UDR, Inc. (NYSE:UDR) Q3 2023 Earnings Call Transcript

UDR, Inc. (NYSE:UDR) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Greetings. Welcome to UDR’s Third Quarter 2023 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. It is now my pleasure to introduce your host, Vice President of Investor Relations, Trent Trujillo. Thank you, Mr. Trujillo, you may begin.

Trent Trujillo: 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.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although, we believe 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.

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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.

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 Lacy, who will discuss our results. Senior Officers, Andrew Cantor and Chris Van Ens will also be available during the Q&A portion of the call. To begin, for much of the third quarter, the multifamily industry continued to benefit from a resilient consumer, continued job and wage growth and relative price point affordability versus alternative housing options. These tailwinds 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 FFOA 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 as the seasonally slower leasing period took hold. Since mid-September, increased concessionary activity from new supply deliveries and lease-up have put more pressure on our lease growth rate and occupancy across A and 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. While this situation being felt across our industry, it has led us to lower our Same-Store and FFOA 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, which has added to our bottom-line in 2023, and we’ll do so for the years to come. We expect our two largest near-term initiatives being building-wide WiFi 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 six Texas communities we acquired during the third quarter. By bringing these communities on to the UDR platform and operating them more efficiently, we expect to capture approximately 800 basis points margin over time.

Third, the joint venture partnership executed at the end of the second quarter 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 ROE. And fourth, we can actively enhance 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 organic growth and capital markets recession should limit external growth prospects. Mike and Joe will add 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 fifth annual ESG report, being named a sector leader by GRESB. Our GRESB survey score of 87 matched the highest in our history, and for the fifth consecutive year, our public disclosure was NA 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 moving forward. In closing, to my fellow UDR associates, thank you for your continued hard work and dedication.

With that, I will turn the call over to Mike.

Mike Lacy: Thanks, Tom. Today, I’ll cover the following topics; our third quarter same-store results; early fourth quarter 2023 results 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 5.3% and 6.1%, respectively, as well as sequential same-store revenue growth of 2.3%, 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 have benefited our business. These include stable occupancy, improved revenue 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 this, we have seen a 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. In short, the consumer seems okay right now, but in place and prospective residents can choose among more options at a discounted price in 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.

Nevertheless, 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 a resilient consumer elevated supply with developers offering approximately one month free and not competing with our predominantly B quality product and easier year-over-year comps in the fourth quarter. This dynamic persisted through early September until things begin to change. The financial health of our consumer was and still is okay, for 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 brands in occupancy under more pressure than originally anticipated.

EDR typically does not use many concessions, but as a result of more direct competition, our average portfolio-wide concessions have increased threefold from half a week to 1.5 weeks. This equates to approximately 2% lower blends or the difference between the 3% to 3.5% fourth quarter blends we thought we would achieve back in July versus the roughly 1% blends we are 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 2024 same-store revenue earn-in of approximately 1%, slightly below our historical norm. We will provide official 2024 guidance in February, but two initial considerations include: one, as it relates to same-store revenue market conditions suggest that 2024 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 two, our same-store expense growth is likely to approximate 2023 levels, driven by pressure on insurance, utilities and personnel. In particular, we faced 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 the years ahead. The two largest initiatives underway: one, building wide WiFi 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 2023 with community-wide WiFi installed across roughly 20,000 units, with additional rollout planned through 2025.

Two, our customer experience project will help to reduce turnover over time. We’ve spent the last two years analyzing nearly a decade worth of leasing data and resident interactions across every possible touch point. From this, we built real-time resident-specific experienced dashboards and [indiscernible] 50% of our turnover is controllable. We sell across various operational metrics, but acknowledge our turnover has been higher than the peer average of light and believe there is a large opportunity to put upon this. While still early in the process, we are operationalizing our dashboards to identify resident or property-specific probe areas, make changes and ultimately improve retention. On its own, every 100 basis points of improved retention equates to approximately $2.5 million of higher NOI.

Over the coming years, the 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 relative outperformance of Coastal versus Sunbelt markets in recent quarters has continued, although elevated supply exists across all regions. On the East Coast, New York and Boston, which comprised nearly 20% of our total NOI, continue to be two of our strongest markets. Weighted 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 continued to support pricing power with blended lease rate growth of nearly 4% during the quarter.

In 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 at 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, have 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, renters have been wanting to shop more, we expect Sunbelt supply deliveries will remain elevated in 2024, which should continue to constrain pricing power across the region. In closing, while the near-term operating environment presents some challenges for us, I thank our teams for continuing to utilize new tools and technology to drive superior long-term results. I will now turn over the call to Joe.

Joe Fisher: Thank you, Mike. 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 and a balance sheet update. Our third quarter FFO as adjusted per share of $0.63 achieved the midpoint of our previously provided guidance range and was supported by strong year-over-year same-store NOI growth. The approximately 2% sequential increase was driven by incremental NOI from same-store, joint venture and recently completed development communities. Year-to-date results 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 thus far.

As a result, we have reduced our full year 2023 same-store growth and FFOA per share guidance ranges. Looking ahead, for the fourth quarter, our FFOA per share guidance range of $0.62 to $0.64, or an approximate 3% year-over-year increase at the midpoint. The expectation for stable sequential FFOA per share is driven by a $0.005 benefit from same-store NOI growth, additional lease-up NOI from recently developed communities and lower G&A expense. Offset by $0.05 from near-term FFOA dilution from the OP 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 of 1,753 apartment homes in Dallas and Austin for approximately $402 million.

This was financed to 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 3.8%. Due to negative non-cash debt 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 FFOA 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. Second, during the quarter, we repurchased a total of approximately 620,000 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 a 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 FFOA 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 manage on our balance sheet has resulted in the best three-year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 3.4%. Second, we have nearly $1 billion of liquidity as of September 30th. And third, our leverage metrics remain strong debt to enterprise value was just 30% at quarter end, while net debt-to-EBITDAre was 5.7 times, down 0.3 times from a year ago and happy turned better versus pre-COVID levels. We expect these metrics to remain stable through the remainder of 2023. In all, our balance sheet and liquidity remain in excellent shape. We remain opportunistic in our capital deployment with balanced forward sources and uses. And we continue to utilize a variety of capital allocation, competitive advantages to drive accretion.

With that, I will open it up for Q&A. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Eric Wolfe with Citi. Please proceed.

Eric Wolfe: Hi. Thanks. You talked about the impact of supply. But if I look at the sort of deceleration in 3Q from 2Q, it looks like the deceleration is pretty broad-based, not just in markets that have that heavy supply. So just trying to understand if maybe there’s also a more, broad tenant or consumer problem or if the impact of supply is, just going to get more pronounced in certain markets going forward?

Joe Fisher: Hey Eric, it’s Joe. I think it’s probably helpful to look at attachment 8G, because I think will Sunbelt does get the predominance of the focus in terms of supply. The reality is that supply as a percentage of stock is increasing above long-term averages in all three of our regions. And so while in an absolute sense, clearly in the Sunbelt up at 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 throughout 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, they’ll probably continue into the first half of next year. And it’s degrading the growth rates and blown all three of those regions.

And so they’re 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 than the West than the Sunbelt. And so I do think it really is a supply story. When you look at the consumer side of the equation, look at our dashboards on that front, 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 the B-Quality Resident in some cases, actually jumping up and paying more and taking 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’s trends are still good. It’s just really fighting through these pockets of supply.

Eric Wolfe: Got it. That’s helpful. And I think someone asked this on the last call, but it was a good question. So I guess I’ll steal it. Can you just sort of look at the sort of compounding impact of supply 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?

Joe Fisher: Yeah. I think it’s a good question. Hopefully, we have a similar and/or good answer as last call. So I think there’s definitely reasons to be optimistic as you think about 2024 from an 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 first half of next year before it starts to dissipate a little bit. But we still do have from a total housing perspective, supply is coming off overall. When you look at the reduction in single-family starts and deliveries that are expected in next year, it sets the tone in terms of total supply, I think also when you look at the relative affordability component, clearly, affordability is a stretched to the spend going back to the GFC, 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.

And so in terms of closing the back door at least and capturing any incremental household formation, think rentership remains in a really good position on that front. We still expect to see positive demand overall. If you look at third-party forecast going to the next year, when you look at third-party expectation job growth, wage growth, et cetera, that looks positive. So it really just comes down to the supply picture and the fact that renewals remain pretty sticky overall, as you saw in the third quarter and throughout this year. I think most of us are still sending out renewals in the four-plus range, and pretty sticky. So I think there’s reasons to be optimistic that we could say positive as a whole. That said, when you do have a little bit less demand and clearly a little bit more supply going into next year, we do think next year is a below average trend in terms of blended lease rate growth and revenue.

What we’re going to be focused on is clearly on the innovation and 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 of the end of the tunnel as we work into the back half of next year.

Tom Toomey : Hey, Eric, this is Toomey. Just elongate the answer a little bit. I think we might see the capital markets recession that we’re currently experiencing start to lessen and so I think with capital 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.

Operator: Our next question is from Jeff Spector with Bank of America. Please proceed.

Jeff Spector : Great. Thank you. Just want to follow-up, Tom, on your opening remarks, given it’s so significant. The unprecedented comment, again, listening to the responses to Eric on supply. But given this is the first time in your career, 30 years to see such an impact on B quality mean what’s the conclusion here on what’s happening? Because just to tie this into storage, right, 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.

Tom Toomey : Yes, Jeff, I appreciate the question. In the opening comment, here’s what color I would add to it. I haven’t seen the Bs have 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. And 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 in the concessions of one month, two months, they’re 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 Bs on a concessionary and not down, which would be the normal concern we would have in a slowing economy.

So that says a lot what Joe just commented on. The consumer seems very healthy. just enabled a lot more than they have been in the past to shop for value and they’re doing it. And I think Mike can add some more color on ASPs and this what we call a shopping phenomenon that we hadn’t seen before.

Mike Lacy: Yeah. Thanks, Don. Let me give a little context here. So in our Sunbelt markets where we have 25% of our NOI, and we’re obviously, we’re experiencing a little bit more elevated supply. Our Bs have underperformed our As our new lease growth by about 170 basis points. And just to size it, our Bs were negative 4.4%, and our As were negative 2.7% on new leases. This is very different from what we experienced during the second quarter and quite frankly, what we would have expected to experience. So during the second quarter, Bs actually outperformed our As on our new lease growth by 110 basis points. again, the size that Bs were negative 1.3%, As were negative 2.4%. And again, just to summarize, from what we would have expected, our Bs over A performance was off by 300 basis points on new leases in the Sunbelt.

Jeff Spector: Great. Thank you. Very helpful. My follow-up is, I just want to clarify when you believe we’ll see peak supply pressure. I know that’s probably difficult to forecast right now, but how should we think about the supply into 2024, what’s estimated into 2025? And again, when there might be peak supply pressure. And I don’t know if it helps to discuss by region? Thank you.