it cost us maybe a penny or two in the first half between you've taken a little bit.
The occupancy on pricing hit losing some fee income and of course, you have higher turnover higher legal and then marketing cost to go acquire the new residents. So we did have that headwind.
But overall I feel like we're in a pretty good place now you've seen our gross they are in the a or continue to trend down and when you look at our collections are in the month of collections and end of quarter collections continued to trend higher. So overall feel good on that trajectory. So when you kind of think about that 2% to 5% sequential number.
There is some occupancy pick up that we expect as we go forward. So you've got that you have blended lease rate growth that is positive Michael already talked through some of the other income and reimbursement initially.
The initiatives that we have out there that are going to help drive some of that sequential and then you get into bad debt after taking more of a hit in the first half it starts to improve from a sequential and year over year perspective here in the second half of the year in <unk> and going into <unk>.
At the same time on the expense side, we think were relatively static in expenses in the back half relative to <unk>. So the pop up a little bit in three two and back down to <unk>.
And then beyond that the other big driver that we have out there, which is non same store, but helps drive that increase in <unk> from 61% to 63% to 65.
We've got development lease up NOI. So we've got three assets that are in lease up right now about $375 million basis <unk> produced a annualized yield of just over 1%. Those are eventually going to stabilize in the high fives. So there's about a $3 million or one one tiny pickup from <unk> to <unk> from that plus.
Probably another three pennies of accretion year over year by the time, we get into 2024 from those lease up so that's kind of the rollout of kind of that walk forward from <unk> to <unk>.
And a lot a lot of helpful detail in there and it sounds like stomach kopinski pick up but maybe not back to the high 96% range you are at.
So as we think about then this this improvement in lease rate can you just give some detail around how new and renewal lease rate growth trended month to month and <unk>. So we can get that picture of how things are trending into the back half you know now that the skips and evictions or you know further behind you.
Yeah, Hey, Austin, it's Mike throughout <unk>, we were hovering right around three to three 5% in the first part of the quarter and then June we were closer to two and a half I would expect July and August to look very similar to June at this point, just because we're anniversarying off of those very high numbers from last year.
And again that being said, we do expect September to start to take off even with normal seasonality right now with market rents, we will see year over year market rent growth going forward and that will obviously lead to higher new lease growth and higher renewal growth.
Just to clarify when you say start to take off is that sort of back to the three to three 5% level or do you think it could get better than that.
Right now we're thinking that three to three 5% range as we move forward once you get past this.
Last July August timeframe.
Very helpful and also just to quantify that a little bit when Mike talked about that seasonality. We saw last year are starting to September when we saw those a lot of those headlines pop up on the banking and the tech side, Yes, we saw seasonality dip pretty aggressively September through December it actually dropped by 300 basis points versus typical seasonality. So a lot of that loss to lease.
Mike is talking about plus or minus 3% that's embedded in basically September all the way through one Q of next year. So the loss of lease that are we're looking to capture isn't so much occurring here in the next couple of months as we go through kind of those blends youre going to really start to see a pop potentially in <unk> and <unk> next year. So that's really the momentum piece part of it is a better market.
Rent growth year to date and part of it is just a lot easier comp are both on an absolute and relative to peer basis.
That's good detail and I appreciate the insights.
Yeah.
Thank you.
Question is from Adam Kramer with Morgan Stanley . Please proceed with your question.
Hi, This is Derek metzler on for Adam Kramer.
Appreciate the comments on accretion for the JV and the subsequent.
The acquisition in the opening remarks, but if you could talk any more about expectations for timing to deploy that dry powder that you mentioned in the JV and any other puts and takes you can talk about after the subsequent six property acquisitions. So net net what how should we think about accretion.
For these transactions.
Yes.
Yeah, Great question so.
I would say as it relates to guidance this year, because we've gotten a couple of questions on kind of the implications of the two.
The JV is expected to be year, one accretive but contingent on deployment of that dry powder is once that the dry powder gets deployed that's when you start to earn the asset management property management fees. It's also when we're able to redeploy it into assets that we can go capture operations upside and kind of enhance yield on so yes day, one it's kind of.
Push as we sold the life low fives, and then paid off you got a low to mid fives commercial paper balance. So there should be some accretion coming there we're pretty convicted in terms of our ability over the next 12 months to begin to get that capital deployed as I mentioned Paragon Andrew of team have been working pretty tightly with Lasalle and looking at a lot of different <unk>.
Assets in the market trying to make sure what fits for them what fits for us and as we've talked about aside from kind of that just accretion from the fee side.
Definitely think its beneficial to be able to have a partner that over the long term. We can continue to grow with redeploy proceeds with an inefficient basis and get some of that operating upside from our platform no that'd be it through the traditional initiatives or getting more deal next door and more densification plays so.
I think over the JV, you'll see that accretion coming over the next 12 months.
The counterbalance to that is obviously the O P unit transaction, which is day one dilutive for us. So the net of these two ends up being slightly dilutive here to 2023.
But over time, both <unk> and cash flow accretive in 'twenty four 'twenty five we believe so.
Maybe just a couple of comments on that O P unit portfolio transaction.
We're obviously very excited I think this is going be a very fun test for the operational team to take what has been under managed assets and really lean into the operational upside there. So.
I'll make a couple of points, but Mike will probably come over the top and give you some more specifics.
But to the positive the controllable operating margin here.
It's about 800 basis points below the margin in our Dallas and Austin assets. That's the widest differential that we've seen of the $3 $5 billion that we bought over the last four or five years, so probably the most meat on the bone of any transaction we've seen from.
From a funding perspective, we really like this because theres basically self funded in a sense that we had low cost assumable debt combined with a very attractively priced equity issuance through O P units and so we like the self funding nature of it on the debt side.
That assumable debt carries a rate of about three 8% when you look at that relative to market today in the low fives. So we've got six plus years of call. It 150 basis point advantage on that debt, which if you think about it that fair market value. It translates into about a 25 basis point benefit in terms of asset pricing and then lastly these are.
Newer institutional assets that had been very well maintained if you think about the capex profile on these relative to our legacy portfolio.
As a percentage of NOI target of roughly about half of our legacy portfolio over the next five plus years, so that equates to about a 25 basis point improvement to the cash cap rate relative to the equity that we issued so day one we buy this at about a four 5% NOI yield year, one, it's probably about a $4 75 and that.
Soon that would capture about 200 basis points of that margin upside.
Then when you adjust for that cash differential you're basically issue in and buying in year. One at the same cash cap rate and from that point forward do you have all the revenue initiatives plus all the margin upside to go after which we think ultimately drives much better growth from this portfolio relative to our legacy portfolio and gets to probably a penny or so accretion over the next couple.
I'll turn to Mike He can take you through some more details yeah. Let me, let me just add a little bit more color around that control. The operating margin Joe mentioned to have the team is very excited to get our hands on these assets.
He'd mentioned 70, 576% controllable operating margin we run our properties in the same markets closer to around 84%. So we do believe in the next six to 12 months, we'll be able to capture a good chunk of that and obviously after two years there'll be able to capture the majority of it a couple of things just to give you more specific.
Fix around it for one of these assets are basically in our backyard right next door to one of our wholly owned assets. So we intend to get a lot of efficiencies just as it relates to just the personnel side of the business and we expect to capture that again in the next six to 12 months aside from that we do have some positive immune.
That amenities that we're able to get in there day, one and add such things as smart homes washer dryers on a couple of two or three of these deals were able to get in there and do that that's a really good return for us and in addition to in.
Amenities Theres also everything that's on the outside so things that we've done in the past with parking initiatives. The fact that they do not have package lockers, we're able to order those and get those installed in the next few months.
Lot of low hanging fruit and we believe between the in unit A&D amenity areas, there's probably 150 basis points alone in the next 12 months aside from that more innovation.
<unk> Wi Fi over the next six months, we'll assess that and try to go go hard on installations and then just a revenue management alone. The fact that we can get in there and do more of our surgical pricing on in units, we think theres a lot of upside. So I think it's safe to say that call. It 700 800 basis points will be captured in the next 12.
18 months.
Okay.
Great really helpful. Thank you.
Thank you. Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.
Great. Thank you.
A lot of moving pieces here on the guidance you know puts.
Puts and takes as you think about the back half of the year, where do you think there's the most variability where it may you actually surprised to the upside and where are you most concerned about the downside.
Yeah, I think when you go to the non ops lines, we generally feel pretty dialed in as it relates to interest expense variability.
We're running it maybe 6% floating rate debt plus or minus in the back half of the year. So minimal variability there G&A feels pretty well dialed in.
DCP we did.
The $40 million of additional investment there will have some additional fundings on a couple of other deals as we fulfill commitments on a couple of they're just working through construction, but minimal variability that we see on the DCP side.
I think a couple of variability aspects of on the Op unit transaction, just as we integrate maybe you see a little bit of either positive or negative.
Same with the joint venture if we redeploy quicker those cash proceeds we could start to earn those fees a little bit sooner and start to capture some of that upside.
But I think most of it is going to come through on my side on the same store base and so we do expect to see some upside in occupancy we've talked about that pick up in blood and starting in September of the year, although that ends up being a little bit more of a earn in in 2024 story at that point and given how many months are left so I think that's your big variability real estate taxes.
Pretty well dialed in at this point, we know 80 plus percent of those are the personnel R&M, especially given that we've gone through a lot of the high turnover pretty well dialed in on the expense side. So.
We feel we're pretty tight plus the reason we ended up going right back to the mid point is overall, we're tracking to where we expected to do this year.
If I can just add a couple of things I think to Joes point, we feel pretty good about the blocking and tackling around the operating environment. In fact, we're sending out between four and five 5% renewals through October .
We intend to capture that and again market rents should start to see that year over year bounce back. So overall the blocking tackling feels good on the opportunity front I think it's around innovation and you've heard us talk a lot about what we put in place. This year in terms of rolling out Internet, We've got about 9000 units installed.
For bulk at this point, we've got another 9000 or <unk> that are coming over the course of the next five months or so and we'll continue to push that forward as we move into next year. So I think theres some opportunity there.
Far as unmanned sites, where a little bit over 20% of the portfolio rolled out we're going to be assessing that and looking at 2024 to see if we can add more.
Overall, I'd say the things that we've rolled out had been successful, but where we're probably most excited about and you've heard us talk a little bit about it is the customer experience dashboard and the fact that we have full transparency on the lifecycle of the residents with all of our data in one place in chronological order, which includes things like tax serve.
<unk> phone call service request, we can see exactly what's happening or testing different hypotheses right now and we think there's a ton of opportunity as it relates to this I think what's on the horizon, it's probably more of a 'twenty four 'twenty five but obviously, we expect this will increase our retention, we think it'll be a while.
To do a little bit more as it relates to capital decisions and how we spend money and ultimately it's going to lead to pricing power. So I think there's more opportunity with this in front of us and we're just now scratching the surface.
Okay. Thank you.
It sounds like you'll see some acceleration in the back half of the year and same store and earnings.
Rolling into 'twenty four on the expense side.
What do you think your growth rates look like there do you think about the major line items at least from the visibility you have today.
Yeah, Jamie I'd say, it's pretty early to get into that but.
Honestly I think it was a 475 midpoint. This year you probably don't look materially different next year I think it's a little bit above that long term kind of 3% number so can a let's say, 4% to 5% real estate taxes, you do have some lagged impact valuations having come down in NOI is moderating.
Insurance clearly is going to continue to be an area of pressure, although overall premiums only about two years or 3% of expenses.
Theres still some degree of wage pressure given the strength of the job market out there. So you'll still have wage increases and as falls within R&M, but.
It doesn't look much different than it has here in 2023.
Do you see a scenario where it's materially higher.
Never say never but some of the big pressure items that we saw here coming through this period of time.
If you look at the level of turnover that we had driven by those long term delinquents those are exceptionally costly to us and given how much they cost us in the first half of the year, it's hard to see how that would be the case.
We do have some tough comps I think everybody remembers in first quarter.
The benefit of the cares.
Benefit in terms of the personnel reimbursement.
So with.
That was maybe 75 basis point impact.
At the same time, we've got a lot of initiatives, Mike mentioned go into fewer head count overtime, we rolled out our maintenance technology suites here recently, which is vastly improved efficiency as well as resident communications, So there's probably more benefits there.
We've got a number of rois that will be focused on both from a revenue and expense perspective. So.
Vastly higher would be challenging I think but.
It remains to be seen I think six months from now we'll get into it on the guidance call in January .
Okay alright, thank you.
Hey, Jamie this is toomey I might just add I mean, if you think about it.
Let me just the publics have a sophisticated operating models.
That continue to put distance between us and the private owners.
So when we get our cost of capital advantage, you're going to have a distinct advantage both on the revenue and the expense because of the investments. These companies have been making so I think when I look out on the horizon 'twenty four 'twenty five when we get our cost of capital.
There's going to be opportunities for these enterprises to continue to grow by making investments in their operating in innovation platforms. So.
While we may not be able to find backhaul the expense pressure. It is by far a fraction of what private operators are having to deal with.
Yeah, no that makes sense I guess, Tom just lie.
Yeah, Mike I mean, the whole thing about the beat I mean, it seems like this quarter.
Tom some portfolios enacted a little weaker than people thought something that get better.
The big picture on Sunbelt supply in your mind.
Well I mean, I think it's always been we run a book of National So we can't talk a region are up or down one I think in the long term. The sunbelt will eat will have an equilibrium should have attracted a lot of supply did attract it attracted a lot of jobs at higher paying ratios.
So we'll see how those higher paying jobs other businesses relocating if those grow and grow into that supply it should perform very well and so I think a long term housing as a whole is a great place to be invested in and these markets go through these ups and downs.
Cycles, but in long term our business really comes down to the health of the consumer their wage growth and their ability to continue to be employment in and grow that income that we want a piece of so long term.
<unk> will equal out markets will cycle up and down that is our philosophy about how we structured the company be diversified these markets are going to go up and down but if we can pick the right markets at the right time.
We're going to do really well.
Yeah.
Okay alright, thank you.
Okay.
Okay.
Thank you. Our next question is from Juan Sanabria with BMO capital markets. Please proceed with your question.
Alright, thanks for the time.
In the opening remarks, you made some comments about maybe some stretched affordability in the Sun belt. So I was hoping maybe you could provide a little bit more color on where those levels have gone from end to end and how that compares to.
The other markets are close to a core part of your portfolio. Please.
Hey, Juan it's Mike Yeah, I think that's more specific to what we experienced with the skips in the sunbelt versus the evictions in the coast. So we did see around $2 5300, skips and a lot of that has to do with some of the supply in our backyard. So and we're tracking we're finding out where people are going there's pretty much sticky.
Within that marketplace, but they are able to capture either a concession or a lower rent at some place next door. So again that put a little bit of pressure on us in the sunbelt and its the opposite with what we experienced in the coast, that's where we're able to get in there and move through the eviction process. We did see more evictions and what we saw last year and again, let's put it the same.
Type of pressure on both our occupancy and our rents, but we feel like a lot of this is behind us now and where we're able to move forward.
Maybe a dumb question here, but how do you determine if something is quote skip versus just a normal course move out.
Skip typically somebody comes in and they drop off the keys, so they're not waiting to go through the eviction process, they're more or less giving up.
Got it okay.
And then just second question.
How are you guys thinking about it.
With potential overhang from the entity student debt relief.
And.
Distraction related to the Hollywood business. The writers actors any impacts you guys are incorporating or thinking about with regards to your second half expectations.
Yeah, I guess as it relates to the student debt piece I'll take that one and then Mike can talk to anything about the.
The recent strikes in our life.
Yeah on the student debt side I wouldn't say, we have great insights here.
Kind of beholden to wait and see when August 29th occurs in payments go potentially back into place.
Overall, you typically see about 20% of households in the United States that have some form of student debt.
The medium payment only been about $200. So as you think about our renter and their typical household income yeah. It is less than 2% typically of overall household incomes.
Meaningful component.
That said I think we're going to have to wait until we get into the fall and see if there are applications in terms of pricing power on renewals or demand impacts in terms of traffic come through the door, but today, we don't have any great insights there.
Specific to L. A I think it's always important to know that this is really just a.
335% of our NOI market a lot of our exposures in Marina del Rey and I'll tell you the market's done well, where we continue to see positive new lease growth renewal growth still in that 5% range and occupancies hovering around 96, 5% today more concessions or downtown where we have our JV assets.
But overall it feels good I have gotten a couple of questions around just our sequential growth and I think it's important to note that.
Without some of the evictions that we saw there as well as some of the gaps we would've been closer to about one to one at one 2% sequential revenue growth without bad debt. So again this market feels pretty good to us today, not really seeing a big difference in traffic and I think we're in a good position as we move forward.
Thank you very much.
Thank you. Our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Okay.
Good afternoon, and thanks, a lot for taking my question, Mike the quantification of the new lease rate growth by region was helpful. Do you expect the gap in the new lease rent growth for the east and West Coast in the Sun Belt do you expect that to widen through the back half of the year and by how much.
Not much so I would tell you is again in the back half of the year, we think theres more opportunity in the coast just because that's where we have the greatest loss to lease and again, that's where we had some of the depressed market rents last year. So I think you'll see that continue to show well in the back half, but what we're seeing.
With the Sunbelt today is we've got through a lot of these scabs. It did put pressure on us we do expect that it to be somewhat stabilized going forward, it's not going to widen so maybe the coast gets a little bit better, but I don't expect the sunbelt to get materially worse.
Okay. That's helpful. And then have you seen any changes in the lease up strategies from merchant builders, who see their product delivering into a high supply environment or has pricing remained overall pretty rational.
Around lease up.
It's been very rational.
We see in some cases where concessions.
Six range, but we're not seeing people go as far as E. Two anything past that so overall feels rational.
Sunbelt today minimal concessions and I think there's just pockets, where you have developers offering a little bit more but overall, we feel pretty good I mean, we have a couple of lease up of our own and we offer right around four to six weeks and we're ahead of schedule in terms of leasing there had been leasing at about double the rate of what we see in our mature.
Yeah, so overall promising.
Thank you very much.
Okay.
Thank you. Our next question is from Nick <unk> with Scotiabank. Please proceed with your question.
Oh, hi, everyone I just wanted to see in terms of the.
<unk> that were announced you gave some.
Perspective on the yield are these also under occupied assets any any sense on what the.
If you can give us on the occupancy of the assets.
There are a little bit lower than what we would run so we see around 95, 5% to 96 and again in the Sunbelt area were closer to 96 five today. So just just slightly under where we typically run them.
Okay got it I just wasn't sure what the initial yield you talked about whether we should think that in reality the yield would be a little bit higher.
For what you've already mentioned was some of the margin improvement you expect to achieve.
Yeah, that's right.
Yeah.
Okay. Thanks.
Yeah.
Thank you. Our next question is from Wes Golladay with Baird. Please proceed with your question.
Hey, everyone. It looks it gave a lot of opportunity on the acquisition discussed earlier, but can you remind us like what what is the typical value creation you can achieve just to the UDR platform within a few years.
Yes, typically when you go back with some nugget from 19 to early 'twenty two it three plus billion of transactions, usually the controllable margin differential that we saw on those was around 400 basis points.
So back then we'd buy and we can typically get 10% lift excluding any market rent growth and so that would be captured in that 400 basis point, plus youre going to put on some occupancy upside Rev management, you have to do other topline initiatives like parking and packaging smart rent in Wi Fi and all that that's helped drive top line as well.
The expense base helps the margin. So it's usually 10% lift we can kind of take to the bank. When it's managed by typical third party.
In this case this is not managed by third party property manager, it's really more of a mom and pop shop.
There's a little bit more meat on the phone there.
Basis points of margin than we typically see.
Got it and you mentioned not seeing any distressed, but we did see you come in and help one of your D. C. P. A few of your D. C P investors and and I know, you're well capitalized company I'm, just kind of worried not worried I just maybe wanted to get your view of the state of the average private developer you know there are probably getting a lot of accrued interest cap rates have moved up a little.
Conversely, NOI has increased has that been sufficient that's still have them with equity just for the broader industry, but based on the people you talk to what do you think we'd lose some developers in the cycle.
I think I think you're definitely going to see some developers lose assets a cycle and lose capital.
In this case you know with these three assets are definitely not going to tell you that theyre going to get the returns that they originally expected when they went into these transactions, but from a capital stack perspective, yes. The cap stack on these was basically they were built for $360 million.
After these paydowns the senior loans at about $175 million.
Our position is about 160 <unk>. So we're kind of go under 50% low 90% loan to cost on these assets. Obviously originally they expected to these be worth substantially more than cost, but even if you use cost as a baseline there is still some equity in there.
In terms of the distress for those developers, yes, we talked a lot internally about how to approach. These over the last kind of three to six months ultimately, we don't want to push either our London partner, our equity partner to the break on this to find out.
Was that going to be capital available from the equity or force them into the position, where there are plenty of opportunistic lenders out there.
Challenge with them is they charge much higher rates, you'll have points on the way in and on the way out potentially interest rates their reserves in just general terms that we as a prep equity partner don't really want to have sitting ahead of us in the cap stack. So we like the idea of doing the refis, what the relationship lenders keeping them in place and just doing the paydown, which.
For us doing it at 50% to 60% loan to cost is effectively where were investing that new capital.
Mid nines that felt like a pretty good return for assets, we know the assets.
Still going through their stabilized NOI phase they are 90% leased last occupied but.
NOI trajectory looks good on those so overall feel good about them, but.
Yes, there probably will be some distress out there at some point in time for certain developers.
Great. Thanks for the time.
Yeah.
Thank you. Our next question is from Alan Peterson with Green Street Advisors.
Please proceed with your question.
Thanks for the time guys, Joe maybe just a follow up there on the D. C. P projects that you guys extended incremental capital too in terms of the conversation with those partners.
What's really holding them back from starting to market these assets for potential disposition opportunities for them.
Yes, just think timing wise when you look at the environment that we're in today.
Theyre coming through lease up these markets, specifically relative to a lot of the rest of our own owned or D. C portfolio had been more challenged when you look at the Oakland market has faced a lot of supply.
Santa Monica has been a little bit more challenged and even philly it isn't a pocket where there has been a lot supply delivered recently so.
NOI trajectory, there's a belief that as you work through that that youre going to see rents continue to lift those otherwise will stabilize and you'll have a better number here in a couple of years to either refi off of and look at the different refi environment to potentially sell into or recap them too at the same time, you've got a lot of unknowns around.
And where if that has been where rates going to stabilize and where buyers can actually underwrite these assets too so.
Today, while they have equity they don't have the equity and returns they wanted and so holding on for a potentially better environment makes a lot of sense to them and we're happy to be along for the right as we like where we're at in the capital stack.
I appreciate those comments.
Maybe just shifting over to operations, Mike in terms of some of the heavier supplied markets I. Appreciate your comments on just the lease up concessions that are being offered right now you're starting to narrow as noticed a lot of stabilized concessions as well within some of these heavier supply markets within the sunbelt, whether you're using you're using them or some of your private peers.
And to what degree.
Yeah. That's a it's a very good question I'd tell you again just to remind everybody.
We have been giving out less than half a week on new leases. So we're not really utilizing a lot of concessions on stabilized.
That being said in the Sunbelt, we have seen a few more people off or maybe two weeks here and there just to try to drive a little bit of demand, but nothing that's that's thrown us off and I'm not really seeing a lot on stabilized assets in some of the coastal especially east coast markets.
Hey, Alan This is toomey I'd also add I mean part of this market is how owners operate and how they adjust their strategies. The other part is really the resident and my cabinet in his opening remarks, but we're not seeing any stress with respect to our residents.
I've seen the doubling up impact.
And we're kind of grateful that we've gotten through the long term squatter issue.
And gotten that behind us and so that really feeds a lot of our optimism from where we are the facts that we are looking out 90 days and what we're seeing for renewables et cetera. So that really does feed the second half story of what we believe is unfolding in the marketplace.
And you continue and like you have written strong employment picture.
Good wage no stress on the consumer that's evident.
Our optimism and it's turning into being a reality when we look out 90 days and what we're spending up for renewals and what we're getting back into our turnover numbers coming down again.
So it feels good really.
I appreciate those comments and thanks for taking the question guys.
Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question.
Hi, good afternoon, maybe one more on the seasonality here it sounds like Youre, saying that the first and fourth quarters will be the highest for lease spreads and market rent growth, which is the anniversary of a typical seasonality. So is that the case and do you think thats unique to your portfolio or is that an industry wide phenomenon, we'll see.
Adjusting for our markets and geographies.
I think it's a little bit of both so when you think about just the comps we pushed very aggressively in.
The middle of last year and that goes back to one of the comments I made are planes were about 200 basis points higher from call. It April through July as we went into the back half of last year, we started bringing down our renewals are blends we're a little bit lower than some of the peers. So I think we have more upside in terms of year over year as it relates to <unk>.
But a lot of this is the seasonality we've talked about if nothing else changes and we have normal seasonality going forward September really starts to move. So you do see that inverse relationship as it relates to a year over year basis, and then that drives your new lease Andrew renewal growth.
Got it so you're pretty confident you'll see that higher rent growth even in a lower foot traffic environment kind of in September October November just given the comps given given what you're seeing on renewables.
Given the strong consumer.
Based on everything we're seeing today, yeah, and it goes back to Tom's point with the consumer being as healthy as they are in and again, where we're tracking today, we feel pretty confident.
Alright, thank you.
Yeah.
Oh.
Thank you. Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good afternoon out there so.
Two questions and.
First your comments around the sunbelt and the rent pressures certainly poke a lot of holes in the folks who would want to say that these pricing systems control. The market clearly not my question is you know when you guys were pushing rents.
Yeah aggressively and I think you said you ended up with a bunch of skips in the Sunbelt what went into the process on the on the I'm pushing the rent so aggressively presumably your your leasing team knew about the competitive supply.
Nearby so I'm, just trying to understand better.
The strategy of pushing rents.
If you in fact, new that you are facing the supply pressure down there.
Yeah, Alex I think that's a really good question I'd tell you it's more about what we did not what we did in the last couple of months. So the last couple of years, we were probably more aggressive on some of our renewal increases in the sunbelt and I think that's starting to stretch people to some degree as we moved into this year, but over the last few months you can see it in our renewal growth rates.
As well as our turnover our renewals were going out at a pretty normalized for five 5% range. So it wasn't necessarily what we're doing recently, it's more of what we did over the last couple of years.
Okay and then the second question is supply in the Sunbelt definitely seems to be more of a sub market issue because.
It's not uniform.
And you guys. Obviously, just bought committed to buy more profit product down there. What are you guys doing as far as diversifying away either older buying older product or buying more in the suburbs or or diversifying your holding such that you know in this.
By the way I guess applies to the coastal infill markets as well so that you diversify your product away from where people can build new supply.
Yeah, I think it's a good question when you look at our existing Sunbelt portfolio, we are much more suburban and b quality.
The new development rents that are coming online are typically 20% above most of our sunbelt portfolio. So I think were mildly insulated, but clearly not immune from that activity, but we have talked about over time do we want to become more diverse within those markets been more suburban and b quality. This trait to obviously it helps us go up in quality.
From a quality perspective so.
Newer product.
Obviously the pod in aspect we are party for these six assets so they're closer adjacent to our existing assets. So it's helpful. For my ops perspective, maybe not diversification of Submarket perspective, but it does help the ops team quite a bit. So we do think about that and yes, we did think long and hard about the exposure to Dallas and Austin.
It is adding to the sunbelt in a period of temporary weakness, we believe Tom laid out kind of the thesis longer term or we do think sunbelt longer term as a great place to be.
And I would say Dallas.
It's been kind of middle of the pack for us it's not the same level with the Austin Nashville, Charlotte Phoenix et cetera that have been getting hit as hard with.
Supply and there's all kinds of degradation on fundamentals.
<unk> for the asset.
It's been performing better for us.
Okay. Thank you Joe.
It's Alex.
Okay.
Thank you Andrew.
Our next question is from Hendel St Juste with Mizuho. Please proceed with your question.
Hey, good.
Good afternoon out there.
My first question's a follow up on the JV with Lasalle I guess three quarter, but of course, the firstly, how do the IRR on the assets, you're buying and underwriting compare with what you are selling into the JV second can you discuss the market selection process involved I understand that the assets that were contributed to the JV. There were no sunbelt Boston D C. Seattle.
Let's see.
Without a deal breaker for the partner did not want any sunbelt and then lastly, you mentioned the capacity or desire to contribute further assets. So curious how much larger this JV could become.
Okay.
Oh good good question so.
A number of these actually kind of evolved as we went through the process of talking about this partner and others in terms of desired portfolio exposures Unlevered returns future growth profile et cetera, So I'd say on the Unlevered side.
Generally not necessarily specific to this conversation, but a lot of the conversations that we had as we went through the partner selection process.
Unlevered.
Low to mid Sevens, IRR is where a lot of sovereign wealth funds wore looking to transact at so that with a typical kind of two and a half 3% growth number.
It really supported the kind of five cap environment that we're in so.
I would expect these were underwritten about the same way on a go forward basis as we show assets I do think we have the ability to capture outsized irr's on Unlevered basis, yes, if you're buying at market pricing, but then can put better than market operations onto that asset.
You should have the potential to drive a little bit of incremental IRR relative to that seven plus number. In addition, I think theyre going to continue to look at our partner.
We're going to continue to want to look at kind of that 10 to 2025 year old asset.
That maybe has more of that operational upside.
As well as potentially the Capex plan, which could help juice returns further so I think we're pretty well aligned because that's been our strike zone for a number of years of.
On the acquisition front, so it should be good there market selection wise, we really didn't try to.
Cherry pick certain markets, we've tried to make it sure it was diverse or all the potential partners, we talked to make sure. It kind of looked like the UDR portfolio as a whole I would not say that sunbelt as red line for this partner Andrew.
Andrew and team are showing them a number of sunbelt transactions already so it's not a redline market has kind of come down to market sub market and asset. So perhaps over time, we do see more sunbelt assets come into that JV.
Then just lastly in terms of future growth.
Each of us have plus or minus $250 million of dry powder earmarked for future growth together on a unlevered basis. So that would take this JV from roughly a $5 billion to $1 billion.
At some point in time, we may put leverage onto the joint venture if it becomes accretive and makes sense for both parties in the future and then the one of the pieces. We're probably most excited about with this partner was.
They're pretty light on real estate allocation today and expect to continue to grow over time.
We'd love to be one of their preferred partners to grow with and continue to enhance this JV when returns on our cash sources and uses makes sense for us. So hopefully we see more growth going forward there.
And this is to me what I'd add that.
Probably hasnt been said enough.
As in the interview process.
Finding a partner it was finding someone that thinks about the business the way, we do and what we found was a very unique.
The partner that looks at it and says.
Diversification.
Operating acumen.
<unk> ability to continue to grow these assets over time, so in targeting assets you can see what we contributed but we're also looking at is buying assets over a 15 year cycle that have a couple of opportunities to redevelop continue to expand margin through our operations and innovation.
So theyre looking at it from that standpoint, and not just target a market and hope it rebounds, but who could actually drive cash flow growth over time and expand the investment because of their footprint.
It comes in as a very good partner, who looks at the world a lot like we do.
That's great color guys I appreciate that the other question I had was on the insurance market. The headwinds you referenced I know, it's not a huge component opex opex, but I was hoping you could talk a bit more specifically about the level of inflation youre seeing there or what you're expecting near term and then I guess, how much of yourself insurance today versus historically and if theres any.
Cost savings for perhaps doing that how do you balance that against potential catastrophic Chris. Thanks.
Yep. Thanks, Ed So yeah on the insurance program. So I'd say number one we are locked in through mid December with the existing program. So feel good about the kind of go forward rest of year insurance money.
Or forecast.
Yeah.
Driver of the number being down year to date, we did see about 20 plus percent premium increase last year.
What we've seen though is that year to date claims have come off dramatically.
Part of that's because we came through 'twenty, one 'twenty two off a very inflated number of claims activity as individuals simply happen to stay home more we also put them together and place a lot of preventative maintenance and Rois to help drive those claims down so I feel pretty good about the number this year I think going into next year's renewal no doubt, we're going to see continued pressure on the premium side I wouldn't doubt to say plus or minus 20.
Percent number again, but I think by next call, we'll have a lot better sense for what that number is we just got to do our best to either constrained that or continue to focus on claims through more ROI and preventative maintenance.
On the self insurance side that you mentioned, we've traditionally had a $4 $5 million retention above and beyond our deductible that we have to eat through first and then over time, we play with the different layers and evaluate what's our historical loss ratio relative to the premiums being charged.
Last year, we took another $5 million of self insurance risks in the primary is $10 million from where we were at previously.
That process there was really.
The premium we're going to be charged for that $5 million was something like $4 million for the year versus a loss ratio of maybe $2 million for the prior 10 years. So.
Over the long term it should be a net positive for us so each year, we'll look at which layers are potentially.
Priced inefficiently and see what decision we want to make.
Okay.
Yeah.
Thank you.
Thank you.
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.
Great. Thank you. Thank you for all your time interest and support of beauty.
Clearly, we have established ourself as a full cycle investment that delivers above average growth and total shareholder return across a variety of macro environments.
We remain enthusiastic about the apartment business and believe our operating.
Our capital allocation, our innovation advantages should deliver relative outperformance versus peers in 2023 and beyond.
As a longtime veteran of this industry, but I'm struck by.
Actual results.
I find that our number one number two in.
And operating statistics for my viewpoint, and look to be finishing that at the end of the year and number two or three and cash flow growth.
So actual results is what matters in life and the most I've always found and I think the teams very focused enthused about those results and we look forward to continuing to grow beyond those numbers. So with that we look forward to seeing many of you in the upcoming event and we will hope you the best for the remaining balance of the summer take care.
Yeah.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
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