Greetings. Welcome to UDR's Second Quarter 2022 Earnings Call. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Senior Director of Investor Relations, Trent Trujillo. Thank you, Mr. Trujillo, you may now 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 this supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made on 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 the call over to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent, and welcome to UDR's second quarter 2022 conference call. Presenting on the call with me today are Senior Vice President of Operations, Mike Lacy; and President and Chief Financial Officer, Joe Fisher, who will discuss our results. Senior Officers, Andrew Cantor and Chris Van Ens will also be available during the Q&A portion of the call. Let's get started. We continue to be in the strongest operating environment I've seen over my tenure in the multifamily industry. This is largely driven by the strength of our customer, relative affordability among housing options and steady near-term supply. This, combined with ongoing accretion from our well-timed 2021 acquisitions and DCP activity, drove our strong quarterly results including a 16% year-over-year increase in FFOA and led to our second guidance raise this year. Still, we are aware of the underlying economic crosscurrents that support our business and how they may impact the results in the near term. We believe UDR is well equipped to manage this environment based on what we can control, specifically, first, our diversified portfolio as defined by geographic mix, portfolio quality and location within markets should provide some level of risk mitigation. Second, our ongoing innovation will continue to drive relatively better margin expansion and drive more accretive dollars to the bottom line, irrespective of the macro environment. Third, our anticipated 2023 revenue growth earn-in of 5% is about 4 times the average earn-in over the past decade. Fourth, our balance sheet is in excellent shape with plenty of capacity to invest in highly accretive opportunities. And lastly, compared to prior periods of economic uncertainty, we have a lower leverage profile, higher liquidity and minimal debt maturities over the next 3 years. While not in our direct control, there are also favorable conditions that are supportive of the multifamily industry, including: first, shelter is a necessity and multifamily rentals continue to seem incredibly cheap versus housing alternatives despite the exceptionally strong effective rent growth our industry continues to realize. And second, wage growth remains strong. Unemployment is historically low and employers may be less willing to lay off employees during a potential downturn given the ongoing challenges of finding skilled labor. All in all, our growth prospects for the remainder of 2022 and into 2023 are very strong. These tailwinds, combined with our leading operational capabilities and innovation, which Mike will further detail in his comments, should drive incremental margin expansion, higher resident satisfaction and more value from our real estate. Moving on, we continue to build on our position as a recognized global leader in ESG with the hiring of Patsy Doerr as UDR's Chief ESG and People Officer and our commitment to the science-based targeting initiative to reduce our carbon footprint. We are focused on continuing to be a leader in ESG. Furthermore, during the quarter, we appointed Joe Fisher to the role of President in addition to his responsibilities as CFO. Joe's promotion reflects his strong leadership and ability to consistently create incremental shareholder value. In closing, I remain very optimistic on the resiliency of the multifamily industry and know we have the right team in place to deliver best-in-class results. Moving forward, we will continue to base our decisions on data and adjust our tactics to maximize our competitive advantages while delivering value to our stakeholders. I thank all my fellow UDR associates for their effort to demonstrate on a daily basis. Your commitment and dedication to drive our innovation, culture and the success we enjoy together. With that, I will turn the call over to Mike.

Thanks, Tom. To begin, strong same-store cash revenue and NOI growth of 11.4% and 14.7% accelerated sequentially by 60 and 70 basis points and above our expectations. Key drivers of these results included: first, effective blended lease rate growth accelerated more than 300 basis points sequentially to 17.4%. This resulted from the differentiated pricing strategy we implemented earlier in the year, whereby we have traded 10 to 30 basis points of occupancy to drive rental rate growth and improve our 2023 rent roll. Second, annualized resident turnover ticked up year-over-year to 50%, but of the 16% of residents that moved out because of rental rate increases, we re-leased those apartment homes at an average 30% higher effective rate. This enabled us to capture embedded loss to lease quicker than normal, highlighting our rationale for allowing turnover to increase. This approach of focusing on rental rate growth has maximized 2022 revenue growth and we anticipate a 2023 earn-in of 5%. This is the highest earn-in in our history. It's double our previous high, which we achieved coming into 2022 and is nearly 4 times the average earn-in over the past decade. As is clear from the regional results we reported, strength is broad-based. Sunbelt markets continue to demonstrate phenomenal growth, while West Coast markets such as Los Angeles and San Francisco, as well as East Coast markets such as New York, were among our leaders in year-over-year growth. Currently, same-store revenue growth drivers remain robust. London lease rate growth is expected to be roughly 16% in July, with new lease rate growth of more than 17% and renewals of approximately 15%. While we expect tougher comps on new lease rate growth in August and September due to the exceptionally strong results from a year ago, renewals have been sent out at a still-strong pace of 11% to 12% for these two months. July resident turnover is higher year-over-year given the loss to lease trade we've been willing to make but remains below historical seasonal averages. And occupancy remains high at just under 97%. Portfolio-wide market rent growth was 5.2% from January through June, the highest over the past decade and 120 basis points above historical norms. Looking ahead, we expect to see more seasonal market rent growth trends as we enter the back half of the year but the strong first half growth should continue to drive above average sequential growth through year-end. Moving on, we continue to assess the fiscal health of our in-place and prospective residents given the evolving inflationary environment. Thus far, our leading indicators continue to suggest durable strength in near-term fundamentals. First, income growth remains robust, resulting in portfolio-wide rent-to-income ratios in the low 20% range. Consistent with our historical ratios, we have not seen any material evidence of doubling up and residents who turned over have been backfilled with rents at higher rates. Second, our in-place residents are increasingly paying rent on time. Collection rates improved sequentially in the second quarter and long-term delinquents continued to decline. Third, traffic remains strong, enhanced by the larger funnel generated by our shift to a self-service business model. Fourth, concessions are virtually non-existent with the exception of one week on average in specific submarkets of San Francisco and Washington, D.C. Last, multifamily has become incrementally more affordable versus alternative housing options. It is now approximately 50% less expensive to rent than own across our portfolio versus 35% less expensive pre-COVID. During the second quarter, move-outs to buy a home was only 8%, the lowest level we have seen in over 10 years of tracking the statistic and 400 basis points below our historical average. These factors, along with having visibility on 85% of our full year rent roll, led us to meaningfully increase our full year 2022 same-store revenue and NOI guidance ranges for the second time this year. We now expect to achieve midpoint growth of 11% for same-store revenue and 14% for same-store NOI on a straight-line basis. Relative to our prior full year 2022 outlook, the drivers of our improved guidance ranges are as follows: First, we expect full year effective blended lease rate growth of approximately 12% to 14%, which is 300 basis points higher at the midpoint compared to our prior assumption from April. For the second half of 2022, we expect blended lease rate growth in the 10% to 12% range. Second, we continue to expect occupancy to remain stable at 97% plus or about flat year-over-year. Last, we expect controllable operating expense growth to be 3% to 4%. This is 50 basis points below that of our overall same-store expense growth guidance, which we increased by 50 basis points at the midpoint, primarily due to the inflationary environment, higher resident turnover and higher associate compensation to retain capital. As indicated earlier in my remarks, we are now forecasting a 5% earn-in for 2023 based on these drivers which assumes market rent growth in the back half of 2022 follows a typical seasonal trend. Said differently, we would expect to achieve 5% same-store revenue growth in 2023 based on the leases we have already signed and expect to sign through year-end. Considering annual historical market rent growth averages 3% to 3.5%, we believe there is further upside to this number in 2023, depending on the macroeconomic environment. That said, the forward regulatory environment remains a wildcard. Collections are incrementally improving and our long-term delinquent residents are slowly declining. But we are approaching the end of government assistance in many states and a macro hiccup could entice regulators to reintroduce their COVID playbook in some areas. Our dedicated governmental affairs team remains closely in tune with any developments and we continue to work with our residents to find the right apartment home to match housing needs and economic realities. Finally, our ongoing innovation continues to drive attractive results and differentiation versus peers. Key foundational technologies such as smart home tech, software robotics, AI chatbots, proprietary self-guided tours and resident apps, spatial analysis heat maps and a unique data hub have already been integrated into our operating platform. These have improved staffing efficiencies at our communities by 40% and increased the number of apartment homes managed per employee by 60%, improved resident satisfaction by 25% and resulted in controllable operating margin advantage of 325 basis points versus public peers at a similar rental. Importantly, these foundational technologies have enabled more recent initiatives developed by our innovation team to move from concept to implementation more quickly. For example, it took us three years to capture the first $20 million of NOI upside from the rollout of our next-gen platform. Since the beginning of 2022, we have identified an additional $40 million or an incremental 4% of NOI initiatives that we expect to capture by year-end 2025. Examples of these initiatives include building-wide WiFi, visitor parking, increasing the number of properties operated with no dedicated on-site personnel, improving our process to reduce vacant days and leveraging big data to make better pricing decisions. Above and beyond these, we continue to make progress on improving the resident experience which we anticipate will contribute far more NOI down the road through additional pricing engine optimization, better renewal forecasting and increasing our share of the resident wallet, amongst other initiatives. In closing, I'm excited about our operational trajectory. A big thanks for the ongoing hard work of my colleagues in the field and at corporate. We have plenty more to accomplish but your innovative and competitive spirit drives our continual growth and our desire to further improve how we conduct our business. And now, I'll turn over the call to Joe.

Thank you, Mike. The topics I will cover today include our second quarter results and our updated outlook for full year 2022, a summary of recent transactions and capital markets activity, and a balance sheet and liquidity update. Second quarter FFO as adjusted per share of $0.57 achieved the high end of our previously provided guidance range and was supported by strong same-store revenue growth and further accretion from our 2021 acquisitions. For the third quarter, our FFOA per share guidance range is $0.58 to $0.60, or an approximately 4% sequential increase and 16% year-over-year increase at the midpoint. This is supported by continued positive sequential same-store NOI growth and accretion from recent capital allocation activities, partially offset by increased interest expense, given recent changes in the yield curve and higher G&A to enhance innovation and retain talent. These same drivers led us to increase our full year 2022 FFOA and same-store guidance ranges for the second time this year. We now anticipate full year FFOA per share of $2.29 to $2.33. The $2.31 midpoint represents a $0.03 or an approximately 1.5% increase versus our prior full year guidance and a 15% increase versus full year 2021. The guidance range increase is driven by a $0.04 benefit from improved NOI and offset by approximately $0.05 each from higher interest expense and increased G&A. For same-store guidance, we have increased our full year revenue and NOI growth ranges by 125 basis points and 150 basis points, respectively, to 10.5% to 11.5% and 13.25% to 14.75% on a straight-line basis. In addition, we have lowered our capital uses by approximately $240 million for the year as we have proactively reduced our net deployment strategy and pivoted away from acquisitions towards higher risk-adjusted return land acquisitions and DCP investments. While these investments represent smaller dollar amounts versus traditional acquisitions, they present the opportunity for future value creation while preserving balance sheet strength. DCP investments often provide us with optionality around future purchase, while land purchases allow for gradual funding of development starts and implementing value-creation mechanisms on our preferred timeline. Other guidance details are available in Attachments 14 and 15 of our supplements. Next, a transactions and capital markets update. Our second quarter and third quarter-to-date external growth commitments totaled approximately $550 million and were split amongst acquisitions, DCP investments and land sites for future development. Our DCP investments are generally funded over multiple quarters, so we were able to match fund our current commitments with $350 million of proceeds from the settlement of 6.5 million shares under our previously announced forward equity agreements and approximately $80 million of proceeds from prior DCP maturities. External growth activity included: first, during the quarter, we acquired a 433 home community in suburban Boston for approximately $208 million at a mid-4% cap rate. Our predictive analytics framework identified Boston as a desirable market, and this property is located proximate to other UDR communities. These characteristics are similar to the more than $3 billion of acquisitions we have executed since 2019, where we have expanded yields by an average of 120 basis points to 5.7%, well in excess of what the market alone would have provided. Speaking broadly to the acquisition market, pricing on the majority of multifamily deals suggest cap rates are probably up 25 to 50 basis points from recent lows depending on market and asset quality. Asset values are largely flat to down 10% versus earlier this year as realized NOI growth has offset some of this cap rate increase. Second, during the quarter, we acquired three future development sites, one each in Southeast Florida, suburban Dallas and Riverside, California for an aggregate of $135 million. Collectively, these sites are entitled for the development of nearly 1,300 apartment homes and represent likely 2023 or 2024 starts dependent on market dynamics. Third, during the quarter, we've committed to invest a total of $100 million into three DCP opportunities at a 10.5% weighted average return. Subsequent to quarter end, we fully funded an additional $102 million into the recapitalization of a portfolio of stabilized communities valued at $900 million with an 8% return. Because recapitalization of stabilized assets have lower risk profiles, this is a relatively lower return rate versus our typical DCP investments. All told, we continue to have DCP, development and redevelopment opportunities into which we can accretively deploy capital. However, volatility in the macro environment has led to an elevated cost of capital as compared against a couple of quarters ago. Therefore, we reduced our 2022 acquisitions guidance to $208 million from the previous $600 million midpoint. This assumes no additional activity in 2022. Partially offsetting this reduction is a $200 million increase in DCP and land investment. The balance is comprised of the removal of previously assumed debt capacity utilization which helps further improve our balance sheet metrics. Please refer to yesterday's release for additional details on recent transactions and capital markets activity. Finally, our investment grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: first, we have only $115 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities and our commercial paper program. Our proactive approach to managing our balance sheet has resulted in the best 3-year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 2.9%. Second, $1.3 billion of liquidity as of June 30, which is comprised of approximately $1 billion of available capacity on our line of credit and nearly $300 million of unsettled forward equity agreements, provides us ample dry powder and strength. Third, our leverage metrics continue to improve. Debt to enterprise value was just 25% at quarter end, while net debt to EBITDA was 6.2 times, down more than a full turn from 7.4 times a year ago. We expect year-end debt-to-EBITDA and fixed charge coverage will further improve to the mid-5 times range after considering our decision to run a capital-light external growth strategy this year versus previous guidance. By year-end 2022, both metrics should be approximately a half turn better versus pre-COVID levels. Last, our approximately $370 million of developments in lease-up have been a drag on 2022 earnings but are expected to benefit future earnings by approximately $0.05 per share based on a 6.5% weighted average stabilized yield. Stabilization of these developments should improve our run rate EBITDA and further enhance our leverage metrics. Taken together, our balance sheet remains in excellent shape, our liquidity position is strong, our forward sources and uses remain balanced, and we continue to utilize a variety of capital allocation competitive advantages to create value. With that, I will open it up for Q&A.

And our first question comes from the line of Nick Joseph with Citi.

And I appreciate all the comments and thoughts on external growth. As you look at the DCP environment and opportunities today, how has it changed over the last 3 or 6 months, just given kind of the lending environment, higher interest rates and some of the other opportunities that may present themselves?

Nick, it's Joe. So maybe a couple of things because there are some wrinkles within our DCP pipeline and the recent investment activity that you've seen here in this quarter last. So we are starting to bifurcate that DCP portfolio into our traditional investments which are residing or preferred equity lending on to traditional developers and development assets. And then you see some of these recapitalizations that have taken place. Subsequent to quarter end, we had a $100 million portfolio deal as well as back in Q2, we had the Portland deal. So we are starting to bifurcate that a little bit. I'd say on the traditional DCP deals, you still see plenty of activity and employee interest in that space. The returns really haven't moved up meaningfully. So they've picked up a little bit but not as much as a 1:1 ratio might imply if you thought about whereas traditional cost of debt. So returns there are still kind of in that 11% to 12% IRR type of range. When you come over to the recap space, we are seeing really good economics there. So that space is a little bit different for us and that traditional DCP, we're really trying to go after the underlying assets that at the end of the day have the optionality. In addition to the good returns, with the recap side, we're just viewing this as an opportunity to get really good IRRs on a risk-adjusted basis relative to the underlying real estate. Those are generally in that kind of 8% to 9% range, and I think that area of the market has really come towards us in the last 3 to 6 months.

And then just on the land, are you seeing any repricing of land just given where construction costs have moved? And then how are you thinking about underwriting the developments or the future development on some of these land parcels that you acquired?

Yes. On land, no, we're really not seeing much repricing at this point in time. Traditionally, land prices have remained much stickier. So you don't see as much volatility on that side. I would say though that when you look at the land acquisitions that we had in the quarter, a number of these are exceedingly long lead times. So when you look at something like the Riverside transaction, that's a transaction that we wouldn't work with for probably 5 years now with a potential joint venture partner on the retail side. Ultimately, we have fixed pricing on our 50% and we're able to buy that out at a discount as well as buy out the partner's 50%. Some of these are longer lead times in nature. But overall, not seeing a lot of volatility on that land price. When it comes to future starts, our near-term start is going to be Newport Village, that's a densification play on an existing asset. So we're probably going to start. That pricing will be about $150 million, $160 million starting in the third quarter for almost 400 units. As we think about the future starts, generally, we run with about a 5% contingency for price purposes and risk, but we're also increasing expected pricing by about 1% per month at this point in time in our underwriting for the next year. And so that Newport Village deal or a couple of additional transactions we'll be looking at starting in 2023, we think we're pretty well covered from a cost and risk perspective. That's still allowing us to get to that low 5s current yield and a mid-to-high 5% stabilized yield on those transactions.

Next question comes from the line of Austin Wurschmidt with KeyBanc.

Mike, you alluded to this a little bit in your opening remarks but maybe to put a finer point on it. If we take the 5% earn-in and assume that rent growth gets back to historical inflationary levels in 2023, is it fair to say 7% same-store revenue growth is achievable next year, assuming kind of the macroeconomic backdrop doesn't accelerate to the downside?

Austin, I think that's fair. Just taking the math of, again, that 5% earn-in, if we can get to 4% market rent next year, use a midyear convention. And yes, you get to 7% pretty quickly. That being said, I'd like to point out, we've done a good job over the years of trying to be a little bit more innovative in nature, just going after other income. So there are other things out there that we are constantly looking at. And again, we have a pretty good pipeline at this point of ideas. So we think that we can continue to push that as well.

That's helpful. And then I know strategically you guys have tried to draw down on your loss to lease, but where does that figure stand today? And also, if we do see things soften up a bit, do you think the loss to lease that some still have provides a little bit of a cushion in terms of how portfolio rents would start to roll over? Or in reality, if demand softens, do you think that disappears pretty quickly as people look to hold occupancy?

That's the thing with loss to lease. You want to capture it while you have it. And today, we've seen loss to lease continue to go up. Last time, we talked about this thing around high 9%, 10% range. Today, it's sitting around 8.5%. Again, that goes back to our strategy of really driving our rent roll. You can see in both our market rents how that's played out on new lease growth and really, especially on that renewal side, we've been able to push a little bit more aggressively. Again, that's leading into that earning of 5%. And frankly, today, we think we have very good visibility. I mentioned in my prepared remarks around 85% of our leases for the year because we can basically see what's being sent out through September and October at this point, we see where our market rents are going. We feel really good about that 10% to 12% that sits out there in terms of blended growth in the back half. So when we talk about where we're trending, we'd have to be 0% growth in the fourth quarter to really move away from that 5% earn-in closer to 4%. Currently, third quarter looks like it's in the bag. It's close to 12% to 14% today. So we've got a lot of visibility, a lot of dashboards out there that we're looking at. It goes back to that innovative approach, a lot of green lights telling us to push go. So we feel good about where we're at today.

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

Can you guys hear me?

Yes. You're good, Steve.

Okay. I guess the headset died. Anyway, just to circle back on capital allocation, Joe, I think you said on these new land parcels that you bought, you thought that yields were maybe in the high 5s. I think you said your current developments are kind of yielding 6.5%. And DCP is getting to kind of 8% to 10%. I'm just trying to think through with the economy softening and slowing, not clear how much. I mean, I guess, how are you thinking about that capital allocation and maybe changing underwriting criteria and prioritizing kind of where to put the incremental dollar today?

Yes, good questions. I'd say, first off, you can see within the guidance the pivot that we have from a capital allocation standpoint. Broadly speaking, pulling back on capital deployment, I'd say, while we're not always experts on the macro perspective, I think we are pretty good on pivoting and adjusting to cost of capital and knowing when to pull back and really when to push forward. So we did net-net pullback deployment strategy, with guidance now at this point, effectively everything that we've done to date is reflected in the high end of those numbers. So we're not taking into account additional speculative activity from here. When you do think about that pivot though, the DCP and development, i.e., land acquisition did tick higher. Part of the reason we like that is because they are smaller dollar amounts and they create future optionality. In the case of DCP, obviously, you have better optionality on the back end to potentially monetize and acquire some of those assets. Historically, we've had about a 50-50 hit rate on that. And then development, while we are building up the land bank, we're not hit-and-go today. All those land parcels and development starts aren't starting in Q3. We have Newport Village here to close out the year. The rest of our starts are really probably going to be 2023 decisions. We think we got the land at a good basis. We got a good price there. We feel comfortable with the underwritten yields at low 5s on a current basis and high 5s on a stabilized basis and that's factored in contingencies plus inflation. It does give us that optionality though. If the macroeconomic environment continues to deteriorate, if the cost of capital changes, I think we'd reevaluate kind of sequencing of those starts and think through sources and uses at that time. For now, you've seen most of what you're going to see out of us on the cap allocation side.

Great. I have a more technical question, and we can discuss it later if needed. I'm trying to understand the bad debt situation. I noticed you mentioned nearly $13 million of bad debt recorded in the quarter, which, if I'm calculating correctly, is about 3.5% of revenue. That seems quite high. I'm looking to clarify what was included in the second quarter and what is projected for the second half of the year.

Yes, that's a good question. Firstly, I want to emphasize that in these discussions about bad debt, we should not overlook the positive trend overall. Collections have been performing exceptionally well, with June being our best month since the onset of COVID. April and May also showed strong results, ranking second and third. Looking at July, we are actually seeing even better performance so far compared to June. I don’t want the conversation about bad debt and account receivables to overshadow these positive results. I am open to discussing this in more detail offline if needed. Regarding the $12.8 million reserve, it's important to focus on the changes compared to prior quarters rather than just the total amount. On a year-over-year basis, we experienced about a 30 basis point decline in same-store revenue, and on a sequential basis, a 90 basis point decline in Q2 compared to Q1. This is mainly due to the increase in collections we saw in Q1 as we began to see improvements in previous trends. Our methodology for assessing these collections has been consistent since the start of COVID, analyzing each resident's situation, considering the regulatory landscape, and tracking their status in governmental processes. This approach gives us greater confidence in future collections, which impacts our forecasts and reserves. That’s why you may notice less volatility in our results compared to others. We aim to keep surprises to a minimum, thanks to our dedicated business managers in the field and our regulatory team at corporate, who regularly meet to discuss these matters. If anyone has further questions about our methodology, I’m happy to address those after the call.

The next question comes from the line of Chandni Luthra with Goldman Sachs.

You mentioned that cap rates are up 25 to 50 basis points and that asset values have decreased by 10%. How much more do asset values need to decline for deals to start up again, considering that NOI remains relatively strong? At what point do you believe acquisitions will become more aggressive in this environment?

Chandni, it's Joe. When you look at our playbook here the last 3 or 4 years, our playbook has really been contingent on where is our stock price. Can we go out there, find assets that meet the platform requirements, the asset upside requirements, CapEx requirements that we have, and can we do that accretively with our share price? Our circumstances and what we need to see on cap rates are very different from the market as a whole. What we're seeing right now is price discovery taking place for the broader market. UDR and the REITs are not going to be the incremental price setter in that environment. We don't have a great cost of capital. I would say that while there's a lot of focus on cost of debt and how do these different groups finance themselves, a lot of our investor base spends a lot of time thinking about unsecured rates which are higher for the REITs than the secured borrower. Secured borrowers today, a good quality borrower can borrow on a low leverage basis, 4.3% to 4.5% probably based on where treasury rates have moved. When you think about where cap rates are, I think that gives you a sense for kind of what the floor may be. We still got to get through the price discovery phase. But near term, I don't think you're going to see much activity out of us given capital even on the stock price side or what we expose to the market on the disposition side.

That's fair. In terms of the remaining forward equity capital you have that is already secured, could you discuss the potential for its deployment? Do you believe that pursuing more DCP opportunities would be the best approach? Please share your capital allocation priorities for the next 7 to 8 months regarding that forward program.

Yes, it's really identified and penciled in now at this point for opportunities that are already in process and committed to. If you think about our development pipeline today, we've got about $200 million left to fund there. Within our DCP pipeline, we've got about $80 million left in terms of what you can see on Attachment 11. But then we had a subsequent portfolio DCP deal for about $100 million. So you've got $180 million there plus some additional redevelopment and technology spend. You've got $400-plus million of committed spend that we're looking at. So you've got $280 million of funding left to do on those forward equity settlements, plus free cash flow, plus we are exposing some assets to market to explore pricing and have potential proceeds coming. We're not looking at that forward equity settlement as new dry powder or new capacity for additional acquisitions, DCP and dev, et cetera. It's really now at this point, penciled in for what we already have committed to.

Our next question comes from the line of Brad Heffern with RBC Capital Markets.

I was curious if you could talk about any change in behavior that you might be seeing from kind of the deal-seeking renters on the coast?

Brad, it's Mike. I'll tell you, first and foremost, we alluded to in my prepared remarks, we are seeing some of the renter-based turnover just due to some of the rent increases. I mentioned that 16% of them left because of the rent increases. We were receiving about a 30% increase on new lease growth. That being said, when you look at places like New York as well as Florida for us, it was closer to 30%, 35% moving out because of that. Part of that is due to the concessions we were giving in that market. Last year in a place like New York and then in Tampa as well as Orlando, it's just a little more tough. That being said, you can see it on our rent trends. New lease growth is still very strong in those markets. We're refilling with people that are able to pay those rents. Income ratios are staying pretty consistent and what we're seeing on the move-in and move-out side of the equation is very similar to what we saw pre-COVID. Everything feels pretty healthy at this point.

Okay, got it. And then, Joe, is there anything left in the forward guide in terms of rental relief payments? Or has that largely played out?

There is an expectation that we will have additional receipts on government assistance generally in Q3. We do have a pretty good amount of visibility as to what's an application at this point in time, plus what we received in July. I'd say you probably have $3 million or $4 million of expectations out there for additional government assistance at this point. Yes, there still is the possibility that there are reallocations. Maybe we have something there that would be an upside surprise over time. There's also discussions taking place in California in the legislative body as to additional support for landlords for residents that haven't paid. But we have not factored in any of those items at this point in time.

Our next question comes from the line of John Pawlowski with Green Street Advisors.

Just a follow-up question on external growth. Last 2 or 3 years, acquisitions have been really, really tilted towards the suburbs. So I know suburban assets can't provide a higher going-in yield. But is there just a fundamental call on aging demographics here, going more suburban or any other kind of macro overlay that's forcing your portfolio more suburban?

No, there really wasn't. We want them to remain balanced in urban, suburban, A/B, etc. It just happens that when we went through all the parameters that we have laid out and we're going through the acquisition process, we wanted to make sure they were in markets that we had targeted for expansion. We wanted to ensure that we could deploy at accretive cap rates. We wanted to make sure the growth profile was better than our own portfolio, the international market growth or everything that the innovation and redevelopment CapEx teams do. They generally just presented the best opportunities. Some of that has to do with the potting aspect. We've talked a lot about potting aspects. I think when you look at our 2021 acquisitions, the median distance was about 2 miles. So we did focus a lot on could we get more efficiencies out of an asset because of where it was located and we don't dictate to the market what comes to market. We had to be a recipient of what we saw coming and took advantage of where we saw it. I wouldn't take that as a broader thematic or strategic shift. It just happened to be what was available at that point in time that worked with what we wanted to do.

Okay. Second question for Mike. Curious what your team on the ground has told you in terms of June and July kind of leasing trends in tech-centric markets, either Bay Area or life science clusters in Boston, San Diego. Any incremental anecdote layoffs and how that's impacting traffic would be helpful to hear?

Sure, John. I think specific to San Francisco first. I pointed to a 5.2% market rent growth as a whole for the company in terms of cumulative sequential market rent growth. When you think about San Francisco, we are around 13% to 14%. So we've actually seen more market rent growth. Concessions starting to abate even more, so about 2 weeks downtown, 2 to 4 weeks in the Mountain View area because of supply. We've seen more traffic in San Francisco. Our turnover has been relatively kept in check and we feel better about our market rent today than we had in a long time. We're actually back to, call it, pre-COVID numbers at this point. We think we have more of a tailwind going into next year because of where market rents have moved just in the last 6 months. San Diego, obviously, we have a very small presence there. Still seeing good trends. Turnover is staying relatively low, basically no concessions. We're not seeing much of a dip there. As far as Boston, as you can see in our release, Boston performed relatively well for us. We actually expect to see even better numbers come out of Boston over the next 2 quarters.

John, it's Joe. I have a few additional thoughts regarding the questions we received back at June NAREIT and the notes we've observed about tech layoffs or hiring freezes. It's worth noting that while these situations are receiving a lot of media attention, similar announcements are happening in other industries as well. Although job openings remain robust, job growth seems to be slowing down. However, this trend isn't exclusive to tech; it appears to be more widespread. So, it seems unlikely that San Francisco will be significantly impacted by this, especially since job distribution in the tech sector became more varied during the downturn. Additionally, we've been hearing that the tech layoffs are largely affecting support roles, such as sales, back office, and help desk positions, rather than the higher-paying technical jobs. This indicates that the market for higher-income positions is still strong, which helps maintain the multiplier effect of those jobs.

Our next question is from the line of Adam Kramer with Morgan Stanley.

I appreciate the details surrounding the earnings number and your expectations for market rent growth as well as the foundational elements for 2023. I'm curious about what other factors might contribute alongside the 5% earnings and the potential 3% market rent growth. For instance, could developments play a role? We previously discussed bad debt; how do you anticipate that impacting us? Would it be a challenge or a benefit? Additionally, could you clarify what other components might shape 2023?

Adam, it's Joe. We talked about bad debt a little bit. I don't think we're going to see a material change at this point in time as we go into '23. We still got some issues with the eviction moratoriums and slow to open courts or pass the eviction processes that make it more challenging. A lot of that's weighted more to the West Coast with Northern California, L.A. and San Diego, all having various forms of eviction moratoriums in place. I don't think you're going to see a big shift in 2023 numbers coming from that side of the equation. You did mention one of them where we do think we have a lot of upside both next year and in the following years. On the development side, those deals, call it the Q4 lease-up deals, roughly $370 million, they have an effective yield right now. It's in the plus or minus 2% as they come into the lease-up phase, and come off of cap interest, those are going to go to about a 6.5% yield over the next couple of years. You've got $0.05 of upside there. On the DCP side, you've seen our new commitments both in Q2 and subsequently. I think that will earn in a little bit this year as the funding schedules come in throughout the rest of this year. You'll see the full impact next year. DCP sets up well for us from an accretion standpoint. On the acquisition side, while we just had the Boston deal that we announced this year, we still do have upside remaining on those 2021 transactions. Those should help as they come into the same-store pool. What I think is not necessarily additive but it's less dilutive, is when you look at that maturity profile; we've done a phenomenal job over the last couple of years, extending duration and really knocking out most of our majorities through 2024. We only have $100 million coming up over the next 3 years and that's out in, I think, July of '24. We're going to have less reset risk on the debt side. On the flip side, to be fair, we do have G&A and broader expense pressures that we're faced with. So in terms of retaining talent, continuing to add headcount around a lot of our innovation and ESG activities. I think you're due for another tough year of G&A and expense growth. But that said, we do have a lot of efforts on the initiative side that Mike is focused on that should help on both expenses and revenues to help boost some of that revenue and NOI growth in '23 and '24.

That's really helpful, Joe. I have a quick follow-up question. You mentioned earlier an 11% midpoint for blended rent growth in the second half of '22. I'm curious about where you anticipate that number will be by year-end. I understand that's an average, but do you believe blended rent growth will still be positive by year-end? I'm considering that the comparisons might become tougher as we progress through the year. How are you approaching the forecast for year-end blended rent growth?

Sure. No, Adam, that's a really good question. Something as we think about that 10% to 12% we expect in the back half, again, we have very good visibility on basically Q3 at this point. I mentioned earlier, I do expect anywhere from 12% to 14% growth based on everything I can see today, whether it's been signed or whether it's sitting out there that I noticed, it looks like it's in that 12% to 14% range. That would lead you to believe that the back half, the fourth quarter, if you will, is around 7%. We do see some positive momentum as we end the year going into next year and we'll continue to try to drive that higher. Obviously, we've been very focused not only on 2022 but a lot of that's been based on how we can build that earning for '23. That's kind of where we sit today.

I do think it's important within that. We do get a lot of questions on the affordability dynamic and the wherewithal of the consumer. It's important to keep in context that while these rent increases year-over-year feel relatively large, if you go back to 2019 and look at where income growth has been throughout our markets, income growth has averaged 4% or 5%, which is effectively right in line with where rent growth going back to 2019 days earnings with market rents up today, 15%, 16% within our portfolio versus pre-COVID. That's why when Mike talks about rent-to-income ratios, we're still holding relatively static in that low 20% range. Consumers are still in a really good position. Wage growth has continued in those mid-single digits. Even when you look at the new movement activity in Q2, the incomes for those residents relative to the residents that we are applying for last year, those are up high single digits, greater than the market as a whole. We're attracting a better, higher-quality residence today. Thanks, Adam. We're going to miss Rich, by the way, on these calls.

The next question is from the line of Neil Malkin with Capital One Securities.

Unfortunately, it's not Rich, it's just Neil. Just kidding. First question. That was so funny. Okay. Mike, you mentioned that over the next 2 to 3 years, the figure was $20 million. If I'm mistaken, please correct me. If not, could you discuss the new initiatives that have been added to the immediate plan and what those targets are?

Neil, so in terms of that number, the $20-plus million of initiatives, that's still hold steady. So we're going to probably pull about $6 million of that into this year's number. That leaves anywhere from kind of $15 million to $20 million of additional initiatives as you think about what's out there and what we can still go after. There's a number of items within that, anything from third-party parking, additional package and placement there. There's identity and fraud detection. We're rolling out AI chatbots, text, voice throughout the portfolio. There's a bunch of vendor consolidation. There's more centralization and sites that we're going to run without individuals on-site on a daily basis. A lot of initiatives within that $20-plus million. I'd say the big new item that we have been betting with the innovation team here for a while that we are in the process of rolling out over a 3-year timeline is building wide WiFi. We've looked at for the last 5 or 7 years. Of course, there's questions as to are we late to the game? Why have we not done the bulk Internet in the past when others have on both Internet and cable? I think there's a number of things that have changed over time for us that make it more interesting for us to roll out today. This is not going to be a cable and Internet package. We are looking at internet only. We don't view those pass packages that include cable as being beneficial to the resident. The contract duration that we are looking at is much shorter than the typical contract. Typically, those are 7- to 10-year contracts. We're looking at a 5-year contract to present us with more optionality today. When you think about the WiFi experience for the resident, very different today. Historically, it's just been an in-unit setup and that you only have WiFi in-unit. We are looking at ubiquitous or whole building WiFi so that when you walk out of your unit, you have it throughout the portfolio. You're going from your unit to the garage to the pool to the amenities. It's consistent. It's a much better tenant experience. The other thing is that we have a much greater rev share than once historically been offered. Historically, we offered a very high fixed price with an inability to control pricing for that Wi-Fi. Very small rev share and little control over our profitability. We've done a good job taking control of that rollout cost over the next 3 years, we're going to take the lion's share of the revenue off of this and drive profitability pretty substantially. In totality, this helps us create a better customer experience. It helps us transition from what I'd say is a smart home concept to a smart building concept. That's foundational for what we have to do on SBTi, ESG and attacking that Scope 3 perspective and given the power back to the resident to understand the dynamics in their unit and throughout the portfolio of property. Total numbers, we're probably looking at about a $50 million spend over 3 years for this. The returns probably $15 million to $20 million plus is what we estimate. Full rollout potential by 2025. So it's going to be a couple of years. Long-winded answer to that innovation question of $20 million but we've used it up to at least $40 million today and still have more to come that the innovation team is working on.

I really appreciate that. Tom, I want to get your thoughts since you’ve been pretty quiet. I’ve asked you before about how you’re positioning incremental buys based on what the market has shown regarding rent growth, both year-over-year and since COVID began. Considering the hybrid model seems to be a long-term trend and that people are relocating to states with fewer regulations and more affordability, I wonder if now that you’ve had some time to assess the situation, the company might be taking a different approach to portfolio positioning. I know diversification is important to you, but given everything we’ve experienced since 2020, do you think that an additional dollar would be better invested in the Sunbelt market? How do you view this now that we’ve had some time to reflect on it?

Neil, a very good question and a very thoughtful one in a perspective of what have we really learned from COVID in the last 3 or 4 years. What I think we learned still applies to the future, which is diversification is your friend in managing risk and cycles, political, environmental, whatever they might be. You're probably right, we will always continue to focus on it. What I'm grateful for is our investment in technology and portfolio management and data. Chris and the team continue to pour through it, find better data sets to analyze trend lines where things are. The conclusions of that, we continue to share with the investment community every conference. What they point to is we're in the right markets. Things are going in the right direction. If we continue to operate, grow our margin, we're going to have cash flow growth and the enterprise is going to continue to prosper. We'll stay on that template. It's challenging as we've all seen to lift portfolios and shift them. I've had 10 years of experience with that. It's hard to get earnings growth and expansion. So we're very comfortable with the portfolio. We probably won't see a lot of shifting of markets. We continue to always look for new opportunities. That's a long-winded answer. We like our hand at the table and we're going to just keep playing it and continuing to expand our innovation and margin.

The next question is from the line of Juan Sanabria with BMO Capital Markets.

Just a question on the cost side. Is there any change in the magnitude of growth on the cost, either on the controllable or non that you're seeing between Sunbelt and coastal markets that is worth noting?

Juan, I think worth noting, I would say in the Sunbelt we're seeing a little bit more pressure as it relates to some of the R&M side of the equation as well as the personnel. A lot of that has to do with the supply that's down there. Typically, when that happens, it's pulling some of our service employees from us and we're having to pay a little bit more to retain our talent and we're seeing it just in terms of some of the third-party costs being pushed to us as well. That's where I've seen a little bit of pressure on the controllable side but nothing really else material when you think about just urban, suburban, A/B, it's pretty consistent.

Juan, I think you can extrapolate that on the controllable side a little bit to the non-controllable over to real estate tax as well. We are seeing more pressure when you go into some of our Sunbelt markets, be it Texas, Florida, Richmond, Virginia. We are seeing more pressure on the tax side there relative to some of the coast. Similarly, if you come full cycle back to discussion earlier on the development side, you are seeing more inflationary pressures driven by labor down in the Sunbelt too. So a little bit more pressure on cost and development within the Sunbelt as well.

And one more for me, just on the whole discussion about assumed blended lease rate growth in the second half of the year and you guys have given phenomenal color. Any offset we should be thinking about as you drive pricing on a continued occupancy kind of get back with a bit higher churn? Is that going to stay stable or can it be ticked up for the balance of the year?

Another good question. The way we've been looking at that and trying to communicate is we've been comfortable with, call it, about 30 basis points of occupancy coming down. We typically run just over 97% today. Today, we're closer to 96% to 98%. Again, it's a good trade; if you think about 30 basis points for us, it's 150 units per month. We have been targeting over the course of Q2 and Q3, trying to push out and see what we can get. We do expect vacancy loss of approximately $2 million. That being said, we do think we get around 1% to 1.5% pickup in rents. That over the course of 12 months for us and our rents is over $12 million. So it's a good trade and again, it's one that we've been focused on doing to try to drive next year. So 2023 is in very good shape. That's kind of where we're at on that.

The next question comes from the line of Joshua Dennerlein with Bank of America.

So it's interesting, you named Patty as a Chief ESG Officer. Just be curious where her focus will be in the first 12 months on the ESG front?

Josh, good question and very excited that Patty is joining us. If you had a chance to look it up and take a look at her background, absolutely phenomenal experience in the areas of ESG, sustainability, DI, talent development. A lot of areas she's going to be able to help. She's been at some pretty big dynamic organizations in the past. In the near term, there's definitely a focus on our ESG side. We've committed to SBTi. It should be helping us with that, along with a number of other individuals on the ESG Committee working through our SBTi strategy and the ultimate communication execution of that. I think there's a good opportunity from a workforce diversity standpoint. We do have DI initiatives in place for the executive team of compensation tied to it, making sure we continue to drive those efforts to enhance and diversify our workforce. On the talent development side, just continuing to extend the HR strategy that's all in place, making sure we get good high-quality talent in here develop over time and bring them up throughout the organization. She's got a pretty phenomenal skill set so excited to see what she's going to bring to the table and bring a new voice to us.

Josh, this is Toomey. I might add that we've got an 86 last year on GRESB, led the industry; very proud of that. The time to get better is when you're on top. I think Patsy can drive us to another level.

The next question is from the line of Nick Yulico with Scotiabank.

It's Daniel Tricarico on for Nick. I'll keep it brief. I don't believe you started any new developments in the quarter. How should we think about the development start pipeline over the next, say, 12 months? How are you underwriting new development yields today versus cap rates?

Correct. We did not have any new starts in the quarter. We've got the $700 million pipeline, about $200 million left to fund. But really, 4 of those deals out of the 7 are coming through the lease-up and effectively fully funded. You're really down to a relatively de minimis amount of risk when you think about what's in process today. In terms of new starts in Q3, we're going to have Newport Village, which is a densification play, almost 400 units, about $155 million, $160 million development deal in Suburban D.C. That will get in the process in the second half. Beyond that, we've got a really good optionality as we think about the pipeline. We do have a broader strategic objective to get back to plus or minus $1 billion pipeline which sizing-wise is only about 3% or 4% of enterprise value. We do want to get back there over time but that's going to be very much contingent upon where do we look from a sources and uses, macroeconomic environment and cost of capital perspective. We've got the optionality when you look at Attachment 9 with a number of land parcels we can start next year but those are contingent on those other factors. It's hard to say that we're going to move forward on exactly those same timelines as we previously planned but we do have that optionality.

The next question is from the line of Haendel St. Juste with Mizuho.

So you mentioned that tenants are moving out due to rent levels, with some markets seeing rates around 30%, approximately twice the portfolio average. Can you provide more insight into where this is occurring? It seems like this is mainly due to deal seekers relocating. Have you managed to replace them with higher-income tenants?

Yes, Haendel. So that's what I was mentioning. If you look at a place like New York, for example, our renewal growth of 21%, we were pushing pretty aggressively. That was a case where people were getting more of a deal over the last couple of years with concessions. We burn off of those. We're not offering concessions in that market anymore and we've continued to push market rents. We had the strategy in place since the beginning of the year to see what we could get on that we think it's played out. We did see turnover tick up to some degree. But again, we were able to trade out at 30% on the new lease side. It's a good trade for us. Places like Florida, that's where we saw it as well, where we'd start to push and this is more of a function of we pushed last year. We're starting to anniversary off that and seeing it again this year and some residents just couldn't take that increase. Again, we were able to backfill with higher new lease growth and what we're seeing in terms of rent to income ratios, they're relatively flat. We are seeing people with higher incomes, the ability to afford it going forward and we think that we have good prospects as we move forward.

Okay, that's helpful. I appreciate that. I guess we're all trying to figure to a degree of affordability is an issue. Is it your sense that pricing power is still fairly even across your Sunbelt and coastal markets and then maybe how does the rent income ratio within those 2 regions compare today versus history?

Sure. With that question, I'd probably point more towards our loss to lease. You've seen us in previous pitches, we've thrown out there where we're at by region. I would tell you when I mentioned 8.5% across the portfolio today, it's pretty consistent. We're starting to see a little bit of an increase in that loss lease in places like San Francisco, given we've been able to push market rents. But again, it's pretty consistent across the board. I haven't seen much of a change there as far as that goes.

Any color perhaps on the rent income? Is there a meaningful difference between coastal and Sunbelt?

Minor, not very material. We see a little bit more of an increase, if you will, a place like Monterey Peninsula for us. Historically, that's run in the high 20s. It hasn't changed to some degree. Places like the Sunbelt around 23% to 25% today. New York is just under that. So they're pretty consistent across the board.

The next question is from the line of Anthony Powell with Barclays.

You mentioned a few times that you're attracting higher-income tenants as you seek to raise rents. Do you think these tenants may be newly priced out of the home buyer market? And if it becomes easier to buy a home, would these be some of the first tenants that may move out for home ownership?

Not necessarily because another thing that we track and we've been looking at is the average age of our residents and that's actually ticked down to some degree. While it could happen? Maybe. But we feel like we're in a pretty good place. I mentioned in my prepared remarks, we've seen around 8% moving out to buy homes. We're in a pretty good place today compared to historical averages.

The next question is from the line of Tayo Okusanya with Credit Suisse.

My question has actually been answered.

There are no further questions in the queue. I'd like to hand the call over to Mr. Toomey for closing comments.

Thanks for your time and interest in UDR. We started off the call with a quick summary, the strongest operating environment in my tenure, 16% FFOA growth year-over-year, a second guidance increase this year. We appreciate the questions but the big picture is our consumer is in great shape and we've reloaded our rent roll. We have pricing power and continue to innovate and expand our margins. It couldn't be a more exciting time to be in this business. The prospects look great today and in the future. So with that, I'll close and say we look forward to seeing you in the September conference season. I wish that all of you take care.

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