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Edited Transcript of UDR earnings conference call or presentation 30-Oct-19 5:00pm GMT

Q3 2019 UDR Inc Earnings Call

Highland Ranch Nov 5, 2019 (Thomson StreetEvents) -- Edited Transcript of UDR Inc earnings conference call or presentation Wednesday, October 30, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher G. Van Ens

UDR, Inc. - VP – Operations

* Harry G. Alcock

UDR, Inc. - CIO & Senior VP

* Jerry A. Davis

UDR, Inc. - President & COO

* Joseph D. Fisher

UDR, Inc. - Senior VP & CFO

* Thomas W. Toomey

UDR, Inc. - Chairman & CEO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* Hardik Goel

Zelman & Associates LLC - VP of Research

* Neil Lawrence Malkin

Capital One Securities, Inc., Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS

* Richard Allen Hightower

Evercore ISI Institutional Equities, Research Division - MD & Research Analyst

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* Robert Chapman Stevenson

Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to UDR's Third Quarter 2019 Earnings Call. (Operator Instructions)

As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you. Mr. Van Ens, you may begin.

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Christopher G. Van Ens, UDR, Inc. - VP – Operations [2]

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Welcome to UDR's quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com.

In the supplement, we've 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.

(Operator Instructions)

Management will be available after the call for your questions that did not get answered on the call.

I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [3]

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Thank you, Chris, and welcome to UDR's Third Quarter 2019 Conference Call. On the call with me today are Jerry Davis, President and Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results as well as senior officers, Warren Troupe, and Harry Alcock, who will be available during the Q&A portion of the call.

Our robust third quarter results highlighted by same-store NOI growth of 3.9% and FFO as adjusted per share growth of 6%, continue to demonstrate strong execution across all aspects of our business. 2019 has been a very active and productive year for UDR.

First, we accretively grew our business through $1.8 billion in completed or announced acquisitions that have significant operational and investment upside in markets targeted for expansion. These were funded with premium-priced equity and low-cost debt.

Second, we continue to make great progress, implementing our next-generation operation platform. That has and will continue to drive controllable margin expansion by fundamentally changing how we interact with our current and prospective residents, while also creating efficiencies throughout our cost structure.

Third, we simplified our business by winding down the KFH JV and announced an agreement to halve our relationship with MetLife via an accretive assets swap.

And fourth, we derisked our enterprise by proactively taking advantage of low interest rate environment to repay high cost debt, extend our consolidated pro forma durations to over 8 years and reduce aggregate maturities to just 5% of our total debt over the next 3 years.

In short, the team has done a great job in 2019 of executing on all aspects of our value-creation capabilities, which will set up 2020 for continued strong NOI and cash flow growth, all of which fits into our strategic objective of being a full cycle investment.

Last, we received good news on the ESG front with public GRESB disclosure score improving to an A. This compares favorably versus our comp set and further exhibits our commitment to consistently improve our ESG framework.

With that, the senior management team would like to extend a heartfull thank you to all UDR associates for our continued hard work and for making 2019 a very special year.

I will now turn over the call to Jerry.

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Jerry A. Davis, UDR, Inc. - President & COO [4]

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Thanks, Tom, and good afternoon, everyone. We're pleased to announce another quarter of strong operating results, with the same-store revenue and expense and NOI growth of 3.7%, 3.1% and 3.9%, respectively.

Before delving into the quarterly details, let me take a moment to comment on how we view operations from 10,000 feet. We prioritized cash flow growth, which is primarily driven by sustainable and consistent operating margin expansion and accretive capital allocation. Over the coming years, we expect that the ongoing implementation of our next-gen operating platform will not only satisfy our customer's desire for self service but will also drive the majority of our margin expansion by limiting controllable expense growth through a variety of efficiency initiatives and technological solutions.

To sum up, we're somewhat agnostic as to how margin expansion is achieved, given the drivers of that expansion will oscillate over time, but we care deeply about achieving it.

We think about revenue growth similarly. Lease rates, our occupancy and other income are the primary variables in our revenue growth equation. At different points throughout the year and the real estate cycle, the importance of each variable's contribution to our revenue growth fluctuates. As such, our goal each and every quarter is to optimally manage these variables to maximize revenue growth, not fixate on a specific component of revenue growth.

In the third quarter, we continue to run an occupancy-first strategy and harvest above-trend other income growth, both of which offset new lease rate growth that was impacted by tough year-over-year comps and elevated supply levels in some of our high-rent markets such as the San Francisco Bay Area.

2019 deliveries have been back half-loaded across the majority of our markets, and we saw some impact during the third quarter. For at least the next couple of quarters, we expect that this dynamic will continue to play out. Positively, we have not seen widespread irrational pricing on this new supply. Absorption has remained strong. Our 5.3% renewal growth during the quarter was just 30 basis points below that of the second quarter. And third quarter resident turnover would have declined by 60 basis points after excluding the impact of move-outs from our short-term furnished home program, all of which reinforce that the lower-than-expected new lease rate growth was not a demand issue.

At the market level, the Monterey Peninsula, Seattle and the San Francisco Bay Area, which represent 26% of our same-store NOI, performed well, generating weighted average revenue growth of 5.9% in the quarter. Demand, occupancy and other income contribution from items such as parking, short-term furnished rentals and rentals of common area spaces generally remains strong in these markets. Although as previously referenced, supply did impact new lease rate growth in the Bay Area.

Conversely, New York, Orange County and Dallas, which comprise 23% of our same-store NOI, continue to lag our portfolio growth, with weighted average revenue growth of 1.7%, primarily due to competitive supply, although New York continues to incrementally improve versus the past couple of years.

Moving on. The ongoing implementation and execution of our next-gen operating platform continues to drive the expansion of our controllable margin through initiatives that are and will reduce expense growth, thereby, dropping more dollars to our bottom line.

Year-over-year, our same-store controllable margin grew 40 basis points due to controllable expense growth of just 1.2% in the third quarter and 1.4% year-to-date. On a normalized basis, we would expect these costs to be growing at an inflationary rate, somewhere in the 3% range.

More specifically, the combined growth rate of personnel and repairs and maintenance expense during the quarter was negative 0.1%, a solid achievement and representative of how limiting controllable expense growth will continue to expand our operating margin.

As a reminder, once fully implemented, our next-gen platform will fundamentally change how we interact with our customer and operate our portfolio. This will occur in stages and includes or will include: first, gaining efficiencies through process improvement, outsourcing of certain noncustomer-facing tasks and the centralization of sales operations. Second, the installation of SmartHome tech. We are currently over 27,000 homes into this program. Third, a push towards self-service via smart devices. This will include self-touring of our properties as well as a wide variety of other tasks that residents used to have to visit our site office for such as adding a pet to a lease. And fourth, using Big Data and machine learning to drive revenue growth and greater efficiencies throughout our operating structure.

Finally, with regard to this topic, to achieve our goal of expanding controllable margin by 150 to 200 basis points by year-end 2022 or $15 million to $20 million in incremental run rate NOI, we need the right team and the right culture in place. Over the years, our operating teams have accepted and supported the wide variety of other income initiatives we have implemented, and our strong same-store growth results have reflected that. All advancements, like SmartHome tech, are fully replicable by any multifamily competitor willing to spend the necessary capital. An operating team that embraces consistent evolution and a culture that thrives on it are not. We have both.

Taken together, we tightened our full year same-store revenue growth guidance range and reduced our same-store expense growth guidance by 15 basis points at the midpoint. Combined, these increased our full year same-store NOI growth guidance range by 7.5 basis points at the midpoint.

Last, our $1.8 billion in year-to-date completed or announced acquisitions are performing in line with underwritten expectations.

Nuts and bolts of operating improvements, CapEx investment and historical operating initiatives are all in the initial phases of implementation. While this level of growth has at times stretched our teams in the field and at the corporate office, we have a deep bench at UDR, which allowed many of our outstanding associates to advance their careers by way of our expansion. We are excited to overlay UDR's best-in-class operating platform onto these acquired properties and look forward to creating value over the next several years through the implementation of our next-gen platform.

In closing, I would like to thank all of our associates in the field and at corporate for producing another quarter of robust operating growth, while also continuing to embrace the future via our next-gen operating platform. It has been an extremely eventful year, and I'm immensely proud of all of you.

With that, I'll turn it over to Joe.

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [5]

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Thank you, Jerry. The topics I will cover today include our third quarter results and updated full year guidance, a transactions and capital markets update and a balance sheet update.

Our third quarter earnings results came in at the midpoint to above the high ends of previously provided guidance ranges. FFO as adjusted per share was $0.52, approximately 6% higher year-over-year and driven by strong same-store and lease-up performance, accretive capital deployment and lower interest rates.

Next, our full year guidance update. We raised our full year FFO as adjusted guidance range by $0.005 at the midpoint to $2.07 to $2.09, driven by solid operations, interest expense savings and capital deployment. A full guidance update including sources and uses expectations, the same-store updates Jerry referenced and fourth quarter guidance ranges is available on Attachment 15 of our supplement.

Moving on to transactions and capital markets. We have continued to drive long-term value creation and FFO accretion by remaining disciplined in our capital deployment and simultaneously match-funding the low-cost equity and debt capital, all while pivoting to the best-available risk-adjusted returns.

During the quarter, we acquired 3 apartment communities located in Norwood, Massachusetts; Englewood, New Jersey; and Washington, D.C. The closing of the latter, 1301 Thomas Circle fully wound down our JV relationship with KFH. The 3 communities were acquired at an all-in valuation of $541 million and a weighted average year 1 NOI yield of 4.9%, moving to the low 5s in year 2.

In August, we announced a $1.8 billion transaction with our JV partner, MetLife that further simplified UDR's structure, will cut in half our JV exposure to just 5% of total NOI, will be accretive to future cash flow growth, increased exposure to target markets and replaced lower multiple management fee income with higher multiple real estate income, all while minimizing cash needs.

As structured, we are under contract to acquire the approximately 50% interest we did not previously own in 10 UDR-MetLife JV operating communities, 1 community under development and 4 development land sites, cumulatively valued at $1.1 billion or $557 million a UDR share. And we will sell approximately 50% interest in 5 JV communities, valued at $645 million or $323 million a UDR share to MetLife.

After accounting for the assumption of in-place debt, our net cash outflow to complete the asset swap is expected to be approximately $105 million. The transaction is expected to close during the fourth quarter, subject to customary closing conditions and closing price adjustments.

Our year-to-date completed and announced acquisition activity now totals $1.8 billion, including land for future development. These transactions are NAV-accretive, have IRRs that exceed our weighted average cost of capital, were partially funded with the $962 million of equity issued in the last year at a weighted average 6% premium to consensus NAV and will be accretive to FFOA per share growth rate in 2020 and beyond.

In addition, the acquired communities all have significant operational and investment upside, are primarily located in targeted expansion markets and fit well with our next-gen operating platform.

In September, we entered into a forward sales agreement under our ATM program for approximately 1.3 million common shares during the quarter. Expected proceeds are earmarked for another transaction, which we will provide additional information on at a future date. The final date by which shares sold under the forward sales agreement need to be settled is March 31, 2020, as currently structured.

Moving on to debt, where we continue to take advantage of the low-rate environment. During the quarter and subsequent to quarter-end, we issued $800 million of long-duration, unsecured debt at a weighted average effective rate of 3.1%. $300 million of this debt qualified as a green bond and represented our first use of this ESG-friendly product.

Proceeds have been or will be used to prepay $700 million of higher-cost debt, with a weighted average effective rate of 4.23%. Once completed, we will have only 5% of our debt coming due over the next 3 years. And our consolidated weighted average years to maturity will be 8 years versus the 6.9 years reported at the end of the third quarter. Please see our third quarter earnings press release and supplement for further details on our transactional and capital markets activity.

Last, the balance sheet. At quarter-end, our liquidity as measured by cash and credit facility capacity net of the commercial paper balance, was $1.1 billion. Our consolidated financial leverage was 31% on undepreciated book value and 24% on enterprise value inclusive of joint ventures. Our consolidated net debt to EBITDA ROE was 5.5x and inclusive of joint ventures was 5.8x. We remain comfortable with our credit metrics and don't plan to actively lever up or down.

With that, I will open it up for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question is from the line of Nick Joseph with Citigroup.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [2]

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Jerry, I appreciate the operating strategy color, which I guess helps explain why blended lease rate growth was flat year-over-year versus positive the first 2 quarters. When you compare the current environment, and then your comment on supply, do you expect it to remain roughly flat going forward for the next few quarters? Or is there anything indicating an acceleration or deceleration from here?

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Jerry A. Davis, UDR, Inc. - President & COO [3]

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I think it's going to be dependent market by market. We do have several markets, specifically San Francisco, Los Angeles, Orange County and Orlando, where new supply has driven down new lease rate growth compared to where it was last year, where we had strength in those markets. On the opposite side, you've got strength in New York City, Orange -- I mean the Inland Empire and Seattle. So it's all going to be dependent on the effects of that new supply. Currently, we see in the fourth quarter new lease rate growth is probably going to be down compared to where it was last year. But when we look at renewal rate growth, which this quarter was at 5.3%, that's the highest level these past couple of quarters since it's been in 2016, I think it's going to continue to be strong. The other thing we've looked at in that because when you look at the next quarter, over the last 4 years, it's averaged probably about 0.3%. 2016, it was very low single digits. 2017, in the fourth quarter, was actually negative 0.5%. It rebounded the following year in 2018 to a 1.1%. And this year we expected to be somewhere closer to the average. So it will be less than it was last year. But I think that's more indicative of the effect supply had back in '17, which kept new lease rate growth down. So when you anniversaried off '18, it was elevated. And now we are seeing that supply hit us in a couple of markets, and we're also comping against tougher numbers from last year.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [4]

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That's helpful. And then you've been active on the capital raising front and in terms of equity, doing a handful of different ways. So assuming you have a use, how do you think about executing going forward between marketed deals, the ATM and then on the forward basis?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [5]

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Yes. Nick, this is Joe. I think the critical part of that, that you referenced there is assuming that we have the use. We've endeavored over the last 12 months to make sure that if we do raise capital on the equity side, we do have a match funded use teed up for it. So we haven't done any speculative equity that we sit on and then force our transaction team to go out there and execute upon. So I think you'll continue to see that from that front. From a pipeline standpoint, Harry may have some comments here. But I think our pipeline today is probably a little bit lighter than we've seen at any point in the last 12 months. But if we do go out there again, we're going to make sure that we have premium cost of capital relative to NAV. From a use standpoint, make sure it's in our target markets, make sure that we can deploy accretively year 1 and on a forward basis. And make sure that the assets have either operational investments or a platform story with them to keep driving 2020 growth and beyond. So if you we have more to talk about on that front, we'll obviously come back to the market.

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Operator [6]

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Our next question is from the line of John Kim with BMO Capital Markets.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [7]

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Just a follow-up on the leasing spreads, which were healthy, but down sequentially. And then also, it sounds like the fourth quarter will be down year-over-year. How should we think about the translation of that into same-store revenue next year? And then also, were the leasing spreads this quarter in line with your projection?

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Jerry A. Davis, UDR, Inc. - President & COO [8]

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Yes. Leasing spreads in third quarter were down a bit from original projections, mainly because we didn't fully anticipate the effect that new supplies specifically in place like San Francisco were going to have on our new lease rates. On a blended basis, again, they were down a bit, not as much as on the new because the renewals were higher. But we're not currently ready to give any indication or any numbers on 2020. We're in the midst of the budget process right now. I can tell you when we look at supply next year, it's probably going to be slightly higher than it was this year, specific to a few markets, that we operate in. We think Boston will be a bit more impacted by supply. You're going to have Los Angeles continuing to be affected by supply. I think the San Francisco supply issues that I've talked about earlier on this call. I think they probably persist through the first half of next year. But I think you see a little bit of relief in New York as well as in Orange County next year. And I think Seattle while we'll feel some supply. I think the demand side of the equation should stay strong there.

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [9]

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Yes. John, this is Joe. Just beyond, as you asked about 2020, obviously, going through the fundamental side of the equation, but what we have really been focused on this year, when you look at activities that were taken from '19 to try to impact '20, what we've been doing on the balance sheet front to improve quality of the balance sheet and also drive accretion, all the transitional activity trying to drive accretion there. And then the -- all the platform work that Jerry talked about in his opening remarks, trying to drop more cash to the bottom line next year and on a go-forward basis. So we're still working through on the fundamental side, I think on a relative basis, doing everything we can to set up the portfolio and platform to be in a better position next year.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [10]

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Okay. And then Joe, with your cost of new debt declining by 140 basis points over the past year, can you quantify how much that changed the yield you're willing to take on investments, including both those acquisitions and net debt?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [11]

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On the mezz debt side, I think the compression in yields that you've seen out there actually, to some degree, work against us, meaning that developers and other capital constituents have either more access to capital at lower rates or the competition for deploying that capital gets a little bit more difficult. And so you've seen us do a little bit less on the DCP side. That said, you did see a guidance on Attachment 15. We did take up our guidance range for Developer Capital Program. I do want to point out, however, at this point, that is a speculative transaction, nothing has been signed. So there's no guarantees that gets to the finish line, nor any guarantees on the exact timing. But I do think it's important to note that, that is not a typical DCP deal for us, meaning it's more of a bridge loan with the ability to get access to the asset in about 12 months upon stabilization. So the yield we will receive on that if, in fact, we get that done is going to be decidedly lower than what we've done on other DCP deals. So just from a modeling standpoint, keep that in mind. Aside from that, yes, the cost of capital coming down and improving on both the debt and equity side clearly has allowed us to be more competitive and be out there with an external growth signal that we've received. And so we're still trying to make sure we make good deals. We don't pay beyond market, and every deal has a story to it, whether it's the target markets or the operational upside that go with it. So I wouldn't say it's given us just a free pass to go out there and be overly aggressive just because our cost of capital has come down. We still got to be disciplined on that front.

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Operator [12]

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Your next question comes from the line of Shirley Wu with Bank of America.

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Unidentified Analyst, [13]

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This is actually (inaudible) with Shirley. I was just wondering if you guys could give us a little bit more color on any of the rent regulations. So particularly on California, how is that going to impact? And what you are thinking about that new regulatory environment with the talks of Prop 10 2.0 coming back? Are you reconsidering your exposure to California at all?

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Jerry A. Davis, UDR, Inc. - President & COO [14]

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I'll start with the effect of maybe 1482. We went back and looked at it, and I think everybody's familiar with it. But it said for properties over 15 years old that renewal rates will be -- increases will be capped at 5% plus CPI. So when we went back and looked at the effect to next year, it's probably somewhere in that $250,000 to $350,000 range, which for our California portfolio would impact 2020 same-store revenue growth by, call it, 7 or 8 basis points. So not overly material. Well, can you repeat what your second question was?

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Unidentified Analyst, [15]

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We heard there is new talk about bringing Prop 10 back, so is that -- have you guys talked about it? Are you reconsidering exposure to California?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [16]

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Yes. (inaudible), it's Joe. Just from an overall portfolio standpoint, I think it's fair to assume that all markets are going to go through their micro cycles whether it's demand, supply or regulatory environments. So it's clearly going to be something that we take into effect when we think about transactions in California. We continue to believe that anything that restricts economic or rent growth or economic value creation is probably not the right solution to affordability. But it's a qualitative factor that plays into our process. It's one of the benefits of having the diversified portfolio that we do, that we don't end up overexposed to any 1 regulatory environment, gives Harry and team more degrees of freedom from which to transact over time. But I would say, it's not as simplistic and binary as blue states, bad; red states, good, given that there is a second derivative impact on capital flows and capital formation. So if capital does shift from, say, California to a red state or non-rent controlled state, you may see more development in those states and therefore, less rent growth. And so we're trying to factor all of those pieces together. But it's not quite as easy of a binary decision as some may think. So it's something we're contemplating and thinking about.

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Operator [17]

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The next question is from the line of Rich Hightower with Evercore.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [18]

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So Joe, I want to dig in a little bit to these -- the 2 big JV deals during the quarter. So it's pretty clear from a strategic and a financial perspective, why these are beneficial. Just maybe walk us through the genesis of the transactions unwinding one and significantly reducing the involvement of the other. Is there anything related to the partnership? Or to the timing of, sort of, a finite life, sort of, agreement. Just walk us through maybe some of those other elements as to why this happened at this moment in time?

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [19]

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Rich, this is Tom Toomey. Let me try to address those questions. With respect to the KFH, the JV had run 10 years, and KFH wanted to explore what the market value of it was. And we exposed the assets to the market. And as you can see over this year, 2 of them were sold and 1 of them we purchased. And on a net cash basis, not a lot of capital. And so I think it's not more complicated than that with KFH.

On Met, we're 10 years as partners, and we've done a lot of business with Met over the years. And it's a constant dialogue about how we create win-win situations whether at development, acquisition or swapping assets or selling them. And that dialogue started up probably late in 2018. And just takes time. No strategic rationale other than a constant dialogues with a good capital partner, and one that we hope will continue to do a lot of business with in the future, so very grateful for them as a partner. And think we've always done win-win transactions with them. And they think a lot about real estate the same way we do, long-term, operating business that creates a lot of wealth and value over time. So good group of people.

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Richard Allen Hightower, Evercore ISI Institutional Equities, Research Division - MD & Research Analyst [20]

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Okay. Yes, Tom, that's helpful. So there's nothing specifically related to, sort of, simplicity as a strategy for UDR in that sense? I mean there is an equal chance another round of JVs could form some point in the future. Is that what you're also hinting at there?

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [21]

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No, I am not hinting at anything. I am giving you kind of the facts as we see them with respect to our JV footprint and the future of it. I think JVs are always what problem are you trying to solve or what skill does someone bring to the enterprise or to the relationship that can help you grow UDR. And we've got a good cost of capital, we've got a growing capable enterprise, that has a lot of different ways to add value. If we felt that someone could help us enhance that, certainly, we would be back into a joint venture. Right now, don't see any needs, don't see any part of the organization that we would like to grow faster or more. So I think we're right now probably not overly engaged by joint venture activity as much as you can tell from the activity this year, got a lot of value-creation mechanisms in the enterprise. We're playing them all. They are all doing well. And really looking forward to 2020 and the continued growth of the ops platform.

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Operator [22]

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Our next call -- our line is -- from the line of Austin Wurschmidt with KeyBanc.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [23]

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Jerry, I guess with some of the softening in market rent growth hitting your markets and some new lease rates pulling back, have you guys pulled back at all on the SmartHome spend or revenue-enhancing Capex? And would you consider pulling back, I guess, next year because maybe the returns aren't as attractive today in light of some of the supply -- near-term supply headwinds?

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Jerry A. Davis, UDR, Inc. - President & COO [24]

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Yes, I guess, starting with the SmartHome spend. As we said, we're about 27,000 units in. And just to remind you, we're doing the SmartHomes for a few reasons. We're not doing it purely to get rent growth out of the residents. We do think they value it. We think it's part of what's helped drive our outsized renewal growth so far this year. But the primary purpose of doing it is some of the expense reduction capabilities it gives us. First of all, it has benefits on leak detection, it also makes our maintenance guys much more efficient. But one of the big things it does it sets up this operating platform that we're building to allow us to more actively and efficiently do self-guided tours, which we plan to roll out more through automation. This year, we've been doing self-guided tours, but it's been old-school, paper maps. We see throughout next year, it will get much more automated, and we think the ability for prospective residents to be able to access units through a SmartHome rather than through a hard physical key, is going to the beneficial. So while we underwrote it based on rents, there was plenty of extra juice on the expense side and what we expect to get on the operating platform that would enhance that. So I would tell you, we haven't finalized our budgets for next year of how many SmartHomes we will continue to add, but I would expect that you will see a continuation of the program into 2020.

As far as revenue-enhancing spend, which over the last couple of years has been at that $40 million range. Yes, we still think you get paid for that. On incremental dollars, it really isn't overly affected by market rents. We underwrite these things to get an IRR, that's at least 150 basis points of our WACC. There's a discipline to doing this. We look to do it in markets that show strength over the next 4 to 10 years, not just over the next year. So long term, looking at ways to increase the value of our real estate by deploying this capital. And I wouldn't expect next year for the total spend to change much.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [25]

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Great. And then Joe, just curious why include the speculative DCP investment in guidance today if conditions are more competitive. I think you referenced returns aren't quite as attractive. And why not just use that available dry powder to fund the transaction that you referenced that you have good line of sight on, that you intend to fund with kind of the forward equity?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [26]

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Yes. The transaction that I referenced in my opening remarks is, in fact, that DCP transaction. So the forward equity commitment that we made there of $64 million, we raised that with the intention and desire and hope that we get the transaction to the finish line on the DCP side. And that ultimately takes care of the majority of that funding in our capital plan. So those are one and the same, so don't consider the DCP as a speculative unknown transaction. It's known. We're working towards getting that papered. And hopefully, have something to talk about in the coming months.

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Operator [27]

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The next question is from the line of Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [28]

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Jerry, one of your peers spoke about piloting an amenity light model, is that something you would consider, particularly in the context of your recent commentary of renting out common area and some amenity spaces?

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Jerry A. Davis, UDR, Inc. - President & COO [29]

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Yes. I'll start and I'll let Harry or Tom jump in. We haven't talked definitively about any of this. But we have looked at what amenities do residents value, and we've actually gone out in the last year or 2 and look at our properties that we felt were somewhat over amenitized and we've been able to convert some of those amenities into apartment homes, at one of the Vitruvian Park assets, Savoye and Savoye2. We converted 3 common areas into 5 or 6 rentable units, and we do look for those types of opportunities. But I think at the high-end of the market, you do get paid for amenities, but I do think in some places people are just looking for a -- an inexpensive place to live. And there probably is a product that fits that. Harry, you can talk to whether you've really been looking at that for future development opportunities.

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Harry G. Alcock, UDR, Inc. - CIO & Senior VP [30]

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Yes. I think it -- I mean it really gets into, sort of, a return on investment type analysis, where whatever the customer will pay in rents is determined by the location of the product, the quality of the finishes and the quality of amenities. So when we look to buy an asset, when we look develop an asset or when we look to convert these types of amenity spaces into units, we're entirely rational in our approach. I think for certain assets, in certain locations, I think it's an interesting model, but again, we look at each asset on its own merits.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [31]

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Okay. That's fair. So I guess for those Vitruvian assets, this Savoye, what were you underwriting for those redevelopments?

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Jerry A. Davis, UDR, Inc. - President & COO [32]

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It's -- again, it's 5 or 6 units. And I think, we underwrote those at about a -- I think it was 7% to 8% return, cash on cash.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [33]

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And maybe, just a quick follow-up on that same -- similar subject. Under the current operating model, how would you characterize the resident perception to having the current space utilized by nonresidents. Has there been any complaints or disruptions? Or is it fair to say that you can continue to generate incremental income from renting out that space.

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Jerry A. Davis, UDR, Inc. - President & COO [34]

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I guess I'd start with saying, have there been any complaints? Yes, there have been a few. I think percentage-wise to the number of actual rentals we get on these third-party common area rentals, it's de minimis. We are very cognizant of the predominant use of those amenities is for residents. So we do not over book them. A lot of the bookings happen during the day for businesses, when most of our residents aren't at home. There probably have been a few times where we've over utilized a rooftop-type amenity or a large common area space. And we've heard back from the residents, and we've ratcheted back down. That being said, do you I think it can grow? Yes, I definitely do. I think it has a lot of prominence in urban areas. We've seen a high take rate on the West Coast. I think, it's migrating slowly to some of the East Coast markets. And I think over time, you'll probably see the West Coast grow at a moderate rate. And I would expect to see -- I mean the West Coast grow at a more moderate rate and probably, more of the growth on the common area rentals happen in the East Coast, as it becomes much more known in the marketplace, that you can come and rent those common area spaces from multifamily operators.

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Operator [35]

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The next question is from the line of Rob Stevenson with Janney Montgomery Scott.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [36]

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Jerry, the Dallas weakness, you alluded to the fact that's supply-driven. Is that weakness across basically all the submarkets? Or is it submarket specific? And how does it sort of trend by price point?

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Jerry A. Davis, UDR, Inc. - President & COO [37]

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I would tell you, it's obviously is not as weak at the lower price points. We have some old legacy assets in our Vitruvian Park location, that are doing well. Our product up in Legacy Village, though, Plano, is battling new supply, both in North Plano, but probably a little bit more in Frisco. So while there's good job growth up there, it's been going head-to-head on new supply.

You also have supply pressures that are 1 property down in uptown that's feeling it. Our newer assets that are in the Met JV in Vitruvian Park, they're doing better than that same-store average, but they're still also battling new supplies. So I would tell you, supply is -- tends to be occurring or being delivered up and down of the tollway. And our entire portfolio is up and down the tollway. So we may be feeling it more than some of our peers, but it's definitely more at the high-end, the B minus properties that we have in Addison, though, are doing much better than the A product. It's probably a couple -- several hundred basis point differential in the revenue growth.

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Robert Chapman Stevenson, Janney Montgomery Scott LLC, Research Division - MD, Head of Real Estate Research & Senior Research Analyst [38]

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Okay. And then, Joe, given all the capital raises, factoring in the MetLife settlements, the other obligations on this potentially new DCP deal you want to do. How much capital do you have available to invest today in properties, other DCP deals, et cetera, and stay comfortably within your target leverage levels without having to raise incremental equity? I mean, if Harry comes to you with a $500 million portfolio or $1 billion portfolio, do you have to issue equity for that at this point? Or where is that sort of threshold today for you after all of the capital raises and various other things that are said and done.

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [39]

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Yes. Thanks, Rob. Throughout the year, we've done a lot of activities to, kind of, incrementally improve the balance sheet in terms of expanding weighted average duration, continue to improve the 3-year liquidity profile where we have minimal debt maturities coming due in the next couple of years. And then trying to stay relatively stable on things like debt-to-EBIDTA, fixed charge, debt to enterprise, and all those have improved slightly relative to 2018 levels, keeping us at a very solid BBB plus. So we probably have a little bit of capacity today. And I wouldn't say nearly on the magnitude of, you referenced, even $0.5 billion. Yes, $100 million, $200 million, if we want to utilize it. But it's also good to have that for a rainy day and keep that capacity in the back pocket. So we'll continue to evaluate, do we want to utilize it for additional acquisitions, DCP, et cetera? Or do we utilize dispositions, free cash flow or equity. So we'll keep looking at it.

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Operator [40]

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

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [41]

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And so Jerry, on the margin expansion initiatives, looks like you can get controllable margin of 85-ish percentage in a couple of years. I'm curious, if there is any incremental, more or less, impact on the total margin in the, kind of, 70% range? Does that go up at a faster rate because of all this effort or a slower rate versus controllable?

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Jerry A. Davis, UDR, Inc. - President & COO [42]

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I think, it's probably going to go up at roughly the same rate. Maybe a little more elevated. But you're really doing -- taking effect to everything except for real estate taxes and insurance. So I guess, it would be slightly more elevated than it would we be on the controllable side.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [43]

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Okay. I'm just thinking about the math on the fly here. And then, maybe, for Joe, on the DCP side. And I was, kind of, going back and forth to Chris on this while we were talking. But have this $264 million of investment in the DCP program. I know you can't really have a pinpointed number, but what does that represent roughly? In terms if you were to take out everything and own it all 100%. What does $264 million mean in terms of incremental spend to get them all in-house?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [44]

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Yes. It's -- if we want to bring all of those in-house, you're looking at an asset value clearing $1 billion. We already have $260-plus million of that stack. If you think about what our typical leverage profile would be, the $260 million would be a portion of our equity stack. So you're probably looking at a $400 million or $500 million check. You also have participation on 3 of those transactions, which depending on if we buy or if we sell, either way we're going to participate in the upside on those. So the good thing is, though, we stack those up as a typical debt maturity profile. So some coming due '20, '21, '22, '23. So you don't have a whole series of decisions coming at you at one point in time by design. So that we aren't in a box, in terms of not having a cost of capital, but wanting to own all of those assets. So we'll make the decisions over time.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [45]

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Okay, if I could just...

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [46]

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I'd just add 1, thanks for hanging on for the hour and 10 minutes. Second part of that is, Clearly, anything that we would look at -- a 1031 option would be 1 avenue to pursue within in a marketplace. And in all of the DCPs have always been entered under the premise of an asset that we would like to own at the right price, at the right time. So it's a very good question. And I think, we'll play them out, as Joe has highlighted, they come due, every year, 1 or 2 deals. And we'll look at them at that time.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [47]

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Right. But is DCP -- DCP is your sort of development avenue of choice now, just looking at the disclosure, I guess, is that correct?

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [48]

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I don't know if it's over choice. I think we always look at the rainbow of complete opportunities. And you can see from the acquisition opportunities we took advantage of this year. They were clearly assets that we thought were next door, down the street, under managed, there was some value-add beyond just our current operating platform but the platform of the future or CapEx infusion that could right the ship.

I think as we look down the road towards development, we're going to stay disciplined about our underwriting aspects of that. It's been hard the last 3-plus years to make things pencil the right way, and you've seen it shrink. This quarter we announced one deal, we've been working on it for 3 years to get it to that point. Finally, the numbers came in, it's something that worked, and we announced it. I'm not sure that I could say, "Oh, development is going to expand or shrink", I think we just stay disciplined across all spectrums, whether it's DCP acquisitions or development. And the fact that we can do all 3, doesn't put us pressure to only grow 1 channel.

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Operator [49]

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The next question is from the line of Rich Hill from Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [50]

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Just taking a step back, high-level question for me. I'm thinking about some of the commentary you've said in the past about predictive analytics and focusing underserved markets. I was struck by how well Baltimore did in this quarter. But I'm wondering, if you could, maybe, just expound upon your predictive analytics and what that's telling you about what markets you should be in. And maybe, what markets you shouldn't been in?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [51]

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Yes. Thanks, Rich. Baltimore, obviously, is not a large market for us today. So not a high number of properties. So predictive analytics is really intended to drive decisions over the next 4 to 10 years, i.e., longer duration hold periods. So the fact that it's working this quarter, may not mean it works again next quarter. But what we'll try to do is be -- to some degree, deterring from the herd, in terms of following what the underlying demographics and economic drivers are telling us, relative to rents or affordability in those markets. Plenty of markets tend to get overheated and capital tends to follow that excitement. We're trying to go a little bit of a different route with that and go more contrarian. And that you've seen in through our actions. Baltimore being an example. We've been active there. Active in Philly, New York, very active up in Boston and down in Tampa. So some markets that you probably don't see a lot of the private and public capital flowing into as aggressively. Now we also like Southern California, though, so it's not purely an East Coast bias that we're looking. But hopefully, that gives us a little bit of a leg up in addition to the transaction team that really has to find the right submarkets and assets and the operation team, that once given the asset, can outperform with everything they're doing on the initiatives and platform side.

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Operator [52]

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Next question is from the line of Hardik Goel from Zelman & Associates.

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Hardik Goel, Zelman & Associates LLC - VP of Research [53]

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I have a more general, like operations-based question, I guess. We've seen turnover go down year-over-year for a while now, I think, it's been a trend of cycle pretty much. But you have the turnover basically stable this quarter. You think that's just an aberration or it's just a shift in trend? Obviously, overall, on the LTM basis, it's still very low. But just wondering, how you see that change? Or are you seeing something in the market that is different from the rest of this cycle.

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Jerry A. Davis, UDR, Inc. - President & COO [54]

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Yes. I don't think we're seeing anything different. I think what you're seeing with all this -- seeing turnover go down, it's a few things: one, I think all of the REIT peers are listening to the resident better, doing a better job on customer service and resident ratings.

Second, I think you've seen predominately rational pricing of lease-ups over the last couple of years. So it's not enticing people to leave multifamily and jump ship for 2 months free.

One thing that makes us a bit different than the peers is we've got this short-term furnished rental program that has grown quite a bit year-over-year. And this year, it's up about 50%. So if you backed the effect of short-term furnished rental move-outs and these things usually stay occupied for 80-or-so days, so it elevates your turnover rate. But if you backed it out of both years, we would've been actually down 60 basis points.

And then, I guess, third point, when people say, "how low it can go?", and I think part of is what level of renewal increase are you going to send out. And I think, when you look at the renewals we've been sending out in 2Q and 3Q, both north of 5%. We look to maximize revenue, we're doing that while still maintaining in occupancy at that 96.9% level, which was 10 bps higher than it was last year's third quarter. So I think, you got to look at it at the entire revenue stream and not just what's turnover? What's rate growth? And we try to balance all of those factors.

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [55]

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Hardik, this is Toomey. Just to add a couple of things that come to mind for me. I mean, I look at the last decade, and our average resident has gone from 28 years of age to 38. People in their 30s, 40s not inclined to just move at a high turnover rate, they're pretty established and staid. Second, you look at their income level, and third, I think about the product that we're offering them and the variety of amenities, lifestyle, service levels that have grown over the last decade. And I think, that combination of just a better place to live, a stage in life and higher service level has combined to drive that number down. And I don't see a particular reason why I would see it revert back to the norm or the past, if you will. So I think, we're just doing a better job and we've got demographics and our customer on our side.

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Hardik Goel, Zelman & Associates LLC - VP of Research [56]

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That's a really thoughtful response. Jerry, just one quick follow-up. You mentioned excluding furnished housing, it's down 50 basis points. What percentage of the leases that turned or what percentage of turnover is furnished housing, just to have a rough sense?

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [57]

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Why don't you get back to him?

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Jerry A. Davis, UDR, Inc. - President & COO [58]

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Yes. Let me get back to you on that. I don't have that at the -- I don't want to make a guess. We'll get back to you with a number.

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Operator [59]

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Our next question comes from the line of Drew Babin with Robert W. Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [60]

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I wanted to touch on the acquisitions during the quarter briefly. I think it was mentioned that there's some CapEx opportunity or some under management at these properties. I'm just curious, so like the Windsor Gardens one is 50 years old, obviously, the CapEx probably part of that story. Do those amounts, in the release, include the potential CapEx going into them to get the yields that were discussed? Or I think, just to get a general sense might be helpful, if you elaborate on how you view those acquisitions from a core value-add standpoint, kind of, what the unique opportunity is?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [61]

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Drew, this is Joe. I'll take it really quick, and then kick it over to Jerry and Harry to talk about a little bit more about the dynamics of the transactions. But the number referenced in the release on Attachment 13 and within our guidance are not inclusive of any initial capital expenditure budgets that we intend to put in place over the next year to 2, to improve properties or K&Bs or SmartHomes or anything of that nature. So you'll see that spend come through over time. What you see on there, on the Attachment 13, is just simply the price that we paid for that acquisition.

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Jerry A. Davis, UDR, Inc. - President & COO [62]

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And I guess, I'll give you a little bit of insight on the comments at Windsor Gardens, Drew. First, it's a 30-minute train ride into Boston's Back Bay, and the train stop is on our property. Rents are 50% or less of what Boston rents are. So it's a good price point for a short commute.

On the CapEx spend, there are about 200 of the 914 units that have never had their interiors renovated meaning that it has original kitchens and maps. We see opportunity to invest some money in those and get a rent increase, somewhere in the $250 to $350 range. The property has not been submetered. So we are going through the process of scoping that out and ideally, we'll get submeters installed over the next several months and be able to start recouping some of the cost of our water sewer utilities. We expect to put SmartHomes into this property, which will make it much more efficient to manage, plus give the property more of an update. And then we're going to spend some money just getting some of the systems back up to speed and upgraded so that the R&M spend that's been occurring over the last 5 to 10 years is reduced.

After you do that, I think, the entire UDR operating platform that you've heard us talk quite a bit about, fits perfectly with a property like this. It's at a good size at 900 units to probably gain even more efficiency than we would on a typical 300 unit deal. So this one definitely has some capital upgrades and then on the operating side, we think there's a lot of pricing opportunities where the prior owner did not give any locational premiums. So being close to the train versus being a 15-minute walk from the train stop, price was the same. No pricing difference between being on the third floor and the first floor or near the amenity buildings. So I think, there's a lot we can also accomplish there. Currently, there is no charges for parking spaces there and as you know over the last several years, we've been able to implement that and see good growth. So a lot of things we've done over the last 5 years, I think, we'll be able to lay over onto this property then I think, again, when you look at the operating platform as it gets rolled out throughout UDR over the next couple of years Windsor Gardens will participate in that also.

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Harry G. Alcock, UDR, Inc. - CIO & Senior VP [63]

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And Drew this is Harry. I guess, I'll just layer on and I'll probably step back from the more macro standpoint. As we talked about, most of our acquisitions this year have had some sort of a operational or an capital upside. I think Joe mentioned that the first year cap rate for this year's portfolio of acquisitions is somewhere around 4.9%. However, year 2, it's 7.5% or 8% higher than that. We're talking about something around 5.25% to 5.30%. Then the third year is, incrementally, better than that as the, sort of, operational platform initiatives and the capital spend starts to manifest itself in the yield.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [64]

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That's great detail. And just one follow-on for Jerry. As you look at the MetLife assets that are being bought in wholly-owned, I presume that your ability to asset manage those increases with the full ownership. And I guess, what would you find, kind of, most opportune or most exciting about being able to, kind of, fully control those assets and get in there and apply the strength of the platform?

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Jerry A. Davis, UDR, Inc. - President & COO [65]

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I think some of it is going to be in a revenue-enhancing CapEx spend, several of these assets are hitting that 10 to 12 years old level. And we think a refresh will help them better compete against new supply and on that incremental spend, we still think we can get return in excess of our WACC. So I think that's one of the components. I think some of these properties are very proximate to existing UDR product. For example, the one in Tolson is directly across the street from a wholly-owned property. And to be able to manage those somewhat together and share staffing and other cost, I think will make both properties more efficient. Some of the other things we've done historically, whether it's common area rentals or short-term furnished, I think, given more leeway, we may be able to garner more benefit there too. So I think, it's a little bit on the capital side, a little bit on the operational side and with initiatives and some on the efficiencies sharing team members.

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Operator [66]

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Our next question is from the line of Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [67]

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I'll be quick because it has been a long call. So 2 quick ones. First for Joe. The ESG bonds that you referenced before, did you guys get any pricing advantage with those? Or is it more to sort of check the box for marketing purposes, to have, sort of, an ESG issuance out there?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [68]

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It's hard to tell, whether or not we've got an explicit pricing advantage. I will say when you look at the composition of the investors on that offering, about 25% of them did come in from an ESG-focused fund. And so having, obviously, a bigger order book helps drive pricing at the end of the day. So I'd like to believe that there was some benefit, although it's very hard to quantify what is actually the benefit is.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [69]

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Okay. And then the second one is for Jerry. On the mobile initiatives -- the self-help initiatives that you guys are rolling out. Do you think that you'll still be able to get, sort of, the rent premiums that you expect for your properties? Or as Avalon noted on their call, there may be properties where you get a lower rent but the trade-off is that you have less operating expense, in net, you're better?

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Jerry A. Davis, UDR, Inc. - President & COO [70]

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I will tell you the things we're doing it's more on the service side, it's not that we're taking away an amenity. So we believe our residents prefer self-service, I think it's enhanced service. When you look at what we've done so far this year, and I mentioned in my prepared remarks. You look at our repairs and maintenance and personnel cost combined, year-over-year growth was slightly negative. It should be growing probably at least 3%. So a lot of people will say, wow, that's a reduction in service. That was just a reallocation of how we provide service, and it was predominantly done through outsourcing and centralization. At the same time, as we drove those costs down, our NPS scores went up 10% to 34%. Our -- as we noted earlier, our turnover, if you back out the effect of short-term furnished rentals was down 60 basis points. We're running at 96.9%, which is 10 basis points higher than last year. And I think, you look at the revenue growth that we put up at 3.7%, it's sector leading. So I think, when you factor all of those in, it's clear that when we're doing this, the intention is to improve customer service, not take it down, but to make a more efficiently run organization through this, either through outsourcing and centralization or automation. So our intent is, it will not be a reduction in service and it will not drive rents lower.

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Operator [71]

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

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [72]

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A couple of years ago, the Bay Area saw some significant supply that caused market rents to go down quickly, pretty significantly. I'm just wondering, kind of, alluding to your supply comments, I think San Jose has a fair amount of supply coming. Are you doing certain things to, sort of, get ahead of that in terms of increasing occupancy, anything with rents to, sort of, derisk that as the supply rolls into those markets?

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Jerry A. Davis, UDR, Inc. - President & COO [73]

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Neil, this is Jerry. I wouldn't say we're doing things explicit on the pricing side. I mean, we definitely believe, at this time in the cycle, we want to keep occupancy high. So we're not being excessively aggressive, pushing the occupancy down. So we are in occupancy-first mode today. I think you're right, several years ago, San Francisco is -- or the Bay Area supply came in hard, whether it was down in San Jose, Santa Clara, or in Soma, it did heavily impact market rates as concessionary levels, got elevated. We're not seeing quite as much of a concessionary effect today, we are seeing supply come as we look at supply next year, it is going to come down and affect San Jose, it's also going to affect Mountain View, a little bit more than it did this year. But I think, it's predominantly back half of this year and first half of next year loaded. I think, when you look at our job growth that's happening, especially in that Soma as well as Mission Bay area, I think, it should absorb fairly well. And I think, when you look at what new lease rate growth is today a lot of that is based on how strong the market was a year ago because there was limited supply coming in. And there was great job growth. So I don't see it quite being or being what it was several years ago. I just think we're having to work our way through some supply pressures over the next 9 to 12 months. But on the demand side, I think things still looks strong.

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Harry G. Alcock, UDR, Inc. - CIO & Senior VP [74]

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This is Toomey. I would add a little bit to that. I think one thing Mike and Jerry are always focused on is the concessionary level in the marketplace. Because at 1 month, free rent, on a lease-up, it generally gets the new customer in the marketplace and doesn't impact our renewal environment. And you can see that in the numbers today and you heard it in our commentary earlier. And now you alluded to San Francisco, and as I recall that market went from 2 months to 3 months free rent. And that really upsets the cart on the renewal process, and we lose a lot of pricing power that side of the equation. So as long as we're a 1-month free, kind of, concessionary market and that's what we anticipate is coming at us in some of these markets. I think our revenue streams will hold up pretty strong because of the low turnover. And we're not enticing that long-term resident to just move out. So the 1 thing I wish the sell side would track more of is the concessionary market because it's probably a precursor to real pricing power or pricing exposure.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [75]

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Yes, that's helpful. I appreciate that, Tom. Other one for me is that I was reading that you guys are participating in a program called Rhino or a service called Rhino. It's basically to forgo security deposit fee, the tenant would pay for some sort of insurance program. Is that something that has been successful? Are you planning in rolling that out more? And any color on that would be helpful.

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Jerry A. Davis, UDR, Inc. - President & COO [76]

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Yes. This is Jerry. I will tell you, we're talking to Rhino, we have not engaged. We think their product may have legs. It's something that we're trying to compare with some programs that have some similarities that we've used in the past and we're trying to get more comfortable, that some of the negatives of the prior program don't replicate themselves, but something we're looking at. I think any time you can look at opportunities that can help your resident which this product seems like it could because it's less cash upfront to move into an apartment. And protect us on the collection side. If it's a win-win, just like a lot of initiatives we rolled out in the past, we would probably be in favor of it but we're still in the exploration stage, have not piloted it -- any of it yet. But it's something we're looking at.

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Operator [77]

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

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [78]

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So it's 1 hour and 10 minutes into this call -- I'm just kidding. First question for me is on the margin, I guess I'm just curious. I don't know if you've talked about it before, but what type of margin improvement or expansion do you think you can generate on the assets you're buying in from MetLife, now that you completely own and control them, ball park-ish?

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Jerry A. Davis, UDR, Inc. - President & COO [79]

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When you look at those, it's probably a couple -- it's a 100, 150 basis points, most likely, higher than we're at. We've looked at it more on the next couple of years, so we haven't gotten excessively specific. There are multiple programs that we had on the cost structure that we had already rolled into to the UDR wholly-owned platform, previously. And then addition to that, when you look at what we've indicated we expect to get from the next-gen operating platform of a 150 to 200 basis points, I think you could get a little bit more juice out of those. And then the second part is on some of this CapEx spend we're going to have, we should be able to drive revenue up. Probably we've looked at it more on a return basis, but I don't have the exact margin expansion off the top of my head.

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [80]

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But Haendel -- this is Toomey. What I would add is, you look at the acquisitions that we've done, in particular, the Boston one where we might look at it today, and we think somewhere 600, 700 basis point expansions when that's fully implemented and the ops platform is available. And so the key is, it's not going to be what we can do to our portfolio, well excuse me, it is going to be a key, but what we can do with the potential acquisitions from private market operators who won't have the platform or the technology. And then that leads to a real lift in our growth rate, when we can buy at market or below market. And then overlay the platform on top of it and get that type of margin expansion. So the story is not just what we can do to ours. But what we can do to the industry and the potential that it leads to.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [81]

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Helpful, Tom. And while I have you, I guess, I understand you made some long-term investment decisions that your -- and also that your market predictive model also helps you make capital or portfolio strategy decisions over a longer term period. But I want to go back to Dallas, once again. 3.5% of your NOI. The market that just seems to have been a regular underperformer here the last couple-plus years. And so I understand, supply in up town, some of the challenges [who had been established]. But I guess, I'm curious, if you are or should you be considering culling your exposure there? Or are you pretty happy in playing the long, long-term game?

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [82]

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I think, Haendel, overall, we're fairly happy with the portfolio there. Obviously, we increased it within the MetLife JV. And so I'd say, 2/3 of the MetLife JV that we acquired, we feel very good about. And assets that we let go, were not necessarily in target markets. So net-net, we came out ahead in terms of target markets.

The good thing we get with control of Vitruvian in addition to everything Jerry said from existing operations is, if you look at the Vitruvian West one and the lease-up and the yield that took place there, relatively quickly, it's up for 400 units and a yield in the mid-6s. We're in Vitruvian West 2 right now, and 3 will be on the docket next. Those would be 6-plus percent yields. So getting access to land that allows us to go out there and accretively develop is one of the things we liked about the value creation, the access to Vitruvian within that transaction.

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Operator [83]

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

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [84]

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Well, thank you. And first, let me thank all of you for your time and interest in UDR. Second, you -- as you heard throughout the call today, during 2019, the team has executed on all aspects of our value creation capabilities, which I think will set up 2020 for continued strong NOI growth and cash flow growth.

And again, lastly, these results are really achieved through the efforts of our exceptional associates and their continued effort every day as well as our culture of constantly trying to find a way to do it better, every day.

So with that, we look forward to seeing many of you at NAREIT in a couple of weeks. Take care.

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Operator [85]

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This concludes today's conference. You may disconnect your lines at this time, thank you for your participation.