Q3 2023 UDR Inc Earnings Call
Okay.
Greetings and welcome to Udr's third quarter 2023 earnings call.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference 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 UDR dotcom.
In the supplement we have reconciled all non-GAAP financial measures to be most directly comparable GAAP measure in accordance with Reg G requirements.
Statements made during this call, which are not historical may constitute forward looking statements. Although we believe expectations reflected in any forward looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met.
A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC, we do not undertake a duty to update any forward looking statements.
When we get to the question and answer portion we ask that you be respectful of everyone's time and limit your questions to one plus a follow up.
Management will be available after the call for your questions that did not get answered during the Q&A session. Today I will now turn the call over to Udr's, Chairman and CEO Tom Toomey.
Thank you Trent and welcome to Udr's third quarter 2023 conference call presenting 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 Canfor, and Kristen and will also be available during the Q&A portion of the call.
To begin.
For much of the third quarter, the multifamily industry continues to benefit from a resilient consumer continued job and wage growth and relative price point affordability versus alternative housing options.
These tells wins served as an effective break against elevated apartment deliveries during the quarter.
Our quarterly results reflect this relative stable demand versus supply environment.
With year over year same store NOI growth of 6%.
And F F L a per share growth of 5%.
Both of these growth rates were at or above our historical norms. However towards the end of the third quarter and into the fourth quarter, thus far the stable supply and demand dynamic changed.
The seasonally slower leasing Perry took hold.
Since mid September increase concessionary activity from new supply deliveries in lease up that put more pressure on our lease growth rate and occupancy.
Ross a M b quality communities throughout our portfolio.
This dynamic and its impact on our B quality communities in particular was unexpected.
And unprecedented in my 30 years in the multifamily industry.
Even more so as demand has continued to hold up relatively well.
This situation being felt across our industry.
Let us to lower our same store and that's all a per share guidance for the full year 2023.
With yesterday's earnings release.
While we cannot control macro factors that impact our business such as interest rates inflation and job growth to name a few we are focused on what we can control.
These include first we continue to innovate.
We expect our two largest near term initiatives being building wide Wi Fi and enhanced customer experience to increase revenue improve resident retention and further expand our operating margin over time.
Mike will provide greater detail in his remarks.
Second we anticipate driving cash accretion from the sixth Texas communities, we acquired during the third quarter.
Bringing these communities onto the UDR platform and operating them more efficiently, we expect to capture approximately 800 basis points margin overtime.
Okay.
The joint venture partnership executed at the end of the second quarter and is poised to grow with positive redeployment spreads.
Which should expand our fee income and result in scale oriented efficiency benefits to our operations.
We are actively engaged with our partner on where to deploy capital that should provide future earnings accretion and enhanced our elite.
And fourth we can actively enhanced our liquidity to be in a strong position to take advantage of growth opportunities when our cost of capital eventually improves and supply pressures lessen.
Looking ahead to 2024.
We expect that a validated apartment deliveries will continue to pressure, our organic growth and capital markets recession should limit external growth prospects.
Well I can Joe Black comments and color on these as well.
Moving on.
We continue to build on our position as a recognized ESG leader with the publication of our first annual ESG report being named a sector leader by grasp.
Crespi survey score of 87 matched the highest in our history and for the fifth consecutive year. Our public disclosure was an a rating. These are achievements that all UDR stakeholders should be proud of as we work towards a more sustainable future.
Lastly, I believe that UDR multifaceted diversification, leading operating platform and investment grade balance sheet with nearly $1 billion of liquidity will help us to successfully navigate whatever macro environment, we face will be important.
In closing my fellow UDR associates. Thank you for your continued hard work and dedication.
With that I will turn the call over to Mike. Thanks, Tom Today I'll cover the following topics our third quarter same store results.
Early fourth quarter, 2023 resolved and how they factor into our updated full year 2023 same store growth outlook.
And an update on operating trends across our regions.
To begin third quarter year over year same store revenue and NOI growth of five 3% and six 1%, respectively as well sequential same store revenue growth of two 3% met our expectations.
Similarly quarterly same store expense growth moderated.
Primarily due to favorable real estate tax outcomes in Texas and fewer insurance events.
Thus far in 2023, a variety of demand and profitability indicators that benefited our business.
These include stable occupancy improved resident retention and renewal lease rate growth holding above 4%.
However, since mid September some challenges have emerged including weaker traffic lower leasing volume and new lease rate growth decelerating beyond typical seasonal norms.
Combining all of us.
You have seen the demand environment that continues to hold up well, but one that has been overtaken by growing concessionary pressures from elevated apartment deliveries as we entered the seasonally slower period of the year.
And sure the consumer seems okay right now in place and prospective residents can choose among more options at a discounted price and many of our markets.
Buyers have become shoppers, which has pressured blended lease rate growth and occupancy across the industry and ultimately led us to reduce our full year straight line same store revenue and NOI guidance ranges by 75 basis points each at the midpoint.
And unless our revised guidance still remains above the peer group average.
To provide a little more context, when we reported second quarter results in July we were aware of the elevated new delivery forecast through the back half of 2023 at the time, we saw resilient consumer elevated supply with developers offering approximately one month free and not competing with our predominantly.
Quality product Andy.
And easier year over year comps in the fourth quarter.
This dynamic persisted through early September until things began to change.
The financial health of our consumer was and still is okay. The lease up concessions in many of our markets increased rapidly and began to compete directly with b quality product.
This was something we did not expect and place our blends in occupancy under more pressure than you originally anticipated.
Edr typically does not use any concessions, but as a result of more direct competition. Our average portfolio wide concessions have increased threefold from a half a week to one and a half weeks.
This equates to approximately 2% lower blends or the difference between the 3% to three 5% fourth quarter blends. We thought we would achieve back in July versus the roughly 1% blends. We're currently realizing.
We expect this concession heavy dynamic to continue throughout the fourth quarter and into 2024.
Looking ahead and based on this revised outlook. We are forecasting a 2020 for same store revenue earn in of approximately 1% slightly below our historical norm.
We'll provide official 2024 guidance in February but two initial considerations include.
One as it relates to same store revenue market conditions suggest that 2020 for rent growth will be below the long term average of approximately 3% due to the negative impact of elevated deliveries combined with potentially lower forward demand and to our same store expense growth is likely to approximate 2020.
Three level.
Driven by pressure on insurance utilities and personnel in.
In particular, we saw.
Hey, it's a difficult year over year comparison in the first quarter due to the $3 $7 million, one time employee retention credit realized at the beginning of 2023.
Moving on we continue to make solid progress implementing our innovation initiatives, which we expect will enhance our growth profile in years ahead, the two largest initiatives underway.
One building wide Wi Fi installations, we have underwritten and are achieving incremental revenue of $50 per month per apartment home at a nearly 75% margin we expect to end two country.
The community wide Wifi installed across roughly 20000 units.
The additional rollout plans through 2025.
To our customer experience project will help to reduce turnover overtime.
The last two years email IV nearly a decade's worth of leasing data and resident interactions across every possible touch point.
On this we built real time resident specific experienced dashboards and found that 50% of our turnover is controllable.
We sell across various operational metrics, but acknowledge our turnover has been higher than the peer average of late and believe there is a large opportunity to prudent partners.
While still early in the process, we are operationalized, our dashboards to identify residents are property specific problem areas make changes and ultimately improve retention.
On its own every 100 basis points of improved retention equates to approximately two and a half million dollars a higher NOI.
Over the coming years at tangible effects of our efforts should be evidenced by lower turnover as well as higher occupancy expense savings increased other income and improved pricing power.
Turning to regional trends.
The outperformance of coastal versus Sunbelt markets in recent quarters has continued although elevated supply exist across all regions.
On the East Coast, New York, and Boston, which comprised nearly 20% of our total NOI continues to be two of our strongest markets.
What do you see the average third quarter occupancy for these markets was 96, 7% and we achieved nearly 7% year over year same store revenue growth.
Minimal competitive new supply and high levels of demand continue to support pricing power with blended lease rate growth of nearly 4% during the quarter.
And annualized resident turnover 330 basis points lower than a year ago.
On the West Coast occupancy has remained in the mid to high 96% range.
Orange County, which is our second largest market of 11% of total NOI showed the greatest strength with year over year occupancy, increasing by 70 basis points and NOI growth of 7% during the third quarter.
Other markets across the West Coast, However has seen an increase in concessionary activity.
With the San Francisco Bay area most impacted.
While we are currently averaging three weeks of rent concessions across our San Francisco portfolio. It is not uncommon to find four to six weeks of free rent in the market.
Lastly, the sunbelt continues to face elevated levels of new supply.
Which has resulted in year over year, new lease rate growth of negative 3% to negative 6% equating to an approximate three week concession on new lease.
Based on job growth and traffic volumes, we believe demand remains solid and absorption is positive.
However, because of the multitude of new options available to residents miners have been willing to shop for.
Do you expect some bolt supply deliveries.
Mean, elevate in 'twenty, 'twenty, four which should continue constrained pricing power across the region.
In closing, while the near term operating environment presents some challenges for US I think our teams for continuing to utilize new tools and technology to drive superior long term results.
I'll now turn over the call to Joe.
Thank you by the topics I will cover today include our third quarter results and a fourth quarter and full year 2023 guidance.
A summary of recent transactions and capital markets activity.
Our balance sheet up there.
Third quarter adjusted per share of 63.
Achieved the midpoint of our previously provided guidance range and was supported by strong year over year same store NOI growth.
Of the approximately 2% sequential increase was driven by incremental NOI from same store joint venture and recently completed development candidates.
Year to date results through the third quarter were largely in line with our initial expectations.
However, elevated levels of supply have resulted in less robust pricing power than previously expected towards the end of the third quarter and into the fourth quarter. It thus far.
As a result, we have reduced our full year 2023 same store growth and ethical way per share guidance range.
Looking ahead for the fourth quarter, our <unk> per share guidance range of 62 to.
64 cents or an approximate 3% year over year increase at the midpoint.
The expectation for stable sequential S. Avoid per share is driven by a half penny benefit from same store NOI growth.
Additional lease up NOI from recently developed communities and lower G&A expense.
Offset by a half penny from near term ethical way dilution.
O P unit transaction, we completed during the third quarter.
Next a transactions and capital markets update.
First.
During the quarter, we completed the previously disclosed acquisition seven 753 apartment homes in Dallas and Austin for approximately $402 million.
This was financed through roughly $173 million of UDR operating partnership units issued at $47 50 per share and our assumption of 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 rate debt assumed which were more adversely impacted than previously expected due to recent increases in interest rates. The transaction is dilutive to ethical way per share in 2023.
However, moving forward, we are confident in our ability to drive future accretion by capturing approximately 800 basis points of margin upside.
Yeah.
Second during the quarter, we repurchased a total of approximately 620000 common shares at a.
Weighted average price of $40.13 per share for total consideration of approximately $25 million.
These buybacks were executed at an average discount to consensus NAV.
Up 15% and a low 6% implied cap rate.
Funding came from my portion of the proceeds we received from the Lasalle joint venture seed portfolio, which was priced at a low 5% yield, thereby capturing a positive spread.
And third during the quarter, we achieved occupancy stabilization on a $127 million development community totaling 220 apartment homes located in Dublin, California.
This property along with three other recently completed developments are expected to be accretive to our play in 2024 and 2025 as they continue to progress towards stabilization.
Finally, our investment grade balance sheet remains liquid and fully capable of funding our capital needs.
Some highlights include.
First we have only $114 million of consolidated debt or approximately 0.6% 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 as a result in the best three year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at three 4%.
Second we have nearly $1 billion of liquidity as of September 30th.
And third our leverage metrics remain strong.
To enterprise value was just 30% at quarter end, while net debt to EBITDA was five seven times down 0.3 times from a year ago and half a turn better versus pre COVID-19 levels.
We expect these metrics to remain stable through the remainder of 2023.
And all our balance sheet and liquidity remain in excellent shape.
We remain opportunistic in our capital deployment balanced forward sources and uses and we continue to utilize a variety of capital allocation competitive advantages to drive accretion.
With that I will open it up for Q&A.
Operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment, it may be necessary to pick up the.
Handset before pressing the star keys, we ask that you. Please limit to one question and one follow up question one moment, while we poll for questions.
Our first question is from Eric Wolfe with Citi. Please proceed.
Hey, Thanks, you talked about the impact of supply, but if I look at the sort of deceleration in <unk> from Q2, it looks like the deceleration is pretty broad based and not just in markets that have that heavy supply and so just trying to understand if maybe there is also a more broad tenant or consumer talking more of the impact of supply, it's just going to get more pronounced in certain markets going forward.
Yeah.
Hey, Eric It's Joe I think it's probably helpful to look at attachment eight G.
Because I think wall Sunbelt does get the predominance of the focus in terms of supply.
Reality is that supply as a percentage of stock is increasing above long term averages in all three of our regions and so all in an absolute sense clearly.
In the Sun belt, but the four plus range it is higher than the other two regions, but even in the east and West Coast. We do have pockets of supply through all of those markets, where you have kind of high ones low twos as a percentage of stock by each region and so what we've really seen is a ramp up in supply in the back half that'll probably continue into the first half of next year and it's.
Be great in the growth rates in all three of those regions and so theyre all coming down at a pretty similar rate of change. It's just that east coast dealing with a little bit less supply is doing a little bit better than the others in the west than the sunbelt and so I do think it really is a supply story yeah. When you look at the consumer side of the equation look at our dashboards on that.
We're really not seeing anything to the negative in terms of collection trends doubling up trading down.
Anything of that nature in fact, we're actually seeing in the B quality resident in some cases actually jumping up and paying more and taken some a quality product because of the fact that concessions have come up pretty materially in some markets and so not seeing anything on the consumer side, yet and so demand trends are still good it's just really fighting through.
These pockets of supply.
Got it that's helpful. And then I think someone asked this on the last call, but it was a good question. So I guess I'll steal it and if you just sort of look at the sort of compounding impact of supply. The time, it takes to sort of lease up properties and sort of a pretty heavy amount of supply that's going to hit this year. I mean is there a reason to think we're going to see positive market rent growth next year.
Yeah, I think a it's a good question and hopefully we have a similar indoor good answer his last call. So I think theres definitely reasons to be optimistic as we think about 'twenty four from a industry and from a UDR perspective, I think we all know about the elevated levels of supply that are coming on kind of ramping here into the back half and then the fee.
First half of next year before it starts to dissipate a little bit.
But we still do have from a total housing perspective supplies coming off overall when you look at the reduction in single family starts and deliveries that are expected in the next year.
It's the tone in terms of total supply I think also when you look at the relative affordability component clearly affordability is stretched or that spend going back to the GSC and you can see the repercussions of that when you look at existing home sales going back to levels, we haven't seen since the depths of the last crisis.
So in terms of closing the back door at least and capturing any incremental household formation like renter ship remains in a really good position on that front, we still expect to see positive demand overall, if you look at third party forecasts go into the next year. When you look at third party expectation on job growth wage growth et cetera that looks positive. So it really just comes down to.
The supply picture and the fact that renewals remained pretty sticky overall as you saw in third quarter and throughout this year like most of us are still sending out renewals in the four plus range.
They are pretty sticky so I think there's reasons to be optimistic that we can say positive as a whole that said when you do have a little bit less demand and are clearly a little bit more supply going into next year. Yeah. We do think next year is a below average trend in terms of blended lease rate growth in revenue and what we're gonna be focused on is clearly on the innovation in other income.
Components and trying to drive some relative performance as we set up for 2025, which we do think starts to get a little bit better and become the light at the end of the tunnel as we work into the back half of next year.
Hey, Eric This is to me just long Gabe the answer a little bit I think we might see the capital market's recession that we're currently experiencing start to lessen and so I think with capital is starting to flow again that will change some of the dynamics in the marketplace as well towards positive, but we'll see how that plays out.
Uh huh.
Okay.
Our next question is from Jeff Spector with Bank of America. Please proceed.
Great. Thank you I just wanted to follow up Tom on your opening remarks, given and it's still significant.
Unprecedented comment I.
I guess again listening to their responses to Eric on supply.
This is the first time of your career 30 years, she has such an impact on the quality.
What's the conclusion here and what's happening because just to tie this into storage rate self storage is seeing similar sensitivity on new customers since the summer. So it does feel like something is going on with the consumer more than just let's say price shopping.
Yeah, Jeff.
I appreciate the question in the opening comments.
Here's what color I would add to it.
I haven't seen the bees had this much impact from a concessionary a type marketplace ever and what's driving it I think the internet and transparency on pricing.
And the shopper or in essence, our customer has more options available for them.
So they're looking at their renewal or a new move in number and just going down the street and saying I can get more out of a new a product.
After they lay out and concessions have a cup one month two months they were walking in the door and saying I get a lot more so I mean that gives us some comfort that they're trading up out of bees on a concessionary and not down which would be the normal concern we would have in a slowing economy. So that's.
Says a lot what Joe just commented on how the.
The consumer seems very healthy just enabled a lot more than they had been in the past to shop for value and they're doing it and I think Mike can add some more color on A's B's and this what we call a shopping phenomenon that we hadn't seen before.
Thanks, Tom Let me give a little context here so in our Sun belt markets, where we have 25% of our NY and we're obviously, we're experiencing a little bit more elevated supply our bes have underperformed our a's on new lease growth by about 170 basis points and just the size of our bees were negative four 4% and our EA.
Or negative two 7% on new leases. This is very different from what we experienced during the second quarter.
And quite frankly, what we would've expected to experience. So during the second quarter, our bes actually outperformed our A's on new lease growth by 110 basis points again decided that bees were negative one 3% as were negative two 4% and again just to summarize from what we would've expected our beavers a performances.
Off by 300 basis points on new leases in the sunbelt.
Great. Thank you very helpful. My follow up is I just wanted to clarify when you believe we'll see peak supply pressure I know thats, probably difficult to forecast right now, but how should we think about the supply into 'twenty, four which estimated into 'twenty five and again when there might.
Peak supply pressure and I don't know if it helps to discuss by region.
<unk>.
Yeah, Hey, Jeff I guess, the positive is clearly what you've seen headline wise with starts dropping pretty dramatically here in the last couple of months are down kind of 50 plus percent, which someday it will be a positive as we get into the fundamental picture probably in the 2025.
We look at 2024 and it looks like we're gonna placer.
So in the first half of the year Theres really not that much of a divergence with in our different regions. There's clearly some markets that start to look a little bit better than others, but regionally, they're all kind of hitting in the first half of the year that said, it's not going to be a cliff in the second half you're going to start to see a dissipation and deliveries.
But then you still have to deal with plus or minus 12 months to get through the lease ups and so those lease ups are going to take place end of 2025. So we're not going to say that 2025 is going to be the panacea for multifamily.
When you start to see the light at the end of the tunnel. Some of these more extreme levels of concessions probably start to roll off and you have a little bit more rational pricing as we move through the back half of 'twenty for another 25, and so we're going to be dealing with it for a while but 24 clearly we're still facing that twenty-five probably starts to look a little bit better for us.
Yes.
Our next question is from Nick <unk> with Scotiabank. Please proceed.
Thank you Yeah I just wanted to go back to I guess, the original guidance sound revenue growth and what it is now and just to understand what changed I guess.
In terms of sort of the you know second half of the year here what was the original guidance assuming that you wouldn't have as much typical back half of the year, you know seasonality pressures and you're assuming you know better pricing and occupancy in the back half of the year and that's why yeah. Now you're are you faced some issues on both.
Those items.
Yep.
Nick It's Joe So good question and one we've obviously spent a better time on here in the last 30 to 45 days. So it's probably helpful to go back a little bit to July when we last confirmed guidance and talk about kind of what we had been experiencing at that point in time as well as kind of what we expected here in the second half of the year and so yeah in terms of experience.
Yeah, we're sitting there in July with six plus months of sequential rent growth kind of up 4% through the first part of the year that was pretty normal with historical trends in both in terms of absolute level, but also seasonality, we're seeing increased levels of supply, but we are still seeing pretty normal concessionary utilization, we still had pretty soon.
Vicki occupancy sticky renewals and so we had a pretty stable environment. It felt like even in the elevated supply as we're sitting here in July and so back half of the year.
We expect to kind of a continuation of that in terms of yes, with new supply was gonna keep picking up but we thought the developers will continue to act rational and we wouldn't see a material increase in concessionary activity.
We definitely thought that the first half performance of our bees and those more heavily supplied markets, we're going to keep outperforming is which Mike talked to that reversal a minute ago.
And we really did believe that given we'd seen normal seasonality in the first half of the year that that easier comps. When we went into that September time period that we talked about previously we thought we were coming up on the easier comps and that would definitely help as we moved into <unk>. So when you kind of rolled it together, we expected plus or minus 3.5% blends coming here through <unk>.
What we talked about upfront was we're starting off the first part of October at around 1%, which we hope kind of continues at that level through four two and so we ended up with about a two 5% divergence that.
That two 5% on our revenue is roughly two pennies.
That's kind of two thirds coming from the broader supply commentary across all markets and so yeah, just to increase concessions east west and Sunbelt and about a third of its kind of a b phenomenon and so it kind of breaks up the change.
That occurred obviously, we're not happy about it we've got a really good track record historically of consistently delivering on the guidance that we put out there. So it's.
It's probably a little bit on this room here on the call of we were a little bit too optimistic you know 10 12 months ago. When we put that together that said definitely don't want it to mask, while the operations team is doing a kind of detract from what our goal here is which is relative results and I think at least to date on third quarter. When you look at the five of us put out results.
Like Mike and team and the rest of the ops team should be really proud of what they've done on a relative sense. Yeah. If you look at revenue I think in the quarter were number one sequentially and year over year year to date I think we're number one or two on both revenue and NOI.
We're number two on year over year F O and so overall I think the relative peace still holds we're proud of what we're doing on a relative basis and I know blends get a lot of focus too we've seen deceleration in blends on an absolute basis were slightly lower than some of the peers, maybe 50 bps 100 bps.
But it does mask a little bit of the occupancy strategy that we've had because our occupancy has been holding better than peers keeping that relatively static at the same time were drive in other income which is why those revenue numbers look good so.
It kind of gives you a summation of where we're at where we're at today, but also want to refocus everybody on what we're doing on a relative basis.
Okay. Yeah. Thanks, Thanks for that Joe.
Just one other question then is on a if you have what the full the new full year blended rate growth assumption is I think last quarter. You said it was 2.5% and then for 2024. There was some commentary earlier that rent growth would be below the long term average of 3% I wasn't sure. If that was also referring to like them.
Blended rate growth number.
Yeah, so kind of the update for this year is roughly 2% on blends down from that two and a half so that 50 bps kind of a for the full year equates to that kind of two plus percent delta that we're seeing in <unk> from three and a half to around 1% and then as it relates to 'twenty four yeah. They come out really has to do with where CN.
<unk> earned and as we go into next year, approximately 1% earn in as we head into 'twenty four or so slightly below the long term average, but still a pretty good jumping off point.
We do expect other income as it typically has to be additive to the number.
But we do expect that all else equal on the third party forecast on demand, which obviously those can move around but at this point in time, it looks like demand, maybe a little bit weaker next year at the same time that supply on the margin is a little bit higher and so blends will probably be a little bit below the long term average if they're typically plus or minus three 5%.
This year were putting up 2%. So we've got 75 days to kind of work towards that and see what the market gives us on the supply and the demand front and then come out with guidance next year, but we don't expect.
Expect it to be a above average year as it relates to revenue growth.
Our next question is from Austin, <unk> with Keybanc capital markets. Please proceed.
Great. Thanks, do you guys expect any of your markets have negative market rent growth next year, maybe more importantly negative blended lease rate growth and then on the flip side, you know any any regions or markets, you think could exceed that long term average of 3% in 2024.
Hey, Austin, It's Joe I think it's too early at this point in time no.
We're going to look at it at a portfolio level and then also a ground up level when it come through the budgeting process and so there's probably going to be outliers to either side, but ultimately we need another 570 590 days to get through our budgeting process get into next year and then.
Come out in the late January early February and talk to you guys about what we're thinking.
That's fair and then how far along are you in back filling kind of skips and evictions and I guess I'm just curious how you kind of shape up the additional risk in the quarters ahead.
Some of your peers have recently started discussing some similar issues that they're seeing.
Yeah, I think we talked a lot in the first half of the year about that elevated level of long term delinquent switch put some pressure on the occupancy and the pricing and some of the fees and of course, the turn costs and legal costs in the first half, but the team has done a really good job both with upfront screening, but also working through the appropriate regulatory and legal processes.
Your throughout the year to get that number down and so we do have a slightly elevated number of long term delinquent still in the portfolio, maybe 15% above the long term average.
The challenge is that you still have elongated eviction processes in place, which means that you end up with two to three X. The amount of dollar exposure for those individuals and so we're probably stay at that level, maybe get a little bit better over the next year.
Encouragingly, though I'd say in the month of collections continued to be strong we kind of get 96, 5% collected each month subsequent to that we have additional collections that usually take us about mid 90 eights collected overtime and so that kind of gives you a one 5% bad debt number yeah, that's been pretty stable here over the last couple of quarters we'd.
Specced it to remain stable into year end.
As we go into next year, yes it.
Could there be a little bit of upside I don't think were getting back to long term averages of kind of 99, 5% collected given the regulatory environment, but maybe there's a little bit of upside from that 98, and a half type level. That's.
It really kind of becomes a rounding error in the total picture. So I think we're kind of losing a little bit of the forest through the trees, when we kind of dive into it.
Got it and then just sneaking in one quick one I'm curious how the level of concessions portfolio wide compare versus that I think it was 2016 2017 period, where coastal markets were negatively impacted supply could you just compare those two periods.
Yeah, and we'd have to probably go back and look at some of the numbers from 2016 2017, but I think what I would tell you is what we mentioned in my prepared remarks is seeing a one and a half weeks today that compares to a half a week just a few months ago and what's been interesting is places like Denver.
In San Francisco, we've actually seen those increase a little bit more than the average right around two to three weeks and then the sunbelt as well as our Philadelphia assets have moved about a week and a half to two weeks over that timeframe with everything else being pretty consistent but I would say as you go back to 2016 17 levels, maybe slightly elevated.
Hey.
Yeah.
Our next question is from Jamie Feldman with Wells Fargo. Please proceed.
Great. Thanks for taking my question.
So you know the other income line continues to grow I know it's a.
Part of your growth plan, we're just wondering about the quality of those earnings versus rental income and how resilient you think they'll be in a downturn.
Is you're pulling back on your rent expectations.
Okay.
Yes, Jamie this is Mike, they're pretty sticky in nature and a lot of this has to do with things like parking and in different fees that we've applied whether it's package lockers are smart homes things like that so these things tend to be pretty sticky. In addition to that it's it's incremental in nature. So things like short term furnished we.
Thought premiums there, we're still doing things with our amenity rentals.
And the newest thing with just rolling out our Internet program.
Starting to achieve those 50 dollar increases and again that's.
That's looking pretty good the earn in for next year on that alone is going to be pretty significant to to continue to drive called that 50 basis points of other income growth. So overall everything feels pretty good today.
Okay.
Thanks for that and then shifting gears to some of the other levers are for.
For investment I mean can you you know what is this.
I guess what is the change in market conditions mean for your appetite to fund developer capital program, even new development starts.
When do you think this has any kind of big picture impact and how much capital you think you could put to work in some of those in the coming year.
Sure.
This is Joe I'll take it.
Number one feel really good about the liquidity and balance sheet position. So clearly going into this period of time with our position.
Position of strength, if you will so we get good optionality as you go down to kind of that pick list.
I'd say, we would start with the dry powder that we reserved for our joint venture and so we did that seed portfolio earlier. This year saw some capital in the low fives effectively today cap rates are in kind of that mid to high fives range based off a limited transaction volume that is out there in the market.
So we'd like to be able to transact with our partner, we're showing them transactions. We think we can transact at that level, but just as importantly, we can go out there and layer on the platform and get the additional kind of 10 plus percent upside in NOI on top of that plus that recurring fee stream. Both on asset management to make the effective yield pretty compelling relative to where we source that capital in.
So.
We and our partner very focused on that right now to drive the Florida accretion and take advantage of the market. The way. It is right now I'd say on the DCP side.
The good thing is we're really not seeing that many opportunities, which tells you what that means.
So it's going to be taking place and so while we do think that market comes to us over time, and we would be interested in potentially adding to our portfolio. There at this point in time looking at the capacity being utilized over on the JV and waiting for more opportunities to come our way and then lastly, you mentioned I'm just development.
Elements pretty challenging right now we've got some assets coming through lease up that are doing well and will clearly drive some additional <unk> accretion here in 'twenty four and 'twenty five.
But in terms of new start thresholds.
We'd want to see at least mid sixes on a current basis, most likely given current cost of debt where cap rates are and where our cost of capital is we're not there at this point.
But I would say, we're getting some benefits potentially over time from a cost side, we're starting to see costs level out if not come down. So I think if we're patient there and just keep building up the optionality and making sure that we got all our land ready to go there is going to come a point in time, when we go pretty aggressively when all the AR market.
Market signals point is to go that way.
Okay.
Our next question is from Michael Goldsmith with UBS. Please proceed.
Good afternoon. Thanks, a lot for taking my question you.
You talked about the demand has been holding in there pretty well, but I was wondering if there was any change in how the consumer is approaching the cancellation processes.
That there's a lot of options out there we've talked quite a bit about the A's and B's are are they regret are they walking in signing a lease and then regretting their decision and backing out.
Curious about the trends within that.
Hey, Michael that's a great question and something we obviously have been watching very closely and to your point, we are seeing people shop, a little bit more so when you think about that cancel them denial rate. We typically run in that 36, 37%. This time of year. We're currently running around 42%. So we are seeing people come through the door. They are finding that.
There's potentially a better option out there. So they are canceling their lease at times. So that is a little bit more elevated on the front door and then on the back door. What I would tell you is negotiating has picked up to some degree we typically negotiate on call it 20% to 25% of our leases.
We are currently around 25% to 30% negotiations and that equates to about 50 basis points off of what we send out and normally that's around 20 to 30. So both front Dorian backdoor is elevated a little bit but still.
Still selling about drive that occupancy in the high 96%. So we feel pretty good about where we're at.
Just to clarify the backyard that's related to lease renewals correct.
Correct and I'll tell you we've been very focused on our renewals as of late and over the last six months, we have seen our turnover go down just like putting a flashlight on that so even though we are negotiating a little bit more and again, it's not that much more we are still achieving above 4% on our renewals, we're still sending out around 4%.
And we're going to continue to try to drive our attention.
Got it and then as my follow up question, just going back to the A's and B's is this an issue relative pricing and that the relative price the gap between as and BS have come down as new supply is get the concessions or is this more on the absolute issue where.
Ease of come down to the price where.
<unk>.
And at a certain price that theres more utility at that price and so like the gap between the A's and B's is less relevant than just at that price due to more interest in that new supply is any thoughts around that.
Yeah, I think it's more of the relative piece. So if you look at traditional delta between our B quality portfolio and the new deliveries you are usually looking at a 20% to 30% Delta in price point, but when you throw two months concessions on there or roughly 16% well you end up with is call. It a 10% dealt.
Effectively between that would be in that brand new product, so 10% on our type of rent youre talking about about $250 a month and so positively youre seeing the consumer say, okay, I can afford $250 incremental amount. So it speaks to the strength cash position and kind of wherewith all of them and so they're getting.
A better quality asset or a little bit more cash I think what it'll be interesting is when we get 12 months from now and to the extent that those concessions begin to burn off that's where you start to recreate that wider delta one suites A&P product it'll be interesting to watch what happens to that consumer 12, and 18 months from now if they come.
Back down into that B space, but that's a little bit further down the road for now that dynamic we're seeing is the ability to upgrade for that b quality consumer.
Our next question is from Steve <unk> with Evercore ISI. Please proceed.
Oh, great. Thanks, just one question Joe on kind of capital allocation. You know you talked about the share buybacks I think around $40 and obviously the stock is appreciably lower than that today and stockpile trading around a seven cap I'm just curious what the appetite is to maybe sell more assets either into JV or outright asset sales.
Even if they're at higher cap rates than what you'd normally dispose out and use some of those proceeds to buy back stock at these levels.
Yeah, we did do the buyback when we had kind of identified source of capital locked in at that lower level and so has generally been our mo in the past is to do it.
And smaller scale, if we have that identified source.
Right now we will take a look at exposing additional assets to the market to see where they price over the next several quarters just to continue to shore up liquidity present ourselves with some more optionality and of course look at redeploying into some opportunities be it the JV DCP or potentially buybacks.
But I think right now the priority definitely is trying to find JV opportunities instead of the buyback side of the equation and wall. If we're trading in the mid to high sixes that may seem like a wider spread versus a mid to high fives on the acquisition market.
You capture that upside that we can get from a below average operator, if you will and bringing it onto our platform plus throw in that recurring fee stream on and then adding scale to the enterprise versus shrinking scale from the enterprise.
The Delta really isn't that wide in terms of call. It the final NOI yield on stabilized <unk> between the two options. So I would prefer to deploy with our JV partner in this environment.
Okay, and then just one quick follow up on the development I think you mentioned six 5%. It was kind of a targeted deal I guess why is that the right level if.
I know bond yields may come down, but we're sitting close to 5%.
Spreads would certainly tell you you'd probably be issuing in the mid sixes.
Cap rates might be in the high fives to 6%, So why would a 6% development yield makes sense.
Yeah. That's fair question I'd say number one we are definitely on pause on that front.
So I wouldn't expect anything here definitely not the rest of this year and even probably at least through the first part of next year, maybe by the time, we get later into the year. If dynamics change then we'll be able to take a much harder look at what is the required yield relative to what the source of capital is that we have at the time I'd say that six and a half right now on current.
Should stabilize out higher than that if we were able to start a six and a half is usually where looking at current rents and stabilized cost.
So that six and a half becomes a seven over time as we lease that up that seven would compare to kind of that five and a half to six cap rate in the market today and so you get a brand new asset stabilized at call. It 125 basis point spread to the source of capital or market cap rates and so that's why we think it makes sense, if we get to that point in time.
We're not at that point in time, yet where we have starts available at those levels and I think we're still in a macro environment, where we want to wait and see and cast a capital light.
Yes.
Okay.
Our next question is from John Kim with BMO capital markets.
Thank you.
Other markets or other markets.
And a drag on these growth rates and when you look at some of the.
Okay.
It doesn't seem like they have lots of supply pressures I know Joe you mentioned that supply is broad based but can you just remind us are these assets typically older in nature or is there one particular market that's kind of dragging down this performance.
Hey, John It's Mike This goes back to what I was talking about a little bit around concessions than what we've experienced over the last few months places like Denver and Philadelphia, They fall in our other market category, and that's where we've seen concessions pop over two to three weeks in that period of time, so partially due to a lot of supply those those properties in those markets.
Typically a quality competing with that supply.
Okay.
And Mike you mentioned in your prepared remarks.
The focus on improving retention.
And that you've identified at 50% of turnover is controllable at the same time.
I mentioned many times on the call that people can price shop make more information to move around.
I guess my question is how.
How much confidence do you have that you can improve retention meaningfully in this market.
Quite a bit of confidence in that and part of it I had mentioned in the prepared remarks, we will have done a great job within the last few years. When you just compare us versus our peers and so we think there is 3% just to get back to average and the things that we're putting in place today, we think are going to drive us above.
Average and for example, I mentioned it a little bit in my prepared remarks, but just having these dashboards to score interactions from from every interaction that's coming through the door and being able to see exactly what's happening to change those trajectories, we're arming our associates in the field with that as well as our centralized teams and it's starting to play out.
As I mentioned six months straight of turnover coming down we're just now scratching the surface and so as we go into 'twenty four and 'twenty five we're going to lean heavily into this utilizing the data that we've been able to to mind and I think it's going to produce a lot of results for us.
Hey, John just to add on to that because I think embedded in your comment a little bit is.
In a environment, where theres concessions or better rent opportunities. If you will want that overwhelm their desire to stay or go.
The reality is when we went and looked back at the last 10 years of that controllable performance on turnover.
One of the top 15 factors actually had to do with rents and so it has a lot more to do with their movement and experience and then what's their experience subsequent to move and so its both of that property level, when youre dealing with things like trash and pet waste or noise or parking and how do we remedy those <unk> at an individual level, how do your remedies certain.
They're having related to perhaps service calls some of the maintenance issues some of the appliance issues maybe noise next door.
Just start with responsive and meeting their needs and so there's a lot of property and individual level controllable factors that have nothing to do with rent that we think we can take care of hopefully give them a better experience and therefore are stickier resident at the end of the day.
Our next question is from ahead Dallas, just with Mizuho. Please proceed.
Hey, guys just one left on my list here.
Joseph maybe set some light on why the bad debt reserve.
It was up I think about $9 2 million up 10% versus last quarter and I know you've got the comp a bit differently, but maybe you can remind us what's embedded in your full year 'twenty three we got from a bad debt perspective.
Yep.
So just for reference where he's looking for everybody on the call just attachment one down in footnote two.
We disclose our net AR reserve and I'd say number one that number is a output of two other inputs and so you have our gross accounts receivable and then you'll have a reserve that we put against that which is basically at predicting what do we think as uncollectible of that gross amount and so the net of those two is that roughly $9 million it was up.
About 900 Grand in the quarter and.
And that's really driven by two things that gross accounts receivable actually came down by about $1 million and so that number coming down clearly a good thing in terms of collections. The other piece is we brought our reserve down as we looked at in the month of collections and collections over time getting up to that 98, 5%.
We're looking at that and saying, we think collectability of that gross accounts receivable actually improved so kind of similar to what you see with the banks when they're getting a delinquency on a mortgage loan it's really no different in that instead of us having a delinquent payment and then write it off to zero, we're accurately assessing collectability of each one of those delinquencies.
So it's not necessarily binary.
Utilizing a little bit of signs on a little bit of art. So the trends that we see and continue to be good on collections. It ticked up a little bit, but we would think it would probably be stable to trending down here over the next couple of quarters.
I appreciate that and then broadly.
Within the guidance for bad debt near term expectations.
Oh, yes, sorry, yes.
Yeah. So we're kind of having a full year at this point plus or minus that 98, 5% collected.
We think we will probably level out of that here in the back half, we're a little bit lighter than that in the first half of the year, a little bit better in the second half of the year as we had success getting those long term delinquents out and so I think for a full year 98, and a half I mentioned earlier, maybe theres some upside to that as we go into 2024, thats really going to depend on.
The regulatory environment, plus some additional screening mechanisms that were put in place here in the back half of this year to try to keep fraudulent individuals' from coming through the front door. So there could be a little bit of upside but.
Again, I don't think it's a big number for your 98 and a half and over time, we get to 99, maybe there's 50 bps on the table over a couple year period, and so it's not going to be the key driver of performance next year, but hopefully there is a slight positive.
Our next question is from Adam Kramer with Morgan Stanley. Please proceed.
Hey, guys just wanted to ask I think you guys characterize kind of the competitive environment with some of the new supply I assume maybe kind of no longer rational in some ways in terms of kind of the concessions are offering maybe just if you could kind of I don't know its a.
A little bit of a high level question, maybe just kind of describe some of the behavior, you're seeing from developers right.
Kind of the.
To which they are offering concessions.
And this is maybe on the other side of it right to the extent that they're not able to kind of.
Hit their targets for lease up.
Starting to get inbounds from them.
Where you know they have different pressures capital market challenges and maybe there is opportunity there and it kind of more of the distress side.
It's always hard to judge if people are being rational irrational, but my experience says that I think the developers are being rational about it because theyre looking at their maturing loan and trying to say I need an extension I need a debt service coverage ratio and there.
Mostly going to pro forma one month free and they will stretch during slow periods of time to two months free to try to get their capitulation is is when they go to three months free then they are mediately, calling their lender and saying we need to start negotiating a paydown and or an extension so youre right to connect.
What is the ultimate goal is to get to that refi and hold onto the asset as long as possible and I'm not sure that they're being irrational. What I think has caught us by surprise is the customer that sitting in that b apartment paying $2200 a month and looking at the a down the <unk>.
Treat at 3000, and saying two months free I don't have to pay any rent.
Even though I can't afford the three most likely I'm going to stretch for Ed and hope for a better day, our arrays and frankly, a lot of them are getting those races. So that's a surprise to us is the jump from beta eight and a lot of these markets and wouldnt expect that to consider.
I'm not sure I hate this forecasting stop all the time, but the truth is that doesn't seem very rational to me on the consumer side jumping that way and putting themselves farther in under water. If you will at a time of higher rates higher credit card balances. So we may see that reverse.
No evidence of it yet, but that's the surprise we're speaking the developers not so much not really surprised they don't seem desperate yet we're not seeing any market with a three month free flag hanging out there and.
And when we do I think that will be some very very interesting times.
That's really helpful. Tom Thank you I'll leave it better.
Our next question is from John Pawlowski with Green Street. Please proceed.
Thanks for the time, Joe just one question on the developer capital program, just how quickly.
Given how quickly property values in land values are moving can you give us a sense. What you think the true loan to value ratio is for the average deal in your existing book right now.
Yes.
It's definitely and blend a fluid situation as you mentioned I mean.
Or not cap rates borrowing costs are up about 100 basis points, just since our last call. So.
It is pretty fluid.
Majorities. These deals did have built in expectations of 30 plus percent value creation relative to cost and many of them. If you think about when they started to where they are today. They had NOI exceeded our pro forma numbers. So there have been some challenges where there's been greater pockets of supply, but by and large I'd say the majority of these deals are actually.
Exceeding their expectations and so.
I don't know specifically how to get into individual deals or overall.
I would say if you look on attachment 11 b.
Just to point out the timelines that we have to potentially figure out when that equity comes due.
Got some questions on those first four up in the press equity stack showing that years to maturity just want to remind everybody that downpour footnote for that years to maturity is actually for our press position, that's not always coterminous with the senior loan. So those first four deals which looked like they come and do a little bit sooner those are actually mid twenties.
Five to mid 2026 type maturities. So those are not coming due the next deal up for US was actually down in the loan section 13 under fair amount that's coming due in January 'twenty four and so that's the only one that we have due in 'twenty four that we're going to be working through and trying to think about how does that refi look and what is the capital stack look like so.
I think by next quarter, we'll have some more to talk about on that transaction, but overall I think most of these are exceeding their initial pro forma just trying to figure out where cap rates and values stabilize ultimately.
Okay. One follow up can you give us a sense how many projects on attachment 11, b you're concerned about the debt service coverage ratio of those interest costs on the other types of data going up market, that's gone down it sounds like.
Perfect storm or develop a cashflow drawing up so can you give us some thermal projects youre worried about.
Okay.
Yeah, I guess I don't want to get into specific transactions I'd say most of these.
Kind of in that 9% to 10% NOI yield.
Steels that are kind of in the.
The bottom two thirds of the page.
Because of the fact that they are pro forma has been exceeding expectations. So, let's kind of 6% to 7% yield to our press position, which in a mid to high fives cap environment feels pretty good.
I think what we've got to be able to get to with these is yes, sofer's increased materially and when your silver plus 300.
That becomes painful from a coverage perspective. The reality is that the GSA is are very much still alive, and well and have as liquidity available and so you got to balance the liquidity and then the rate and coverage and so if youre doing GSE debt you can get a nice cash flow coverage on many of these deals once they get to refi, they're just trying to.
When do they want to go to that refi window and do they want to lock in longer duration debt. So.
I'd say at this point nothing to speak of in terms of impairments or take backs of any of these assets given the.
The duration that we have on the senior loans, but we will continue working with the senior partners and equity partners over time to figure out where those discussions need to go if they have to go somewhere.
Okay. Thanks for the thoughts.
Our next question is from Conor Mitchell with Piper Sandler. Please proceed.
Hey, Thanks for taking my question.
So you guys talked a little bit about how you're looking at the different development landscape now and I guess my question is just.
Regarding the guidance reduction how does that impact your underwriting of your owned and then also JV. So how can we think about the environment now versus a few months ago. When you made the Lasalle JV deal and maybe looking ahead, what can you expect to see.
Difference in the underwriting.
Yeah, I guess I'd say first off we're very pleased that we got that joint venture done obviously is a little bit different that market at that point in time, so fluctuate in that transaction at the pricing that we did very pleased with them not being able to pull out those cash proceeds and deploy them and to basically CP paydown in a non dilutive manner was.
Clearly a nice trade there for the time being as we got it.
Stockpile that liquidity, if you will until we redeploy I think from a underwriting standpoint.
We're going to meet the market in terms of where cap rates are if we find the right opportunities. So today, you're seeing kind of that mid to high fives caps you are seeing that on a very limited transaction volume.
Theres not a lot of sellers out there in the market.
And you do have a number of buyers that are in the market to kind of help that pricing. So you've got a.
Number of closed end funds that have capital available that they have already raised you have family offices high net worth type of money then of course, the 10 31 buyers out there and so.
The market right now while those pricings are beneath where current borrowing costar with a limited amount of transaction activity. There is enough of a buyer and seller pool to actually get that done.
And then going forward the underwriting is not necessarily going to change in terms of forward growth expectations over an extended period of time, we're going to really be focused on what kind of us and our partner fine together.
Can maximize what we can do from an operating platform perspective, and so that's always what we're focused on.
So I don't think theres much in terms of change in underwriting on a go forward NOI growth perspective.
Thanks, I appreciate the color and then.
You've talked a little bit about the underperformance of feed products versus a products.
That was the opposite earlier this year.
Just kind of wanted to get it.
Some of your updated thoughts on how you think about the mix of DNA in your portfolio going forward.
Yeah, I think over time, the diversification has clearly served us well when you look at having diversified price points diversified sub markets and of course, the 20, plus or minus markets that we're in.
Provides a pretty good foundation from which to insulate ourselves relative to volatility in cash flow, but also kind of pivotal sources and uses so I think we want to remain balanced for a little bit more be biased obviously throughout the portfolio.
Which has worked well for us over time, having kind of that solid b that you can redeveloped when you see upside rent potential in the markets are going well, but also helps insulate you. During downturns is pretty nice so I don't see any material shifts taking place to the overall portfolio strategy.
We do typically like to try to find ways to buy because as allowed for more opportunity to get a little more meat on the bone and or more margin upside when we bring those onto the operating platform. So you do typically see us kind of by that B to a minus range typically and then the improvement in portfolio quality really comes through our development arm that does a great job of <unk>.
On high quality developments for us.
There are no further questions in the queue I would like to hand, the call back over to chairman and CEO, Mr. Toomey for closing comments.
Well, thanks for all of you and your time and interest in support of UDR.
I want to highlight again.
Relative performance in my closing remarks in particular, I think during the quarter, Mike out of the five peers that have reported finishing number one in revenue expense and NOI.
It matters, what we get to the bottom line and it starts with operations and I take my hat off to the team for that level of performance and.
And it's a testament to their efforts in the platform which are.
Key points of future differentiation and growth potential.
With that we look forward to see many of you at NAREIT in Los Angeles and in a couple weeks at other upcoming events and.
Enjoy your holiday Slash Halloween and take care.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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