UDR, Inc. (NYSE:UDR) Q4 2024 Earnings Call Transcript

UDR, Inc. (NYSE:UDR) Q4 2024 Earnings Call Transcript February 6, 2025

Operator: Greetings, and welcome to UDR’s Fourth Quarter 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Vice President of Investor Relations, Trent Trujillo. Thank you, Mr. Trujillo, you may begin.

Trent Trujillo: Thank you, and welcome to UDR’s quarterly financial results conference call. Our press release, supplemental disclosure package and related investor presentation 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 the expectations reflected in any forward-looking statement are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC.

We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone’s time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR’s Chairman and CEO, Tom Toomey.

Tom Toomey: Thank you, Trent, and welcome to UDR’s Fourth Quarter 2024 Conference Call. Presenting on the call with me today are President, Chief Financial Officer and Chief Investment Officer, Joe Fisher; and Chief Operating Officer, Mike Lacey. Senior Officer, Andrew Cantor, will also be available during the Q&A portion of the call. First, I’d like to congratulate Mike on his well-deserved promotion to Chief Operating Officer; and Joe for his appointment as Chief Investment Officer. Both Mike and Joe have been exceptional leaders, driven value creation and have positively influenced UDR’s culture. As Joe transitions from his role as CFO, we have commenced an executive search process to fill this critical role. We are early in process and we’ll update you as progress is made.

Moving on, in conjunction with our earnings release, we published a presentation that highlights our outlook for 2025, completed with what we see as the drivers of potential outcomes. Our prepared remarks align with the presentation, and those on our webcast can see the slides on your screen. We will resume our usual format for the balance of earnings calls in 2025. Next, turning to Slide 4. Key takeaways from our release and 2025 outlook are: one, fourth quarter and full year 2024 FFOA per share results, net guidance expectations, while same-store results exceeded our guidance midpoints. Two, based on consensus estimates, we expect economic growth and apartment demand will remain resilient in 2025. This growth profile should be enhanced by supply pressures abating in the back half of the year from the historically high levels experienced in 2024.

Three, ongoing investments in innovation, including advancing our customer experience project should continue to drive incremental NOI growth in excess of the broader market in 2025. Fourth, despite and elevated cost of capital, we are positioned to take advantage of external growth opportunities when appropriate. We will continue to utilize various sources of capital, including existing joint ventures and operating partnership unit deals to accretively grow the company while heating cost of capital signals. Fifth and final, our balance sheet is well positioned to fully fund our capital needs in 2025 and beyond. With that, I’ll turn the call over to Joe.

Joseph Fisher: Thank you, Tom. Topics I will cover today include our fourth quarter and full year 2024 results, including recent transactions, the 2025 macro outlook that drives our full year guidance, and the building blocks of our 2025 guidance. First, beginning with Slide 5. Our fourth quarter and full year FFO as adjusted per share of $0.63 and $2.48 achieved the midpoint of our previously provided guidance. Additionally, our same-store results meet expectations with NOI growth that was above the high end of our guidance range. During the quarter, we shifted to an occupancy-focused strategy similar to the fourth quarter last year and built occupancy going into 2025. Occupancy trended sequentially higher for each month during the fourth quarter, resulting in a 50 basis point sequential improvement versus the third quarter.

As anticipated, this occupancy trend resulted in slightly lower blended lease rate growth versus original fourth quarter expectations but the right decision to maximize NOI in 2024 and place our portfolio in a position of strength as we enter our traditional leasing season. Thus far in 2025, we have maintained occupancy above 97% which is approximately 30 basis points higher than our fourth quarter average. Underlying market rent growth has turned positive sequentially and is following normal seasonal patterns. New lease rate growth has largely bottomed across our regions and renewal lease rate growth remains healthy in the mid-4% range. We are encouraged by these results. Turning to Slide 6 and our macro outlook. As in years past, we utilized top-down and bottom-up approaches to set our 2025 macro and fundamental forecast.

Our 2025 rental forecast of 2% and was informed by third-party forecast and consensus expectations for a variety of economic factors that drive rent growth and our internal forecasting models. Among the positive factors are favorable GDP, job and wage growth, a continued decline in home ownership rate due to elevated mortgage rates and lower total housing supply. We combined this top-down forecast with a bottom-up growth estimate built by our regional teams as they best understand local supply and demand dynamics in their markets. Our 2% rent growth forecast for 2025 and is slightly conservative when compared to prominent third-party forecasters estimates in the mid-2% range. In short, our outlook is driven by stable demand set against declining multifamily supply while factoring in macro uncertainties such as immigration reform and regulatory risk.

Turning to Slide 7. We remain encouraged by a variety of key supply and demand metrics that are supportive of positive near to intermediate term fundamentals for the apartment industry. First, at the top left, our residents’ financial health remains resilient with rent-to-income ratios below the long-term average. Second, at the top right, relative affordability versus alternative housing options remains decidedly in our favor at roughly 60% less expensive to [ rent to own ], a 25% improvement from pre-COVID. This supports a stable to declining homeownership rate and absent a major correction in home prices or a significantly more accommodative long-term interest rate environment, we do not expect this dynamic to change. Third, at the bottom left, the latest census statistics indicates that the largest U.S. age cohorts remain in their prime renter years.

This should provide continued support for long-term rental demand. And fourth, at the bottom right, while multifamily deliveries are expected to remain above historical average levels at the beginning of 2025, development start activity has significantly retreated and is down approximately 65% from recent highs and is now well below historical averages. This should benefit rent growth in late 2025 and beyond. Moving on to Slide 8. Third-party data providers are forecasting full year 2025 multifamily deliveries in the U.S. and in our markets to be similar to the historical averages. Based on development completion data, peak deliveries occurred in the middle of 2024 and should trend downwards below long-term historical averages in the second half of 2025.

We are cognizant that there will be supply slippage as we move through the year, and that lease-up concessions could remain prevalent for a period of time after the pace of new deliveries abates. Where concessions move throughout 2025, will be a key driver to our ability to capitalize on our rent growth forecast. On Slide 9, we provide more context on which regions expected to feel the greatest impact from 2025 supply. The Sunbelt is forecast to face new supply deliveries to the tune of approximately 4% of existing inventory, which is twice as much as coastal markets. Positively, Sunbelt Supply is down by nearly 1/3 compared to 2024 completions, while new supply across our coastal markets is on average similar to 2024. Mixing this all together, we arrived at our 2025 guidance, which is sized on Slide 10.

Primary expectations include full year FFOA per share guidance of $2.45 to $2.55 and same-store revenue and expense growth expectations that translate to NOI growth of 1.75% at the midpoint, which is 25 basis points better than full year 2024 results. Slide 11 shows the building block for our full year 2025 FFOA per share guidance at the [ $2.50 ] midpoint, which represents a 1% year-over-year increase. Drivers include a $0.10 increase from same-store revenue and lease-up income from recently developed communities, offset by a $0.05 decrease from same-store expenses. A $0.01 increase from interest expense due to a lower average debt balance, which mitigates the impact from the midyear expiration of certain hedges, a $0.01 decrease from G&A and property management expenses reflective of inflationary wage growth and a $0.03 decrease from joint venture and debt and preferred equity activities due to a combination of the following 2 items: First, a $0.02 decrease attributable to moving to nonaccrual status for our debt and preferred equity investment in 1,300 Fairmount located in Philadelphia, which we previously disclosed.

And second, a $0.01 decrease attributable to the pending sale of the company affiliated with a one-off technology investment. Should the transaction occur, UDR’s $43 million of notes receivable that earn 12% interest would be converted into equity of the acquiring company. We are excited that the company we chose to support and help build is expected to be acquired by an industry leader and exchanging our notes for equity is the prudent long-term economic decision. We have received various inquiries pertaining to the risk in our debt and preferred equity book. So here are important considerations to help provide transparency. 1,300 Fairmount was our largest investment risk. And by moving that investment to nonaccrual status and taking a reserve, we believe we have largely derisked this book of business.

There remain 2 investments on our watchlist, totaling approximately $40 million, which would represent $0.01 or less than 0.5% of FFOA per share in the event of nonaccrual. However, for these investments, we have been encouraged by their recent operating trajectories and the senior loans for each do not mature until mid-2026. Moving on to Slide 12. And specific to the first quarter, our FFOA per share guidance range is $0.60 to $0.62 or an approximately 3% sequential decrease at the $0.61 midpoint. This is driven by a $0.01 decrease from same-store NOI, primarily due to higher expenses attributable to normal seasonal trends and a $0.01 decrease from a lower debt and preferred equity investment balance due to recent pay downs and the aforementioned tech investment.

Last, on Slide 13, we provide our debt maturity schedule and liquidity. Only 10% of our total consolidated debt matures through 2026, and thereby reducing future refinancing risk. Combined with more than $1 billion of liquidity, the $211 million of proceeds from our recently completed first quarter property dispositions, minimal committed capital and strong free cash flow, our balance sheet sits in an excellent position. In all, our balance sheet and liquidity remain in excellent shape. We remain opportunistic in our capital deployment, and we continue to utilize a variety of capital allocation competitive advantages to drive long-term accretion. With that, I will turn the call over to Mike.

Michael Lacy: Thanks, Joe. Today, I’ll cover the following topics. How our 2024 results and other drivers factored into the building blocks of our full year 2025 same-store revenue growth guidance. an update on our various innovation initiatives, expectations for operating trends across our regions and our 2025 outlook for same-store expense growth. Turning to Slide 14. The primary building block of our 2025 same-store revenue growth guidance include our embedded earn-in from 2024 lease rate growth. Our blended lease rate growth expectations for full year 2025 and contributions from our innovation and other operating initiatives. Starting with our 2025 earn-in of 60 basis points, which is about half of our historical average and in line with our earn-in from a year ago.

The 50 basis point sequential increase in average occupancy we achieved during the fourth quarter of 2024, led to slightly lower blended rate growth and resulted in earning towards the lower end of the range that I spoke to on our third quarter earnings call. We believe this was a prudent operating strategy that will position us well as 2025 progresses. Next, portfolio blended lease rate growth is forecast to be approximately 2.5% in 2025. This is 100 basis points higher than what we achieved in 2024 which matches our expectations for year-over-year rent growth improvement. We expect blends will be lighter through the first half of 2025 before improving during the second half of the year as supply pressures lessen. This dynamic, if accurate, means that blended rate growth should contribute approximately 90 basis points to our full year 2025 same-store revenue growth and have a positive flow-through impact on 2026 earn-in.

Underlying our blended rate growth forecast are assumptions of approximately 4% rate growth in 2025 and approximately 1% new lease rate growth on average. Moving on innovation and other operating initiatives are expected to add approximately 65 basis points to our 2025 same-store revenue growth, which equates to $10 million to $15 million or approximately 7% growth for this line item. The bulk of this growth should come from the continued rollout of property-wide Wi-Fi, other property enhancements such as further penetration on package lockers, improved retention and less fraud. For retention, our guidance assumes that our 2025 resident turnover will be 100 basis points below that of 2024. Equating to approximately $3.5 million of higher cash flow.

This improvement should be driven by our proprietary customer experience project, which helps us improve our residents’ experience throughout their time with UDR. Thereby increasing their probability of renewal. Today, our efforts have resulted in higher resident retention on a year-over-year basis for 21 consecutive months. We continue to enhance how we measure, map and orchestrate the customer experience, which we believe will drive further year-over-year improvement in turnover and margin expansion in the years ahead. Last, we expect the combination of higher occupancy and reduced bad debt to provide a modest positive contribution to same-store revenue growth in 2025. Regarding fraud, recall that in mid-2024, we implemented a variety of AI-based detection measures, process improvements and credit threshold reviews to enhance our upfront resident screening.

We have seen the benefits of these efforts in recent bad debt trends, resulting in more favorable results in recent quarters. Rolling all this up, our 2025 same-store revenue guidance ranges from 1.25% to 3.25%, with a midpoint of 2.25%. The 3.25% high end of our same-store revenue growth range is achievable through improved year-over-year occupancy, additional accretion from innovation and blended lease rate growth that occurs more ratably throughout the year or at a higher level than our initial forecast. Conversely, the low end of 1.25% reflects the inverse scenario, with full year blended lease rate growth closer to flat, some level of occupancy loss and delayed income recognition from our innovation initiatives. Turning to Slide 15 and our regional revenue growth expectations, we expect the coast will continue to perform better than the Sunbelt in 2025, led by the East Coast.

The East Coast, which comprises approximately 40% of our NOI is forecast to grow same-store revenue by 2% to 4%. We expect New York and Washington, D.C. to be our leading markets in the region, continuing 2024’s trends. We are slightly more cautious on Boston due to peak supply deliveries that are expected to occur midyear, which could result in some pricing pressure. The West Coast which comprises approximately 35% of our NOI is forecast to grow same-store revenue by 1.25% to 3.25%. San Francisco, Seattle and Orange County are expected to produce upper tier growth, while Monterey Peninsula is forecast to be softer, some of which is due to recently enacted rent control. Last, our Sunbelt markets, which comprise roughly 25% of our NOI, our forecast to have same-store revenue growth of flat to positive 2%.

Austin and Nashville will continue to face elevated new supply in 2025, which should limit our pricing power for the third consecutive year. On a relative basis, we expect Tampa and Orlando to be leaders among our — some markets. Moving on. As shown on Slide 16, we expect 2025 same-store expense growth of 3.5% at the midpoint. This is primarily driven by growth in real estate taxes, personnel and administrative and marketing costs. While only 5% of total expenses, insurance expense growth of negative 4.5% to negative 6.5% reflects the benefit of the pricing we negotiated on our policy renewal in December and our deployment of targeted CapEx. To conclude, as summarized on Slide 17, we delivered strong fourth quarter and full year 2024 results.

Same-store revenue, expense and NOI growth were all better than the midpoint of our guidance and same-store NOI growth exceeded the high end of our range. The near-term operating environment presents some challenges, but we have successfully navigated through historically high levels of new supply and fundamentals suggest an attractive growth outlook with 2025 same-store NOI growth expected to accelerate compared to our 2024 results. We continue to innovate with the intention of increasing the growth, improving resident retention and further extending our operating margin over time. I thank our teams for their collaboration, which drives innovation and superior results. We are positioned to take advantage of external growth opportunities when appropriate.

We will continue to utilize various sources of capital, including existing joint ventures and operating partnership unit deals to accretively grow the company while heating cost of capital signals. And our unique approach to portfolio strategy, operating excellence and continued innovation has created a company that is a full cycle investment and one that we believe maximizes value creation for our stakeholders, regardless of the economic environment. Finally, I give special thanks to our teams in Southern California for their efforts during the recent wildfires that resulted in no damage to our properties and our teams across the country for their actions during the most recent polar vortex that brought brutally cold weather and even snow to southern states from Texas to Florida.

I’m proud of the preparations you took to ensure the safety of our residents and fellow associates. And the difference you have made to the cities, communities and families affected by these events. With that, I will open it up for Q&A. Operator?

Q&A Session

Operator: [Operator Instructions]. And our first question today is from the line of Nick Yulico with Scotiabank.

Nicholas Yulico: First question is just in terms of the guidance, helpful all the details on markets and on same-store revenue. Can you just give us a feel, though, in terms of blended rate growth how that could trend through the year for the different markets, particularly as you think about sort of Sunbelt versus the rest of the portfolio? Is there more of a kind of convergence on blended rent growth on the regions as you get into the back half of the year?

Michael Lacy: Nick, it’s Mike. I’ll take that. I think, first and foremost, maybe starting high level with a total company just as it relates to that 2.5%. I think, first of all, it starts with our strategy. Obviously, you’ve heard us talk about this over the last 6 to 9 months really driving our occupancy up during a period of time where expirations are low. And given the fact that we’ve had historically low turnover, that allowed us to drive occupancy to about [ 96.8 ] during the quarter. Happy to report today, it’s closer to [ 97 to 97.2 ] and so that’s giving us a lot of tailwinds to be able to drive our rents as we move forward. But as you think about that 2.5%, it’s important to think about the cadence of it. And so in the first half of the year, our expectations as we continue to deal with elevated supply it’s around 1.4% to 1.8% growth.

And then when we get into the back half of the year, closer to about [ 2.8% ] to 3.2%. So again, first half of the year, call it, [ 1.6% ] at the midpoint. That is right where we landed for 2024 in the first half. In the second half of the year, that 3%. It’s still about 70 to 90 basis points lower than the pre-COVID average. And so we do have seasonality built into that number. We expect 3Q would be higher than 4Q, but again, it is lower than most pre-COVID norms. Specific to the regions, I think it’s probably good to start on Page 15, where we were able to go through just some of the expectations around the different regions. For us, what we expect is obviously a higher earn-in for places like the Coast, East Coast being higher than the West Coast.

Right now, we think earn-in is 1.3 for the East. about 80 bps for the West Coast and then we were negative 1 for the Sunbelt. Specific to the blends though, Coast is looking very similar to what we achieved in 2024. Our expectations are blends will be roughly around 2.5% to 3% on the East. It’s going to be about a 1 to 1.2 contribution to our total revenue in that region. On the West Coast, probably closer to plus or minus 2.5% blends this year. And again, that contribution is pretty close to 1% as it relates to total revenue. And then as you get into the Sunbelt, blends this, we’re thinking probably closer to 60 to 90 basis points this year and a relatively small contribution, only around 30 or 40 bps on the difference is where other income comes in.

And so for us, we had about 8% growth in 2024. expectations are another year where we’re expecting around 7%. And I’ve seen a lot more growth in places like the Sunbelt. So similar to 2024, expectations are, we could see anywhere from 10% to 12% growth in the Sunbelt versus closer to, call it, 5% growth on the coast.

Nicholas Yulico: Very, very helpful. Second is just on investments. And Tom, I think you said the balance sheet set up pretty well for you to get to — decide to do more investments. I guess the guidance is for you to be a net seller this year. So how should we think about sort of where the focus is going to be on investments? And is there actually some sort of capital built into the plan that if you were to do acquisitions, you don’t necessarily need to raise new capital and there could be some benefit if acquisitions actually pick up?

Joseph Fisher: Nick, this is Joe. Maybe 2 things on that one. I’d say number one in that seller component, that’s really a byproduct of a couple of sales that we have teed up last year that happened to slip into early January. So those are really related to neutral funding for last year. So I wouldn’t read too much into us looking like a net seller. That’s more just a ’24 issue and timing issue. As it relates to capital and deployment, I think you’re going to see us remain fairly opportunistic on that front. We’ve continued to advance discussions with our joint venture partner, LaSalle and their capital stores, which after being on the sidelines for kind of 12 months as they went through a global mandate review, happy to report, we had meetings with them earlier this week, and we are back in action and looking to deploy capital with that partner.

On the DPE front, as we’ve said in the prepared remarks and previously disclosed, we think we’ve really kind of cleared the deck on that front from a risk perspective. And so now we’re back into normal course business and we had a couple of really good payoffs there in the fourth quarter as well as some effective payoffs this year. So we’re focused on redeploying capital on that front. When you get into the development side, we don’t have much of a pipeline today. But as we continue to get more optimistic on where rent growth goes in ’26 and ’27, we do expect to see maybe 2 to 3 starts coming out of the development side this year, included one possible here in the next quarter — and then you got the redevelopment portfolio. The redevelopment team continues to hum and continues to collaborate really well with the operations team.

And so continue to invest on the redevelopment side. And then I think lastly, while we haven’t had anything announced recently, the OP unit transactions that you’ve seen us do in the past, we do have a number of discussions ongoing on that front. And so we’ll continue to see what plays out on those, but we are definitely looking to be active and opportunistic here with capital allocation.

Operator: Our next question is from the line of Eric Wolfe with Citi.

Eric Wolfe: You mentioned that were concessions trend in your markets will be a key factor in achieving your outlook. So could you just talk about where concessions are today and sort of where you think they might go as we progress through the year?

Michael Lacy: Eric, I’d tell you, first, it goes back to kind of finishing up on a strong note. So coming off a very strong 4Q. This positioned us obviously with high occupancy and our turnover continues to trend down. And so right now, what we’re seeing in January, further momentum, again, occupancy above 97% today. Turnover in January was down another 500 bps on a year-over-year basis. And our rents and other income are tracking with our expectations for the first half of the year. And so we are getting more active as we try to drive our market rents up, and we’re driving our concessions down. We’re right around a week in January, and we’re starting to push that down to sub-1 week as we move further into the first quarter. Concessions are coming down a little bit right now. And again, I think that’s part of our strategy to drive occupancy now put our focus on driving our rents out.

Nicholas Joseph: That’s helpful. And then I guess as far as the new CIO role, can you maybe just talk about the rationale for the change there from CFO? And then Joe, if there’s anything that you’re expecting to do differently in this role is the company’s capital allocation strategy is going to change at all? Or if it’s more about processes, just anything that’s going to be different now versus before?

Tom Toomey: Eric, I think I’m always striving and the room is striving to get better. And so I’d start off with first as my prepared remarks, congratulations to Mike and Joe for promotions and assuming additional responsibility. As part of my role and the Board as well as the executive team is to push ourselves to get better and deeper talented bench. And I think this opens up opportunities under both of them to advance people’s careers and their skills and ability to generate shareholder value. And with respect to the CFO, Joe has been an exceptional CFO for the company for 8 years. I don’t want to say you get stale in the job, but you become a key part of our success. But I’m looking to say, “Gosh, how can we get better as a team?” And it opens up a slot.

And I think with Harry retiring and Joe stepping in the CIO, working with Andrew and the team there. He brings a fresh perspective. I would expect us to continue to have a lot of success in the investment area and we’ll commence a search for a CFO. I think it’s a very attractive position and a very stable capable quality and team member for our future. So that’s how I’ve been thinking about it, and the group has been always along in this conversation about how do we get better as a group, how do we get better as a company. And I think it prepares us that way. And again, growing talent is a critical element of our long-term success.

Operator: Next question is from the line of Jamie Feldman with Wells Fargo.

James Feldman: Mike, I was hoping you could walk through the line of sight on other income a little bit same-store revenue growth contribution year-over-year from that bucket in the guidance. We’re just trying to figure out if this number goes down as Wi-Fi rollouts move through the system? Or if this could say even or reaccelerate in the out years?

Michael Lacy: Sure. Appreciate the question, Jamie. First and foremost, just as it relates to other income, we have a culture and history of driving incremental — in fact, we’ve been at this for more 10 years where we’re not only increasing our — do every year, but also driving those margins as well. So as we look at it, we’ve got about $60 million in max potential NOI to choose from right now through a whole list of different initiatives. We’re looking at them. We’re prioritizing them. We’re trying to assess which ones we pull the lever on. And I’m happy to report, again, last year, we had 8% growth in other income it’s going to be another strong year this year. I think for us, when I look at it, we’ve got about 11.5% of our revenue that comes from other income.

It’s approximately $180 million on our $1.5 billion and same-store revenue. And it looks pretty promising. I look at the Wi-Fi rollout, the package lockers, the — amenity areas, things like that, that are really driving a lot of this line item. We look at it at about 60% of that 7% growth in 2025 is already baked. And when I say that, we’ve done a lot of the heavy lifting with the Wi-Fi rollout. We still have about 10,000 to 12,000 units we’re installing throughout this year. But a lot of that income is coming from all the work that we’ve done over the last 12 to 18 months. So we feel pretty good about our other income line item at this time.

Joseph Fisher: Jamie, maybe just to add on to that, too, because we do focus a lot on other income as a company and obviously, within the investor space. But you’ve heard us talk somewhat ad nauseam on customer experience in the past. And you’re seeing the results of that, of course, with turnover — incoming down both absolute and relative. But that initiative is across all line items. So as we continue to do better and better on customer experience, keep driving down that turnover. It’s going to enhance pricing power, enhance other income, enhance occupancy, drive down turnover costs, both capitalized and expensed. And so I do think you’ll continue to see a benefit there as we really lead into that initiative, which may not show up in other income necessarily, but will show up throughout the enterprise. So just be cognizant of that.

James Feldman: Okay. That’s very helpful. But do you think as we look ahead in the next few years, like at some point, does it become a headwind to the growth rate? There’s enough still that you can keep it going for a while in terms of your growth rate?

Tom Toomey: This is Tommy. I think like a lot of things in life. It’s a flywheel. And customer experience projects going to spawn off many more new ideas about other income aspects and our relationship with our customer because they’re going to be with us for a longer period of time. So I think it’s premature to kind of highlight some of those. Why? Because they’re in early stages of experimenting and finding out what customers respond to and don’t. But it is the cornerstone of how we can build out a deeper pipeline of those opportunities in the future to backfill it. Clearly, I’m with you, if you don’t keep innovating, you eventually run up against your own success. I think the case here is continue to innovate, use data, use that aspect of it to convert to cash flow, if you will. And we’ll find out where that margin keeps growing, if you will. But that’s essence the long view of that customer experience project.

James Feldman: Okay. And then as we — I’m looking at Slide 9 from the presentation, where you talk about ’25 supply as a percent of existing stock. I know you’ve got the red, green and yellow bucket we’re coming off of historic levels of supply and thinking about those red bucket. But like what’s the number here where you actually worry about supply weighing on fundamentals going forward? Like are some of these yellow markets going to move into the red bucket or 50 to 150 basis points in ’25 is just not something to worry about, and we really think you’re kind of cleaning things up here in every market as we work through ’25.

Joseph Fisher: Jamie, we’re definitely leaning than — if you will, as it was throughout ’25. When you look from the green bucket of the red bucket, you do have pretty meaningful deltas and blended lease rate growth plus or minus upwards of 500 basis points, depending on which market you’re coming in to. The yellows are in the middle. I think as you migrate throughout the year, and Mike started to kind of allude to this earlier, which we showed back where we give the regional revenue performance. You’re going to see some of these red markets start to compress upwards relative to the East and West Coast markets. And so as Sunbelt supply comes down pretty meaningfully, while it’s still at a high absolute level, it is going to come down pretty meaningfully from where we’re at in ’24, which we do think enhances pricing power throughout this year.

Then as you go into ’26, the part of the reason that the East and West Coast don’t see that same decline in supply is really just longer lead times for developments there, more blended high-rise product being delivered, which has a little bit longer development cycle. If you get into ’26, you’re going to see supply overall frac come off another 30-plus percent, and that’s going to be across the border in all 3 of those regions. So we’ll gradually see fewer and fewer markets sitting in the red and yellow and more than [indiscernible].

Operator: The next question is from the line of Steve Sakwa with Evercore ISI.

Steve Sakwa: Yes. Joe, I know you were out at NMHC, and I’m just curious what the discussion was like broadly around development. Everybody is painting this picture of ’25 still a little bit of a transition year, high supply, but ’26, ’27 and beyond looks great. So I’m just curious kind of the discussions around new development and even sounds like you guys might want to start some new developments. So what’s the — I guess, the risk that everybody is seeing the same picture and goes to put shovels in the ground sooner than later?

Joseph Fisher: Yes. Great question. I do think everybody is generally speaking, seeing that same view — of the view of the future. as you get into that ’26, ’27 and you look at some of the slides that we put on here slide — and prior to that in terms of supply deliveries. You’re definitely going to see less supply with the backdrop of very strong relative affordability and hopefully still get demand. And so there is an expectation of outsized growth in those years, which obviously gets developers excited. I think the ability to translate excitement and a thesis on the future into actual shovels in the ground is a little bit more challenging. We have seen construction financing start to come back a little bit from the banks, so they are improving in terms of the availability of that capital.

The spreads are still relatively high and kind of plus or minus 300 basis point range. The bigger challenge still seems to be the LP equity. And so can you go out there and raise capital to deploy into development to get those starts done today. So if you have the thesis, yes, I think a lot of us believe in it. Do you have the capital not so much. So not overly concerned about your point on do we see a big surge in supply. And to the extent that we do, I think it’s more of a ’28 issue. We still have a pretty good runway here for a couple of years. In terms of how it relates to ours, I mentioned kind of 2 or 3 starts potentially teed up here for this year. We look at the yields that we’re going to have on those on a current underwritten basis.

We’re looking for high 5% to 6% on that capital, so full with those projects and moving forward with those.

Tom Toomey: Steve, Tom if I can. You’ve been through a lot of these cycles. And you know where we’re at today, all the developers are trying to keep their shops busy and penciling a lot of deals. The truth is capital is looking over there and saying, why am I building if I can buy below replacement cost. So the acquisition market, sale market is probably going to heat up a little bit more in ’25, ’26 before the development starts to rewind itself up. It will — there hasn’t been any development where there’s rent growth. So that we step back and look at it and say, it’s a window where be prudent, but we think there’s — and it’s a competitive window for acquisitions right now. Still get out there and see what we can find.

Steve Sakwa: Great. Maybe just quickly on Slide 16, maybe for Mike. Just as you look at the expectations for expense growth in ’25 and there’s some big deltas from where ’24 came in. I’m just looking at like personnel loss was an elevated number in ’24, coming down much more in ’25, but real estate taxes kind of going the other way around. Just where do you see the risks on more slide? And how have you sort of thought about that in the budget?

Michael Lacy: Got it, Steve. I’d say, first of all, thinking about ’24 and ’25. And specific to personnel. Just a reminder, we had the cars refund that we had to deal with last year. And so our personnel cost expense was up about 11%. And that’s mainly because of anniversarying off of that. Now we’re back to kind of a normal run rate, if you will. And so when we look at our expenses, I mean, we would have been around, call it, 3.5% this year if we didn’t deal with that anniversary. Things feel pretty good. The team has been doing a lot around all the different initiatives. We talk a lot about other income, but they’ve made a lot of progress in things like efficiencies and how we’re utilizing technology, try to drive down some of those costs.

And we’re also doing things with our vendors trying to consolidate that. That’s playing out in some of these numbers that you see here today. And so for us, it feels good going into ’25, we ended on a good note in ’24, and we’re off and running ’25.

Steve Sakwa: And maybe just taxes real quick. Anything there to speak about?

Joseph Fisher: Steve, on the real estate tax side, we did have some wins in terms of appeals activity that took place in ’24. So it’s taking a little bit higher up in the mid-3s. Obviously, we’re going to be going after a lot of those same types of deals is really probates out in California. So we look to appeal down that initial number of 3.5%. When you look regionally by markets, to be honest, most of them are plus or minus in that range. I think the only outlier is really — coming with up in Seattle, we were seeing values come down. And so actually, we’re forecasting negative — over year real estate tax growth there in Seattle, largely the other side, we’re seeing rates come in higher in Boston, a little more tax growth there. And then out in Nashville. Also we have the 4-year reset that take place a little bit more pressure in Nashville. But most of our markets right now, we’re thinking within that 2.5% to 4.5% range.

Steve Sakwa: Great. It’s it for me.

Operator: The next question comes from the line of Jeff Spector with Bank of America.

Jeffrey Spector: Great. Joe, at the top of the call, you — in your opening remarks, talked about lower supply benefiting I think you said late ’25, please confirm if that’s correct or not. I guess my question really is on the confidence level here. And how does that tie to, let’s say, guidance, right, upper end versus lower end versus midpoint?

Joseph Fisher: Yes, we do expect to see supply continue to trickle down throughout the year in terms of the deliveries. And on Page 8, we have demonstrated for our markets, which you see it does trend down that really plays into Mike’s commentary earlier on blends. And so our first half blend assumption being roughly in line with what we saw first half of ’24. And then we start to see that blended number lift as we go into the second half, kind of peak out in 3Q and see some seasonality going into 4Q with a declining a little bit. That’s driven across the board, but we did talk about seeing Sunbelt start to accelerate a little bit more as we move throughout the year as they do see a more significant decline in those deliveries.

And so I think there’s a couple of things that give us a little bit of comfort with that in terms of the higher second half versus first half. We mentioned now the decline in delivery activity, which should help. The other pieces are relative affordability continues to be strong. And obviously, demand environment continues to be strong. So lifting that second half blunt rate growth assumption up into the 3s, which is still well below what we were at pre-COVID. And we’re kind of getting into more of a pre-COVID norm when we get into the back half of the year and definitely going into ’26 that gives us the comfort on the guidance piece. I do think the other thing I just want to mention, too, Jeff, as we kind of think about this, if you go to Page 14 within the presentation, I’ll give Trent just a second there to get it ready for the webcast.

But Page 14, when you look at these assumptions between earn and blended lease rate growth, innovation and then occupancy and bad debt. In totality, we get to that 2.25% revenue number, which is basically the exact same as what we put up in 2024. And so we got some questions overnight on the 2.5% blended lease rate growth, which we’re talking about right now. But because it is more back half weighted, you can see in there only a 90 basis point contribution coming off of blended lease rate growth. Typically, if you are in a normal seasonality curve, you’d have a midyear convention, that [ 2.5% ] would translate to [ 1.25% ]. So it really tells you that the revenue contribution is pretty typical with what we saw in 2024. So we haven’t assumed a lot of acceleration in that rev contribution and the blends that they don’t come to fruition in the back half more of a ’26 earn-in issue instead of a 2025 guidance or revenue growth issue as most of these somethings look pretty spot on with what we delivered in 2024.

Jeffrey Spector: Okay. And then turning to the tech initiatives. I know you guys are always scouring for new. I’m just curious whether it’s AI-driven or just new technology or applications you’re seeing. Is there anything exciting on the horizon here that you’re looking into?

Michael Lacy: Yes, a couple of things. I’d say maybe some people saw that we recently just transitioned, we’re going to be implementing funnel as our CRM this year. So we’re really excited about that — it’s important to it. It’s something that’s going to help our relation definitely to drive it. And ultimately, we think it’s going to allow us to be more effective, more efficient with our — central team is [indiscernible] and will have to focus on new ideas and not necessarily get bogged down on a lot of the back office. So that’s going to be happening over the next 3 to 6 months. We’re very excited about that rollout. In addition, some of the other play-based initiatives, things that we’re using with technology. It goes back to what we talked about last year, just as it relates to who is coming through the front door, who are allowing to be a resident with us and making sure we’re identifying bad actors, if you will, before the event of the doors.

So things like ID verification, proof of income, just making sure that we’re capturing that playing out. And if you recall, we rolled that out mid last year. we saw our occupancy come down a little bit as we started to roll it out. We feel like we’ve got our hands around it, and that’s really starting to pay dividends today. And just to kind of size them given a few stats — some of our more riskier residents, if you will, that comes through the door. Our average deposits are up almost 20% at this point. Our cosigners are up 1% or 2%. And our credit scores are actually up about 20 points closer to 730 versus 710. So we think that this is going to continue to try to drive our revenue and make sure that we have good revenues as we move forward.

Tom Toomey: Jeff, this is Tom again. If I could add just a little bit more. I think the key here is that we own our data. So the amount of data Mike could tell me how much we’re accumulating every day on every customer interaction from prospect all the way to move out builds an enormous warehouse, if you will, facts to mine trends to look for responses that were missed and so it’s not just winding the business model better. It’s looking more around the corner, owning that data, what are better ways we can run the business to anticipate the customers position, a market position and then ultimately, how we’re pricing our product to those individual customers. So I think it’s just the very early stages I think the focus that Mike and the entire team has on it. It’s always amazing every money we sit and go through where we stand and how much facts we know about where we are and where we’re going, help us run the business better, faster, more efficiently.

Operator: Our next question is come from the line of Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt: Great. Mike, I appreciate all the detail you gave across regions. But the question on the same-store revenue guidance, which assume some acceleration in the Sunbelt markets for a lot of the reasons you cited first half versus back half, but you do have deceleration assumed for the coastal markets, despite having a higher earnings. So I guess what’s driving that assumed deceleration in the coastal regions this year? And could you actually see some upside given some of the positive dynamics being discussed on the West Coast in particular.

Michael Lacy: Yes, it’s a really good question, Austin. I think it’s important to point out, when you look at the coast, specific to the West Coast, our blends and our earn-ins are very close to what we experienced last year. And so not really seeing a whole lot of deceleration from that standpoint. The difference is going to come in other income in a place like the West Coast and the main reason is a place like Monterey Peninsula for us. We are now dealing with rent control on that front as well as we’re not able to charge for our reimbursements if we don’t have sub meters at those assets. So that’s actually about a $2 million to $3 million drag for us in ’25 and so if we didn’t have that driving down the West Coast, we have about 50 basis points more in growth.

And so our costs would actually look very similar to 2024. And then specific to the Sunbelt, it really comes back down to the other income growth again, which, again, we had close to 14% growth in 2024. Expectations are that we’re going to have around 12% this year. Yes. And then as far as — just to put a ribbon around [ Sunbelt ] Monterey Peninsula. We do have a plan to try to get back in there, get the submeters going, and so we can start to recapture a lot of that income we’re going in ’25 and that’s probably more of a ’26 and ’27 initiative.

Austin Wurschmidt: That’s really helpful. And then just switching gears kind of high level, maybe Tom or Joe, I’m just kind of interested in your view about a potential privatization of Fannie Mae and Freddie and just the impact you think it could have on broader housing market, transaction market and obviously multifamily.

Tom Toomey: This is Toomey. I’m not sure anybody is going to make a very long living predicting what’s coming out of Washington these days. And so I will just pass and let the cards fall where they — they seem to have a lot of other things that they’re working on before they get to the GSCs in that aspect. It’s a very high functioning group. It stabilizes the market. I don’t think anyone wants to see any of that disappear. And so then in whose hands it’s and how it’s run. I’ll leave it to the people that have a say over that to speculate and deal with.

Operator: Our next question is from the line of Michael Goldsmith with UBS.

Michael Goldsmith: How much occupancy are you willing to sacrifice to push rate in the peak season? And how much rate growth you need to see during that peak season to hit the guidance range?

Michael Lacy: Sure. I think that’s sizes. So I think, first of all, the way we think about — paid-off. 1% of rent loss approximately $26 per home. It’s equal to about $7 million a year, you mentioned. When I think about occupancy, 1% of occupancy is about 550 homes at $2,600. That’s about $17 million in a given year. So the way we think about it is if we lower occupancy by, say, 30, 40 basis points, we would need 100 basis points in rent just to breakeven in a given year. I don’t know if you can capture that in the shoulder quarters where you have low demand. And so you’ve seen it with our strategy. As demand starts to pick up, we let our occupancy migrate down, and we’re willing to take that bet that if we can’t capture another call it, 1% or more on rent. But again, during the shoulder quarters, we think it’s a prudent strategy to try to drive that occupancy up and prepare for that period of time where you can really drive your rent.

Joseph Fisher: I do think it’s credible to — Michael. As you think about your comment or question about how much are we willing to sacrifice. Part of that occupancy strategy is occupancy versus rate, but I don’t want it to get lost on the group in terms of customer experience and a decreased turnover component. I think Mike referenced earlier the continued decrease in turnover in January, that’s part of the surge in that occupancy. So it’s not necessarily occupancy and rate trade all the time. Sometimes it’s good customer service that just results in better occupancy and residents wanting to stay longer. So there’s 2 components to it, as you think through it.

Michael Goldsmith: That’s helpful context. And my second question is we’ve discussed the trajectory of blended rent trend, but maybe looking at same-store revenue growth. Is there any lumpiness in? Or is there any expected lumpiness of that through the year due to [ syncratic ] factors for either positive or negative?

Michael Lacy: No. I mean, for us, when we look at the cadence of growth throughout the year, expectations are the first half of the year is a little bit lower in the back half, maybe call it 2% to 2.5% and then in the back half. we’re probably closer to that 2.5%, maybe reaching upwards of the 3%, but not a whole lot of lumpiness. It’s pretty consistent.

Operator: Next question is from the line of Brad Heffern with RBC Capital Markets.

Brad Heffern: You mentioned a number of uncertainties in the slides. All of those are regulatory or political in some way. It seems like you don’t want to predict those. I don’t blame you for that. But I’m curious if you’ve risked those items in the guidance at all? And how much specifically with regard to dose and immigration?

Joseph Fisher: We have not. I mean it’s why there is a range around our base case. And I think uncertainties could be both positive and negative in all of these. As you think about regulatory risk, there’s the state and local regulatory risk that we talk about a lot with things like rent control or pet fees, deposits — something of that nature. But there’s also less regulation that we think we may see at the federal level both from a legislative and legal perspective, but also just in terms of small business formation, medium-sized business formation, which is really the driver of job growth across this country with over 50% of employment coming from the small business side. So I think if we see what happened in the first administration where you’ve cut some of that red tape, that actually could be a positive uncertainty in all of this.

I think the same thing could be said about those on a federal perspective the question remains as to where they concentrate potentially some of their head cuts or entitlements or pork or anything of that nature. It may impact different markets differently. But at the federal level, it could actually be positive including for the interest rate environment. So we put a range around this to try to factor that in. But it’s hard to say they’re all negatives are all positives.

Brad Heffern: Okay. Got it. And then a question on the customer experience project. Obviously, everybody has been seeing record low turnover. So I’m curious how you’re separating out the benefit specifically of that program. versus just how the broader market is acting. And then what sort of gives us the confidence that you can move turnover even lower from record levels already.

Michael Lacy: Right. Yes. We look at this in both an absolute and a relative basis. And so what I would tell you is going back to 1Q of ’23, on an absolute basis, we’re down about 3.5%. And on a relative basis over that same period of time, we’ve improved by about 200 basis points against — the period. So we watch it against how we can have everybody else. Not just in the fact that everybody’s turnover is down. And I’ll tell you why we still believe it because we do have a ton of data. Tom talked about it a little bit previously, but it’s upwards of [ 800 million ] data elements at this point, [ read a million ] a day. And so we have the team in place. We have the dashboard bill and we have dedicated resources that are watching every day, creating touch points with our residents and we see it playing out.

And again, I saw it play out again in January. Expectations are that February is going to be another month that’s down on a year-over-year basis. And this isn’t even factoring in all the stuff that we have planned for this year. And I’ll tell you what I’m most excited about is the fact that we’re able to spend a little bit more on NOI-enhancing CapEx to try to drive problems down that we know are an issue at these sites that we do think will be the — impact to the list. And then also the rollout of funnel, I spoke to a little bit with our CRM. We think that’s going to pay a lot of dividends throughout the year, too. So there’s a lot more to come on this front. We’re still continuing to work on it.

Operator: Next question is from the line of Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb: Here. Two questions. First, on the other income, you guys have certainly been on the forefront of growing different entities, the different services that you offer for your residents. But at the same time, we still talk about earnings growth and revenue growth based on supply/demand in the general apartment sector. So do you feel that these efforts are truly accelerating overall earnings growth? Or is it sort of a pie mix where you can either push rent or push these other fees, but the tenant — the resident still looks at the whole on shoulder together. They don’t say, “Oh, I can stomach a rent increase and then I can stomach these incremental fees.”

Joseph Fisher: Alex, that’s a constant source of discussion internally. As we think about effectively where we’re going is the cannibalization concept of if you’re going to pay more over in one bucket, are you willing to pay as much in the other bucket. And we have done a bunch of past work and studies on that to ensure we are capturing what we believe is the total amount of other income that we should receive while not cannibalizing rent component. Now I think one of the things that we do that’s very helpful for the resident and gets us kudos from resident is all in pricing upfront on our website where you can go in and select your unit, you can pick what amenities or what other income items you’re going to have, you can see what your utility bill will typically be.

And so right up front, we’re being very transparent, which is a rarity within the industry. I think residents appreciate that because they know now the total check they’re coming in with. They’re not surprised when they get through their first month of residency. And then when it comes to the deal, we don’t have that in [indiscernible] I think we’re trying to address it by being transparent with the resident and then also doing a check to make sure we don’t cannibalize for us.

Michael Lacy: Alex, just quickly, these are also win-wins for us and our residents. And so when we think about this, like Wi-Fi, as an example, we are very competitive with our pricing. We’re trying to provide a benefit that helps them out, it helps us sell. It gives them access to Wi-Fi across the property. And quite frankly, it helps with our self-guided tour process. So there’s that — I mean, things like reserve parking we’re trying to identify spots that are actually better for our residents to make it more efficient for them. So a lot of these things we keep in mind how will it benefit them as well as us.

Alexander Goldfarb: Okay. The second question is on the debt and preferred equity business — can appreciate Philly probably was done. But as you guys look at new investments, Are there any changes to underwriting or geographies that you would no longer look at? Or was the fill sort of an isolated one and these other 2 watchlists are I’m just trying to see, were there any learnings from these that going forward, you would change? Or this is just part of the business and it’s why the yields are the way the yields are?

Joseph Fisher: Yes, it’s a great question, and I think it wasn’t fun. It’s a very fair terminology to utilize and working through that. But I think we had any changes. When you look at the structure of the book, look at the components of how much is on development versus operating assets now. So we’ve continued to ramp up the amount that we have within the operating kind of recap side of the portfolio. And I think we’re up to 30-plus percent of the deals now have a current cash pay component. And so we are pivoting a little bit in terms of the book of business. And then you get into the lessons learned component. I do think there are quite a few that lever time — I mean from a lower loan-to-cost perspective. I think when we look at development deals going forward, we’ve definitely committed to ensuring that we’re at a lower loan to cost than perhaps we were back during COVID years.

I think ensuring some constraints to make sure these don’t get as drawn out because when they get drawn out, while we continue to improve earnings, ultimately, it may put the equity partners back against the wall a little bit. More utilization of our marketing and analytics team. A number of these challenges are really driven by supply to some degree. And so we find high supply concentration, definitely negatively impacted rent and NOI growth profiles and therefore, ability to recap these investments. And then I think just the scenario analysis. We did not underwrite that during the COVID years of when we were kind of 4 cap or sub-4 cap that you’re going to see a run-up in raise some borrowing cost of [ 100 to 200 ] basis points and an increase in cap rates to that degree.

So in area of analysis to work through and ensure that in various scenarios, we do see the paybacks. And so there’s a number of lessons learned and approaches to structure the book of business as well.

Operator: The next question is from the line of John Kim with BMO Capital Markets.

John Kim: Just going back to other income, the 65 basis point addition to things to revenue, actually seems a little bit light because it implies $10 million in revenue. Last year, you aim for $10 million in NOI. You’re suggesting another $60 million that you’re expecting going forward. Can you just comment on that? And also remind us what your typical margins are on the other income?

Michael Lacy: Yes. The margins vary by initiative, I can tell you for something like the Wi-Fi, we charge around $70 on average, and it cost us around $20 on average. So that’s a pretty strong margin and things like parking, obviously, it doesn’t cost us anything to try to drive up more reserve parking. So huge margin there. And then things like short-term furnished rentals, we do have a lower margin on that book of business, and we’ve been actively bringing that down over the last couple of years, just trying to make sure that we’re achieving the highest cash flow we can. So they’re all a little bit different. But for us, again, the 8% growth last year was very strong. And basically, to repeat that, we feel pretty good about it.

Obviously, we’re always looking to that [ $60 million ] in that number I referenced earlier into initiatives that we can pick and choose from and try to drive it higher throughout the year, which last year, we had a lower bar and we ended up exceeding it. I hope you’re right. I hope we can do that again in 2025 — those based on everything we see today, we feel like that seen is a pretty good number.

John Kim: Yes. Okay. And then Mike, you mentioned rent control in Monterey Peninsula, which is a little disconcerting because rent certainly haven’t gone up that much. But can you comment on whether or not there’s a vacancy decontrol components to that new measure? And are you concerned or are you hearing rumblings of similar rent control measures in other markets?

Unknown Executive: John, this is Chris. We can look at that a little bit further, but it does have to be abided by [ Costa-Hawkins ]. So there is no — I don’t feel that there’s a vacancy control measure.

John Kim: And any commentary on other markets?

Unknown Executive: The biggest thing we’re looking at this year, there’s commentary out of Washington state. A couple of bills at the state level. Obviously, we’re looking at if there’s an agency legislation in California, especially at the state level as far as rent freezes, et cetera. Those are kind of the 2 big focal points, I would say, right now.

Operator: Our next questions are from the line of Julien Blouin with Goldman Sachs.

Julien Blouin: I might have missed it, but can you give us a sense of January blends and new lease rate growth by region? And also one of your Sunbelt peers was noting that pricing events in January felt better than normal seasonality. I guess, are you seeing that in your own portfolio?

Michael Lacy: Hi, Julien. You didn’t miss it. We didn’t give necessarily the exact numbers, but what I would tell you again is occupancy is higher than we expect it to end of the year, turnover is lower than we expect and we’re right on track when we look at our initiatives related to other income as well as our blends. So we feel pretty good about January right now. And quite frankly, we’re in February, and that feels pretty good.

Julien Blouin: Okay. Got it. And then maybe a second one. I mean, when we look at some of the really strong Sunbelt absorption numbers that continue to come through in the fourth quarter, on the face of it, it maybe seems even better than I would expect from current levels of job growth or migration trends in those markets. Do you feel that, that speaks to the pent-up demand in those markets from several years about this migration and job growth. And at some point, do we have to start worrying about maybe these high levels of absorption starting to deplete that pent-up demand?

Joseph Fisher: Julien. it’s Joe. I think it’s kind of 3 different factors. The first is we’ve talked a lot about the relative affordability component. So the total household formation activity this year hasn’t been materially different than what we’ve seen in the past. But given the lack of new housing being built and then the lack of existing homes being sold, you’ve seen more household formations pivot over towards the rentership side, which we’ve talked about in the past when you got into the mid-20 tons we kind of saw rentership society take place given the relative affordability. So that feels like a multiyear trend, mainly because we don’t expect home prices to come down and rates need to come down 100 to 200 basis points just to get back to a pre-COVID level in terms of affordability.

So it’s a little bit of that. And again, you are hearing — homes of individuals coming off the couches and some get in other renter’s basements. So when you look at younger age cohorts, you’re seeing a little bit of that, which there’s been a pretty high level of younger age cohorts living at home. And so you’re starting to hear a little bit of that as they’ve built up their savings and got into their income-producing years. And then lastly, as you see more and more return to work and return to office, that does bring people back in and get them off couches at home as well. And so there’s a couple of different trends that are providing a tailwind during the phase of record supply. As we talked about, we’re kind of going more normal supply here as we move into ’25 and decrease in ’26.

And so I think those trends generally probably remain in place. The big one will obviously just be what even on the demand from a jobs perspective.

Operator: Our next questions are from the line of Alex Kalmus with Zelman & Associates.

Alex Kalmus: First off, congratulations to Mike and Joe, for your new roles at firm, wanted to ask about your strategy for potential acquisitions this year. There’s definitely more optimism for unlocked seller supply at NMHC last week and is there any upside to that acquisition volume from what you’re hearing? And any particular markets that might be in focus at the moment.

Joseph Fisher: Hi, Alex. It’s Joe. There definitely was a lot of optimism in NMHC in terms of not just the go-forward fundamental picture, but a lot of capital out there looking for transactions on the multifamily side. obviously continues to be one of the favorite asset classes out there. I think one of the best challenges, however, is that the sellers see that same dynamic. And so unless you’re a force seller due to duration of funding coming up on the end of a fund. Do you have a capital event, such as a refinancing — that you don’t think you’re going to be able to effectuate. You’re just not seeing many assets come to market. And so the bullishness on the buyer side is kind of lines on the seller side though, that is keeping transaction volumes down where we’re focused is, obviously, with our joint venture partner, LaSalle and trying to effectuate a couple of deals there with them.

We’re talking about a couple of different target markets, which we’re still aligning on and making sure we work through. So I’m not prepared to talk about that right now. But it’s going to be typically that 2- to 3-year-old product to a maximum is going to have a nice value-add component that we can get off to either our operational team and/or our redevelopment team to try to get a lift in NOI for on-balance sheet transactions, we will continue to look at those as well as continue to look at disposition activity and see if maybe we can enhance the cash flow growth profile of the company over time.

Alex Kalmus: Got it. Makes sense. And I know you touched on it earlier, but just on your recent partnership with funnel, are there any additional details you can provide about the partnership? And maybe more specifically, its effect on NOI or how it fits into the context of the technology and innovation initiatives you’ve been rolling up.

Michael Lacy: I’ll take that. I think for us specific to the rollout of it, it’s really going to help allow us to drive the customer experience project even further. And again, it’s not the end all be all with how we think about innovation. It’s going to allow us to really spend more time on all these other ideas and all the data that we have on the customer experience, how we can leverage that because we’re not going to have to deal with a lot of the back office, pieces that we were dealing with because, quite frankly, funnel wasn’t around when we started our own CRM probably 3 years ago. And so we’ve had a — notion that for quite a long time. This is going to allow us to leverage a group that’s done a really good job with it.

And I’d say, in addition to that, we had plans around our online leasing process, our move-in process and something we call omni-channel just a more seamless streamlined approach to how we communicate with prospects and residents. So there’s a lot of benefits that are going to come with this, and we’re just now scratching the service. We’re going to learn a lot over the next 3 to 6 months.

Operator: Our next question is from the line of Haendel St. Juste with Mizuho Securities.

Haendel St. Juste: Thanks for hanging in there. Two quick ones for me. First, a follow-up on development. I guess I’m curious…

Joseph Fisher: You’re breaking up.

Haendel St. Juste: My first question is on development. I’m curious how you guys are…

Joseph Fisher: We lost you again. Operator, can we have a jump back in the queue.

Operator: Our next question is from Linda Tsai with Jefferies.

Linda Yu Tsai: Just one. You said turnover would be 100 bps lower this year. It sounds like it’s mostly from operational improvements. Are there certain markets where you see larger opportunities to reduce turnover?

Michael Lacy: Good question. I’d tell you, again, we put 100 bps into our can for the year. And again, just looking at January, February, we’re between 400 and 500 bps better than the prior year. So we’re off to a really good start. And I can tell you when I look at our markets, our regions, we’re seeing a pretty consistent downward trend across the board. I mean it was pretty amazing to see just January was sub-30% turnover. I’ve never seen a number like that. And so it’s pretty much broad-based across the country because with the implementation of our CRM, all the efforts that we have on the data we are backing in every market, every property and quite frankly, every individual resident that we have at the property. So it should be kind of broad-based.

Linda Yu Tsai: Are there more costs associated with reducing that turnover?

Michael Lacy: A little bit. This year, we’re placing a little bit more of a bigger bet in terms of some of our CapEx spend. And so again, we’re going in — we’ve identified some properties where we’ve had just recurring issues as it relates to HVAC or water heaters or things of that nature. And if we can get in there and try to fix some of these recurring issues, we think that we can also limit how many people are moving out on a given basis. So a little bit more as it relates to the CapEx balance, but not necessarily on our OpEx.

Operator: Next question is from the line of Tayo Okusanya with Deutsche Bank.

Omotayo Okusanya: Perfect. Sorry about that. So just a quick question. One of your peers is kind of increasingly doing more in terms of just kind of like townhouse, townhome type product. kind of looking a little bit more like FFR products. I’m just kind of curious how you guys think about that as an opportunity, especially given you already in kind of some of the key FFR markets.

Tom Toomey: This is Toomey. Yes, it’s a product I’m quite familiar with and have done in times in the past. And if you go down to our Vitruvian development in Dallas, you’ll find that we’ve put up 85 homes down there on the townhome product, it only fits where you don’t have enough density opportunity, okay? And so you look at long-term hold periods and you think about a site and where you would get the most cash flow. Density is always something we’re striving for why it just gives us a bigger capital footprint and opportunity to grow. So it fits, it’s generally more of a suburban farther out fringe product. It can be a lot of good Phase II type of development activity. So we’re familiar with it, when we find sites that fit that template certainly have the capability to execute. Leaning in, I think we look down the whole risk reward grid of our capital deployment, and Joe’s in charge of that now.

Operator: Our next question will be coming from Haendel St. Juste.

Haendel St. Juste: I apologize for that earlier. I had 2 quick ones. First is on development. I guess I’m curious how you’re factoring in potentially higher input costs from potential tariffs, lumber labor into the high 5 yield targets you mentioned. And of the 2 or 3 projects that you were looking to start near term, how much of those costs are locked in?

Joseph Fisher: Yes. So you’re seeing costs come down there for a short period of time kind of early ’24, cost settlements have really kind of stabilized at this point in time. So in our underwriting, have factored in some inflationary pressures. We are out there on our first start out and bidding that out and trying to lock in costs right now. And so that is in process, piece of the project, the starts that could potentially be in the second half of this year. We’ve got estimates that they are not locked in at this point in time. So that’s a little bit fluid. I think while on the tariff front, there’s going to be a couple of concerns if, in fact, those tariffs actually stick and at what level. The lumber side of the equation would be kind of the near-term concern with the lumber supply coming from Canada.

There’s obviously other things like mechanicals and glass and things of that nature that may be at risk to depending on the origin source. The flip side is that as you continue to see start activity plummet, there is greater availability of labor. And so seeing what happens with the labor side and subcontractors being either able to squeeze out margins just to keep our people working would — and/or just seeing less wage pressure from certain trades. So there’s some balancing back to it. But right now, we feel like we’ve sensitized at least the first deal to make sure that we can move forward with it.

Haendel St. Juste: Got it. Got it. And then looking at the 8 projects in your future pipeline? How many are shovel-ready today? And maybe how many could be within the next couple of quarters? Just curious how soon perhaps you could flex that potential pipeline up here over the next couple of quarters or so?

Joseph Fisher: Yes. I’d say there’s probably 4 to 5 projects right now that if you fast forward over the next 12 months, are either shovel-ready or could be shovel-ready. So some of them going through kind of the tail end of designs, and we continue to value engineer, see what else we can do to enhance yields. Let’s say, 4 to 5 of those projects could be ready within the next 12 months if we needed to be.

Haendel St. Juste: And the yields would be about the same?

Joseph Fisher: Yes, that’d be about the time in the high 5% to 6% is what we’re targeting.

Operator: Our final question is from the line of Mason Guell with Baird.

Mason P. Guell: On the preferred equity book. Do you have any update on the [ 1,000 ] investment attrition — year? And then for [ junction and notes ] maybe other [indiscernible] has there been any change in demand given the hire?

Joseph Fisher: Hi, Mason, I think we caught part of that. I think you were asking about 1,000 Oaks in demand for that project. if that’s not correct, obviously, jump back on and if you could reiterate, but the 1,000 Oaks project has continued to see very strong demand. Unfortunately — how the implications from the fires. And so we are seeing that. That project has gone from kind of low 90s leased and occupied a few weeks ago up into the mid-90s already and continues to see good momentum. And so that object is performing well in the face of what’s an important circumstance.

Mason P. Guell: Can you give me an update on — I get something mature this year? Do you have any update on that?

Joseph Fisher: What pace of the maturities?

Mason P. Guell: On 1,000 Oaks.

Joseph Fisher: On 1,000 Oaks. Yes, just it shows a shorter years to maturity that equity partner is probably going to be looking at a short-term extension on the loan just as we continue to see momentum on the occupancy and that side. So we do think that probably transact this year. They’ve got good valuation, good equity in that deal. It should trade very well. But I think they’ll probably stand here short term to continue to work through what’s going on out there in L.A.

Operator: Thank you. I would now like to turn the floor back to Tom Toomey for closing remarks.

Tom Toomey: Once again, thank all of you for your time, interest and support of UDR. We look forward to seeing many of you at upcoming events. And with that, take care.

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