Hello, and welcome to UDR's Second Quarter 2024 Earnings Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Trent Trujillo, Vice President, Investor Relations. Please go ahead, Trent.

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 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 2024 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; Senior Officers, Andrew Kantor; and Chris Vans Ens, will also be available during the Q&A portion of the call. First half results exceeded our initial expectations provided back in February due to ongoing solid fundamentals and the core operating strategies we continue to utilize to drive strong same store and earnings growth. Positive fundamental drivers for our industry include, first, year-to-date employment growth of approximately 1.3 million jobs has well outpaced initial full year consensus expectations. Additionally, year-to-date household income growth has remained robust at approximately 5%. Taken together, this has driven strong demand for housing while also reinforcing healthy affordability metrics. Second, more than 250,000 newly delivered apartment homes were absorbed nationally during the first half of the year, a near two-decade record. Adding to that, total housing deliveries appear stable through the end of the year, and development starts continue to decline to levels below historical norms. This dynamic bodes well for rent growth in the years ahead. And third, renting an apartment is on average 60% more affordable than owning a single-family home in the markets where we operate, the best level of relative affordability in two decades. These fundamental trends, combined with our operating tactics that have improved resident retention, led to revenue and expense growth outperformance in the first half of 2024. Drivers include more robust pricing power, higher occupancy, improvements in month rent collections, higher ancillary income growth, lower resident turnover, and lower turnover-related expenses than originally expected. In all, this led us to raise our full-year FFOA per share guidance for the second time this year, while also increasing our same-store growth expectations in yesterday's release. Mike will provide additional details in his remarks. We feel good about the year-to-date results and the opportunities ahead of us in the second half of the year. However, we also remain cognizant of the slowing growth rate in the recent employment data and the effect that may have on pricing in the face of still elevated new supply through the rest of 2024. Moving on, we continue to build on our position as a recognized ESG leader, with UDR recently being named a 2024 Top Workplace winner in the real estate industry. This achievement reflects the engaging employee experience we have built and solidifies our stature as an employer of choice. Key to our success is an innovative and adaptive culture, and this recognition is one that all our stakeholders should be proud of. Big picture, I remain optimistic about the long-term growth prospects of the multifamily industry and UDR's unique competitive advantages that should enhance our relative results. We have a strong culture that empowers our associates to deliver best-in-class service to our residents and create outsized value. With that, I'll turn the call over to Mike.

Thanks, Tom. Today, I'll cover the following topics; our second quarter same-store results, early third quarter operating trends, our improved full-year same-store growth guidance, including underlying assumptions and regional operating trends. To begin, second quarter year-over-year same-store revenue and NOI growth of 2.5% and 2% respectively were slightly above our expectations. Quarterly sequential same-store results also outpaced initial forecasts. These results were driven by, first, 2.4% blended lease rate growth, which was driven by renewal rate growth just shy of 4% and new lease rate growth of 50 basis points. New lease rate growth improved by 300 basis points versus the first quarter as concessions stabilized and demand increased, which resulted in improved pricing power. Second, 47% annualized resident turnover was 300 basis points below the prior year period and our best second-quarter retention in more than a decade. This has enabled us to increase renewal rate pricing through at least August and has led to more favorable blended lease rate growth. Third, occupancy remained strong at 96.8%, supported by healthy traffic and leasing volume. New York, Boston, Washington, D.C., and Seattle, which collectively constitute 40% of our same-store pool are standouts, averaging higher than 97% occupancy during the quarter. And fourth, other income growth was nearly 9% and was driven by our continued innovation along with the delivery of value-added services to our residents. Shifting to expenses. Quarterly year-over-year same-store expense growth of 3.7% came in better than expectations and was primarily driven by reduced repair and maintenance costs as well as insurance savings. Repair and maintenance growth of less than 1% was partly due to our improved resident retention and having 500 fewer unit terms than a year ago while insurance savings of nearly 5% was driven by lower claims activity. Moving on, core operating trends have remained resilient in July and key metrics have largely followed typical seasonality. First, July blended lease rate growth is expected to be in the mid-2% range, which is slightly higher than June results and follows normal historical sequential rent growth trends. New lease rate growth is slightly negative on average while we have had success increasing our renewal lease rate growth closer to 5% from 4% in the second quarter. In terms of relative performance, the East Coast is showing the most strength with blended lease rate growth of approximately 4%. This is followed by the West Coast at 3% on average and the Sunbelt at approximately negative 1%. Based on current trends, we expect East Coast leadership to persist through at least the remainder of the third quarter. Second, resident retention continues to compare well against historical norms and July will represent the 15th consecutive month our year-over-year turnover has improved. Relative affordability compared to other forms of housing is a benefit to the apartment industry in total. Given the level of home prices and mortgage rates, the average cost of owning a home across UDR markets is nearly $5,500 per month. By contrast, the average rent for a UDR apartment home is approximately $2,500 per month, thereby creating annual shelter cost savings of $36,000. This disparity has led to a record low level of our residents moving out to buy a home. Furthermore, because of our ongoing customer experience project, our resident retention over the past year has improved by approximately 210 basis points relative to the peer group average. This is a testament to our team's focus and execution on our innovative data-driven approach to customer service. Ultimately, improved retention should drive better pricing power, higher occupancy, increased other income, reduced expenses, lower CapEx, and margin expansion. We are still early in the innings of capturing these benefits but believe the incremental opportunity is in the $15 million to $30 million range. Third, occupancy remains high but has trended slightly lower to 96.2% to 96.3% in July due to elevated new supply coming online and typical seasonal operating trends. Markets facing heavy supply, including Nashville, Dallas, and Tampa, making up 16% of our NOI, have seen occupancy decline by approximately 100 basis points on average compared to the second quarter. Conversely, occupancy remains in the mid to high 96% range on average across markets facing less supply, such as New York, San Francisco, and Orange County, which make up 26% of our NOI. Strategically, we anticipate regaining portfolio occupancy later in the third quarter as we tactically adjust our operating approach ahead of a seasonally slower leasing period. And fourth, other income continues to grow in the high single-digit range in July, similar to what we achieved in the first half of the year. As a reminder, other income constitutes roughly 11% of total revenue. We remain pleased with the trajectory of other income initiatives, such as the rollout and penetration of building-wide Wi-Fi as these contribute significantly to incremental same-store revenue growth. Based on our results for the first seven months of the year, we raised our full-year 2024 same-store growth guidance in conjunction with yesterday's release. We are encouraged by the resiliency of various forward demand indicators such as year-to-date job growth and wage growth, but we remain somewhat cautious given there's potential for macroeconomic volatility in an election year combined with elevated supply deliveries in the back half of 2024. To provide details on our guidance increases, starting with same-store revenue growth, we raised our midpoint by 50 basis points, resulting in a new range of 1% to 3%. The primary building blocks to achieve the 2% midpoint include the following. First, our 2024 earnings of 70 basis points. Second, portfolio blended lease rate growth is forecast to be approximately 130 basis points in 2024. This represents a 60 basis point increase compared to our initial guidance. Given blended lease rate growth of approximately 180 basis points through the first seven months of the year, this implies a deceleration to 60 basis points on average for the remaining five months of the year. Using a midyear convention, our full-year blended lease rate growth expectation should add about 65 basis points to 2024 same-store revenue growth, reflecting a 30 basis point improvement versus our prior expectations. Underlying our full-year blended rate growth forecast are assumptions of 3.5% to 4% renewal rate growth and approximately negative 1% new lease rate growth. Third, we expect the combination of occupancy and bad debt to be roughly flat year-over-year in 2024, in line with our prior expectations. And fourth, innovation and other operating initiatives are expected to add 70 basis points to our 2024 same-store revenue growth, which is an increase of 25 basis points versus our prior guidance. The bulk of this growth should come from the continued rollout of property-wide Wi-Fi initiatives along with a variety of other property enhancements. 3% at the high end of our same-store revenue growth range is achievable through improved year-over-year occupancy, additional accretion from innovation, higher blended lease rate growth or a combination thereof. Conversely, the low end of 1% reflects full-year blended lease rate growth of approximately 50 basis points, some level of occupancy loss, and the moderation in other income generated by our innovation. Moving on to same-store expense growth. We lowered our midpoint by 25 basis points to 5% with the full-year range now at 4% to 6%. The improvement was primarily driven by constrained insurance and repair and maintenance expense growth. As a reminder, same-store expense growth of 7.5% in the first quarter was elevated due to comping off of a one-time $3.7 million employee retention credit we realized at the beginning of 2023. Absent this factor, we would expect normalized same-store expense growth for the full year to be in the low 4% range or approximately 80 basis points lower than our updated midpoint. Turning to regional trends. Our coastal results have exceeded our expectations while our Sunbelt markets are largely in line. More specifically, the East Coast, which comprises approximately 40% of our NOI, was our strongest region in the second quarter, and Washington, D.C. was our best-performing market driven by strength in Northern Virginia. Second quarter weighted average occupancy for the East Coast was 97.1%, blended lease rate growth was 4.7% and year-over-year same-store revenue growth was 3.8%. With continued healthy demand and relatively low new supply, we expect this region to be our strongest throughout the rest of the year. The West Coast, which comprises approximately 35% of our NOI, has performed better than expected year-to-date but stabilized somewhat in the second quarter following tremendous momentum in the first quarter. We are encouraged by various employers more strictly enforcing return to office mandates as well as increased office leasing activity from technology and AI companies but are also cognizant of corporate relocations that influence job and wage growth. Absolute levels of new supply remain low at less than 2% of existing stock on average across our West Coast markets, which we expect will lead to a more favorable supply dynamic in the coming quarters. Lastly, our Sunbelt markets, which comprise roughly 25% of our NOI, continue to lag our coastal markets. Year-to-date performance was in line with our original expectations through the beginning of June, at which time we began to see some pricing deterioration due to elevated new supply and the concessions that came with it. We tactically decided to hold our grade to best set up our rent roll for future quarters, which resulted in occupancy drifting lower. While our Sunbelt markets broadly have more robust job growth than our coastal markets, we remain cautious on the region in the near term, given the very high absolute levels of new supply coming online. To close, our coastal markets, which comprise 75% of our NOI, have performed above initial expectations. While our Sunbelt markets, which comprise 25% of our NOI, are largely in line with expectations. Our diversified portfolio enables us to be surgical with regard to how we operate each market and each asset, allowing us to leverage the strong fundamentals of our industry. This, coupled with continued innovation that will further expand our operating margin over time, maximizes revenue and NOI growth. My thanks go out to our UDR associates nationwide for your dedication towards meeting the challenges we face head-on as we continuously innovate to drive strong results. I will now turn over the call to Joe.

Thank you, Mike. The topics I will cover today include, our second quarter results and our updated full-year 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 $0.62 achieved the high end of our previously provided guidance. The $0.01 per share sequential increase was supported by strong same-store NOI growth, driven by higher than expected blended lease rate growth and lower than expected expense growth across both controllable and non-controllable categories. Year-to-date operating results have exceeded our initial expectations, which led us to raise our same-store and FFOA per share guidance ranges. Our new full-year 2024 FFOA per share guidance range is $2.42 to $2.50 with a midpoint of $2.46. Since providing initial guidance in February, we have raised FFOA per share guidance twice by a cumulative of $0.04 per share or approximately 2% and have improved the midpoints of our same-store guidance ranges. Current trends suggest upside to our midpoint but we believe a cautious approach is prudent given the risk of elevated new supply, election uncertainty, and macroeconomic volatility. Looking ahead, our third quarter FFOA per share guidance range is $0.61 to $0.63. The $0.62 midpoint is flat sequentially, which is similar to our historical average earnings results from the second to third quarter and is due to minimal expected changes across NOI, interest expense, and G&A. Next, a transactions and capital markets update. First, during the quarter, we completed construction of 101 North Meridian, a $134 million, 330-home community located adjacent to another UDR community in Tampa. Due to robust demand, the community is already 40% occupied as of today, which is twice the level we expected at this point in its lease-up. When combined with attractive rental rate pricing, the yield on the project is trending approximately 75 basis points ahead of underwriting. With the completion of this community, we have no active development projects. However, we are evaluating up to four potential starts in the next 12 to 18 months. Second, subsequent to quarter end, we went under contract to fund a $35 million preferred equity DCP investment at a 10.75% rate of return on four communities located in Portland as part of their recapitalization. Each of the four communities has achieved stabilized occupancy and is generating positive cash flow. Therefore, the risk profile is lower than a typical new development DCP project and positive cash flows allow approximately two-thirds of our contractual return to be paid in cash. And third, subsequent to quarter end, we received an approximately $17 million paydown on our preferred equity DCP investment in Vernon Boulevard located in Queens, New York. In conjunction with the paydown, we agreed to lower our rate of return from 13% to 11% to reflect the reduced risk in our investment due to the development being completed and having a more secure positioning in the capital structure. Lastly, our investment-grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: first, we have nearly $1 billion of liquidity as of June 30; second, we have only $112 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through the end of the year and only 11% of total consolidated debt scheduled to mature through 2026, thereby reducing refinancing risk. 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 amongst the multifamily peer group at 3.4%. And third, our leverage metrics remain strong. Debt to enterprise value was just 28% at quarter end while net debt to EBITDAre was 5.7 times. In all, our balance sheet and liquidity remain in excellent shape. We remain opportunistic in our capital deployment and we continue to utilize a variety of capital allocation competitive advantages to drive long-term accretion. With that, I will open it up for Q&A.

Our first question is coming from Eric Wolfe from Citigroup.

Can you talk a bit more about what you saw in June and July in your coastal markets versus the Sunbelt? I was specifically wondering about how much occupancy fell in the Sunbelt versus the coastal markets? And if that's impacting your pricing strategy for both going forward?

So let me try to capture all that. First and foremost, one month is not a good trend line. I tend to look at it over 90 days. During peak leasing from May to June through July, we actually averaged right around 2.5% blend, which was 100 basis points over our original expectations. Second to that, May was so strong for us that we actually pushed our market rent, pretty much double compared to what we see pre-COVID, right around 2% versus 1% on a month-over-month basis. So very strong trends led us to push our rents, which helped us push our renewals higher through 3Q, which is helping to offset new lease growth. So to that point, I spend a little bit more time just on our renewal strategy and how it's playing out before I give you some of the numbers. But we are sending out about 5% through September at this point. We typically achieve between 20 and 30 basis points of what we send out. And I'll tell you our strategy around getting more aggressive by about 100 basis points from the first half of the year was really stemming off of our customer experience project, just given the fact that we've had closer to 900 fewer move-outs through the first six to seven months of the year and our turnover were down 3% year-over-year, along with the fact that we changed the trajectory of our relative basis versus our peer group by over 200 basis points. We wanted to test that pricing strategy and right now, it feels like it's playing out. To your point on the occupancy, we did lose a little bit of ground over the last 30, 60 days. We've seen that stabilize as of late and I think it's important to size it for us. When you have, call it, 10 bps lower occupancy, that's 50 homes, which is approximately $100,000 during the month. So while it's down a little bit, it's not material and we're starting to see it stabilize into August. To your point just on some of the stats around the regions, what I would tell you is the East Coast in July still hovering around 96.5%, the West Coast and the Sunbelt, a little bit lower, right around 96%. But on the blends, we are still seeing 4% growth on East Coast, 3% growth on the West Coast, and the Sunbelt has somewhat stabilized in that negative 1% range similar to what we saw in May, June, and throughout the second quarter. So overall, trending kind of as expected.

And then I guess, based on your guidance for the full year, it seems like you're sort of guiding around 0.9% or something around there for the back half of the year, which is I think, pretty close to your original guidance. I mean, would you say that's more of a conservative placeholder or do you think it's sort of reflective of a more conservative position, just given some of the things you mentioned? Just trying to understand what's going into that back half estimate for blended rent growth?

Maybe just to lead off to how we approached it. Versus original guidance, we had taken kind of consensus estimates, layered in our bottoms-up forecast to come up with that initial forecast. I think, since that period of time, we've clearly seen jobs coming better, wages coming better, GDP come in better, supply has been about as expected with developers acting fairly rational from a concessionary perspective. And then the relative affordability piece, I think, is one that has been clearly a nice tailwind for us from either a move-out to buy or just capture rate on new household formation. So that's really what's driven kind of our year-to-date market rent growth. We're seeing an effective market rent growth on a year-to-date basis, up about 4%, which is under 200 basis points better than we expected originally. So that's what drove those blends in the first seven months. So as we approach kind of back half of the year and full-year guidance, the way we did it was really just take what was put in the bank for the first seven months. So what we knew it happened here through July updated guidance for that impact, and we really want the back half assumptions alone. And so the implied number for the last five months of the year is only about 60 basis points in blended lease rate growth. Obviously, Mike mentioned where we're sending out August renewals. We'll talk to the street once we get more visibility on news as we go into September, but we have factored in some conservatism on that front under the view that you still have supply out there, still have unknowns on the macroeconomic front and on the election front, and we typically see some degree of seasonal slowdown anyway on blends as you go into the back half. So everything we're seeing to date tells us we have continued momentum with that kind of mid-2s blends, but I think it's still prudent to be a little bit conservative on that front as we approach guidance and then update as we move into the back half of the year.

Next question is coming from Steve Sakwa from Evercore ISI.

This is Sanket representing Steve. We had a question regarding the increase in guidance for DCP funding from zero to $15 million. Can we anticipate further developments in this area in the second half of the year?

So that $15 million is really the net of a couple of items. We originally had zero in there. I think everybody saw in the press release, we did the $35 million investment in a recap portfolio in Portland, which Andrew can give you more details on here in a second. We also got the payback on Vernon, which is part of a bigger payback for both us and our partner, which we can provide some more color on as well. And then we have a couple of other cash pays and small prepayments. So that nets to that $15 million. As we look out to the rest of the year, we really don't have much coming up on the maturity front. I think our next maturities from a senior loan perspective were the first part of '25. So that would be the first action we have from additional prepayments or potential extensions there. And on the investment front, really no major discussions right now, but not to say that we aren't looking. We're just not far enough along to really commit to increasing guidance on DCP deployments. But as we think to next year and assume that we have additional prepayments or payoffs, I would expect us to be active on that front and looking to deploy that capital even if it takes place ahead of time.

As it relates to the DCP activity for the quarter, Vernon, which is a DCP deal that we have in the Astoria West neighborhood of New York, originally funded it in June of 2022, we had a partner that was originally pari passu with us in that transaction who had invested $15 million next to our $40 million. At the time of the redemption, their accrual was $10 million and their entire amount was fully refunded. So $25 million, that's in addition to our $17 million that was refunded. And as Joe said, this is now a recapitalization of a completed and stabilized development. The property is 95%, 96% occupied. And then on a very similar situation, we had on the Portland DCP recap where we invested in four stabilized assets, one of which will close shortly but that as well as in both of these new DCP investments are about two-thirds of our accrual will be paid current.

Our next question today is coming from Austin Wurschmidt from KeyBanc Capital Markets.

I wanted to follow up on the new lease rate growth trends from July. Mike, you mentioned that Nashville, Dallas, and Tampa were mainly responsible for the decline in occupancy. I’m interested to know if these markets also contributed to the slowdown in new lease rate growth, or if there were other markets or regions that experienced a similar moderation in new lease rate growth from July compared to what you observed in May and June.

What's interesting, obviously, from May to June, we saw a little bit more of a deceleration in blends and then coming through July, we saw that uptick a bit. So really, the way I look at it is from May to July, we saw close to 100 basis points, let's call it, 50 to 100 basis points across all regions with the Sunbelt being a little bit weaker than we thought over the last 30 days or so. But again, it's been pretty stable as we've gone towards the end of the month, and we're still hovering around negative 1% today. In terms of the new lease growth, we're still seeing negative 5% to negative 6% down in the Sunbelt where we're seeing upwards of 2% growth in the East Coast, and 1% on the West Coast. So on an absolute basis, still strongest coming out of the coast, a little bit weaker in the Sunbelt as expected.

Just to follow up on that, too, as you think about the occupancy number, a little bit of insight beyond just the pricing strategy that Mike has talked about. We've talked a lot in the past about our fraud prevention efforts and kind of the $25 million to $50 million opportunity that bad debt represents for us over time. We've talked about starting to roll out in pilot some new AI platforms on both income and ID verification. We're also trying to be a little bit more robust and disciplined on our deposit strategies on our credit scores around the portfolio. So as we continue to ramp up that we are seeing some of our denial rates increase, which will temporarily impact occupancy negatively. It's not necessarily reflective of traffic, which still continues to be good; applications continue to be good. It's just that we're kicking more of those individuals out of the system, taking the hit today on occupancy. But we do believe longer term that's going to get us better residents in place that stay with us longer and continue to pay. So it's a longer-term trade-off to take the occupancy hit today, get the better numbers in the future. Although, I'd say for bad debt, we have not factored that into our numbers. We're still assuming in guidance that we’re plus or minus kind of flat on a year-over-year basis, even though we're trending slightly ahead at this point in time.

And you partially, I think, you answered my next question, which is really around the size of the supply and concessions impact in July. I was curious about the slowdown in traffic and any impact to these near-record absorption levels we've kind of heard about throughout the first half of the year. But maybe on top of that, I guess, how have concessions trended? Can you kind of quantify that, and then how does that stack up versus last year?

Austin, I think that's a really good point. I think just stepping back a little bit, just thinking about the consumer and how healthy they are, a few stats that we typically look at in addition to concessions, I would tell you, first of all, not seen doubling up. So we still have 1.8 residents per home. We've seen the single occupant go up about 1.5% to 42% of our homes. And we're seeing a stable rent-to-income ratio across the board at 22%, with places like Boston, Dallas, DC, San Francisco, and Tampa even down a little bit, where places like Seattle are up just slightly, given the fact that we've been able to push rents so much. But to your point on concessions, we're right around half a week today, which is pretty consistent with where we were pre-COVID. It's kind of normal steady state today, obviously, with the Sunbelt being a little bit higher and then the Coast being next to nothing.

Your next question is coming from Josh Dennerlein from Bank of America.

Mike, I wanted to revisit some of your comments regarding your increased confidence in raising rates due to your platform initiatives focused on customer data. When did you start to push for rate increases more aggressively than before? How do you see your ability to further increase renewal rates in the future?

It goes back to what I was saying with what we're seeing in May. And so when we had very strong dynamics in the marketplace, we're able to start driving our market rents up, again, about 2% compared to normal historical averages of 1%. That gives us more confidence to get a little bit more aggressive as we started to price our renewals 60, 90 days out. And so that's what you're seeing play out in front of us today. And in addition to that, I think it goes back to what we're seeing with that customer experience project. A lot of that work has been done over the last year or so. And what we looked at is when we compared ourselves to our peers on a relative basis, we were about 200 basis points below them. Over the last six to nine months, we've actually changed that trajectory. We're closer to 50 basis points above them. And so it gave us the confidence to continue to try to push in there and test a different thing, if you will, test out our pricing strategy, see if we can get a little bit more aggressive on renewals. Again, I feel like it's playing out today. We'll know more here over the next 30, 60 days, but it feels good.

What were you previously below your peers on, and what are you above them on now?

So turnover, when we compared ourselves against the peer group and turnover, we were lagging the group, and that's what led us to really dive into the customer experience project, to try to change that trajectory. And we believe that we were on to something, we see it playing out in front of us but we also know that we have a long way to go. And we think that this could potentially continue to drive, call it, $15 million to $30 million in value over the next couple of years by holding a sustainable lower turnover than the peer group going forward.

Next question is coming from Jamie Feldman from Wells Fargo.

I appreciate your comments regarding the guidance for top line revenue and the uncertainty surrounding the election and consumer rates. Can you elaborate on other line items in your guidance where you believe you have the most flexibility or where you are being more conservative? If the situation improves and doesn't decline, where could you potentially see a significant increase?

Jamie, that's a good question. I'll tell you where we're feeling pretty good today and you could see it in our guidance. Expenses, and I'm seeing across the board. It's not just on our controllables, it's also on the non-controllables. And so when we went into the year, we had a midpoint of around 5.25% and today we're closer to 5%. Based on everything we're seeing with the customer experience, the fact that turnover is down, we're getting a little bit more aggressive with our turn vendors, people on site that do a lot of the work for us. We're able to sharpen our pencil there. So we're continuing to see strength on that line item. And so I'd say that's probably the biggest one for me.

And I think real estate tax as well, when you look at what we came into the year at, we were expecting more in the 4% to 5% range. Today, depending on what the appeal activity is as well as I think we have some opportunities in Florida to improve our numbers based on values and rates. We think we could trend that real estate tax number down into the 3% to 4% range. We've not fully factored that into our expectations yet because there's still unknowns out there but I think real estate tax still is an opportunity for upside. Insurance, we've had really good year-to-date activity from a claims perspective. A lot of that driven by expense-saving ROIs, doing a lot of asset quality work, and then a little bit of luck just coming off of higher claims activity, but we've had really good success on a year-to-date basis there. We have not factored that into continuing into the back half to the same degree. But if we see that trend continue, we probably have some upside there in expenses as well. So expenses is probably a good variable for us on a go forward basis.

And then, I guess, just kind of sitting where we are in the cycle, everyone's talking about the very low level of starts. I guess that means a stronger '26, '27 across all markets, rates pulling back a little bit. We'll see what spending looks like from the different candidates out there if rates stay low. But you talked about how strong your balance sheet is. How aggressive do you feel like you need to be right now on the investment front to kind of catch the early part of the cycle or do you think you can be patient? And just what does the landscape look like, whether it's from your perspective or competing buyers' perspective on the macro picture and putting capital to work?

Maybe I'll kick it off just from a high-level perspective, how we're thinking about capital and then toss it to Andrew, he can kind of talk about what we're seeing in the market with buyers and sellers and cap rates today. So I'd say right now, it's a continued capital light strategy for us. We don't have the cost of equity that's compelling today. We don't have a lot that we need to do either on the debt maturity side or the development commitment side today. From an external growth perspective going out there and acquiring utilizing balance sheet capacity isn't really something that makes sense for us in terms of levering up for minimal accretion. When you look at where cap rates are today that Andrew will talk about relative to that cost you're kind of in line to possibly even negative leverage today. And so going out there and utilizing the balance sheet capacity for that isn't overly compelling from an FFO accretion perspective. So I'd say continue with the capital light strategy. We are building up a lot of optionality within the development pipeline. And we've got plus or minus four deals that could start in the next 12 to 18 months. So we continue to try to whittle cost out there, wait for rents to come our way, wait for yields and cap rates to keep coming our way. But I think that's where we'll lean in as we get more conviction on the cycle and the cost of capital.

As Joe mentioned, we will maintain our capital light strategy. We are concentrating on underwriting deals and presenting them to our joint venture partner. Currently, many of the major firms have indicated that the markets have reached their lowest point. Cap rates are around 5%, depending on the location. A notable difference from the past is that rates have become more consistent across various markets, with higher growth areas trading at lower rates, while slower growth areas are somewhat higher, and this trend is visible across the board. Additionally, investors are now making decisions based on the disparity between replacement costs and purchase prices in markets with significant differences. We are observing increased activity among certain buyer groups, which is positively impacting internal rates of return, as many investors are successfully reducing reversion values, lowering cap rates, and increasing their reversion values and internal rates of return in markets with considerable discounts to replacement costs.

Just to confirm, you're noticing a difference in cap rates between higher growth and lower growth markets? What is the difference between the higher and lower growth?

I would say that cap rates range from 4.75% to 5.25% for most assets currently trading. In markets without a discount to replacement cost and low growth, those assets are trading at higher cap rates. Conversely, in high growth markets, people are more willing to push for better pricing, resulting in lower cap rates.

Your next question is coming from Nick Yulico from Scotiabank.

It's Daniel Tricarico on for Nick. A question for Mike. With respect to the incremental 60 basis points rental rate growth for the year versus the initial guide. Could you put some numbers around how that changed between your different regional exposures?

I think, first and foremost, when you think about the 60 bps, what we're assuming for the back half of the year is renewals being, call it, that 4% range, so it would have to be closer to negative 2.5% to get to that number. And so when you think about what that means by region, obviously, we're still sending out 5% through September at this point. There's not a big difference between regions. I'd tell you at the low end, we're probably closer to 3%, 3.5% in the Sunbelt, slightly above that on the Coast. And then when you get to the new lease side what I've been seeing is negative 5%, negative 6% in the Sunbelt. Expectations are that could get a little bit worse as we go into the back half of the year just given that supply is going to still be peaking and you have less demand. But with the Coast, you're probably coming down marginally but not anything significant.

And relative to kind of the first half, that 60 bps pickup that we saw, we continue to see Sunbelt operating about as expected. The positive surprises have really been coming on the Coast. And I think as we talked about before, D.C. has been a nice positive surprise for us as well as, San Fran and Seattle picking up on the West Coast. So it's really been the coast of driven the upside to that improved blended lease rate expectation for the full year.

Following up on D.C., it has clearly outperformed this year, with some benefits from the election and possibly from defense sector spending. Looking ahead, do you expect some level of normalization next year, particularly in light of a potential change in administration?

I'd tell you, first, what we're seeing there, just size of this market, D.C. has been doing tremendous over the last 60, 90 days. And again, this is 15% of our NOI market. So a very important market for us. We're 40% urban, 60% suburban. Occupancy is in the 97% range today and blends were 5.9% during the quarter compared to 3.4% in the first quarter. So DC has been a strong performer for us. Expectations as we move forward, we're going to have a little bit more supply down around the 14th Street corridor also along the Navy Yard. So we'll continue to see a little bit of pressure there. As it relates to just demand and job growth there, it's too early to tell kind of how that shakes out. But right now, we feel good about that market.

I would tell you, election cycles, particularly presidential and the impact on DC, there's not much of a bump. It just turns out these guys put on new jerseys and go to work for somebody else and stay in the marketplace. So I think the dynamic in DC that could change is the return to office. If that takes root and sees significant return to office, if you will. So we'll wait and see how it plays out. I think we know in about 97 days kind of where that one is going to play.

Your next question is coming from John Kim from BMO Capital Markets.

I wanted to follow up with Mike on an answer you gave to Austin's question on new lease rates in July. And I know we don't want to focus too much on one month of data. But I think you mentioned that the July was down 5% to 6% in Sunbelt, up 1% to 2% in coastal markets. That would basically imply that the weakening of the July rates was driven by the coastal sequentially versus Sunbelt. I just wanted to make sure that was the case.

John, it's more of a general trend. As I mentioned, the period from May to July showed a slight slowdown on the East Coast, particularly in places like Baltimore. New York and D.C. maintained growth rates around 5% to 6%, although they have decreased a bit. Overall, new lease growth has been consistent across the board. On the renewal side, we're actually seeing a slight increase in the Sunbelt compared to May, with renewals now around 4% to 4.5% in July, up from below 3% in May. Meanwhile, the coast experienced a smaller increase of about 50 to 70 basis points. So, while new leases are a bit weaker, renewals are stronger, especially in the Sunbelt at this time.

And relative to kind of the recent discussions, we've been feeling pretty good; our leasing stats still look quite good. Not too far off historically but understanding the concern there. Our renewals are still on a positive trajectory but we have a lot of moving parts with regard to the markets. And that's what we're seeing with some of the performance in the Sunbelt. And while we are more confident in our coastal performance, we're still adjusting some of the pricing accordingly regionally in the Sunbelt with guidance firmly in tow. But again, we appreciate the inquiry.

Next question is coming from Nick Yulico from Scotiabank.

On the preferred equity investments that are maturing soon, what are your plans for these investments now that the associated assets stabilized?

So if you look at the numbers that are in the supplement for the maturity dates on those different investments, those are without extension options. So currently, all of the DCPs that are maturing within the year have some form of extension option available. So we're talking to those developers, and those developers are looking at different opportunities to either recapitalize their asset, to sell their assets, or to extend their asset, but each is a different conversation.

We reached the end of our question-and-answer session. I'd like to hand the floor back over to Chairman and CEO, Mr. Toomey, for closing comments.

Thank you, operator. And thank you all for your time, interest, and support of UDR. We look forward to seeing many of you at the Evercore ISI and Bank of America Conferences in September and other upcoming events and tours. So with that, enjoy the balance of your summer. Take care.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.