UDR, Inc. — 2024 Q1

Nick, it's Mike. I'll take the first crack at it. What we're looking at, and as a reminder, we had 70 basis points of blends for the year. And I would tell you, our blends right now in the first quarter, running about 20 basis points higher to start the year. But April, May trend even higher, I'd say, about 100 basis points higher than what we had in our original business plan going into the year.

Occupancy in the first quarter was about 10, 20 basis higher than we expected. And over the last 30 days or so, we brought that down. So we're running right around [ 96.9% ] today. Expectations are, we'll continue to see that probably migrate down maybe 10 or 20 bps as we continue to push our blends a little bit higher. So overall, I'd say occupancy is pretty much on target through the first 4 months or so.

Mike, again, good question, Nick. Right now, we're sending out around, was around [ 3.8% ] through June on renewals. And then in July, we just sent out about 4.5% growth. So we are getting a little bit more aggressive on renewals, but at the same time, we're really pushing our market rents. So we're trying to compress the new and renewals. And I think what you saw from us in the first quarter was about a 600 basis point difference between new and renewal. My expectations -- that's going to come down to around 300 to 400 basis points as we move throughout the second quarter. And that's really setting us up to drive total blends, which is equating to total revenue growth a little bit ahead of our expectations.

Mike, you commented -- I want to hit back on the leasing trends about May, lease rate growth improving versus April. You talked about how things have kind of trended. I think, through the first quarter into April relative to expectation. But which markets are really driving that improvement into May? And maybe where are you becoming a little bit more aggressive on the renewal rate growth. And then do you think you can kind of keep retention or keep occupancy high while pushing a little bit harder?

Yes. Great question, Austin. We are seeing more strength based on our own expectations coming into the year really out of the West Coast. Right now, we've talked a little bit about what we've experienced in Seattle and San Francisco. And we're starting to see same thing coming out of the East Coast, New York is really picking up as demand picks up. So a lot of strength coming out of our coastal markets, and that's where we're seeing on an absolute basis, the highest rents.

So yes, my follow-up kind of wanted to dig in a little further on sort of the positive surprise or seemingly like you're -- I feel fairly good about the Sunbelt relative to expectations. So I mean, would you be willing to say that the worst is behind you in the Sunbelt and that potentially the benefit of better job growth and maybe easier comps in the back half of the year could lead to continued acceleration? What are sort of the updated thoughts on the outlook through the balance of the year?

Yes, Austin. That's been getting a lot of questions on the Sunbelt. So maybe let me step back a second, just give you a little bit more color. And as a reminder to the group is, that's about 25% of our NOI. And to your point, we know supply is -- it's a certainty. And it's in front of us. Peak deliveries are still right around the corner, but at the same time, it's during peak demand. So that's a positive, and we're seeing stronger job growth as well as demand is a little bit stronger. And a lot of that has to do with record absorption. So overall, while it feels good, we're cautiously optimistic just given that supply is still coming.

And then can you just clarify, did you guys underwrite 5% other income growth for the year?

We were between 5% to 7% growth on our other income line. And again, we're holding around 10% today. So that's a 200 to 300 basis points improvement from what we originally expected.

Mike, I appreciate all the comments on some of the trends by market. I'm just curious in the Sunbelt, given that we've got heavy deliveries coming over the next 4 quarters. Is it your expectation that the better trends continue? Or has this maybe been either a little bit of low in supply or maybe stronger demand? And like, I guess, how are you thinking about those concession trends maybe over the next several quarters?

Yes, Steve, we still think that peak supply is -- it's going to hit us here in the next couple of quarters. So we're going to continue to watch that, lean into the things that we control. And again, that's where we're hitting our other income and driving our results against the peers on a relative basis. But we do expect that we're going to continue to take the headwind just given supplies in front of us for the next 6 to 12 months in that market.

Steve, this is Toomey. Just to add some more color, and I think we had it in our prepared remarks. The record absorption in the first quarter, high for 2 decades. The jobs number, I think, has surprised us all through the balance of the year. If that continues, the Sunbelt has a pretty good path, if you will, and absorb it. I'm not sure betting on the jobs market, going into an election cycle is a very strong bet on that piece of equation.

Okay. And then maybe one for Joe. Just as you think about maybe any opportunities for capital deployment. I know you probably don't like where your stock is trading, but how are you thinking about any kind of investment opportunities, whether it's DCP or land purchases for future developments? Like just kind of where are the recurrent opportunities? Where is the opportunity set today?

Yes. Steve. So I'd say number one, balance sheet remains in a phenomenal position. So liquidity-wise, maturities sources and uses all look to be in a really good position. So we're able to kind of sit back and be in this capital environment and wait to pivot to offense. I'd say opportunity wise, the transaction market was finding -- footing there in terms of agreement on where cap rates were and buyers and sellers were coming together. Obviously, this recent surge in rates creates a little bit more of an unknown in that environment. And so we're kind of sit back trying to see where valuation starts to settle out here a little bit.

Just wanted to hit on some of the expenses. I was looking at Attachment 8. There's a couple of markets where you had some pretty big jumps year-over-year like Seattle, Boston, Monterey Peninsula. Anything going on in those markets that we should be aware of on the expense side?

Yes. Josh, I would say, first and foremost, you have to remember the CARES, we're anniversarying off of that. So as a whole, that had about, call it, 350 basis point growth rate. So if we didn't have that, we would have been 4% overall. But specific to some of these markets, Seattle, as an example, we had taxes go up about 9%. So that drove a little bit more growth there, a place like Monterey Peninsula, utilities were up 7%. So you have some of these other factors that are in play in addition to what we're anniversarying off of given the CARES Act. So that's driving some of the higher growth if you will.

Just to add to that because we did get a couple of questions overnight on the expense number. I think we did a great job of telegraphing what was going on there with the CARES Act comp in 1Q. And I think a lot of notes noted that, but that was in line to slightly better than we had expected. So that 7.5% overall expense growth number was definitely not a surprise to us. So as it relates to the range for the rest of the year, we definitely see the path to see that year-over-year number come down here for the next 3 quarters. And when you look at the initiatives around that, be it additional automation of leasing, more no staff properties, some of the stuff we're doing with sweet spot maintenance, some of the purchasing. We still got a lot of initiatives out there to keep that expense number controlled as we have in the past. So I would not let 1Q scare you in terms of is that going to be a recurring issue for us.

Okay. I appreciate that. And then back on other income, just kind of curious what's driving the outperformance in the other income line? You mentioned the building-wide WiFi. Is that like people can sign up any time? Or I kind of thought is that like lease renewal or when there's a new lease signed. So any color there would be great.

Yes. So let me give you a little bit more color just again -- the other income, it does make up over 10% of our total revenue. And so on our stack, we're looking at about, call it, $40 million and 1/4 of that growth came from the rollout of our bulk Internet. And so we did see about $1 million benefit during the quarter compared to about $100,000 last year. So the majority of it is coming from rolling out that initiative.

I was hoping you could talk a little bit more about how Class A versus B is performing across the markets, across your portfolio?

Sure. I'll take that. So B outperformed our A's on a blended basis at the portfolio level by about 50 basis points. So what we saw was 1% growth versus 0.5%. And I'll tell you the Sunbelt deviated from the recent trends we talked about last year where B's were underperforming A's across the board. And this does suggest that the supply dynamics are impacting A's more than B's across the Sunbelt, which is more in line with traditional supply dynamics. So overall, it feels like it's normal steady state today, and these are doing a little bit better.

Okay. And then you talked broadly about the Sunbelt, but can you just get a little bit more granular on the trends? You mentioned Texas, but as Dallas different than Austin and then even Florida, Tampa, Orlando and then Nashville, which, of course, it's not Florida. But can you just talk more granularly about those markets? Or are they all pretty much doing exactly what you said in your broader Sunbelt comments?

I may give you a little bit more color on the makeup of those regions and what we're seeing today. I think first and foremost, starting with Florida. Florida makes up about 10% of our NOI, and it's really split between Tampa and Orlando. Let's say, Tampa, we have about 20% urban, 80% suburban portfolio. We're seeing concessions around 0.3 weeks today. Occupancy is running in that mid-96% range. and Orlando is very similar. So we're seeing about 0.3% weeks concession. Occupancy is a little bit higher at 96.9%. Blends are still slightly negative, but they continue to improve. And so Florida feels like it's on track with our original expectations for the year, specific to Texas, similar in the sense that Texas is about 10% of our NOI, but the majority of this is coming out of Dallas.

Maybe, Mike, for you -- I mean you talked about how high the retention is and just the strength of the renewal rates. And so I'm just wondering, like is there a loss-to-lease in portfolio still? Or as we look over the course of the year, does -- do you think this flips to like a gain-to-lease, or how should we think about that and that divergence between new and renewal spreads?

Yes. Tony, what we're seeing today is a loss to lease right around, call it, 2% to 2.5%. Typically, that grows as you go through the demand period over the next 3 to 6 months, and then it starts to trail off towards the end of the year. But right now, our loss-to-lease is hovering right around that 2% to 2.5% range today.

One, just one other thing, too, in terms of kind of that momentum and that loss to lease question, I think probably one of the things we're most excited about on a year-to-date basis, when you look at the combination of our gross rents and that concessionary number coming down since the start of the year, we're actually up plus or minus 3% on effective rents on a year-to-date basis, which through the first 120 days is a really good result relative to historical averages. Obviously, that's being led by East and West Coast doing a little bit better. But even Sunbelt, as Mike talked about, we're seeing market rents move higher there. And so when you worry about that gain to lease, the fact that market rents continue to move higher at the same time that we're pushing our blends both on renewal and new base is higher. We feel pretty good about that trajectory in terms of -- as a forward indicator.

Okay. That's helpful. And then just the other one, can you comment on what bad debts were in 1Q and whether you expect any improvement from here for the rest of the year?

Yes. So when we put together guidance, we had assumed a flat year-over-year number from '23 to '24 for bad debts. Most of that really being due to the fact that we think we did a really good job of assessing the AR balances historically and knowing kind of what we are going to receive over time. And I'd say that's continued to play out.

Yes. Let me give you a little bit of color on all of them. I think first, starting with Seattle and San Francisco because we do get a lot of questions regarding those markets. First and foremost, performing better than we would have expected. And a lot of this has to do with things that are unique to our portfolio. So I'll give you an example. Seattle for us, we're not located down in Seattle. So we're not facing as much of the supply pressure as some others are. We're more located in Bellevue and then out in the suburbs. And what we're seeing in a place like Seattle is Amazon's return to work has really helped demand.

That's a really good question. And you'd be surprised to know that rent increases meanwhile, it's a factor, it's 1 of 15 factors, and it's not even in the top 5. And so some of the things that we're finding with going through these millions of data points, it comes down to what you're saying. It comes down to trash, pet waste, noise, the move-in experience. You have to make sure that that's bulletproof. As well as even [ pet ] issues.

I guess first question, Mike, sorry if I missed this, but -- did you give the new lease rate growth, how that's looking in April for the Northeast? Could you also just explain why that number was a little bit weaker than some other markets in the portfolio in the first quarter.

So we did not provide that, but I'm trying to look through some of my notes here quickly. What I would tell you is new lease growth continues to improve. And when you think about what we just put out there as a whole, on our blends being roughly around call it 2% in April. Our new lease growth is roughly flat. And as we move throughout May, expectations are that's going to turn positive. And I think what we're seeing across the board, whether it's the Northeast or even the West and Southwest regions we're seeing improvement there. And a lot of that has to do with pushing our retention up, holding our renewals at a pretty steady rate and trying to find a happy medium on those blends between new and renewal. We're going to continue to test the water as well we can and see where it takes us. But overall, what we're seeing is a positive momentum pretty much across the board.

Okay. Second question is maybe for Tom or Joe, in terms of -- it seems like you have the policy of not revising same-store guidance in the first quarter. And I know you talked about you still want to see the leasing season in the spring play out, and there are some reasons to be cautious in some instances, but you are, it sounds like you are trending above the guidance. So I guess I'm just wondering what is the reason at this point to have that policy since a lot of your peers do adjust in the first quarter. And in fact, I'd say much of the broader REIT market is willing to adjust guidance in the first quarter. So if you could just remind us sort of why you feel strongly about that policy? Or if this is just an instance of situation on the ground. There's still a reason for caution, Sunbelt supply, whatever it is driving that decision.

Yes. Nick, it's Joe. I'd say as it relates to the broader REIT market, we don't pay a lot of attention to their policies, but I'd just remind everybody, by and large, the broader REIT market is a longer lease duration sector. So maybe a little bit less exposed to the volatility of supply or macros that comes quarter-to-quarter. So as we look at ours -- we've traditionally had that policy with the exception of during COVID when we saw meaningful outperformance to start the year back in '22.

I don't think anyone's asked it yet, so I'll give it a shot. Your Attachment 8(E), you no longer provide the market detail on new and renewal spreads. And I was just wondering why decrease that disclosure. I found it very helpful in the past.

John. So that's part of our annual review that we do with the disclosure committee. They go through and look at best practices throughout the broader REIT space, but also adjust within the multifamily peer group. And so when we looked at what others did around disclosure and the blends, we found that some do regional, some just do portfolio, but we're definitely an outlier with the level of detail that we provided on 20 different markets.

Okay. Got it. Joe, you also mentioned on the DCP, the watch list remains at $50 million over 3 investments. It didn't move despite the favorable resolution of 1,300 Fairmount. Can I ask what investment got added to the watch list and what's the likelihood of consolidating when these assets are among these 3 investments?

Yes. So I'd say it's no change to the watch list. So there's a total of 4 assets on that watch list. It's that Philadelphia DCP that we just went through the successful refi for, plus the 3 others that were still in their last quarter. So 4 in total totaling $150 million.

Does your current guidance contemplate unfavorable outcome for any of these 3 investments? In other words, could there be other upside?

No, that's -- yes, it's a great question. I should have clarified that. Thank you. Now the upgraded guidance took the downside risk from the Philadelphia out of the equation. So no FFOA risk related to that or the other 3 that we see this year. The next maturity for one of those is January of '25. And thereafter, the other 3 are in mid-'26 generally. And so we have time on all of those. I'd say if you wanted to bracket the potential downside, if all 4 of those transactions, that $150 million, if we had to go off of the accrual and buy in at the lower yield, it'd probably be about $0.03. But between now and 2 years from now, obviously, we expect upside on NOI from those assets. And so we don't see that full risk into fruition, even if all 3 of those did eventually have to be taken back at their maturity.

Just wanted to ask maybe a little bit more of a high level, maybe theoretical conceptual question. You talked a little bit about the kind of robust job growth we've had so far this year, and I think it's something to certainly focus on when it comes to apartment demand. Maybe just walk us through, is there any kind of -- I don't know if it's a rule of thumb or a way that you guys think about for x number of new jobs created. How many apartment renters are created or what that does in terms of kind of quantifying apartment demand for you guys?

Yes, it's good because we kind of took a look at that as we step back, if you remember, when we put together our initial guidance, we have put together our top-down perspective as well as the bottom-up budgeting process that we always do. And our assumptions that led to that plus or minus 1% rent growth or roughly 70 basis points of blends for the year, that was driven by a multitude of factors, including GDP, wages, job growth, all being low-single digits based off consensus. We had a decline in homeownership rate and then the higher supply number that we [ knew ]and expected.

Great. That's really helpful. Maybe just one a little bit more on the ground, if you will. You talked about it a little bit earlier, but just, I think you guys were really kind of present and clear with the narrative last fall post-Labor Day. It's kind of what happened with the 10-year at that time and kind of what that meant for concession usage on the ground. And maybe taking about the 10-year is today, maybe not quite where it peaked out, but certainly could be higher than it has been in the last number of months. Maybe just walk us through, are you seeing kind of elevated level of concessions again, are you seeing developers maybe change their behavior given where the 10-year is relative to 2, 3, 4 months ago.

Adam, I'll kick it off and kick it over to Joe. I'll tell you what we're seeing on the ground, and as you can see it in our numbers, concessions have been coming down. And I think, this is due in large part to the fact that a lot of these deliveries are coming at a time where you also have demand picking up. And that's the big difference between what we experienced back in 3Q of last year. You had a lot of deliveries coming when -- very demand was starting to go the other way. And so there's a big difference there. There's still more supply to come. So we're, again, cautiously optimistic of where this is headed. But from what we can see on the ground today, concessions have actually come down a little better.

This is Toomey. I'd probably just add a little bit more to it. And in the developer's mindset, he's looking to add this rollover loan in what terms you can get in proceeds. And so in case of last year or third quarter, we really faced with falling rates, slow traffic, 50 bps spike in your refi and your proceeds coming off 10% to 20%. So that you got squeezed from every angle possible, and you just drop rate to try to fill up to get some level of cash flow because what's probably your most stressful point isn't necessarily the rate. It's the proceeds number. And on a debt service coverage ratio, that squeeze right there means your check to rebalance your loan, if it's $100 million and it went from $10 million to $20 million, you don't have extra $20 million in your pocket. So you hit the panic button, then you try to respond that way. And can that happen again unlikely, but it can. And I think we want to be prudent and see how that emerges. And anyone that can figure out where the 10-year treasury is headed. Please call me because it's a lot easier than buying lottery tickets.

Two questions. First, just looking at New York with the recent rent law changes. One, do you see any DCP opportunities for you to help finance third-party office to resi conversions? And then two, with the new laws really do you see any buildings where either they're pre-2009 or you don't see a sightline to exceeding the luxury rents to escape good cause that you would look to prune?

Alex, this is Andrew. I'll take the first question and then pass it off to Chris for the second one. As it relates to DCP opportunities, we're always open to underwriting any transactions that we see in the marketplace. To date, we haven't seen anything yet. But we evaluate each opportunity based on its merits. And if it's the right deal, then we'll move forward. So at this point, there's nothing we're working on, but it's not [ red bind ] by any stretch.

Yes, Alex, it's Chris. Before I dive into New York rent control, maybe let me first step back, talk to the big picture a little bit more on the regulatory side. So first, I would say many of our state legislative sessions have convened for the year while we continue to see bill signed and a lot that impact our -- really our business at the margin. This really was the second year in a row where major legislation like extremely restricted rent control, I would say, for example, that could negatively impact our business in a significant way. It was largely defeated in most of the areas we operate. Obviously, a good trend for the industry, trend we hope continues in the year ahead. So really big things goes out to our advocacy partners around the country.

Okay. And then the second question is, you guys have spoken about a pretty strong operating environment echoing your peers. It's interesting because on the office front, there's still a sense of corporates outside of maybe Midtown Manhattan still being hesitant to lease or to take space. So what are your property managers seeing is driving the demand? Is it really -- is it just a lot of small businesses hiring and there's a disconnect? Or are they seeing a lot of corporate jobs that are coming in to rent -- employees renting apartments and therefore, that's -- you guys are indicating a sign that the corporates are going to return in a growth mode. Just trying to understand the disconnect between what the apartments and you guys are saying about healthier-than-expected demand versus some of the comments from other REIT sectors.

Alex, it's Mike. Funny enough, I actually spent last week with our teams out there in New York and ask them that same question and a lot of this comes back to lifestyle. So they're still saying that people are coming back to the market. They just want to live in Manhattan. They want to feel the experience of being there. And expectations are that they've somewhat plateaued in terms of people returning to the office, but there's still room for that to continue to grow. And if and when that happens, that will only help demand even more.

Right. But Mike, across all markets that you guys are in, you're seeing a similar dynamic. It's just people wanting to live in the different markets, not necessarily meaningful job growth? I'm just trying to understand the difference.

Yes, Alex, I think that's a fair point. I don't think every market is created equal. And I think as an example, I talked a little bit about San Francisco earlier, that market is still getting cleaned up. And I think once they get that cleaned up a little bit more, people want to live down there, and it will be a similar dynamic to what we're facing in a place like New York. But every market is created a little bit different. But overall, I'd say, yes, those sentiments are the same across the board.

And I'd say too Alex, just as it relates to the demand. I mean, we talked about jobs and wages both coming in ahead of expectations. The consensus is well over 1 million jobs at this point in time. And so while we focus a lot on the multifamily supply picture as we should, and kind of that national picture of, call it, 600,000 or so units being delivered this year. Keep in mind, the lion share housing is over on the single-family side, which has seen minimal increase on a year-over-year supply basis at around 1.1 million units. You're also seeing from an existing supply perspective, really no homes being sold, you're back to kind of GSE lows. And so you kind of do get into this environment where what's available for all those jobs that are being created and therefore new households that are being created.

In terms of April retention improving 400 bps from a year ago, is this consistent across your portfolio? Or are there regional differences?

It's pretty consistent. Again, what we're seeing is a lot of these actions that are put in place from what we're doing with the customer experience project. And so I'd say relatively consistent across the board. The only difference I would tell you is in a place like the Sunbelt, historically, what we would have experienced is call it, 20% of our move-outs were leaving to buy a home. Today, that's closer to 10%. And so significantly less people moving out to buy homes in places where it was historically more affordable. But other than that, a lot of this has to do with the actions that we're putting in place through our innovation.

And then in terms of automation, as you move forward, does it ever become apparent that automation is being relied upon too soon that efficacy falls short and impact service levels and then you have to recalibrate and move people back into seats. If so, how do you monitor and correct that?

Yes, Linda, that's a fair point. That's something we've experienced as we transition from, call it, Platform 1.0, where the intention was to go to that self-service model, and we reduced our headcount by about 40%. We have found that there are cases where you have to add bodies back that will drive value in the long term. And so we've been going through that over probably the last 12 months or so. And we're still trying to find opportunities where we can run what we call the unmanned sites. And today, we're around 20% of the portfolio. We are adding back from the customer service type positions in the field to make sure that we're acting all these items that we mentioned earlier as it relates to how you change that trajectory and retention.

I don't think, as we kind of look through it, obviously, we go through the peak delivery cycle here over the next couple of quarters. And so 2Q, 3Q is kind of your peak, but it's not a dramatic drop off. It's going to take a while to work through the lease-up of those deliveries. But even into 2025, when you look at overall deliveries coming that year, it's going to be a pretty normal year in terms of relative to long-term averages with the Coast actually coming in a little bit lower as they start to see it drop off a little bit quicker in terms of new starts and permits activity.

Thank you, operator, and thanks to all of you for your interest and support of UDR. And we look forward to seeing many of you at the Wells Fargo conference next week and NAREIT in June. So with that, we'll close this today. We're always available to take your follow-up calls and take care.