UDR, Inc. (UDR) Q1 2021 Earnings Call Transcript

Greetings and welcome to UDR's First Quarter 2021 Earnings Call. Operator provided instructions. It is now my pleasure to introduce your host, Director of Investor Relations, Trent Trujillo. Thank you, Mr. Trujillo. You may begin.

Welcome to UDR's quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.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 statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn over the call to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent, and welcome to UDR's First Quarter 2021 Conference Call. On the call with me today are Mike Lacy, Senior Vice President of Operations; and Joe Fisher, Chief Financial Officer, who will discuss our results. Senior officers, Harry Alcock, Matt Cozad and Chris Van Ens, will also be available during the Q&A portion of the call. To begin, first quarter results met our guidance expectations, and we anticipate same-store growth and FFOA per share will improve from here. As evidenced by our guidance increase and the demand trends, which we will speak to during the balance of our prepared remarks. We are often asked the reason for optimism on the recovery of the multi-family sector and the magnitude of the potential upside UDR can capture. Our response is twofold. First, on the macro front, we expect to see the typical demand and growth cycle witnessed in past recoveries. The U.S. economy appears prime to accelerate as additional fiscal stimulus kicks in. Vaccination rates continue to improve and the return to office plans crystallize. Business conditions across most of our markets are returning to more normalized levels. These factors should have a positive impact on job growth and wage growth, which drives demand for multifamily housing. It is difficult to put a range on the potential economic benefit from this unfolding, but recent operating trends put us in great position to realize this upside as we enter peak leasing season. Second, this recovery will have an additional tailwind that no past recovery has had, the potential relaxation of regulatory restrictions. These COVID-related regulations cost UDR an estimated $8 million to $10 million of NOI during the first quarter alone. Mike will further detail this opportunity in his remarks. But we are optimistic in our ability to recapture the income as restrictions sunset and the recovery ensues. Collectively, our macro views, the acceptance of our Next Generation Operating Platform by our residents and our ongoing ability to accretively source and deploy capital drove the full year 2021 guidance increases provided in our release. Joe will discuss this further in his remarks. Let me take a step back and look at our business over the intermediate time horizons of 2019, 2020 and 2021 and into the future. I firmly believe we have the correct strategy in place to outperform. Our business model is somewhat unique in the multifamily space as our widespread diversification, innovative culture and focus on operations makes UDR a full cycle investment, capable of performing well across a variety of macro backdrops. This proved true in 2019 when we accretively acquired nearly $2 billion of properties with attractively priced capital. In 2020 amid a pandemic, we made tremendous strides implementing our Next Generation Operating Platform, which represents an entirely new way of conducting business in the multifamily industry, that has and should continue to drop more dollars to the bottom line. For 2021, we believe we are well positioned to take advantage of the accelerating economic recovery and eventual relaxation of regulatory restrictions in many of our larger markets. All in, UDR has generated better-than-average FFOA per share growth in seven of the last nine years, a track record I'm immensely proud of. In closing, I remain highly confident in the strategic direction of our company and our team's ability to execute on an opportunity set that's in front of us. The ongoing commitment of our team has delivered increasingly higher levels of service and satisfaction to our residents as we progress towards the full rollout of our platform while also becoming more efficient. For this, a heartfelt thank you goes out to all our associates for skillfully adapting to a new way of conducting business and executing our strategy. With that, I'll turn the call over to Mike.

Thanks, Tom. A little over 60 days ago, when we provided initial 2021 guidance, we believed the reopening cadence of markets, and therefore, the pace of recovery in multifamily demand indicators that we track would be largely tied to how rapidly vaccinations proceeded and how quickly regulatory restrictions were subsequently relaxed. Our best guess was that meaningful positive inflection would most likely occur in the second quarter for our portfolio in total and the second or third quarters for assorted markets more negatively impacted by COVID. While the regulatory backdrop has yet to exhibit material improvement, I'm pleased to say that we are seeing core operating trends improving a bit earlier than expected. This quarter, we added a new page to our supplement that illustrates these key operating trends. Let me take you through our first quarter results and positioning ahead of peak leasing season, using those charts on Page 2 of our supplement. First quarter results were solid, as evidenced by occupancy continuing to tick higher, blended effective lease rate growth turning positive and revenue growth improving sequentially. These trends have continued into April and give us confidence that results can further improve as we reprice 60% of our portfolio in the second and third quarters. In terms of demand, traffic was 35% higher year-over-year during the first quarter. Positively, we witnessed residents migrate back to harder-hit urban areas in greater numbers, while residents leaving these markets declined. This has resulted in physical occupancy of 96.8% in April, our highest reading since April 2020. Higher occupancy is usually a precursor to future pricing power and our effective blended lease rate growth has improved following occupancy gains. Strategically, we continue to improve occupancies in our harder-hit markets, but are also actively driving rents across numerous markets and communities that held up better during the pandemic. Regarding blended lease rate growth, the transition from vacancy to occupancy in some harder-hit urban areas of coastal markets has had a near-term anchoring effect on our blended rate growth. However, I expect our blended growth to trend higher during the second and third quarters as market rents across our portfolio continue to rise. As of today, we have a weighted average loss to lease of 2%, a significant improvement versus October 2020 when our gain-to-lease topped out at 6%. We have priced our May and June renewals at a 100 to 150 basis point average premium to the 2.7% growth we achieved in the first quarter. And we are forecasting effective new lease rate growth to turn positive portfolio-wide during the summer as markets reopen and return to office is in full swing. A material positive development we saw during the first quarter and in April thus far is the continued downward trend in concessions. As a reminder, our strategy through the endemic has been to maintain gross rents and offer concessions to not diminish our future rent roll in anticipation of a rebound. As demand has improved across our markets, so has pricing power, and we have been able to reduce the amount of concessions granted on new leases from a peak of 3.5 to 4 weeks on average in November 2020 to 2.7 weeks today. Each week of concession equates to approximately 2% effective rate growth, and we should see this benefit more clearly in our results as we reprice a large portion of our portfolio over the next two quarters. These factors have contributed to higher sequential billed revenue, which we anticipate will improve further in the coming months. Importantly, cash collection rates rose by 50 basis points between February and March with further improvement in April as we benefited from reopenings, job growth, stimulus programs and $2.5 million in rental assistance received from a variety of programs. We expect these trends to support revenue collection rates in the high-90% range going forward. Taken together, our same-store cash revenue growth turned positive on a sequential basis. Based on the most recent trends, I expect our year-over-year same-store revenue growth to be less negative in the second quarter and turn positive in the third quarter. In addition to these core trends, our future same-store and earnings growth prospects are bolstered by the potential to recover lost income opportunities directly tied to the pandemic. As Tom mentioned in his remarks, we estimate reduced collection levels and regulatory restrictions accounted for approximately $8 million to $10 million in lower NOI during the first quarter or $0.03 per share. Breaking this out further, despite recent sequential improvement, rent collections have trended around 2% lower versus pre-COVID, resulting in $6 million to $7 million in quarterly run rate bad debt reserves and write-offs. Another $1.5 million to $2 million can be attributed to other regulatory restrictions that have limited our ability to monetize our real estate through initiatives such as short-term rentals, amenity rentals and late fees. The balance of lost potential income comes from mandated flat renewal pricing across 15% to 20% of our portfolio. As markets continue to reopen and regulations are eased, we anticipate recapturing these revenue streams over time. While these big picture trends demonstrate our strong execution and the opportunity ahead, it's always helpful to provide some color at the market level. Briefly, New York and San Francisco are collectively 14% of our same-store NOI. During the quarter, we observed higher levels of demand from favorable migration patterns into and out of these markets. This dynamic and its positive impact on market rents and concessions helped to drive occupancy higher and therefore, sequential revenue and NOI growth. Washington, D.C. and Seattle are collectively 24% of our same-store NOI. These markets experienced relatively high levels of competitive new supply during the first quarter, which resulted in a near-term reduction of pricing power. We anticipate sequential NOI growth improving in these two markets as concessions decrease over the coming quarters. Our Sun Belt markets are collectively 25% of same-store NOI. These markets continue to exhibit strength with occupancy above 97%, and we are actively increasing rents to maximize our rent roll. Moving on, our Next Generation Operating Platform, version 1.0, has now been fully rolled out to 16 of our 21 markets. Our residents have embraced our move to a self-service model as evidenced by 96.5% of our tours conducted during the first quarter being self-guided or touchless. With the widespread introduction of automated self-touring and easy to use resident interfaces across our communities, we've remained on target to achieve headcount reductions, averaging 35% of our communities by year-end 2021, primarily through natural attrition. When coupled with other platform initiatives that also mitigate controllable operating expense growth, we remain confident in our forecast that the platform can increase our annual run rate NOI by $15 million to $20 million by the end of 2022. Finally, I want to thank my colleagues in the field and at corporate for their continued hard work to make the platform a reality. Every UDR associate should take pride that we have created a new way of doing business in the multifamily industry that improves resident satisfaction, increases engagement and career mobility for top talent and delivers strong bottom-line results. Although we have been working on the platform for three years, we are just scratching the surface of what is possible. And now I'd like to turn the call over to Joe.

Thank you, Mike. The topics I will cover today include our first quarter results and our improved outlook for the full year 2021, a summary of recent transactions and capital markets activity and a balance sheet and liquidity update. Our first quarter FFO is adjusted per share of $0.47 and at the midpoint of our previously provided guidance range and was supported by same-store revenue and NOI growth in line with our internal expectations. For the second quarter, our FFOA per share guidance range is $0.47 to $0.49. The $0.01 per share sequential increase is driven by our expectation for improving sequential same-store NOI growth, and accretion from recent capital allocation activities. Our year-to-date results, when combined with our expectation for continued sequential improvement throughout the year, drove the increases in our full year 2021 FFOA and same-store guidance ranges provided with our release. We now anticipate full year FFOA per share of $1.91 to $2, with the midpoint representing an approximate 1% increase from prior guidance. This increase is driven by $0.005 from a 25 basis point midpoint improvement in same-store revenue growth, $0.005 from a 50 basis point midpoint improvement in same-store expense growth and a $0.01 accretion from accretive financing activity and transactional activity, offset by $0.005 from increased G&A expense. Our same store guidance, we are now forecasting full year 2021 revenue growth of negative 2.0% to positive 0.5% with concessions on a cash basis and negative 4.0% to negative 1.5% with concessions on a straight-line basis. This difference is due primarily to the residual impact of concessions amortizing during 2021 that were granted in 2020. Additional guidance details including sources and uses expectations are available on Attachment 15 and 16E of our supplement. The low end of our full year 2021 FFOA guidance range suggests we achieved the midpoint of second quarter FFOA guidance of $0.48 per share and experienced flat sequential growth for the balance of the year. As Mike discussed, we are encouraged by the trajectory of several forward-looking operating trends and believe we are well positioned to drive rate growth as we enter the peak leasing season. We are optimistic that these dynamics, when combined with the accelerating economic recovery and eventual easing of regulations, will provide a growth tailwind as we progress throughout the year. As such, we plan to revisit guidance on our second quarter call once we have further evidence of the sustainability of recent positive operating trends are deeper into the leasing season and have a clear view of the regulatory environment. Next, a transactions update. A primary objective when we undertake transactions is to remain diversified by market mix, price point and location with end markets. While our portfolio-wide urban, suburban and AB quality exposures will oscillate over time as we pursue higher return deals, the 21 markets we operate in provide ample flexibility to utilize our value creation drivers to enhance earnings and NAV growth. We believe these tools allow us to pivot to the right capital allocation decision and consistently generate outsized yield expansion over time on investments, which provides a repeatable, enduring and compounding set of advantage versus private operators and public peers. These drivers include: one, our ability to improve core operations. Examples include implementing revenue management software, charging view or location premiums and using our scale in markets to secure lower vendor cost. Number two, implementing legacy operating initiatives such as parking optimization, short-term furnished rental programs and renting out common areas. Number three, overlaying our Next Generation Operating Platform, which reduces headcount needs, improves resident experience, adds smart home capabilities and brings data science into the mix. Number four, renovating apartments and common areas as well as increasing curb appeal where appropriate. And number five, utilizing predictive analytics and qualitative assessments to provide a better jumping off point for our investments in markets that are likely to produce better rent growth over the coming years. We have found that the greatest opportunities for outsized accretion come from acquired communities that are mismanaged, located proximate to other UDR communities, those with renovation upside, or a combination of the three. Pairing this with premium-priced equity, like what we did in 2019 and during the first quarter of 2021 only serves to further enhance returns. This form of value creation is repeatable in any environment, given our ability to pivot sources of capital between dispositions, free cash flow and equity. Proof of the accretive nature of our transactional value creation strategy is evident on the $1 billion of third-party acquisitions completed in 2019. Thus far, the weighted average yield on these properties has expanded by approximately 35 basis points or 7% in terms of NOI growth to a 5.1% yield. This is a stunning result. Let me say again, this is a stunning result given this upside was realized during COVID, a period during which NOI generally declined. On the first quarter transaction activity, during the quarter, we sold two communities, one each in Orange County and Los Angeles, for total proceeds of approximately $187 million at share at a low 4% weighted average cap rate. We acquired or are under contract to acquire three communities, one in suburban Boston and two in suburban Dallas for a combined $360 million. All three communities are expected to generate outsized returns once fully integrated under our platform, with the weighted average initial yield projected to increase from mid-4% in year one to mid-5% by year three. This equates to an approximate 20% uplift in NOI. And lastly, we committed to fund two DCP investments totaling $50 million. Each investment yields 9% and includes profit participation upon a liquidity event, which we expect to occur in approximately five years. Please refer to yesterday's release for additional details on recent transactions. Moving on, our investment-grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: first, during the quarter, we entered into forward sales agreements for approximately 9.3 million shares of common stock for a combined $405 million of future expected proceeds. We anticipate using these funds on accretive acquisition, DCP and development opportunities, some of which we have completed and others we expect to close in the coming quarters. We plan to overequitize these investments, which should improve our leverage as measured by debt to EBITDAre by 0.1 to 0.2x. Second, after using the proceeds from our $300 million, 2.14% unsecured bond issuance in the first quarter to redeem higher cost, 4% debt originally scheduled to mature in 2025, we have only $640 million of consolidated debt or approximately 3% of enterprise value scheduled to mature through 2025 after excluding amounts on our credit facilities. Our proactive balance sheet management puts us in a position of relative strength with the best three-year liquidity outlook in the sector and a weighted average interest rate of 2.8%, the lowest amongst the multifamily peer group. Third, we recently announced a 1% increase to our dividend. Based on our 2021 AFFO per share midpoint of approximately $1.78 per share, our dividend payout ratio is forecasted to be 82%, resulting in approximately $100 million of annualized free cash flow after accounting for dividend payments. And last, as is evident on attachment 4C of our supplement, we continue to have substantial capacity under our line of credit and unsecured bond covenants. As of quarter end, our consolidated financial leverage was 35% on undepreciated book value, and 28% on enterprise value, inclusive of joint ventures. Net debt-to-EBITDAre was 7.0x on a consolidated basis, but would be 6.5x if outstanding forward equity agreements were settled during the quarter. As of March 31, our liquidity as measured by cash and credit facility capacity net of our commercial paper balance and including the future expected proceeds from the potential settlement of our forward sale agreements was $1.35 billion. Taken together, our balance sheet remains healthy, our liquidity position is strong, our forward sources and uses remain balanced, and we continue to utilize a variety of capital allocation options to create value. Finally, subsequent to quarter end, SmartRent, which is one of the investments held by RETV 1 and 2, of which we are one of the lead investors, entered into a definitive merger agreement with a special purpose acquisition company. Confirmation of the merger is subject to regulatory approval, stockholder approval and other customary conditions. As many of you know, UDR was an early adopter of SmartRent SmartHome technology across our portfolio, as part of the foundation for our Next Generation Operating Platform. We are pleased to see the rest of the industry following our lead in its utilization and the benefits SmartRent has provided to our investors through tangible bottom-line results to our operations, and yet to be realized appreciation within our RET investments. At this time, there are still many conditions to be satisfied, including those mentioned moments ago, before the merger is closed and SmartRent becomes a public company. Related to implications to UDR, the approximate $25 million valuation of our RETV interest presented on 12A of our supplement will continue to be presented in accordance with GAAP, utilizing fair market value accounting and the valuations provided to us by RETV. Based on information provided to us by RETV, the valuation presented on 12A of our supplement could increase to approximately $75 million on a pretax basis at a publicly disclosed transaction price, but depends on a number of factors. We do not intend to provide any additional commentary on this topic until it is appropriate. With that, I will open it up for Q&A.

Operator provided instructions. Our first question comes from the line of Nick Joseph with Citi.

I was hoping you could compare the recovery you've seen thus far in San Francisco versus New York? And then your expectations from both markets over the next few quarters?

Nick, it's Mike. Thanks for the question. It's been interesting. I'll tell you, just in general, New York, San Francisco, Boston, those markets have performed a little bit better than we expected to start the year. And when you look at New York specifically, we've been able to bring our occupancy from around 94.5% during the quarter to around 96.5% today. And it's been promising to see the concessions continuously drop. In general, we've seen a remarkable improvement over the last few weeks. So just to break it down a little bit, New York, average concession still 0 to 8 weeks, and it's very different by different parts of the city. We're seeing 2 to 4 weeks in Chelsea. And then we're right around 6 weeks down in the Financial District as well as Midtown. We're still upwards of around 6 to 8 weeks around Columbus Square. But overall, occupancy today is hovering around 96.5%, and we expect to see our blends continue to improve. San Francisco, specifically, that's been a little slower to recover. We're starting to see some of that availability transition to occupancy as evident by our new lease growth, down around 11% to 12%. But we're excited to see the occupancy go from 92.8% in 1Q to 94.5% today, and again, concessions in this market have also come down in the last couple of weeks. We're averaging between 4 to 6 weeks as a whole. Downtown as well as SoMa is closer to that 4 to 6 weeks today, which is a significant improvement compared to just 45 days ago.

And from the new move-ins, like you have seen and that picking up of demand, are there any kind of interesting trends that you're seeing in terms of who's actually moving back in apartments?

Yes. We do have some interesting trends. For New York specifically, move-ins coming from outside of the MSA were about 25%, and that compares to about 10% the year before. Something that jumps out to me is our 25 to 30-year-old age group in that market is twice as likely to live alone now. We've seen stats go from 14% to 27% in that market. In San Francisco, not as big of a difference. We're seeing 20% come from outside of the MSA. It's pretty comparable to what we saw last year. And the age demographics haven't changed as much in that market.

Our next question comes from the line of Austin Wurschmidt with KeyBanc.

So Joe, appreciate all the details you gave on guidance. But just wanted to check and see if the math here was right that if we look at the billed revenue figure you had in April, around $95.5 million and sort of apply a collection rate, as you mentioned, the high-90% range and assuming that remains stable, does that get you pretty close to the midpoint of the revised range for same-store revenue guidance?

Now. The way it kind of works, and it actually tracks a pretty similar trajectory as our FFOA guidance. If for 2Q you take the midpoint of expectations, both for FFOA and then our internal expectation for billed revenue in same stores, which we do expect to see a sequential improvement on both same-store revenue and NOI as we move into 2Q. If you flatline those for the rest of the year, you get to the low end of expectations. So that effectively assumes that the reopenings pause, there is no further improvement or pricing power, and all the trends that we've seen that we're talking about on the second page of the supplemental effectively cease to exist. So I think a somewhat conservative assumption there, but probably prudent given where we're at in terms of timing of the year with 70-plus percent of the leases left to be signed, the economic recovery is still ongoing, and of course, the regulatory environment. To get to the midpoint, you need to see that continued improvement as we move throughout the year—be it occupancy, pricing power, getting the collections number up and bringing back some of those other income numbers. So you'd need to see continued improvement from 2Q into 3Q and 4Q to get to the midpoint or high end of those guidance ranges.

Okay. Got it. That's helpful. Appreciate it. And kind of coincides with some of the commentary you guys had in the prepared remarks. Secondly, just on traffic and demand. You provided some good detail in there on how traffic and visits have trended. Curious how conversion rates compare versus historic levels really, what's driving that big leg up? What markets are really driving that leg up in traffic and visits. And then are people — is that really for people that are looking for units, call it, April, May timeframe? Or are you seeing people kind of start to look further out as some of these back-to-office dates firm up?

Great question, Austin. I'll take that. I would say it's very market specific. One of the best trends I've seen over the last few weeks is in some markets I have a 30-day trend that's higher than my current occupancy. So that tells me that there's some people that are looking to move sooner rather than later. And when you have that type of trend, you can really start pushing on your market rent. That is places like the Sun Belt for us. It's Richmond, Baltimore. Just phenomenal results over the last few weeks. But specific to traffic, when you look at that chart that we provided on Page 2 in the supplement, New York, San Francisco, Boston, our traffic was up about 120% on a year-over-year basis, most recently, and that compares to the rest of the portfolio, around 90%. And then as it relates to converting, we've been seeing as a percent of our home count, 1.6% lease conversion, which, typically, in a normal time, when I compare back to, say, a time like 2019, it's closer to 1% at this period of time. So I'm seeing leasing that's more typical of end of May, early June timeframe.

And Mike, maybe a follow-up. How much of that does the platform enable to deal with more traffic than it used to, and are people more likely to lease with the platform versus our prior stabilized period with leasing agents?

Yes. That's a good point, Tom. Obviously, we've opened up the funnel. We've talked about this in the past. By allowing more people to come to the property, we can send out sometimes upwards of five, six, seven people at a time who want to go see different units on the property. So obviously, that's had a pretty big impact on our traffic. You can see it in the numbers. I would say it's increased twofold in a lot of markets. So that's probably one of the bigger factors going forward on how we're able to continue to drive that traffic number and convert at a high rate.

That's great detail. And I appreciate the follow-up to the follow-up.

Our next question comes from the line of Jeff Spector with Bank of America.

First question, I'd like to turn to supply. Can you provide some comments on supply nationally this year? And any initial thoughts on 2022 and if possible, if there's any key watch markets or even regions, Sun Belt versus, let's say, Coast.

Yes. Jeff, it's Joe. Starting with 2021 MSAs in terms of UDR's portfolio, we think we're probably going to be up about 10% to 20% in terms of supply growth this year. That equates to roughly 1.5% of stock. That number has come down plus or minus 10% from what we would have been talking about a quarter ago as we have seen continued revisions and delays taking place in some of the Coast. So the picture is getting a little bit better there in that sense. Submarket wise for us in terms of competitive supply overall, for our portfolio, is looking like it's going to be flat to down actually. So competition-wise, looking a bit better than the MSA as a whole. I'd say the markets that probably look best for us in 2021 are Boston, Orange County, Baltimore and Inland Empire. Those that look a little bit more difficult: Northern California, L.A., New York, Nashville, Orlando and Seattle. If you start to fast forward into 2022, 2023, I think all of us have been a little bit frustrated by the stubbornly high number of permits and starts. So we probably don't have quite the tailwind that you've seen in historical recoveries coming from the choking off of capital and supply as we get into those years. Relative to starts, permits are down plus or minus 10% off of peak levels. I think regionally, as you look through, clearly, the coastal markets have come down more, while Sun Belt has remained relatively static. And that's a trend that you see even when you cross over to the single-family housing market as you start to think about total housing supply that's out there. So markets that are kind of best and worse that we're keeping our eye on. The markets that look to be a little bit more troublesome: Raleigh, Phoenix, Charlotte, Austin, Denver, Nashville—so a lot of the Sun Belt markets. On the Coast, I'd say the ones that look a little bit better are Boston, New York, L.A., San Francisco, and then even within the Sun Belt, Dallas looks a little bit better. Orlando looks a little bit better. And then the Inland Empire looks a little bit better. So generally speaking, high level though, Sun Belt is just not seeing the same reprieve in supply on a forward basis.

That's Joe, that's very helpful. And then my second question, Joe, on your—some of your opening remarks. Really appreciate some of the color and the details you provided on the value UDR has created and the growth on assets you've acquired, especially as you mentioned during the pandemic the NOI increase. What limits UDR from doing more acquisitions? Is it capital, competition, resources? Have you considered doing an open-end fund business, something similar to Prologis, to really grow that business—like to get back into that?

Yes. The biggest inhibitor for us in terms of external growth is probably going to be the opportunity set available to us. When we go through that list of value creation mechanisms that are available—be it the ops initiatives, the platform, the CapEx programs—it's not as if every deal that crosses Harry and Andrew's desk presents that opportunity. So the ability to fare it through a wide swath of opportunities across the markets that we're targeting, have them figure out the submarkets that we want to be in and then put together the business plan around those assets so that ops can go operate those assets and execute upon it and get the upside kind of from that 4.5% cap to 5.5% cap over time—those are not a dime a dozen. So I think the opportunity set is probably the biggest inhibitor to go out there and continue to take advantage of the competitive advantage that we have in place. Sourcing the capital, we always have assets that we can turn around and sell that we think may be maximized from any one of those perspectives. So we can always go find assets to sell and recycle into additional accretive opportunities. But I think the external piece is limited by that. As it relates to the second part, the fund business: we do have a great JV partner in MetLife that we continue to be partners with and very much enjoy operating with. So we don't have any plans to change from that perspective. But fund-wise, it's not an avenue that we have explored. Keeping the value creation in-house and having it fully accrue to our shareholders is generally beneficial, and complicating the business is generally not something that we've tried to look to do. It's something that may be discussed with the Board, but no plans at this time.

Our next question comes from the line of Rich Hill with Morgan Stanley.

I want to maybe pick your brain about squaring same-store revenue compared to some of the operating metrics that you're comparing, notably the blended spreads. I think blended spreads have remained really solid and stable over the past several quarters. But same-store revenue growth has remained much more negative. If I'm looking at CoStar data, it looks like new lease spreads troughed at a similar level to peers, but you've had a steeper recovery. So with renewal spreads where they are, where occupancy trends are going and taking into account the bad debt, why shouldn't we expect to see same-store revenue growth even better than where it is right now?

Thanks, Rich. It's Joe. Maybe I'll kick it off and turn it to Mike for some details. I think in terms of expectation of revenue growth, clearly, we do expect to see, given the fundamentals that we've displayed on Page 2 of the supplemental, an acceleration in our year-over-year performance as we move throughout the year. Q2 likely remains in negative territory, but we do believe we flip over, maybe even as early as June on a year-over-year basis, but definitely in the third quarter, given the trends that we're seeing. So we do think all the efforts that we put forth on operations will start to show through on that year-over-year number pretty soon here. As it relates to your comment specifically, that starts to come into a little bit on Page 4 of the press release in terms of the blends that we show at plus or minus down 50 basis points throughout most of the cycle versus within the Page 4 table, the year-over-year contribution to growth, that minus 2.6% for gross rents. I'll spend some time on that as I think concessions, occupancy loss, bad debt reserves are probably a little bit more self-explanatory. But the walk from how you get the blends to that down to 2.6%—keep in mind that blends are lease-to-lease. So you have to have a new lease in place to actually capture that metric. So the 50 basis points down really explains only about 20% of that down 2.6%. What you're not seeing here is that we do have a lot of units that were occupied in Q1 of 2020 that were higher rents in the urban coastal markets that are sitting vacant today. And so that is not captured in the blends. When they do get leased up, they will start to show up in blends. So if you have 400, 500, 600 units out there in some of our major coastal markets that are at much higher rents that are sitting vacant, that revenue stream has been lost, and that really explains the other 80% of that down 2.6%. Over time, as you start to lease those units, it's going to be a positive to billed revenue, positive to occupancy, positive same stores. But it could potentially weigh as you put new leases in place in some of those more distressed markets at lower rents. It could weigh on new lease pricing depending on where they're going. But I think you heard from Mike in the opening comments there, the trajectory on those markets clearly heads in the right direction, retaining pricing power, driving concessions down. So we hope to not see that negatively impact blends, but do think it's a positive for year-over-year as we move forward.

Got it. And I guess I have just a follow-up question. Why wouldn't that be included in economic occupancy? Happy to take it offline if it's too long, but just trying to square it with our math.

Close enough, it's okay, Rich. We can take it offline and then walk through the definitions in a little bit more detail in terms of how we allocate the different dollars between physical and economic. So why don't we take it offline? We'll take it through there. And then if others have questions as well, we can go into kind of the details on the math on it.

Fair. So one more question: as you start looking beyond the next 12 months, what's to stop you from pushing rents even more? There seems to be a lot of demand coming from millennials and Gen Z. Maybe supply pressures begin to abate a little bit. Is there a scenario where full occupancy allows you to push rent, maybe even higher than where you were in 2019? Ultimately, can you outpace inflation?

Yes, Rich, this is Mike. I'll take that. Generally speaking, we are pushing rents, and we like to push it until it breaks. In some markets, we're able to push a little bit higher; in others, it's a struggle. It comes down to what's happening within these markets. A good example for us today is a place like Orlando—we compete with a lot of private operators and we can push hard. But at some point, they start offering concessions or lowering their market rents, which puts pressure on us. So we manage based on the 30-day trend. As long as our occupancy is stable, we're going to keep pushing. It also comes down to the regulatory environment in some places. Specifically, for renewals, we're still at 0% for about 20% of them where we can't raise rents. So we're limited by that. We're watching that very closely, and as soon as that opens up, that's going to give us a lift.

Our next question comes from the line of Rich Anderson with SMBC.

Good—so first question for me is sort of what was just alluded to about the private competition. Part of the problem with the multifamily business is you have 80% to 90% of the ownership in private hands and a lot of that is maybe not so sophisticated, particularly relative to your Next Gen platform. I'm wondering if this environment—besides them acting inefficiently and screwing up the math for you guys with concessions and whatnot—have people thrown in the towel and gotten out of the business to some degree? We're seeing that in New York: a lot of the condo sales that we're hearing about are actually former investment properties by mom-and-pop owners that have just decided not to rent apartments anymore. Are you seeing a silver lining from COVID potentially that you get a little bit more sophistication in your competitive set?

Rich, I would say this: there's always going to be inefficient operators in the marketplace as long as it's a fragmented industry. Certainly, you could see from our purchasing over the last couple of years, we're very adept at finding that opportunity and executing on it. With respect to seeing operators in the marketplace pull product off, well, let's hope they do so. It gives Mike an operating tailwind that he can take advantage of, and we'll see where that plays out. I think the bigger question on most investors' minds that own today is what are interest rates going to look like? And what is the new tax law going to look like. I think we're going to find that out over the next six months. Both of those may, if they break a certain way, free up a lot of assets for purchase. That has typically been the pattern. Cap gains going up would be one thing. The potential elimination of 1031 like-kind exchanges would be another. Those probably push a lot of assets from the old pattern to the sale pattern or exploratory pricing. You couple that with potential interest rate increases or proceeds constraints, it pushes more assets into the middle of the table. So I think we're well positioned to take advantage of that, should it unfold. I think we'll have our answer in the next six to nine months.

Okay. Good. And then somewhat unrelated question, but a bit related: Joe, you went through the discussions about investing in acquisitions and cap rate returns. But what value do you place on the snapback of performance in various markets over the next couple of years, which we all expect to see, which may be a natural level of growth as we recoup lost ground? Or are you looking past that when you're underwriting deals and not placing as much value on that kind of short-term phenomenon—really thinking 10 years out?

We're really trying to look more in that four to ten-year time frame when we're thinking about these assets. Clearly, you've seen depressed NOIs coming in some of the more harder-hit markets. But if NOI was down 10% or 20% in New York and San Francisco, we never saw asset values adjust to that degree. So you're not seeing a 1:1 adjustment between NOI and asset value. So it's not as if you can take advantage of the upcoming NOI stream by buying that depressed pricing. While we do fully expect that you'll see that short-term phenomenon of coming off a low base and momentum in our press release for some of those more harder-hit markets on a sequential basis, we believe it's coming and we're seeing it, but we're not necessarily factoring it into how we think about our diversified portfolio. We're trying to think more in that four to ten-year time frame. You can see the incremental deployment and sourcing that we've done based on our portfolio strategy work here in the recent quarters. So buying some more in Boston and D.C., Philly, Dallas, Tampa, etc., and then sourcing a little bit in Southern California as well. So a little bit of changes on the margin, but it's very much on the margin. It's not going to be a big shift given that we're already starting with a pretty strong position with a diversified portfolio.

Does the snapback almost cause a distraction, make it harder to underwrite and see through to that four to ten-year time frame? Does it muddy the vetting process?

Rich, this is Harry. I think I'll jump in. We realize we're going to get market rent growth, and that's going to vary and should be priced in the assets. But the assets that we're buying, we're sourcing properties where we believe we can push NOI above market rent growth. The market rent growth is typically priced; there might be some inefficiencies, but primarily we're focusing where we can do something with the asset, either with the platform, buying a property near other UDR properties or through some capital programs so that we generate outsized NOI growth over and above the market and therefore outsized returns.

Our next question comes from the line of Rich Hightower with Evercore.

One quick housekeeping one. I apologize if I missed this earlier, but tell us what's driving the 50 basis point midpoint reduction in expense growth this year, if you don't mind?

Rich, it's Mike. I'll tell you, it's two things. We're actually seeing benefit both on our controllables and our noncontrollables right now. A lot of that I would attribute to the platform on the controllable side. For example, our expense growth in the first quarter was around 2%. A lot of it had to do with what was going on with the snowstorms down in Texas as well as in Richmond and Baltimore. If it wasn't for that, our controllable expenses would have been closer to flat. We're seeing pretty good trends as we move into 2Q and 3Q as it relates to personnel reductions and things of that nature. On the noncontrollable side, our taxes have been coming in better. Joe can elaborate more on that, but it's both components for us today.

Overall, on the real estate tax side, Rich, we came in at 2.7% in the quarter; for the full year, we think the number is probably around 4% growth. That's down about 100 basis points from our original budget, really driven by some of the valuations coming in better and then some of the appeals work that we've had. In California, we've had a number of appeals and valuation wins. We've had some others throughout the portfolio as well. But there is still some risk out there as it relates to Florida and Tennessee and Texas as well as Boston and New York in the back half of the year. But we feel a lot better. We've kind of derisked that piece of the equation and feel better about where we're growing at that point.

Okay. That's helpful. And then, Mike, maybe just a follow-up on some of the platform-related improvements. You mentioned in the prepared comments that the company is just scratching the surface of what's possible. Care to expand on that?

Yes, Rich. We've talked a little bit more in the past about getting into data science. I can tell you, we have a lot of information going into the system from all of our data sets. We're really just scratching the surface on what we can tap into, and it's pretty exciting to get an idea of what opportunities are out there. We're starting to put estimates on them—understand how much return is there and how much time it's going to take. We've got leeway over the next couple of years, and we'll continue to push on it. We're very excited about Platform 1.0. I mentioned in my prepared remarks we've transitioned 16 of the 21 markets. We're getting close to a 30% reduction in headcount in some communities. Our heat maps are up and running. We're starting to see that play through in our blended rate growth. Our residents and our prospects like what we're doing, evident by the NPS scores continuing to increase. At this point, we've rolled out 43,000 SmartHomes. So we're getting close to finishing that up too.

Rich, just to add on: in a self-service model, which is really the core of the platform, you'll find opportunities in the following areas. Immediately is the cost structure of the organization. Beyond that is customer satisfaction potential and understanding in more depth. We've hired a group to help us work through understanding the sales cycles and our opportunity set and where we fail to date. In today's leasing environment—whether online or touchless—we actually touch the customer seven times. The truth is we probably don't need to touch them that much, but we're trying to figure out which points of that touch cycle actually lead to a successful sale. Second, Mike's demographics point: you've seen the power of our pricing by home because we're tracking 10 years of data and can figure out what the right renewal strategy should be for each individual and not a holistic mail-out offer. Actually customizing it to their situation and their patterns. Those are just two examples. Others in a self-service model go into speed and ability to interact—people want it to be three clicks and done. As we learn more and more about those things, we're obviously focused on the margin and customer service angle of it. We think there's plenty of room to run here because a lot of other industries are way ahead of us. Fortunately, I think we're in the lead in the multifamily space in thinking about it and executing on it, and we want to maintain that.

Our next question comes from the line of Neil Malkin with Capital One Securities.

First one is on capital allocation this quarter and subsequent: a lot of activity in the Sun Belt, specifically Dallas and the suburbs of Dallas. Obviously, you sold some California product. Being that you guys have excellent technology and data science, and you look at analytics, what does that say about how you think these markets are going to shake out and how demand trends are going to shake out over medium to longer-term period? You said you don't want to make big moves until the dust settles. Are you any closer to making that sort of move or decision? What do the investments you made recently indicate?

I think the recent capital markets activity effectively demonstrates how we're thinking about the portfolio on the margin. We've talked about the principle by which we operate, which is maintain diversification. So we think that's worked in the most recent down cycle. It will work in the up cycle as it has historically; it provides a good jumping-off point for us and our investors to deploy capital and create value over time, which you've seen us continuously outperform on cash flow growth for the last almost a decade now. So we want to maintain that. As it relates to Dallas, Dallas ranks middle of the pack in our quantitative models, but it ranks very well on the qualitative side—affordability, corporate headquarters, corporate relocations, the industries that they're attracting and the demographic growth they're seeing. So we have a pretty high degree of positives on a market level related to Dallas, and it comes down to the opportunity within those markets and making sure that it checks all those different value creation boxes. Overall, though, I think all these markets have the ability to do well going forward. It's not as if Southern California, Northern California, New York, etc., cannot perform on a go-forward basis. We think they have a near-term, very strong rebound coming as demand comes back and hopefully, as regulatory restrictions come off. Longer term, they'll remain hubs in their respective industries. It's just that they may not get the same monopolistic share of jobs and incomes that they've had historically. Historically they performed 70% to 80% of the time on a rolling 10-year basis; maybe they're more in line with some of these other markets that are becoming more of a hub or more of an ecosystem. Some of these future drivers of economic growth and job growth.

I appreciate that. Turning to DCP/development: material pricing has gone up quite a bit, especially lumber. Are you seeing the pipeline or potential get harder or decrease a little bit, and how does that rising price environment affect your on-balance-sheet development decisions?

Neil, it's Harry. On the DCP side, the number of opportunities remains elevated. There's a ton of developers looking to capitalize their projects. Capital overall is more difficult for developers. Debt proceeds are lower, LP capital is more difficult, all of which increased the demand for DCP. However, it's taking a long time to work through these projects as developers work on their capital stacks and the overall economics. On lumber and other material costs: lumber is in the midst of what we hope and expect is a bubble in pricing. But lumber overall is only about 3% of total development cost on a normal wood-frame project. So even if lumber doubles, you're talking about a $100 million project going to $103 million—it's 15 or 20 basis points and that's an extreme outcome. Other material costs are also increasing. Typically materials are 15% to 20% of total development cost. So even if materials increase 10% to 15%, that's a 2% to 3% increase in total development cost. So it's meaningful but doesn't necessarily kill these deals. If you think about it, that's maybe $50 to $75 a month rent increase, which in a recovery market we can often overcome. We continue to see material shortages. We are operating in a difficult environment, but on our on-balance-sheet development projects, we don't change our long-term strategy as a result of short-term cost bubbles. We believe we can create value through our development capabilities. If lumber and other material costs stay high, we would consider that in the context of our overall economic analysis before we start a project.

Our next question comes from the line of Amanda Sweitzer with Robert W. Baird.

Following on development: your development guidance did go down a bit this year. Is that just less optimism about your ability to add new projects to the pipeline beyond Tampa? Or are you seeing other more interesting opportunities within DCP and acquisitions?

Amanda, when we originally put that guidance range together, we put a fairly wide range out there. At the lower end, even up to the midpoint effectively encapsulates all the known spend. When you look at Attachment 9 at $500 million, it encapsulates that spend. We have a number of shadow projects sitting out there that we may potentially start, but it really depends on timing—third quarter, fourth quarter, even into the first half of next year. We do have a land site we're working on in Tampa that we hope to get on the balance sheet and start within the next 12 months. There's the densification opportunity we've talked about at Newport Village in suburban D.C., which is about a $140 million project. There's the Alameda parcel that we took on the balance sheet in Northern California subsequent to quarter end. So we have a number of other projects that we're working on timing for and hopefully will get started, but we brought down the top end of the range slightly.

That's helpful. And where have you seen development yields trend this year either pre-COVID to today? How does that stack up with other opportunities?

Two points: on Attachment 9, for the current pipeline, costs are largely locked in and we've already bought out the lumber we need for the next 18 months for these projects. So we do not have that risk for the existing pipeline. The lumber bubble today factors into forward underwriting and future starts, which we probably won't start for another two to four quarters. As it relates to yields we underwrite, we have not adjusted from historical levels, which are in the high-5s to low-6s for stabilized yield. Most projects we look at are somewhere in the 5.5% range untrended. By untrended, we mean current market rents as we look at the current NOI stream off of that asset relative to a trended cost. We look at forward cost at the point in time we'd start and deliver that asset. So the untrendeds we look at are about 5.5%. Over time, we expect rents to grow and catch up to cost and grow to about a 6% stabilized yield.

Our next question comes from the line of Juan Sanabria with BMO Capital Markets.

Just hoping you could give a little bit more color on the renewals and the impact of regulation. You said that there's 20% of the portfolio where you couldn't push. Do you have an estimate as to what that would have been, had you had the flexibility to drive those renewal prices?

Juan, it's Mike. It's about 70 basis points. We would have been 70 basis points higher if we weren't at 0% across that 20% of our renewals.

Great. And on the new lease spreads or rate growth: you improved about 30 basis points from Q4 to Q1 and are down 2.4% year over year. Can you give color on how that trended through the quarter and where April stands today to give a better sense of momentum for new lease rates?

Sure. January we were negative 2%, February negative 2%, March negative 3%. April is looking very similar to March as we transition vacancy to occupancy in some harder-hit areas. After that, I expect it to start improving significantly as we go into June and July. As for renewals, we averaged 2.7% for the quarter. January was 2.5%, February 2.6%, March 3.0%. Going forward, we expect about a 50 to 80 basis point increase throughout the rest of Q2.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

Two quick ones. First, Mike, you mentioned the platform can deliver $15 million to $20 million of run-rate NOI improvement. Is part of that employee attrition or cost cutting? Can you give more color on what initiatives those are and the timeframe for that $15 million to $20 million?

Alex, that $15 million to $20 million is really related to our platform. We started this back in 2018. We expect about 75% of it to come to fruition by the end of this year, and about $5 million remaining in 2022 from additional cost savings and some revenue increases based on data science initiatives we're seeing.

I want to point out that the $15 million to $20 million figure we've talked about is related just to the base portfolio that we had in 2018. We've continued to add assets, so the true benefit is above and beyond that amount. That upside gets reflected in acquisitions as well. So there is even more upside from the platform than we typically quantify.

Okay. Second question: if New York enacted broader rent regulations, would you consider shifting exposure from New York into New Jersey and Connecticut?

Alex, let me provide a high-level overview on a couple of regulatory topics. First, businesses reopening, return to work and vaccinations continue in earnest across our markets. While people get focused on things like eviction moratoriums, those are major drivers of how our business performs going forward. We've continued to see incremental progress there. Second, rental assistance: we've been actively pursuing rental assistance dollars at local, state and federal levels since early in the year, and we've seen success—Mike talked about recovering about $2.5 million to $2.6 million thus far, which is a good result given many programs only recently opened. Currently, about $11 million of our AR is in an application process; we aren't sure of the exact hit rate, but we feel good about it. Before we've gotten most state rental assistance funds from California up to now, it's largely been local programs. On the negative side, we may see an extension of the eviction moratorium in New York because their program isn't fully up and running; we're looking at mid-May there. But we've operated under moratoriums for a year and feel good about our ability to continue to drive growth even with those restrictions in place. As for rent control, we have yet to see if proposed legislation will pass in New York; it hasn't moved out of committee. We continue to monitor regulatory developments carefully.

Alex, regulatory is one of the qualitative factors we incorporate in our process. So New York and some coastal markets don't screen as well on that factor, but they score well on many other quant and qual measures. We're not going to sell out of those markets; we'll maintain diversification. Also, remember the second-order impact: to the extent regulatory concern scares away capital and new supply from certain markets, capital will find a home elsewhere and you may see supply increases in the Sun Belt. So it's not a one-to-one relationship of regulatory being bad and therefore not investing.

Our next question comes from the line of Haendel St. Juste with Mizuho.

You mentioned some renters are coming from outside the New York and San Francisco MSAs—20% to 25%. If more people are migrating back to coastal markets and the number of residents leaving those coastal markets is decreasing in the short term, is there any reason to be concerned about near-term demand and pricing for your non-coastal markets? Also, can you share any nuggets on rent-to-income ratios across Sun Belt and coastal markets?

Haendel, first our rent-to-income ratio hasn't really moved; it's still around 24% and we screen based on a gross number. Our strategy has been to keep gross rents high and use concessions, so it's been nice to see stability on that front. Regarding moves and occupancy, we're still coming off of some pretty big lows, so while things are improving, some harder-hit areas still have room to recover. The last three weeks have been promising—demand has been stronger than expected. One of our markets, New York, had a higher 30-day trend than current occupancy, so we're actively pushing rents now to see what we can do.

Embedded in Haendel's question on pricing power risk: early in the cycle there was debate about a mass exodus from urban coastal cities. Research suggests that did not take place. Many individuals stayed within markets or moved to suburbs within the same region. Sun Belt performance relative to coastal was driven by differences in reopening and employment. As long as states reopen and employment holds, Sun Belt markets can maintain pricing power. At the same time, the coastal markets are showing signs of a rebound as reopenings continue. We expect rents and occupancy to come back in those markets.

Appreciate that. Any color on comparative IRRs between what you're selling and what you're buying?

When we do underwriting comparisons, we typically utilize a baseline assumption for forward market growth and then do a gradient for best and worst markets to scenario analyze. IRR differentials primarily come from ingoing cap rates in that analysis, given similar long-term growth profiles. So you might buy at a higher yield and get a stronger IRR. You're typically picking up about 50 to 100 basis points on IRR spreads between buys and sells.

Our next question comes from the line of Alex Kalmus with Zelman.

You spoke a lot about the Next Gen program. Obviously you're into the technology space. Is this at all licensable and a potential ancillary revenue stream you guys have discussed going forward?

We continue to look at a lot of this. The vast majority of it can be replicated. The challenges might be cultural as well as implementation. We'll continue to explore any piece that is licensable or IP and report on that later.

Got it. One other quick one: the DCP deals this past quarter had the stated return around 9%, a little below average because you have upside participation. Is that the dynamic—lower upfront return for upside? Or was there competition pressuring spreads?

When you look at those deals, we've historically been flexible with partners—going 100% fixed at a higher coupon or a lower fixed with more backend participation. As you look at deals today, the majority of business has backend participation, which we're excited about given early-cycle timing. The economics reflect some of the difficulties Harry mentioned—LP capital and financing. We're typically underwriting 13% to 14% IRRs on those versus 11% to 12% pre-COVID. The way we structure these with optionality and back-end participation gives us upside as these projects mature. Ultimately, we'd like to own a handful of these and this gives us a chance to get to know those partners better.

There are no further questions in the queue. I'd like to hand the call back to Chairman and CEO, Mr. Toomey.

Thank you, operator. Just some quick closing comments, recognizing we ran a little long today, but I thought it was very beneficial. Again, thanks for your interest and time today in UDR. Certainly, you can see from our tone and our results that we're very excited about our business prospects and looking forward to talking with you more as we execute in this recovery cycle. With that, please take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.