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.

Tom Toomey: Yeah, Jeff. I guess the positive is clearly what you’ve seen headline wise with starts dropping very dramatically here in the last couple of months of down kind of 50-plus percent, which someday will be a positive as we get into the fundamental picture probably in the 2025. As we look at 2024, it looks like we’re going to plateau in the first half of the year. There’s really not that much of a divergence within 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 that 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 in 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 into 2025. So we’re not going to say that 2025 is going to be the panacea for multifamily. But I think 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 you move through the back half of 2024 and into 2025. And so we’re going to be dealing with it for a while, but 2024, clearly, we’re still facing at 25% probably starts to look a little bit better for us.

Operator: Our next question is from Nick Yulico with Scotiabank. Please proceed.

Nick Yulico: Thank you. Yeah. I just wanted to go back to, I guess, the original guidance on revenue growth and what it is now and just understand what changed. I guess in terms of sort of the second half of the year here, was the original guidance assuming that you wouldn’t have as much typical back half of the year, seasonality pressures and you’re assuming better pricing and occupancy in the back half of the year, and that’s why now you’re — you face some issues on both of those items?

Joe Fisher: Yeah. Hi, Nick, it’s Joe. So good question. One, we’ve obviously spent a bit of 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, 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 are seeing increased levels of supply, but we are still seeing pretty normal concessionary utilization.

We still have pretty sticky occupancy, sticky renewals. And so we had a pretty stable environment, it felt like even in the elevated supplies we were sitting there in July. And so back half of the year, we expect a kind of a continuation of that in terms of yes, we do supply was going to keep picking up, but we thought that 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 Bs in those more heavy supplied markets. We’re going to keep outperforming days, which Mike talked to that reversal a minute ago. And we really did believe that given we’ve seen normal seasonality in the first half of the year, 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 move into 4Q.

So when you kind of rolled it together, we expected plus or minus 3.5% blends coming here through 4Q. What we talked about upfront was we’re starting off the first part of October at around 1%, which we hope kind of continue at that level through 4Q. And so we end up with about a 2.5% divergence that 2.5% on our revenue is roughly $0.02. That’s kind of two-thirds coming from the broader supply commentary across all markets. And so just to increase concessions East, West and Sunbelt and about a third of it is kind of the AB 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 probably a little bit on this room here on the call of we were a little bit too optimistic 10, 12 months ago when we put that together.

That said, definitely don’t want it to mask what the operations team is doing and kind of track 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 that put out results, I think Mike and team and the rest of the ops team should be really proud of what they’ve done in a relative sense. Yes, you look at revenue, I think in the quarter, we’re 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 AFFO. And so overall, I think the relative piece still holds. We’re proud of what we’re doing on a relative basis. And I know blends get a lot of focus to. And we’ve seen deceleration in blends on an absolute basis, we’re probably 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 we’re driving other income, which is why those revenue numbers look good. So it kind of gives you a summation of where we are at, where we’re at today, but also want to refocus everybody on what we’re doing on a relative basis.

Nick Yulico: Okay. Yes. Thanks for that Joe. Just one other question then is on 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 a blended rate growth number?

Joe Fisher: Yes. So kind of the update for this year is roughly 2% on blends down from that $2.5 million, so that 50 bps kind of for the full year equates to that kind of 2-plus percent delta that we’re seeing in 4Q from 3.5% to down 1%. And that as it relates to 2024, the comment really has to do with we’re seeing decent earn-in as we go into next year, approximately 1% earn-in as we head into 2024. So, slightly below the long-term average, but still a pretty good jumping off point. We do expect other income as it typically is 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 may be 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 3.5%. This year, we’re putting up 2%. So, we’ve got 75 days to kind of work towards that, 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 it to be an above average year as it relates to revenue growth.

Operator: Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed.

Austin Wurschmidt: Great. Thanks. Do you guys expect any of your markets to have negative market rent growth next year, maybe more importantly, negative blended lease rate growth? And then on the flip side, any regions or markets you think could exceed that long-term average of 3% in 2024?

Joe Fisher: Hey Austin, it’s Joe. I think it’s too early at this point in time. We’re going to look at it at a portfolio level and then also a ground-up level when we come through the budgeting process. And so there’s probably going to be outliers to either side ultimately win another five, 75, 90 days to get through our budgeting process, get into next year and then come out in late January, early February and talk to you guys about what we’re thinking.

Austin Wurschmidt: That’s fair. And then how far along are you in backfilling kind of the skips in the VIX? 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.

Joe Fisher: Yes, I think we talked a lot in the first half of the year about that elevated level of long-term delinquents, which put some pressure on the occupancy and the pricing, some of the fees and of course, the turn cost and legal costs in the first half. But team has done a really good job both with upfront screening but also working through the appropriate regulatory and legal processes here 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 fiction processes in place, which means that you end up with 2, 3x the amount of dollar exposure for those individuals.

And so we’ll probably stay at that level, maybe get a little bit better over the next year. Encouragingly, though, I’d say in the month collections continue to be strong, we kind of get 96.5% collected each month. Subsequent to that, we have additional collections that usually take us to about mid-98s collected over time. And so that kind of gives you a 1.5% bad debt number. That’s been pretty stable here over the last couple of quarters. We’d expect it to remain stable in the year-end. I think as we go into next year, could there be a little bit of upside. I don’t think we’re 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 98.5% type level. That said, 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 force through the trees when we kind of dive into it.

Austin Wurschmidt: 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 supplies. Could you just compare those two periods? Thanks.

Mike Lacy: Austin, 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, seeing 1.5 weeks today. That compares to a half a week just a few months ago. And what’s been interesting is places like Denver, L.A. and San Francisco, we’ve actually seen those increase a little bit more than average right around two to three weeks. And then the Sunbelt as well as our Philadelphia assets have moved about 1.5 weeks to two weeks over that time frame with everything else being pretty consistent. But I would say as you go back to 2016, 2017 levels, maybe slightly elevated today.

Operator: Our next question is from Jamie Feldman with Wells Fargo. Please proceed.

Jamie Feldman: Great. Thanks for taking my question. So the other income line continues to grow. I know it’s 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 as you’re pulling back on your rent expectations.

Mike Lacy: Jamie, this is Mike. They’re pretty sticky in nature. A lot of this has to do with things like parking and different fees that we’ve applied, whether it’s package lockers, smart homes, things like that. So these things tend to be pretty sticky. In addition to that, it’s incremental in nature. So things like short-term furnished, we still have premiums there. We’re still doing things with our amenity rentals. And the newest thing was just rolling out our Internet program. We’re starting to achieve those $50 increases. And again, that’s – that’s looking pretty good. The earnings for next year on that alone is going to be pretty significant to continue to drive, call it, that 50 basis points of other income growth. So overall, everything feels pretty good today.

Jamie Feldman: Okay. Thanks for that. And then I mean, shifting gears to some of the other levers for investment. I mean, can you — what is this I guess what does the change in market conditions mean for your appetite to fund developer capital program, even new development starts? I mean 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?

Joe Fisher: This is Joe. I’ll take it. I guess, number one, we feel really good about the liquidity and balance sheet position. So clearly, going into this period of time with position of strength, if you will. So we’ve got a 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, source some capital in the low 5s effectively. Today, cap rates are in kind of that mid- to high 5s 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 and prop management to make the effective yield pretty compelling relative to where we source that capital.

And so we and our partner are very focused on that right now to drive the forward 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 that any development starts is 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 just development. Development is pretty challenging right now. We’ve got some assets coming through lease-up that are doing well and will clearly drive some additional FFO accretion here in 2024 and 2025.

But in terms of new start thresholds, we’d want to see at least mid-6s 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 benefit potentially over time from the cost side. We’re starting to see costs level out, if not come down. And so, I think if we’re patient there and just keep building up optionality and making sure that we got all our land ready to go, there’s going to come a point in time when we go pretty aggressively when all the market signals point us to go that way.

Operator: Our next question is from Michael Goldsmith with UBS. Please go ahead.

Michael Goldsmith: Good afternoon. Thanks a lot for taking my question. You talked about that 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 given that there’s a lot of options out there, we’ve talked quite a bit about the As and Bs. Are they walking in signing a lease and then regretting their decision and backing out? Just curious of the trends within that?

Mike Lacy: Hey Michael, that’s a great question, 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 canceled denial rate, we typically run in that 36%, 37%. This time of the year, we’re currently running around 42%. So we are seeing people come through the door. They’re finding that there’s potentially a better option out there. So they are canceling their release 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 sent out.

And normally, that’s around 20 to 30. So, both front door and backdoor has elevated a little bit, but still will drive that occupancy in the high 96%. So we feel pretty good about where we’re at.

Michael Goldsmith: Just to clarify the factor that’s related to lease renewals, correct?

Mike Lacy: 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 by 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% rest of this year, and we’re going to continue to try to drive our retention up.

Michael Goldsmith: Got it. And then as my follow-up question, just going back to the As and Bs, is this an issue in relative pricing in that the relative — the gap between As and Bs have come down as new supply as get to concessions, or is this like more of an absolute issue where As have come down to the price, where at a certain price that there’s more utility at that price and sort of like the gap between the As and Bs is less relevant. And just at that price, there’s more interest in that new supply. Just any thoughts around that?

Joe Fisher: Yes. 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’re usually looking at a 20% to 30% delta and price point. But when you throw two months concessions on there or roughly 16%, will you end up with is, call it, a 10% delta effectively between that B and that brand new product. So 10% on our type of rent, you’re talking about $250 a month. And so positively, you’re seeing the consumer say, okay, I can afford $250 incremental a month. So it speaks to the strength, cash position and kind of where with all of them. So they’re getting a better quality asset or a little bit more cash. I think what will 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 A and B product.

It will 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.

Operator: Our next question is from Steve Sakwa with Evercore ISI. Please proceed.

Steve Sakwa: Great. Thanks. Just one question, Joe, on capital allocation. You talked about the share buybacks, I think, around $40, and obviously, the stock is appreciably lower than that today and stock’s probably trading around a 7 cap. I’m just curious what the appetite is to maybe sell more assets either into JVs or outright asset sales even if they’re at higher cap rates than what you’d normally dispose at and use some of those proceeds to buy back stock at these levels?

Joe Fisher: Yeah, we did do the buyback when we had identified source of capital locked in at that lower level. And so it’s generally been our MO in the past is to do it and smaller scale if we have that identified source. I think 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 while — 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.

I think when you capture that upside that we can get from a below average operator, if you will, and bringing it onto our platform, plus throwing 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 or stabilized FFO yield between the two options. So we’d prefer to deploy with our JV partner in this environment.

Steve Sakwa: Okay. And then just one quick follow-up on the development, I think you mentioned 6.5% was the targeted yield. 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 sixes. So why would a 6.5% to percent development yield makes sense?

Joe Fisher: Yes. That’s a 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 6.5% right now on current that should stabilize out higher than that if we were able to start a 6.5%, because usually we’re looking at current rents and stabilized cost. And so that 6.5% becomes a 7% over time as we lease that up. That 7% would compare to that 5.5% to 6% 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 stay capital-light.

Operator: Our next question is from John Kim with BMO Capital Markets. Please proceed.

John Kim: Thank you. Other markets, your other markets have been a drag on lease growth rates. And when you look at some of the markets that compose this, it doesn’t seem like they have a lot 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?

Mike Lacy: Hey, John, it’s Michael. This goes back to what I was talking about a little bit around concessions and 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 properties in those markets are typically a quality computing with that supply.

John Kim: Okay. And Mike, you mentioned in your prepared remarks, the focus on improving retention and that you’ve identified that 50% of turnover is controllable. At the same time, it’s been mentioned many times on this call that people can price shop and make more information to move around. I guess, my question is how much confidence do you have that you could improve retention meaningfully in this market?

Mike Lacy: Quite a bit of confidence. And part of it, I had mentioned in the prepared remarks, we haven’t done a great job with us over the last two years. When you just compare us versus our peers and so we think there’s 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 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 rate of turnover coming down, we’re just now scratching the surface.

And so as we go into 2024 and 2025, we’re going to lean heavily into this utilizing the data that we’ve been able to mine and I think it’s going to produce a lot of results for us.

Joe Fisher: Hey, John, just to add on to that because I think embedded in your comment a little bit is in an environment where there’s concessions or better rent opportunities, if you will. Want that overwhelm their desire to stay or go. The reality is when we went and look back at the last 10 years of that controllable performance on turnover, only one of the top 15 factors actually had to do with rents. And so it has a lot more to do with their move-in experience and then what’s their experience subsequent to move in. So it’s both at the property level when you’re dealing with things like crash and pet waste or noise or parking and how do we remedy those. And/or at an individual level, how do you remedy certain circumstances that they’re having related to perhaps service calls the maintenance issues, some of the appliance issues, maybe noise next door.

Just are we responsive in meeting their needs. And so there’s a lot of property and individual level controllable factors. Have nothing to do with rent that we think we can take care of, to hopefully give them a better experience and therefore, a stickier resident at the end of the day.

Operator: Our next question is from Haendel St. Juste with Mizuho. Please proceed.

Haendel St. Juste: Hey, guys. Just one left on my list here. Joe, was hoping maybe you could add some light on why the bad debt reserve was up. I think about $9.2 million here, up 10% versus last quarter. And I know you guys are contorta bit differently, but maybe you can remind us what’s embedded in your full year ’23 guide from a bad debt perspective? Thanks.

Joe Fisher: Yes. And so just for reference, where he’s looking for everybody on the call, just attach them at one down in footnote 2, we disclosed our net AR reserve. And I’d say, number one, that number is an output of two other inputs. And so you have our gross accounts receivable and then you have a reserve that we put against that, which is basically predicting what do we think is uncollectible of that gross amount. And so the net of those two is roughly $9 million, it was up about $900,000 in the quarter. 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 collections and collections over time getting to that 9.5%.

We’re looking at that and saying we think collectibility 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 and that instead of us having a delinquent payment and then writing it off to zero, we’re actually assessing collectibility of each one of those delinquencies. So it’s not necessarily binary utilizing a little bit of science and a little bit of hear. So the trends that we see in continue to be good on collections. It ticked up a little bit, but we think it would probably be stable to trending down here over the next couple of quarters.

Haendel St. Juste: Appreciate that. And then broadly, within the guidance for bad debt near-term expectations, growth the motivation.

Joe Fisher: Sorry. Yes, yes. So we’re — we kind of have in the full year at this point, plus or minus that 98.5% collected. We think we’ll probably level out of that here in the back half. We were a little bit lighter than that in the first half of the year. 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, 98.5%, I mentioned earlier, maybe there’s some upside to that as we go into 2024, that’s really going to depend on the regulatory environment, plus some additional screening mechanisms that we’re putting 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 you 98.5%.And over time, we get to 99% maybe there’s 50 bps on the table over a couple of year period. And so it’s not going to be the key driver for our performance next year, but hopefully, it is a slight positive.

Operator: Our next question is from Adam Kramer with Morgan Stanley. Please proceed.

Adam Kramer: Hey, guys. Just wanted to ask, I think you guys characterized kind of the competitive environment with some of the new supply as maybe kind of no longer rational in some ways in terms of kind of the concessions they’re offering. Maybe just if you could kind of — I don’t know, it’s a little bit of a high-level question. Maybe just kind of describe some of the behavior you’re seeing from these developers, right, kind of to the extent to which they are offering concessions. And then just move on the other side of it, right, to the extent that they’re not able to kind of hit their targets for lease-up. Are you kind of starting to get inbounds from them where they have different pressures, capital markets challenges? And maybe there’s opportunity there on kind of more of the distressed side.

Tom Toomey: Hey, Adam, this is Toomey. It’s always hard to judge if people are being rational irrational. But my experience says this, I think the developers are being rational about it because they’re looking at their maturing loan and trying to say, I need an extension. I need a debt service coverage ratio and they’re mostly going to pro forma one month free. And they’ll stretch during slow periods of time to two months for to try to get there. Capitulation is when they go to three months free. Then they are immediately calling their lender and saying, “We need to start negotiating a paydown and/or an extension.” So you’re right to connect. What is the ultimate goal is to get to that refi and hold on to the asset as long as possible.

And I’m not sure that there’ll be irrational. What I think has caught us by surprise is the customer, that’s sitting in that B Apartment, paying $2,200 a month and looking at the A down the street at 3,000 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 it and hope for a better day or a raise. And frankly, a lot of them are getting those raises. So that’s the surprise to us is the jump from B to A in a lot of these markets. And I wouldn’t expect that to — I’m not sure I hate this forecasting stuff 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 further in underwater, 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 when we do, I think that will be some very, very interesting times.

Adam Kramer: That’s really helpful Tom. Thank you. I’ll leave it there.

Operator: Our next question is from John Pawlowski with Green Street. Please proceed.

John Pawlowski: Thanks for the time. Joe, just one question on the developer capital program just how quickly, given how quickly property values and 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?

Joe Fisher: Yeah. It’s definitely in blend a fluid situation. As you mentioned, I mean, — cap or not cap rates, borrowing costs were up by 100 basis points just since our last call. So it is pretty fluid. I’d say majority of 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’re at today, they had NOI exceeding their pro forma numbers. So there have been some challenges where there’s been a greater pocket 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 11B, just to point out the time lines that we have to potentially figure out when that equity comes due.

We got some questions on those first four up in the pref equity stack, showing that years’ to maturity. Just want to remind everybody that down footnote four, that years’ to maturity is actually for our pref position. That’s not always co-terminus with the senior loan. So, those first four deals, which look like they’re coming to do a little bit sooner. Those are actually mid-25 to mid-2026, type maturities. So those are not coming due. The next deal up for us is actually down in the loan section, 1300 Fairmount, that’s coming due in January 24. And so that’s the only one that we have due in 2024, that we’re going to be working through and trying to think about how does that refi look and what does 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. It’s just trying to figure out where cap rates and values stabilize ultimately.

John Pawlowski: Okay. One follow-up, can you give us a sense how many projects on Attachment 11B, you’re concerned about the debt service coverage ratios, the interest cost on the other types of debt going up, market rents are going down. It feels like the perfect storm for developer cash flow drying up. So can you give us a sense of how many projects you’re worried about?

Joe Fisher : Yes. I guess I don’t want to get into specific transactions. I’d say, most of these — they’re kind of in that 9% to 10% NOI yield. These deals that are kind of in the bottom two-thirds of the page, because of the fact that their pro formas have been exceeding expectations. So that’s kind of a 6% to 7% yield to our pref position, which a mid to high 5s cap environment feels pretty good. I think what we’ve got to be able to get to with these is, yes, SOFR has increased materially. And when you’re sulfur plus 300, that becomes painful from a coverage perspective. The reality is that the GSEs are very much still alive and well and have liquidity available. And so you got to balance the liquidity and then the rate and coverage.

And so if you’re doing GSE debt, you can get nice cash flow coverage on many of these deals once they get to refi. They’re just trying to manage 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 takebacks of any of these assets given the duration that we have on the senior loans, but we’ll 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.

John Pawlowski: Okay. Thanks for the time.

Operator: Our next question is from Connor Mitchell with Piper Sandler. Please proceed.

Connor Mitchell : Hey, thanks for taking my question. So you guys talked a little bit about how you’re looking at the different development landscapes now? And I guess my question is just regarding the guidance reduction, how does that impact your underwriting of your own 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 a difference in the underwriting?

Joe Fisher : Yes. I guess, I’d say, first off, we’re very pleased that we got that joint venture done. Obviously, it’s a little bit different debt market at that point in time. So fluctuating that transaction and the pricing that we did, very pleased with and then being able to pull out those cash proceeds deploy them into basically CP paydown in a non-dilutive manner was clearly a nice trade there for the time being as we got stockpile that liquidity, if you will, until we redeploy. I think from an 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 5s caps. You are seeing that on a very limited transaction volume.

So there’s 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’ve already raised. You have family offices, high net worth type of money, then, of course, the 1031 buyers out there. And so the market right now, while those pricings are beneath where current borrowing costs are with that limited amount of transaction activity, there’s enough of a buyer and seller pool to actually get that done. I think 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 can us and our partner find together that 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 there’s much in terms of change in underwriting on a go-forward NOI growth perspective.

Connor Mitchell : Thanks. I appreciate the color. And then you talked a little bit about the underperformance of B products versus A products and how that was the opposite earlier this year. Just kind of wanted to get some of your updated thoughts on how you think about the mix of B and A in your portfolio going forward? Thanks.

Joe Fisher: Yeah. I think over time, the diversification has clearly served us well when you look at having diversified price points, diversified submarkets 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 and cash flow, but also kind of pivot the sources and uses. So I think we want to remain balanced. We’re a little bit more B biased, obviously, throughout the portfolio, which has worked well for us over time. have a kind of a solid B that you can redevelop when you see upside rent potential and the markets are going well, but also helps insulate it 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 Bs 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 on to the operating platform. So you do typically see us kind of buy that B to A range typically. And then the improvement in portfolio quality really comes through our development arm that does a great job of bringing on high-quality developments for us.

Operator: 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.

Tom Toomey: Well, thanks for all of you and your time and interest and 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 it’s a testament to their efforts and the platform, which are key points of future differentiation and growth potential. With that, we look forward to seeing many of you at NAREIT in Los Angeles and in a couple of weeks at other upcoming events. And enjoy your holiday/Halloween and take care.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.