Greetings and welcome to UDR's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder this conference call is being recorded. It is now my pleasure to introduce your host Vice President of Investor Relations, Trent Trujillo. Thank you Mr. Trujillo, you may begin.

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. 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 the risks and risk factors is 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 2023 conference call. Presenting on the call with me today are President and Chief Financial Officer, Joe Fisher; and Senior Vice President of Operations, Mike Lacy, who will discuss our results. Senior Officers Andrew Cantor and Chris Van Ens will also be available during the Q&A portion of the call. To begin, the multifamily business continues to exhibit strength. In the second quarter, the industry experienced positive net absorption demonstrating the health of the consumer and the attractiveness of the apartments versus alternative housing options, despite pockets of elevated supply deliveries. Our results reflect strength; a few highlights: one, our second quarter year-over-year same-store NOI growth of almost 8% led to year-over-year FFOA per share growth of 7%, both of which we expect to be near the top of our peer group. Two, early third quarter trends including traffic, other income, and collections have accelerated versus our June results. This supports our expectations of sequential same-store revenue growth above historic norms and FFOA per share acceleration in the second half of 2023 as indicated in our guidance. Three, the joint venture partnership and portfolio acquisition of six communities we announced aligned with our strategic goals and demonstrates the strength of our operating platform by attracting capital from a sophisticated global institutional partner while finding a unique opportunity to deploy capital and grow the company. These transactions provide future cash flow accretion, enhanced ROE for investors, and offer additional scale and efficiency benefits for our operating teams. And four, our investment-grade balance sheet remains strong with over $1 billion of liquidity. This provides both safety and the ability to execute accretive transactions should our cost of capital improve. Looking ahead we are encouraged by the continued job and wage growth combined with the prospects of additional clarity on the direction of interest rates. Regardless of the economic path forward, UDR is well equipped to succeed based upon our diversified portfolio, prudent capital allocation, and our leading operating and innovative platform, all of which should help us outperform versus peers. Collectively, the actions we are taking are poised to benefit our stakeholders, our associates, and the communities in which we operate. With a highly engaged group of associates and future utilization of innovative technologies, I'm confident in UDR's ability to capitalize on the strength of the multifamily industry and expand our advantages amongst public and private peers. With that, I will turn the call over to Mike.

Thanks, Tom. The topics I will cover today include our second quarter same-store results, early third quarter 2023 results and how they factor into our full year 2023 same-store growth outlook, and an update on operating trends across our regions. To begin, year-over-year same-store revenue and NOI grew at strong rates of 7.6% and 7.7% respectively in the second quarter. Similar to the first quarter, we continue to recapture apartment homes that were previously occupied by long-term delinquent residents. This temporarily high level of baking units pressured pricing and increased repair and maintenance expense relative to what was in our initial guidance. There's still some work to do on this front, but we believe these disruptions are now largely behind us, as long-term delinquents have reverted to near our pre-COVID levels and in the month collections continue to improve. Next, we continue to see favorable fundamental trends to start the third quarter. First, demand remains relatively healthy. Year-to-date job growth has been stronger than most anticipated, which is supporting solid levels of traffic. Second, the financial health of our residents appears robust as wage inflation has largely kept pace with rent growth in most markets, resulting in steady rent-to-income levels in the low-to-mid-20% range. Second quarter move-outs due to rent increases totaled only 8% down from roughly 10% last quarter and 18% at its peak a year ago. Third, relative affordability remains in our favor with mortgage rates hovering around 7% and low single-family home inventories bolstering prices; renting an apartment is approximately 55% less expensive than owning a home versus 35% less expensive pre-COVID. Only 6% of move-outs in the second quarter were due to home purchases, which is 50% less than our historical average. And last, concessions remain minimal and average approximately half a week on new leases across our same-store portfolio. The concessions we've been offering remain primarily concentrated in certain submarkets where elevated levels of new supply are being delivered. With this backdrop, we have confidence in our ability to drive further sequential same-store revenue growth improvement in the second half of 2023. First, after a slow start to the year, sequential market rent growth of 3% over the last four months is above the pre-COVID average of approximately 2% over the same timeframe. July blended lease rate growth of mid-2% and occupancy in the mid-96% range are similar to our June results and are anchored by the most difficult year-over-year comparisons we face, given June, July, and August 2022 blended lease rate growth of 15.5% on average. As the year progresses, our comparisons to 2022 results ease. This, when combined with our strong loss-to-lease and rent growth momentum should result in acceleration in both new lease rate growth and blended lease rate growth throughout the year. This would benefit not only 2023 but also positively contribute to our 2024 earn-in. Second, our loss-to-lease at the portfolio level stands at 3% to 4%. Much of this is related to leases signed in the fourth quarter of 2022 and first quarter of 2023 due to greater than typical seasonality during those periods. New York, Boston, Washington D.C., Seattle, and San Francisco, which are collectively half of our same-store NOI, have the largest upside with a weighted average loss-to-lease of approximately 5%. And third, resident turnover is improving, which has both revenue and expense benefits. During the first half of 2023, we had approximately 600 more unit turns from resident skips and evictions compared to the first half of 2022. This impacted our occupancy, turn costs, repair and maintenance expense, and administrative expenses, which collectively reduced our earnings by approximately $0.01 to $0.02 per share. Now that we are closer to the pre-COVID norm for long-term delinquent residents, we expect less pressure on turn costs, a reduction in vacant days, and improved pricing in the second half of 2023 and into 2024. In all, we have positive operating momentum as we begin the back half of the year and expect to produce sequential same-store revenue growth of 2% to 2.5% in the third quarter, which compares favorably to pre-COVID averages of approximately 1% and above levels seen a year ago.

Thank you, Mike. The topics I will cover today include our second quarter results and third quarter and full year 2023 guidance, a summary of recent transactions and capital markets activity, and a balance sheet and liquidity update. Our second quarter FFO as adjusted per share of $0.61 achieved the midpoint of our previously provided guidance range and was supported by strong year-over-year same-store NOI growth. The approximately 2% sequential increase was driven by incremental NOI from same-store, joint venture, and recently completed development communities. Year-to-date results are largely in line with our initial expectations. Operations are trending to the midpoint of guidance and potential accretion from the LaSalle joint venture is offset by near-term dilution from the announced Dallas and Austin acquisitions. As such, we have narrowed our full year 2023 same-store growth and FFOA per share guidance ranges. Looking ahead for the third quarter, our FFOA per share guidance range is $0.62 to $0.64 or an approximately 5% year-over-year increase at the midpoint. The $0.02 or 3% sequential increase is driven by a combination of higher NOI from same-store and recently developed communities. The implied fourth quarter FFOA per share guidance of $0.65 reflects another $0.02 or 3% sequential increase. This is driven by an increase in revenue from blended lease rates, occupancy and other income initiatives, additional lease-up NOI from developed communities, higher income from DCP investments, sequentially lower expenses, and improved bad debt trends. Next, a transactions and capital markets update. First, during the quarter, we completed the formation of a $507 million joint venture with LaSalle, on behalf of an institutional client. UDR contributed a seed portfolio of four communities, totaling more than 1,300 apartment homes at a low 5% yield. With the $245 million in proceeds, we reduced our commercial paper balance, which carries a mid-5% interest rate. We plan to grow the joint venture alongside our partner by targeting acquisitions with operating upside that are located proximate to other UDR communities to increase operating scale, densification, and earnings accretion. This transaction is expected to be accretive to cash flow and FFOA per share once dry powder is deployed and will enhance our future growth profile. Second, subsequent to quarter-end, we entered into an agreement to acquire six communities totaling 1,753 apartment homes for approximately $402 million. In addition to the operating upside Mike discussed, we were able to finance the transaction through roughly $173 million of UDR operating partnership units, issued at $47.50, reflecting a 2% premium to consensus NAV. Furthermore, we assume nearly $210 million of debt at an attractive weighted average coupon rate of 3.8%. Due to negative noncash debt mark-to-market adjustments related to the below-market debt rate assumed, the transaction is expected to be cash flow neutral and slightly dilutive to FFOA per share in the near term. However, we expect to drive accretion once operations captures the significant margin upside. Third, during the quarter, we addressed three of our upcoming DCP maturities by funding a total of $39 million to pay down and extend the maturity dates of the senior construction loans. These fundings will earn a projected initial contractual weighted average return rate of 9.4% while having our first dollar exposure starting in the low 50% LTV range. Lastly, during the quarter, we achieved stabilization on one development community totaling 292 apartment homes for a cost of $102 million at a stabilized yield in the high 5% range. We continued the successful lease-up at our two other recently completed development communities, which also have an expected weighted average stabilized yield in the high 5% range and will contribute significant FFOA accretion in the second half of 2023 and into 2024. Finally, our investment-grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: first, we have only $113 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities in our commercial paper program. Our proactive approach to managing our balance sheet has resulted in the best three-year liquidity outlook in the sector and the lowest weighted average interest rate among the multifamily peer group at 3.2%. Second, we have $1.1 billion of liquidity as of June 30. And third, our leverage metrics remain strong. Debt to enterprise value was just 27% at quarter-end while net debt-to-EBITDAre was 5.5 times down 0.7 times from 6.2 times a year ago and more than half a turn better versus pre-COVID levels. We expect these metrics to remain stable throughout 2023. In all, our balance sheet remains in excellent shape. Our liquidity position is strong. We remain opportunistic in our capital deployment, with balanced forward sources and uses, and we continue to utilize a variety of capital allocation competitive advantages to drive cash flow and earnings accretion. With that, I will open it up for Q&A. Operator?

Thank you. We will now be conducting a question-and-answer session. And our first question comes from the line of Eric Wolfe with Citi. Please proceed with your question.

Hey, guys. Maybe I missed this in your remarks, but where do you expect market rent growth to go in the back half of the year?

Hey, Eric, it's Mike. We're seeing some pretty positive trends. So just to kind of put it in perspective over the last few months, we've seen market rents rise about 2% in the back half of the year. We expect to see something similar. So right now market rents, we've got some tailwinds, if you will.

Got it. So market rents you said 2% blended rent would be a bit higher than that given like a loss to lease?

Yes. It's different by region obviously. What we're seeing today is loss to lease in that 3% range. We're probably closer to 5% to 6% on the East Coast, around 3% to 3.5% on the West Coast and then our Sunbelt's roughly flat today. So we do expect to capture a lot of that in the back half. And just as a reminder, when we were going into the back half of last year into the first part of this year, we had a lot of headline news around tech layoffs and the banking issues put a little pressure on our market rents, but we expect to gain a lot of that back this year. So that's part of our confidence in where we're headed with both new lease growth and renewal growth as we move into the rest of the year.

Understood. And then just a quick follow-up on that. I mean, in your remarks you said you needed to adjust pricing to induce demand from some of the delinquent tenants that left earlier than expected, which obviously is a good thing. But when I look at where blended spreads went down the most was in the Northeast and the Sunbelt, which is where I would think you would see the least amount of delinquent tenants. I would think would be on the West Coast. So just maybe help us understand sort of how much you think those delinquent tenants and the price adjustments impacted your spreads during the second quarter?

Sure. I'll provide some insights, as I know we have received several questions on this topic. It's essential to recognize that there are different definitions of blends in the current market. Just to clarify, we include everything as a priority. Over the last three to four months and reflecting on last year, we were about 200 basis points above the peer average, which has significantly influenced our loss to lease and renewal growth. Currently, we face a tough comparison. Looking ahead, as we eliminate some longstanding delinquents, we are beginning to observe positive momentum in market rents. This observation aligns with our expectations, particularly in coastal markets, and will be crucial in driving our rent growth trajectory moving forward.

Great. Thank you. Good afternoon. My question is focused on the Sunbelt. Is it fair to say that the Sunbelt is a bit worse than expected so far this year? I know you've been flagging supply issues, but I guess how would you characterize the Sunbelt? And if you could be more specific on certain cities, is it urban suburban? We're getting a lot of questions on the Sunbelt today.

Yes, Jeff, again, this is Mike. I would tell you, we do experience a little bit more weakness in the Sunbelt than we would have expected. And as I said in my prepared remarks, I think it's twofold. It's partially due to some of the supply that we have in some of our submarkets, specifically what we're seeing in the Cedar Park area of Austin as well as Addison in Dallas where we have more exposure. So I think that's part of it. The other piece of it was really the skips that we experienced down there. So, as you all know we've been pushing renewal growth pretty aggressively over the last couple of years, we experienced about 250 to 300 skips in that part of the country and that put a little bit of pressure on our occupancy, which obviously in turn has pressure on your market rent. That being said, skips are starting to slow back down at this point. And going forward it feels like the Sunbelt's relatively stable. Today we're in that 96.5% occupancy range not really seeing the concession levels pop up as much and market rents are holding steady. So, as we move forward, we expect that we'll see probably blend similar to what we just experienced in 2Q in the Sunbelt. That being said, we did see more growth in the coast, specifically the East Coast. We didn't expect New York, Boston, even D.C. to do as well as they have. And again, those are other markets where we're running close to 97% occupancy today. Concessions are basically nonexistent in New York and Boston, still a little bit to some degree in the 14th Street Quarter of D.C., but pretty strong growth on just top line rent. In addition to that, other income is doing really well. We feel pretty confident about where total occupancy is today. We think we can get a little bit more aggressive as we move forward on our rents and we're seeing a lot of success return in some of our other initiatives that relate to other income as we move forward too. So, overall a positive outlook as we go forward.

Thank you. And just to clarify I know you had some comments on supply in the Sunbelt in '24. I guess some of the data showing that might remain elevated beyond '24. Any information or any color you could provide there on kind of that Sunbelt supply you were talking about through '24 potentially into '25?

Hey Jeff, it's Joe. Overall, our portfolio and specifically Sunbelt appear to be quite stable as we head into 2024. We have seen significant growth in 2023 compared to 2022, with deliveries increasing by about 30%, which represents around 2.5% of our overall stock. This rate is slightly lower in our submarkets this year. However, Sunbelt's numbers are around 4% as a percentage of stock, with some markets like Nashville experiencing even higher figures. They are under a bit more pressure, but stability seems likely for 2024, with minimal volatility anticipated between the first and second halves of the year. Sunbelt is expected to maintain a higher rate during this time. From the total housing stock perspective, single-family completions have significantly decreased, as starts have plummeted in the last six to twelve months. The overall picture for housing stock looks more favorable, showing stability year-over-year in 2023 and likely continuing into 2024. Additionally, the relative affordability factor leans in favor of multi-family housing. I think Mike's comments on stability are reasonable, provided we continue to see demand due to household formation in the Sunbelt. As for whether this trend will extend further, early census data indicates permits and starts are down about 10% from their peak. However, based on discussions with developers and lending partners, it seems to be a more substantial decline. The Architectural Billings Index has also dropped sharply, suggesting a potential downturn. Third-party data from sources like QAxio, which correlates well with overall starts, shows a much larger decrease—up to 50% from the peak over the past 12 to 18 months. Thus, the reality is likely somewhere between a 10% and 50% decline, but we are observing a decrease in supply, which should positively impact 2025.

Thanks. I guess good morning out there. I guess Joe to kind of follow up on that question. I'm just curious, are you seeing any maybe early signs of any distress or investment opportunities maybe on the land side? My understanding is a number of merchant builders are starting to scale back the size of their development teams and maybe looking to sell some land parcels. So I'm just curious, is there anything that's come up or you think it's shaken loose over the next six to nine months that might be a '24 or '25 start for you guys?

Yes. I'd say number one, just kind of thinking about the starts activity within our internal business plan, we had plus or minus six projects that we had to kind of penciled in to start either this year or next year. And just given our capital-light strategy, the cost of equity, the cost of debt, where cost and rents are in place yield, we are kind of sitting on those and just building in the optionality so that either when rates come down, cap rates down, stock price up, ingoing yields up, we'll be ready to really jump into our existing development pipeline. And so we have delayed that, which helps sources and uses and is prudent I think to kind of sit back and wait. On the distress side, be it land or acquisitions, we really aren't seeing distress within the multifamily space. I think there are sectors that have become much more capital-starved and/or have different fundamental profiles, but in multifamily with the GSE backstop there's always liquidity available and it is a preferred asset class as we've seen good performance going through COVID and coming back out the other side. So I'd say if you go to some of the tertiary land parcels maybe they're trading off as much as 20%, 30% but if you look at kind of main in main core parcels, you're really not seeing anyone willing to transact at potentially discounted prices. So nothing on that front, and honestly really nothing on the acquisition front. Commentary really hasn't changed much from last quarter. And then when you look at current NOI, we're still seeing plus or minus 5% cap rates on the deals that we've been taking a look at. We've shown a lot of deals to our new joint venture partner and have been working through those assets and see in the market and what the returns are there. We're still seeing a lot of unlevered buyers out there be it sovereign high net worth closed-end vehicles, PE that are looking for kind of that 7-plus-percent unlevered IRR. So we think we're in that plus or minus five cap world right now, so not seeing much distress out there.

Great. Thank you. Just stepping back for the total portfolio, can you just give us a sense how far along you are in that eviction process? And how you expect to be able to backfill some of the vacancy you highlighted due to skips and evicts? I mean is that a 2023 event? Could you get back to the high 96% range later this year? Just trying to get a sense of how that trends and then also what you're assuming to get to that 2% to 2.5% sequential revenue growth for the third quarter?

Hey, Austin, it's Joe. Overall feeling really positive as it relates to that long-term delinquent picture. We're down to plus or minus 250 longer-term delinquents at this point in time, which really isn't materially different than our long-term average. It's just that they are sitting there with a little bit higher balances because they've been able to stick around quite a bit longer than history would have allowed them to do. So, we're feeling pretty good there. We've gone from kind of 750, nine, 12 months ago down to that number. I think as Mike said between the evictions and the skips as we work through that process we saw about 600 incremental in the first half of the year, which definitely came at us quicker than we expected. We thought it may take a little bit longer either due to eviction moratoriums that used to be in place and/or eviction diversion programs that have elongated the process. So we did get them back quicker. As Mike mentioned, it cost us maybe $0.01 or $0.02 in the first half between taking a little bit of occupancy and pricing hit, losing some fee income. And of course you have higher turnover, higher legal and then marketing costs will acquire the new resident. So we did have that headwind. But overall I feel like we're in a pretty good place now. You've seen our gross AR and the AR continue to trend down. And when you look at our collections, our end-of-month collections and end-of-quarter collections continue to trend higher. So overall I feel good on that trajectory. So when you think about that 2%, 2.5% sequential number, there is some occupancy pickup that we expect as we go forward. So you got that, you have blended lease rate growth that is positive. Mike already talked through some of the other income and reimbursement initiatives that we have out there that are going to help drive some of that sequential. And then you get into bad debt after taking more of the hit in the first half, it starts to improve from a sequential and year-over-year perspective here in the second half of the year in 3Q and going into 4Q. At the same time on the expense side, we think we're relatively static in expenses in the back half relative to 2Q. So they'll pop up a little bit in 3Q and back down in 4Q. And then beyond that, the other big driver that we have out there, which is non-same-store but helps drive that increase in FFO from 61 to 63 to 65. We've got development lease-up NOI. So we've got three assets that are in lease-up right now about $375 million basis. In 2Q, they produced an annualized yield of just over 1%. Those are eventually going to stabilize in the high 5s. So there's about a $3 million or $0.01 pickup from 2Q to 4Q from that plus probably another $0.03 of accretion year-over-year by the time you get into 2024 from those lease-ups. So it's kind of the roll-up of kind of that walk forward from 2Q to 4Q.

A lot of helpful detail in there. It sounds like some occupancy pick up but maybe not back to the high 96% range you were at. So as we think about then this improvement in lease rate, can you just give some detail around how new and renewal lease rate growth trended month-to-month in 2Q, so we can get that picture of how things are trending into the back half now that the skips and evicts are further behind you?

Yeah. Hey, Austin, it's Mike. Throughout 2Q, we were hovering right around 3% to 3.5% in the first part of the quarter and then June we were closer to 2.5. I would expect July and August to look very similar to June at this point just because we're anniversarying off of those very high numbers from last year. And again, that being said, we do expect September to start to take off. Even with normal seasonality right now with market rents, we will see year-over-year market rent growth going forward and that will obviously lead to higher new lease growth and higher renewal growth.

Just to clarify, when you say start to take off, is that sort of back to the 3% to 3.5% level, or do you think it could get better than that?

Right now we're thinking that 3% to 3.5% range as we move forward, once you get past this July, August time frame.

To elaborate on the seasonality aspect Mike mentioned, last year beginning in September, we noticed a significant dip in seasonality, particularly in the banking and tech sectors, which resulted in a decline of 300 basis points from the usual seasonality. The loss to lease Mike referred to, which is around 3%, is predominantly seen from September through the first quarter of next year. The recovery we expect won’t happen in the immediate coming months, but as we progress through the different phases, we anticipate a noticeable increase in the fourth quarter and into the first quarter of next year. This positive trend is driven by improved market rent growth year-to-date and favorable comparisons to peers.

Hi. This is Derrick Metzler on for Adam Kramer. I appreciate the comments on accretion for the JV and the subsequent property acquisition in the opening remarks. If you could talk any more about expectations for timing to deploy the dry powder that you mentioned in the JV? And any other puts and takes you can talk about after the subsequent property acquisitions. So net-net, how should we think about accretion for these transactions?

Great question. So I'd say as it relates to guidance this year because we've gotten a couple of questions on kind of the implications of the two. The JV is expected to be year one accretive, but contingent on deployment of that dry powder because once that dry powder gets deployed, that's when you start to earn the asset management prop management fees. It's also when we're able to redeploy and do assets that we can go capture operations upside and kind of enhance yield on. So day one it's kind of a push as we sold the low 5s and then paid off. You have a low to mid-5s commercial paper balance. So there should be some accretion coming there. We are pretty convicted in terms of our ability over the next 12 months to begin to get that capital deployed. As I mentioned, Barry and Andrew's team have been working pretty tightly with LaSalle and looking at a lot of different assets in the market, trying to make sure what fits for them what fits for us. And as we've talked about aside from kind of that just accretion from the fee side, I definitely think it's beneficial to be able to have a partner that over the long term we can continue to grow with, redeploy proceeds with on an efficient basis and get some of that operating upside from our platform be it through the traditional initiatives or getting more deal next door and more densification play. So I think over the JV you'll see that accretion come in over the next 12 months. The counterbalance to that is obviously the OP unit transaction which is day one dilutive for us. So the net of these two ends up being slightly dilutive here to 2023. But over time both FFO and cash flow accretive in 2024 and 2025 we believe. So maybe just a couple of comments on that OP unit portfolio transaction. We're obviously very excited. I think this is going to be a very fun test for the operational team to take what has been under-managed assets and really lean into the operational upside there. So I'll make a couple of points, but Mike will probably come over the top and give you some more specifics. But to the positive the controllable operating margin here is about 800 basis points below the margin in our Dallas and Austin assets. That's the widest differential that we've seen of the $3.5 billion that we bought over the last four or five years. So probably the most meat on the bone of any transaction we've seen. From a funding perspective, we really like this because it's basically self-funded in the sense that we had low-cost assumable debt combined with a very attractively placed equity issuance through OP units. And so we like the self-funding nature of it. On the debt side, assumable debt carries a rate of about 3.8%. When you look at that relative to market today in the low 5s, we've got six-plus years of call it 150 basis point advantage on that debt, which if you think about a debt-for-market value, it translates into about a 25 basis point benefit in terms of asset pricing. And then lastly, these are newer institutional assets that have been very well maintained. If you think about the CapEx profile on these relative to our legacy portfolio as a percentage of NOI, it's probably going to be round about half of our legacy portfolio over the next five-plus years. So that equates to about a 25 basis point improvement to the cash cap rate relative to the equity that we issued. So day one we buy this at about a 4.5% NOI yield. Year one, it's probably about a 4.75% and that assumes that we capture about 200 basis points of that margin upside. But then when you adjust for that cash differential you're basically issuing and buying a year one at the same cash cap rate. And from that point forward you have all the revenue initiatives plus all the margin upside to go after, which we think ultimately drives much better growth from this portfolio relative to our legacy portfolio and gets to probably $0.01 or so accretion over the next couple of years. I'll turn it to Mike. He can take you through some more details.

Yes. Let me just add a little bit more color around that controllable operating margin. Joe mentioned, the team is very excited to get our hands on these assets. He mentioned, 75%, 76% controllable operating margin. We run our properties in the same markets closer to around 84%. So we do believe in the next six to 12 months we'll be able to capture a good chunk of that. And obviously after two years we'll be able to capture the majority of it. A couple of things just to give you more specifics around it. Four of these assets are basically in our backyard right next door to one of our wholly-owned assets. So we intend to get a lot of efficiencies just as it relates to just the personnel side of the business, and we expect to capture that again in the next six to 12 months. Aside from that we do have some positive in-unit amenities that we're able to get in there day one and add such things as smart homes and washer-dryers on a couple, two or three of these deals we were able to get in there and do that. That's really good return for us. And in addition to in-unit amenities, there's also everything that's on the outside. So things that we've done in the past with parking initiatives, the fact that they do not have package lockers were able to order those and get those installed in the next few months, a lot of low-hanging fruit. And we believe between the end unit and the amenity areas, there's probably 150 basis points alone in the next 12 months. Aside from that, more innovation on Wi-Fi over the next six months we'll assess that and try to go hard on installations and then just our revenue management alone. The fact that we can get in there and do more of our surgical pricing on in-units, we think there's a lot of upside. So I think it's safe to say that call it 700, 800 basis points will be captured in the next 12 to 18 months.

Great. Thank you. A lot of moving pieces here on the guidance puts and takes. Just as you think about the back half of the year, where do you think there's the most variability? Where may you actually surprise the upside? And where are you most concerned about the downside?

Yes. I think when you go to the non-op lines, we generally feel pretty dialed in as it relates to interest expense variability. We're running at maybe 6% floating rate debt plus or minus in the back half of the year. So minimal variability there. G&A feels pretty well dialed in. DCP, we did the $40 million of additional investment there. We'll have some additional fundings on a couple of other deals as we fulfill commitments on a couple that are just working through construction but minimal variability that we see on the DCP side. I think a couple of variability aspects of on the OP unit transaction just as we integrate maybe you see a little bit of either positive or negative. Same with the joint venture if we redeploy quicker those cash proceeds. We could start to earn those fees a little bit sooner and start to capture some of that upside. But I think most of it is going to come through on Mike's side on the same-store piece. And so we do expect to see some upside in occupancy. We've talked about that pickup in blend starting in September of the year although that ends up being a little bit more of an earn-in in 2024 story at that point given how many months are left. So I think that's your big variability. Real estate tax is pretty well dialed in at this point. We know 80-plus percent of those, I think personnel R&M especially given that we have gone through a lot of the high turnover, pretty well dialed in on the expense side. So we feel we're pretty tight. That's the reason we end up going right back to the midpoint as overall we're tracking to where we expected to this year.

I would like to add a few points to Joe's comments. We are confident in our operational execution within the current environment. We are expecting renewal rates to fall between 4.5% and 5% through October, and we plan to capitalize on this. We anticipate that market rents will begin to show a year-over-year recovery. Overall, our operational management appears strong. In terms of opportunities, innovation plays a key role. As we've mentioned, we are rolling out Internet services and have installed approximately 9,000 units for bulk service, with another 9,000 planned for the next five months. We will continue to advance this initiative into next year. Regarding unmanned sites, we have rolled out just over 20% of our portfolio and will evaluate the potential for further expansion in 2024. Overall, the initiatives we've implemented have been successful. We are particularly enthusiastic about the customer experience dashboard, which provides us with complete visibility into each resident's lifecycle through all our data organized chronologically. This includes interactions such as texts, surveys, phone calls, and service requests, allowing us to understand precisely what is occurring. We are currently testing various hypotheses and believe there is significant potential in this area. While the major benefits may unfold in 2024 and 2025, we expect this to enhance our resident retention, inform our capital decisions, and ultimately strengthen our pricing power. There is considerable opportunity ahead, and we are just beginning to explore it.

Okay. Thank you. And it sounds like you'll see some acceleration in the back half of the year on same-store and earnings. Rolling into 2024 on the expense side, what do you think your growth rates look like there, if you think about the major line items at least from the visibility you have today?

Yes. Jamie, I'd say it's pretty early to get into that. But honestly, they get with a 4.75% midpoint this year you probably don't look materially different next year. I think it's a little bit above that long-term kind of 3% number. So kind of let's say 4% to 5%. Real estate taxes, you do have some lagged impact of valuations having come down and NOI moderating, insurance clearly is going to continue to be an area of pressure, although overall premiums only about 2% or 3% of expenses. There's still some degree of wage pressure given the strength of the job market out there. So, we still have wage increases and as well as within R&M. But it probably doesn't look much different than it has here in 2023.

Do you see a scenario where it's materially higher?

They never say never but some of the big pressure items that we saw here coming through this period of time as you look at the level of turnover that we had, driven by those long-term delinquents those are exceptionally costly to us. And given how much they cost us in the first half of the year, it's hard to see how that would be the case. We do have some tough comps. I think everybody remembers in the first quarter we have the benefit of the care benefit in terms of the personnel reimbursement. So that was maybe a 75 basis point impact. At the same time, we've got a lot of initiatives. Mike mentioned going to fewer headcount over time. We rolled out our maintenance technology suites recently, which is vastly improved efficiency as well as resident communications. So there's probably more benefits there. We've got a number of ROIs that we'll be focused on both from a revenue and expense perspective. So, vastly higher would be challenging I think. But it remains to be seen. I think six months from now we'll get into on that guidance call in January.

All right. Jamie this is Toomey. I might just add. I mean if you think about it long-term the advantages the public have is sophisticated operating models that continue to put distance between us and the private owners. And so when we get a cost of capital advantage, you're going to have a distinct advantage both on the revenue and the expense because of the investments these companies have been making. So I think when I look out on the horizon '24 '25 when we get a cost of capital there's going to be opportunities for these enterprises to continue to grow by making investments in their operating and innovation platforms. So while we might not be able to fight back all the expense pressure it is by far a fraction of what private operators are having to deal with.

Hey good afternoon out there. So two questions and first your comments around the Sunbelt and the rent pressure certainly poke a lot of holes in the folks who would want to say that these pricing systems control the market, clearly not. My question is, when you guys were pushing rents aggressively and I think you said you ended up with a bunch of skips in the Sunbelt, what went into the process on pushing the rents so aggressively? Presumably, your leasing team knew about the competitive supply nearby. So I'm just trying to understand better, the strategy of pushing rents, if you in fact knew that you were facing the supply pressure down there?

Yeah, Alex I think that's a really good question. I'll tell you it's more about what we did, not what we did in the last couple of months. So the last couple of years we were probably more aggressive on some of our renewal increases in the Sunbelt. And I think that started to stretch people to some degree as we moved into this year. But over the last few months you can see it in our renewal growth rates as well as our turnover. Our renewals were going out at a pretty normalized 4.5%, 5% range. So it wasn't necessarily what we're doing recently. It's more of what we did over the last couple of years.

Yes. It's a very good question. I'll tell you again, just to remind everybody, we have been giving out less than half a week on new leases. So we're not really utilizing a lot of concessions on stabilized. That being said, in the Sunbelt, we have seen a few more people offer maybe two weeks here and there just to try to drive a little bit of demand but nothing that's thrown us off. And I'm not really seeing a lot on stabilized assets in some of the coastal especially East Coast markets.

We operate on a national level, so we can't focus on one specific region. Over time, I believe the Sunbelt will reach a balanced state. It has attracted significant supply and higher-paying jobs, and we'll see how these jobs affect the overall market. If businesses continue to relocate and grow in that area, it should perform well. I believe long-term housing is a solid investment. Markets experience cycles of ups and downs, but the core of our business hinges on consumer health, wage growth, and their job stability. In the long run, I think things will balance out, though markets will continue to fluctuate. Our company is structured to be diversified to manage these variations. If we can choose the right markets at the right times, we will do exceptionally well.

Hi. Thanks for the time. In the opening remarks, you made some comments about maybe some stretched affordability in the Sunbelt. So I was hoping maybe you could provide a little bit more color on where those levels have gone from and to and how that compares to kind of the other markets or close to part of your portfolio please?

Juan, it's Mike. Yes, I think that's more specific to what we experienced with the skips in the Sunbelt versus the evictions in the coast. So we did see around 250, 300 skips, and a lot of that has to do with some of the supply in our backyard. So when we're tracking and we're finding out where people are going, they're pretty much sticking within that marketplace but they're able to capture either a concession or a lower rent at some place next door. So again that put a little bit of pressure on us in the Sunbelt. And it's the opposite with what we experienced in the coast. That's where we're able to get in there move through the eviction process. We did see more evictions than what we saw last year. And again, this puts the same type of pressure on both our occupancy and our rents but we feel like a lot of this is behind us now and we're able to move forward.

Maybe a dumb question here but how do you determine if something is 'skip' versus just a normal course move out?

The skip typically somebody comes in they drop off the keys. So they're not waiting to go through the eviction process they're more or less giving up.

Yes. I guess as it relates to the student debt piece. I'll take that one and then Mike can talk to anything about the recent strikes in LA. On the student debt side, I wouldn't say we have great insights here. We're going to be holding to wait and see when August 29 occurs and payments go potentially back into place. Overall, you typically see about 20% of households in the United States that have some form of student debt with a medium payment only being about $200. So as you think about our renter and their typical household income, it is less than 2% typically of overall household income, so not a meaningful component. That said, I think, we're going to just have to wait until we get into the fall and see if there are any implications in terms of pricing power on renewals or any demand impacts in terms of traffic come through the door. But today we don't have any great insights there.

Yes. Specific to L.A., I think, it's always important to note, this is really just a 3%, 3.5% of our NOI market. A lot of our exposure is in Marina del Rey. And I'll tell you the market has done well where we continue to see positive new lease growth renewal growth still in that 5% range and occupancies hovering around 96.5% today. More concessions are downtown where we have our JV assets. But overall L.A. feels good. I have gotten a couple of questions around just our sequential growth. And I think it's important to note that without some of the eviction that we saw there as well as some of the skips, we would have been closer to about 1% to 1.2% sequential revenue growth without bad debt. So again this market feels pretty good to us today. Not really seeing a big difference in traffic. And I think we're in a good position as we move forward.

Good afternoon. Thanks a lot for taking my question. Mike, the quantification of the new lease rent growth by region was helpful. Do you expect the gap in the new lease rent growth for the East and West Coast and the Sunbelt? Do you expect that to widen through the back half of the year and by how much?

Not much. So what I would tell you is again in the back half of the year we think there's more opportunity in the coast just because that's where we have the greatest loss to lease. And again that's where we had some of the depressed market rents last year. So I think you'll see that continue to show well in the back half. But what we're seeing with the Sunbelt today is we've got through a lot of these skips, it did put pressure on us. We do expect that it to be somewhat stabilized going forward. It's not going to widen. So maybe the coast gets a little bit better, but I don't expect the Sunbelt to get materially worse.

That's helpful. And then have you seen any changes in the lease-up strategies from merchant builders who see their product delivering into a high supply environment, or has pricing remained overall pretty rational around lease-up?

It's been very rational. We see in some cases where concessions are going to four to six range, but we're not seeing people go as far as eight anything past that. So overall it feels rational. Sunbelt today minimal concessions. And then I think there's just pockets where you have developers offering a little bit more, but overall we feel pretty good. I mean, we have a couple lease-ups of our own and we offer right around four weeks to six weeks and we're ahead of schedule in terms of leasing. They've been leasing at about double the rate of what we see in our mature portfolio. So overall promising.

Hi, everyone. I just wanted to see in terms of the acquisitions that were announced, you gave some perspective on the yield. Are these also under occupied assets? Any sense on what the you can give us on the occupancy of the assets?

They're a little bit lower than what we would run. So we see around 95.5% to 96%. And again in the Sunbelt area we're closer to 96.5% today. So just slightly under where we typically run them.

Hi everyone. It looks like you have a lot of opportunity on the acquisition you discussed earlier. But can you remind us like what is the typical value creation you can achieve just to the UDR platform within a few years?

Yes. Typically when you go back, Wes, and look at from 2019 to early 2022 we did $3-plus billion of transactions usually the controllable margin differential that we saw on those was around 400 basis points. So back then we buy and we can typically get 10% lift excluding any market rent growth. And so that would be capturing that 400 basis point, plus you're going to put on some occupancy upside rev management. You can do other topline initiatives like parking and package smart rent and Wi-Fi and all that that will help drive topline as well as expense piece helps the margin. So, it's usually 10% lift. We can contact to the bank when it's managed by a typical third-party. In this case, this is not managed by third-party property manager. It's really more of a mom-and-pop shop. So there's a little bit more meat on the bone there with 800 basis points of margin than we typically see.

Got it. And you mentioned not seeing any distress but we did see you come in and help one of your DCP a few of your DCP investors. I know you're a well-capitalized company. I'm just kind of worried I'm not worried I just maybe want to get your view of the state of the average private developer they're probably getting a lot of recruited interest. Cap rates have moved up a little conversely. NOI has increased. Has that been sufficient to still have them with equity just for the broader industry based on the people you talk to, or do you think we lose some developers in the cycle?

I think you're definitely going to see some developers lose assets to the cycle and lose capital. In this case with these three assets, definitely not going to tell you that they're going to get the returns that they originally expected when they went into these transactions. But from a capital stack perspective, the cap stack on these was basically they were built for $360 million. After these pay downs, the senior loan is at about $175 million. Our position is about $160 million. So, we're kind of going to 50% to low 90% loan to cost on these assets. Obviously originally they expected these to be worth substantially more than cost. But even if you use cost as a baseline, there's still some equity in there. In terms of the distress for those developers, we talked a lot internally about how to approach these over the last kind of three to six months. Ultimately, we didn't want to push either our lending partner or equity partner to the brink on this to find out was there going to be capital available from the equity or force them into the position where there are plenty of opportunistic lenders out there. The challenge with them is they charge much higher rates. You'll have points on the way in and on the way out potentially interest rate reserves and just general terms that we as a pref-equity partner, don't really want to have sitting ahead of us in the cap stack. So, we like the idea of doing the refis with the relationship lenders, keeping them in place, and just doing the pay down which for us doing it that 50% to 60% loan to cost is effectively where we're investing that new capital at a mid-9s that felt like a pretty good return for assets. We know the assets that are still going through their stabilized NOI phase they're 90% leased less occupied but NOI trajectory looks good on those. So overall, felt good about them. But yes, there probably will be some distress out there at some point in time for certain developers.

Thanks for the time guys. Joe maybe just a follow-up there on the DCP projects that you guys extended incremental capital to. In terms of the conversation with those partners, what's really holding them back from starting to market these assets for a potential disposition opportunity for them?

I just think timing-wise when you look at the environment that we're in today, they're coming through lease-up. These markets specifically relative to a lot of the rest of our DCP portfolio have been more challenged. When you look at the Oakland market that has faced a lot of supply. Santa Monica has been a little bit more challenged. And even Philly, it is in a pocket where there has been a lot delivered recently. So, from an NOI trajectory, there is a belief that as you work through that you're going to see rents continue to lift, those NOIs will stabilize and you'll have a better number here in a couple of years to either refi off of and look at a different refi environment to potentially sell into or recap them to. At the same time, you've got a lot of unknowns around where the fed has been, where rates are going to stabilize and where buyers can actually underwrite these assets too. So, today while they have equity they don't have the equity and returns they wanted. And so holding on for a potentially better environment makes a lot of sense to them and we're happy to be along for the ride as we like where we're at in the capital stack.

Hey. It's a very good question. I'll tell you again, just to remind everybody, we have been giving out less than half a week on new leases. So we're not really utilizing a lot of concessions on stabilized. That being said, in the Sunbelt, we have seen a few more people offer maybe two weeks here and there just to try to drive a little bit of demand but nothing that's thrown us off. And I'm not really seeing a lot on stabilized assets in some of the coastal especially East Coast markets.

Thank you for your time, interest, and support of UDR. We have positioned ourselves as a full cycle investment that offers above-average growth in total shareholder return across various macro environments. We are optimistic about the apartment sector and believe our advantages in operations, capital allocation, and innovation will lead to outperforming our peers in 2023 and beyond. As someone with extensive industry experience, I find it noteworthy that we rank second in operating statistics and are close to finishing the year in this position, as well as being in the top two or three for cash flow growth. Actual results are what truly matter, and our team is focused and enthusiastic about these outcomes. We look forward to continuing our growth and to seeing many of you at future events. Wishing you all the best for the rest of the summer. Take care.

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