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Edited Transcript of UDR earnings conference call or presentation 31-Jul-19 5:00pm GMT

Q2 2019 UDR Inc Earnings Call

Highland Ranch Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of UDR Inc earnings conference call or presentation Wednesday, July 31, 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

* 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

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Hardik Goel

Zelman & Associates LLC - VP of Research

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Lauren Renee Weston

Morgan Stanley, Research Division - Research Associate

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Richard Allen Hightower

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

* Trent Nathan Trujillo

Scotiabank Global Banking and Markets, Research Division - Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Greetings, and welcome to UDR's Second Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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Christopher G. Van Ens, UDR, Inc. - VP [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 have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with the 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 Second 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 strong second quarter results highlighted by same-store NOI growth of 4.2% and FFO as adjusted per share growth of 6.3%, continue to demonstrate UDR's value-creation potential as well as execution of our primary strategic objectives. These remain, first, ensuring continued operational excellence through strong blocking and tackling and innovation, such as the implementation of our next-generation operating platform to further boost our operating margin.

Second, maintaining a diversified portfolio to mitigate risk and provide more degrees of freedom to utilize our best-in-class operating platform and adaptive capital allocation platform.

Third, driving cash flow growth through accretive and disciplined capital sourcing and deployment.

Fourth, maintaining a liquid investment-grade balance sheet.

And fifth, promoting a culture of empowerment and innovation.

Continuous execution of these objectives has made UDR a full-cycle investment and over the past 3 years, has resulted in the second highest FFO as adjusted per share growth rate in the group, outpacing our peer average by 100 basis points per year. This is a tremendous result for a highly diversified company.

Moving on, we are now 7 months into the year, with good visibility through the remainder of the peak leasing season. As such, we have raised our same-store revenue and NOI growth guidance ranges by 20 and 37.5 basis points at the midpoint, and our FFO as adjusted per share guidance range by $0.015 at the midpoint. Joe will provide more details in his prepared remarks.

Looking ahead over the next 18 months, we feel good about where we are positioned, assuming the continuation of the stable economic and demand-supply environment. For UDR specifically, we will continue to ring efficiencies out of our cost structure through our next-generation operating platform and our 2019 acquisitions and our investment activities will be accretive to 2020. Jerry and Joe will provide additional color in their remarks.

Next, we continue to find opportunities to match fund equities source at a premium to NAV, with acquisitions that are in target markets and have significant near-term operational upside.

During the second and third quarter, we raised $120 million of equity through our ATM, which is earmarked for acquisitions and we further simplify the company through the liquidation of the KFH joint venture.

We remain disciplined in our capital raising, choosing to wait until investment opportunities are in hand, rather than speculative dilute our shareholders. Joe will take you through our thought process, capital uses, recent debt offerings in more detail during his prepared remarks.

Last, we recently published our inaugural corporate responsibility report and launched an ESG website on udr.com. These resources will help our stakeholders better understand what UDR has done, is doing and plans to accomplish with regards to these important topics.

We are constantly striving to improve all aspects of our business and would welcome any feedback stakeholders may have on this front.

With that, the senior management team would like to extend a special thank you to all UDR associates for your continued hard work.

I will now turn the call over 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 same-store revenue, expense and NOI growth of 3.7%, 2.3% and 4.2%, respectively.

For revenues, blended lease rates grew by 4.4% during the quarter or 60 basis points above last year's comparable period and consistent with the first quarter spread and our expectations. We are forecasting a similar year-over-year spread throughout the back half of the year.

Quarterly occupancy was strong at 96.9% and is forecast to remain in the high 96% range for the remainder of 2019. And other income grew 11.5% year-over-year. This rate was above what we had forecast entering the quarter, but comps do toughen as we move through the back half of 2019.

In short, blended lease rate growth in occupancy have been, as expected, thus far. Whereas, other income growth has outperformed. This outperformance in combination with our expectation for stable apartment fundamentals throughout the remainder of 2019, drove the 20 basis point increase in our full year same-store revenue growth guidance range, which is now 3.4% to 4.0% and near the top end of the sector.

At the market level, San Francisco, Seattle and Austin, which represent 24% of our same-store NOI, marginally outperformed our initial expectations, with average revenue growth of 5.7% in the second quarter. This was a result of increased demand for our apartments which drove occupancy as well as above-average contributions from other income items, such as parking, short-term furnished rentals and rentals of common area spaces.

Conversely, Orange County and Florida, which comprise 22% of our same-store NOI, has slightly underperformed our initial expectations, with average revenue growth of 3.3% due to weaker demand and/or competitive supply. All other markets are performing more or less in line with our initial expectations coming into the year.

Moving on, the implementation and execution of our next-generation operating platform is dropping an increasing number of dollars to our bottom line, evidenced by the 50 basis point year-over-year expansion in our same-store controllable margin and same-store controllable expense growth of only 0.4% during the second quarter.

To be clear, the initiatives associated with our next-generation operating platform, which include process improvement, the centralization of administrative noncustomer-facing tasks, outsourcing certain functions, the installations of SmartHome Tech, the development of enhanced smart device self-service options, and the better utilization of big data, do not just provide bolt-on incremental upside, they are fundamentally changing how we operate the business and interact with our customers. The significance of this change is best captured by examining the inverse growth rates of our personnel and repairs and maintenance cost.

Over the past year, our outsourcing and centralization initiatives have resulted in personnel cost declining by 9%, or $1.4 million, with repair and maintenance cost increasing by 16%, or $1.4 million. Combined, these controllable expense line items, which comprise 35% of our expense stack produced flat year-over-year growth during the quarter. They should be increasing at a rate at least in line with or above inflation given the strong wage growth in our markets, which was near 4% over the past year according to the BLS, theoretically saving us over $800,000 during the quarter.

Over the next 3 to 4 years, we expect our next-generation operating platform to dramatically improve efficiencies throughout our expense structure, drive customer satisfaction higher and increase employee engagement, which should ultimately result in 150 to 200 basis points of expansion in our same-store controllable margin. This translates into approximately $15 million to $20 million of incremental run rate NOI, based on annualized second quarter results. By the end of 2019, we will have captured about 20% to 25% of this upside.

With regard to other aspects in the platform, we made significant progress installing SmartHome Technologies during the quarter and after quarter end. To date, we have completed 19,000 homes. By year-end, we expect to finish 25,000 to 30,000 homes and be beta testing our smart device app that will enable mobile self-touring and provide our residents with an enhanced suite of self-service options to more efficiently connect with us.

For noncontrollable expenses, real estate taxes increased by 4.7%. Year-to-date growth has been 4%, but we are still forecasting full year growth in the 5% to 6% range for this category.

In total, we are lowering our same-store expense growth guidance by 50 basis points at the midpoint to 2.5% to 3%, in reaction to both the positive results from our operating platform efficiencies as well as more favorable real estate tax appeals and levy rates.

Altogether, our operations and the demand-supply environments for our apartments feels good and drove the 37.5 basis point increase in our full year same-store NOI growth guidance range, which is now 3.75% to 4.5%.

Next, an update on New York rent regulation. After evaluating each lease in our New York portfolio, the impact of rent regulation legislation and recent court rulings is relatively immaterial to UDR. To frame this, we are forecasting that the changes will negatively impact 2019 NOI by $300,000 to $500,000 and 2020 NOI by $500,000 to $1 million. These estimates do not include potentially lower real estate taxes or any positive impact to market rate rent growth. They do incorporate the impact on our 421-a homes due to the housing stability and Tenant Protection Act of 2019, and our 421-g homes at 10 Hanover and 95 Wall in downtown Manhattan due to the latter June ruling by the New York Court of Appeals that disallowed luxury deregulation. After incorporating this recent court ruling, approximately 40% of our pro rata New York homes are market rate. This jumps to near 50% of homes by midyear 2020 and as abatements burn off, and over 70% by midyear 2023.

In closing, I would like to thank all of our associates in the field and at corporate for producing another strong quarter of operational growth.

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

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

Next, our full year guidance update. We raised our full year FFO's adjusted guidance range by $0.015 at the midpoint to $2.05 to $2.08. NAREIT, FFO, and AFFO per share expectations were also increased.

Of the $0.015 increase at the midpoint, improved operations, year-to-date transactions combined with equity issuances and lower interest expense due to lower LIBOR and rates on year-to-date debt issuances, each contributed the $0.005. A full guidance update, including sources and uses expectations, the same-store updates Jerry referenced, and third quarter guidance ranges is available on Attachment 15 of our supplement.

Moving on to transactions and capital markets. We remain disciplined in our capital sourcing and flexible with its deployment, continuing to pivot to the best-available risk-adjusted return opportunities that can be accretively funded.

During the quarter, we acquired 4 apartment communities located in Towson, Maryland, King of Prussia, Pennsylvania, St. Petersburg, Florida and Waltham, Massachusetts, for $328 million at a weighted average year 1 NOI yield near 5% and moving to the mid-5s in year 2. These brought our year-to-date acquisition activity to $731 million, including land for future development. These purchases are in target markets, have significant operational upside and utilized the leverage adjusted buying power of the $492 million of equity we issued at an average 2% premium to consensus NAV last December and during the first quarter.

Throughout the second quarter, our equity cost of capital remained advantageous, but as Tom indicated in his prepared remarks, we remain disciplined with regard to our sourcing, only choosing to return to the market via our ATM program late in the quarter and early in July, once we had an identified accretive use. As such, we issued approximately 2.6 million shares at a weighted average 7% premium to consensus NAV for net proceeds of $120 million. We believe this match funding approach which limits the risk of speculated dilution to our earnings stream best serves our investors. Uses of the most recent ATM proceeds include the pending acquisitions of 1 William, located in Englewood, New Jersey for $84 million, and 1301 Thomas Circle out of our KFH joint venture in Washington, D.C. and an all-in valuation of $184 million. Both are expected to close in the third quarter, subject to customary closing conditions.

Closing out this topic, our year-to-date acquisitions are NAV-accretive, have IRRs that exceeded our weighted average cost of capital and will be accretive to our FFOA per share growth rate in 2020 and beyond. In addition, all were funded with accretive capital, are in target markets identified by our predictive analytics work, have meaningful operating upside by improving core ops and implementing legacy other income initiatives and fit well with the next-generation of our operating platform.

On the disposition front, we continue to make progress liquidating our 3 communities KFH joint venture. One of the JVs communities was sold to a third party during the second quarter, with another sold subsequent to quarter end.

As indicated earlier in my remarks, we are under contract to purchase the 70% of 1301 Thomas Circle we did not previously own. At completion, the joint venture will have been fully liquidated. Please see our second quarter press release and supplement for further details on our transactional and capital markets activity.

Moving on. Our Developer Capital Program investment, inclusive of accrued preferred return stood at $244 million at quarter end. We previously announced the $27 million commitment to Modera Lake Merritt located in Oakland, California on our first quarter call and continue to look for new opportunities to deploy capital, should they meet our investment criteria.

Next, balance sheet. The $300 million of 10-year unsecured debt we issued in late June, settled subsequent to quarter end. The issuance had an all-in effective rate of 3.46% after accounting for previous hedging activities. Uses of proceeds include the pay down of short-term debt, including our commercial paper facility and for general corporate purposes.

At quarter end, our liquidity, as measured by cash and credit facility capacity, net as a commercial paper balance was $750 million prior to accounting for our recent $300 million unsecured debt issuance.

Our consolidated financial leverage was 32.1% on an undepreciated book value and 25.8% on enterprise value, inclusive of joint ventures. Our consolidated net debt to EBITDA ROE was 5.4x and inclusive of joint ventures was 5.9x. 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) Our first question today comes 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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Let's turn on the next-generation operating platform. It looks like spend for 2019 in guidance was up about $10 million. I wonder if you can walk through that, is it an acceleration of spend, the change in the scope or something else?

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

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Yes. Nick, this is Jerry. The extra $10 million is just -- we're going to go forward with more SmartHome installations than we had originally planned this year, the first 19,000 have gone well, we're seeing the benefits to the platform in the resident adoption. We made the decision to keep the pipeline going with the vendor, and we've added an additional 10,000-or-so units.

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

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Excellent. Appreciate the margin comments in terms of leading the longer-term opportunity with the platform. But how scalable is that platform? Or how many homes could it support ultimately without adding incremental expenses meaningfully.

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Jerry A. Davis, UDR, Inc. - President & COO [5]

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Really, most of those benefits occur out in the field. So there's just a few positions that'll be added later next year or into early 2021 on an inside sales team. They will only be needed to support some of the functions from here. So I'd tell you, it's really on a property-by-property basis. So it's fully scalable.

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Operator [6]

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Our next question comes from the line of Trent Trujillo with Scotiabank.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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So Joe, your work and the team's work around predictive analytics indicated that New York was an attractive market and perhaps the preferred market for investment. Has the recent rent regulation altered this view at all?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [8]

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Yes. No, it really hasn't. You saw our subsequent activity that we disclosed there in Englewood, New Jersey, which we consider part of the New York MSA. So I think that gives you a signal that we are still interested in New York. That predictive work, of course, kind of leads us in the right direction that kind of go against the herd or against the group a little bit. But then it's still up to all the qualitative assessments and analysis that we do with the group here and with the group in the field to determine, is it the right market, is it the right submarket. So rent control overall, I think, you've heard others make comments on it. We would comment the same thing that it probably does impede future capital and future supply on the rent-stabilized side in terms of competing supply out there. So there is a possibility we think that the market rate units that are in existing portfolio and in this New Jersey deal stand a benefit over time. So overall, doesn't necessarily change the view of the overall market, probably makes us a little bit more positive on our market rate exposure.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Appreciate those comments. And then Jerry, it seems like you started to shift focus on rate increases as opposed to focusing explicitly on occupancy. So given where the portfolio stands and what you achieved on the increase side -- so far this year, I think, it's a 60 basis points gap year-over-year. How much incremental rate growth are you looking to achieve to set up the earn in for 2020? I think you mentioned previously there was about an upside of 70 basis points. Just wondering if that might still hold?

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Jerry A. Davis, UDR, Inc. - President & COO [10]

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Yes, it could. But it's probably comparable to what we've done in the first half. We pushed rate heavily in the beginning part of the second quarter. And we had some resistance as you probably noticed, our turnover ticked up 100 basis points, part of that was because of short-term furnished rentals, which are up 100% year-over-year. But even after backing out the effective short-term furnished from both periods, turnover is still up 40 bps. So we gave it a push in April and May, felt some resistance, lost a little bit of occupancy early June and we built it back up. So we're cognizant that we'd like to run in that high 96% range. So you may see us temper down that rate growth to maintain that occupancy, but I still think it's comparable to what we've done in the first half and probably won't grow.

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Trent Nathan Trujillo, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Okay. And maybe just a quick follow-up to that. You mentioned or you touched on turnover ticking up. Are you explicitly managing that or is it basically an output of the revenue management approach that you're taking? Because if turnover does play into your approach, it does affect the cost control in terms of cost on turns. So just wondering if you have thoughts on that?

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Jerry A. Davis, UDR, Inc. - President & COO [12]

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Yes. I think it is in the -- you do put in target occupancy levels into the rent optimization system. So we've got to sit where we like to be. But at times, when you push a little heavier on renewal rate growth, which we did early in the second quarter, you'll end up with higher levels of move outs. So that's when we'll altar really the amount we send out on renewals. Because you can always take a recommendation from the system then add a few, 10, 20, 30 basis points to it to try to get that incremental growth to see where that sweet spot is. And that's what we attempted to do. But again, we've let the system kind of come back to the natural pricing on renewals to keep that turnover more flat.

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Operator [13]

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The next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [14]

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So is it fair to say, Jerry, that the higher turnover on the short-term rentals you reference and otherwise is what's really resulting in the pause in acceleration in same-store revenue growth despite the fact that you're getting positive blended lease rate spreads, you had a sequential uptick in occupancy, but we've seen now 2 quarters in a row where same-store revenue growth has been virtually flat. Is that the factors that's driving that?

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Jerry A. Davis, UDR, Inc. - President & COO [15]

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Yes, I think so. We're getting no contribution, as you said, from occupancy. We have been getting good contribution from other income, which grew to 11%, but we expect that to moderate down to high single digits as you get into the second half of this year. And the blended rate growth, while it's been up, you're still getting rent growth that goes back over the last 4 quarters. So that's how it gets built up.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [16]

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Got it. So are you assuming that turnover continues to tick up in the back half of the year?

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Jerry A. Davis, UDR, Inc. - President & COO [17]

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No. I think it's going to the comparable from what we see right now to what it was last year. So kind of flat.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [18]

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Okay. And then just on the acquisitions, could you provide what the average pulling in cap rate is for the acquisitions you've completed and have announced? And then what you expect in year 2 or 3 on those? Or what the FFO upside, I guess would be the other way to look at it in year 1 versus 2 to 3 years out?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [19]

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Yes. Austin, it's Joe. So typically, when we've gotten out there, we try to make sure that we can acquire assets that can improve both near-term cash flow growth as well as FFO accretion and then produce a better IRR relative to WACC. So we're trying to check a number of boxes. But when you look at the ingoing cap rate of this current group that we've announced, it's high 4s. And over the next 12 months, by year 2, we think we'll be in 5.25% range. You do have a pretty wide range within that. We talked last quarter a little about Rodgers Forge, one of the deals that we're very excited about that, we think we have the opportunity to take it to a 6% yield by year 2. So some of them have a little bit more opportunity than others, but all of them fit well with the target market strategy, the existing operating platform and then that next-generation operating platform. So we think overall, we're getting pretty outsized growth relative to market assumptions.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [20]

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And is that upside generated just from implementing the next-gen ops? Or also include market rent growth assumptions as well?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [21]

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Yes. There's going to be market rent assumptions as a baseline expectation. But on top of that, there's a lot of things that Jerry and his team do exceptionally well on the core blocking and tackling side, whether that be managing LEMs, putting in place the other income, controlling expenses, et cetera, which is part of the core business, if you will. And then you have the next-generation operating platform that we talk about as well, which is additional juice and returns above and beyond that amount. So you have all those kind of compounded to drive that growth.

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Operator [22]

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Our 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 [23]

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My questions on turnover have been adequately answered, so I'm just going to stick to one here. So just in terms of acquisitions for the year-to-date period, I know that Thomas Circle is a particular situation given that it was in a joint venture and there's a history there. But is there any sort of theme as to sort of the more suburban tilt from what's been acquired more recently outside of that? I'm not familiar with the St. Petersburg asset, but I don't know if you call that suburban or not. Anything to kind of pick up on that?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [24]

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No. I don't think so. It's very asset-specific in terms of the opportunities. Overall, we want to maintain that 50-50 urban-suburban A/B mix. A lot of our development in recent years has been more urban high-rise Class A type of product. So this does help us balance it out. So when you do go through that, as you mentioned 1301 Thomas, which is more urban, the 2 New York area acquisitions, I would say, are more urban in nature. You mentioned the preserve or the current -- or the other Tampa deal, those are more operators of pod. So probably a little bit more suburban, but they work very well within your platform. So it's kind of a mix of probably 1/3 urban, 2/3 suburban. In general, they've been a little bit newer, a little bit higher rents. But the ultimate idea here is to drive accretion. So we're not necessarily trophy chasing, but we're not dipping down into B- suburban quality to get yield either. So trying to produce more cash flow with a little bit better portfolio and a little bit more diversified.

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Harry G. Alcock, UDR, Inc. - CIO & Senior VP [25]

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And it iterates, I guess -- this is Harry. I'd add that the -- I mean we're using the term suburban, but most of these suburban-type assets as we're calling them are really first ring suburbs, whether -- like the Waltham deal, like, Englewood, even like the St. Pete deals are really only 5 to 10 miles from the urban core.

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Operator [26]

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Our next question is from the line of Wes Golladay with RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [27]

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Looking at the DCP program, do you expect that to grow much this year? Maybe you have one being repaid at the back half of the year, see it your permits are falling in some of your markets?

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Jerry A. Davis, UDR, Inc. - President & COO [28]

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Yes. Wes, the intent, of course, is to still try to continue to find opportunities there. We like the risk-adjusted returns that we found to date. And so we're going to hold to that underwriting and that return requirement. Like you said, permit activity has come off a little bit. I think on the construction financing side, the fact that we're probably going to see here in the next hour LIBOR come down and fed funds rate come down. You've seen on the construction financing side, spreads have compressed a little bit. And terms have eased a little bit. So I would say our capital that its cost becomes perhaps a little bit less competitive. But we don't have a ton of capacity there left, another $100 million or so to go to get to our kind of self-imposed limits. So we don't need to stretch, we don't need to go rush out there and find it. So hopefully, we find some more opportunities, but right now pretty happy with all the acquisition activity we've been able to do.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [29]

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And do you expect to formally participate any take out, I guess, on the block 11? It mentioned none of it in the supplement, but you did offer some extensions. So did you get anything in return for that?

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Jerry A. Davis, UDR, Inc. - President & COO [30]

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Yes. We did have incremental returns. We had an extension fee on there that we earned, that was blended in over 5 months. In addition, we think it may create an opportunity on the back end here as we continue to move forward with that opportunity. So it may roll into an additional DCP opportunity which could be larger in nature, could have a different return profile and could have back-end participation as many of our recent deals have had.

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Operator [31]

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Your next question comes from the line of Richard Hill with Morgan Stanley.

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Lauren Renee Weston, Morgan Stanley, Research Division - Research Associate [32]

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Yes. This is Lauren Weston on for Richard Hill. Thanks for the color on the next-gen platform. Could you just provide a bit more color on the use of predictive analytics to select markets? And maybe how you're finding value where others aren't. Previously, you talked about New York and Baltimore and Philly and Tampa, are there any other new insights that you can share with us?

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Jerry A. Davis, UDR, Inc. - President & COO [33]

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Yes. It's a tool that we utilize. At the end of the day, it comes down to somewhat of a mean reversion type of analysis, there's a number of factors that go into it. The goal though is to lead us to where others potentially aren't, where there are opportunities that the herd may not see, if you will. So we're trying to find markets that have good economic growth, good underlying demographic drivers, but I have not seen rents that have kept pace with those. We think we found them in Baltimore and Philly and New York and Boston. So we're trying to go that route. But at the end of the day, they're still a qualitative assessment. We have to make sure that the job composition, education base, the demographics, go through it all, make sure all it works with what the model tells us. And so then you siphon down the market exposure a little bit more in terms what Harry and his team are able to focus on. Then ultimately it just comes down to pick the right submarket, pick the right asset.

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Operator [34]

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

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [35]

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On the revenue enhancing CapEx side, can you give us a sense for how much of the portfolio has seen the kitchen and bath upgrades the last few years? Are we reaching a moderation or revenue-enhancing CapEx or are the current levels, should they persist for the next several years?

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Jerry A. Davis, UDR, Inc. - President & COO [36]

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I would say, John, over the next couple of years, you're probably going to see it somewhat similar levels as these assets continue to age. And we expect the life of a kitchen and bath to be, call it, 10 to 12 years. And you're doing 5,000 or so of those -- I'm sorry, 2,000 to 3,000 of those a year. So there's always some inventory coming in, it's not purely kitchen and bath we also do, do some expense reducing CapEx with that, such as LED light replacements and things like that as well as adding amenities, dog parks, rooftops, repurposing old theater rooms, opportunities like that. Or in some places, we found the opportunity to do single-unit additions at properties where we have additional bed space. So it falls into that. But I think when you look at that $35 million to $45 million range that we've been spending, I think you're going to see that sustain for the next couple of years.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [37]

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And then Jerry, on Orange County and LA, new lease growth continued to deteriorate in 2Q. The supply batch seems better than some of your Sun Belt market. So what are the teams seeing on the demand side? How are the reasons for move-out trending -- I guess why the softness in the Southern California markets?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [38]

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You're just seeing a muted job growth's still in Orange County, it's roughly 1%. And reason for move out typically is they're leaving the area. In Orange County, you're seeing a lack of an influx lately of people for employment. I think in LA, it's -- some of that is supply-driven, it's not as much on the demand side but Orange County, we definitely have felt less job creation and wage growth down there.

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Operator [39]

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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 [40]

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Just a few questions. First, Jerry, when you mentioned your New York market rate exposure now with the thought of the rent control, I think you said that, right now, 40% of the units are market rate. But before, previously, I thought you guys had said that only -- that 20% of your units were regulated, meaning 80% were market rate. So was this a shift because of -- you guys were sort of doing a pro forma with the luxury decontrol or did something else change?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [41]

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Alex, it's Joe. So there was another factor that changed in June. While -- although the focus was on the Tenant Protection Act of 2019, which we had talked about previously, put us at about 80% market rate, with the 2 deals being Leonard Pointe and Columbus Square that were in the rent-stabilized side. What we also got caught with in June was New York State Court of Appeals ruling on 421-g, which impacts our 10 Hanover and 95 Wall assets, which are about 3.5% of our total NOI.

There had been a court case out there that went all the way up through the Court of Appeals, that we had expected would not rule against landlords. The court case specifically focused on could you utilize luxury deregulation in 421-g assets. Historical precedent going back to the '90s had been that all landlords considered those market rates. When 421-g was put in place (inaudible) and the state Senate had agreed that luxury deregulation could be utilized for those. We'd seen prior court cases that had supported that and then the Department of Housing and Community Renewal had also provided us specifically and others, documentation that said that they were market rate. Unfortunately, the Court of Appeals decided to overwrite all of that. And so we're a little bit surprised on the ruling and the timing of it. So that did flip us to 40%.

I'd say the positive or silver lining on all of this, the legal versus market rents today, there is a very substantial gap to where legal rents will be for those 2 assets of over 25%. So new leases are not impacted. We still have the ability to push rates on those. And then from a duration of how long we are within rent stabilization or at least lack of luxury deregulation, 10 Hanover comes off in the next 11 months, on 6/30 of next year, and 95 Wall is off 6/30 of '23. So that's why we ramp back up from 40% today and start ramping back towards that 80% of our couple of years. The NOI impact, I think, Jerry kind of broke down, relatively immaterial, as I looked at these 2, plus the other 2 that we'd previously spoken to. So relatively immaterial NOI impact. Don't see a valuation impact given the fact that they're about to come off of rent stabilization in the next couple of years. But there was a change in that percentage.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [42]

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Okay. And then on the outlook front, on the guidance front, Jerry, it sounds like from the comments, obviously, good start to the year, but then, right now, your year-to-date revenue growth is basically where your full year guidance range is. So was there just sort of, I guess, you could call like slack in the system earlier in the year, where there was a lot of potential to capture a lot of lost ground or mark-to-market on whether it's occupancy or rents or whatever it was that allowed you guys to boost occupancy. But for the back part of this year, it's -- you don't have the same levers, in which case, it's just -- I think as you were saying, it's maybe a tougher comp. But that the real growth that we saw early in the year basically plateaus for the balance of the year. Just trying to better understand what's going on.

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Jerry A. Davis, UDR, Inc. - President & COO [43]

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First, there's really been no occupancy gain at all this year. We've run at 96.9 for the past 2 years. So while some of our peers are getting occupancy pops that are driving revenue growth, we're not.

The second thing is, in the first half of this year, we've had more of a contribution from increasing other income, which as we continue to anniversary out more difficult comps, last year in the second half, it becomes more muted. So I think on the rent side, things are playing out as expected, but you're just going to get less of an impact from that.

I would add, when you look at our numbers, we do have the highest guidance at a midpoint of 3.7. So we're proud of the numbers that we're putting up. But again, we haven't had the opportunity to drive occupancy because we got out in front of that several years before the bulk of our peers. And we're continuing to enjoy the benefits of other income. But it is starting to slow from double digits down to high single.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [44]

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Okay. And then just finally, Joe, on the increased capital for acquisitions this year, over $700 million, how much of that has been driven by just the rising of stock price which has made equity more attractive versus you guys seeing something change in the market that makes apartment investing better this year than you originally thought at the beginning of the year?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [45]

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Yes. It's more driven by the former than the latter. We're always looking for opportunities to improve the portfolio, improve near-term cash, long-term cash flow of growth. So even if we didn't have a cost of equity there, we could be still turning assets over and selling assets. So we're always looking at opportunities, always looking in the market. But there hasn't been a change in our underwriting that's driven us to the more aggressive. I think it's more so simply that we've become more active as our cost of equity has improved. And so given the opportunity to go out there and issue some equity, be disciplined around it in terms of managing the dilution profile, making sure that we match funds, making sure that we keep putting up more accretion for 2020. Given that opportunity, we'd want to take advantage of it. And so we're able to do that, but we'll continue to monitor what's going on, on the used side and then the source side as well and match them up.

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Operator [46]

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Our next question is from the line of Hardik Goel with Zelman & Associates.

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Hardik Goel, Zelman & Associates LLC - VP of Research [47]

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A similar question was asked before, but I wanted to stress on a different aspect of it and maybe put it in context. So if you look at EQR's comments, they believe that suburban assets will not fare well over the course of a long cycle because when supply hits, there won't be any demand to absorb it. You guys are obviously buying assets in the outer range in suburbs. What is your thought on the long-term kind of performance of these assets if supply were to shift there?

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Joseph D. Fisher, UDR, Inc. - Senior VP & CFO [48]

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Yes. So we are not purely buying them, the outer rings. I think as Harry made the comment earlier, really first-ring suburbs, kind of the suburban town centers, if you will, as well as some urban assets. But we're not trying to make a wholesale shift either to suburban. So this isn't a strategic shift in a view that suburban will always outperform urban. I think every market and every submarket will go through its cycles. Our goal is to be diversified around that by the being in the 20 markets, the urban-suburban mix, the A/B mix. I think when we've looked back over time and looked at A and B rental rate growth performance and urban and suburban, there isn't all that much of a discrepancy between the 2. And there are different levels of volatility, I would say, meaning that suburban is typically less volatile, B, a little bit less volatile. So in a portfolio construction standpoint, it makes sense to have a nice blend of all those. In addition, we're typically getting a little bit more yield by going to that first-ring suburb, which allows us to get a little bit better IRR than would be the case if we went for urban A+ quality at a 4 cap.

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Hardik Goel, Zelman & Associates LLC - VP of Research [49]

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Got it. Any thoughts on whether valuation could shift more negatively in the first strength of urban in the core? I know this cycle is kind of compressed to being comparable?

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Harry G. Alcock, UDR, Inc. - CIO & Senior VP [50]

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I think -- this is Harry. I think we don't see any evidence of that necessarily. The fundamentals continue to be strong in these first-ring suburbs. And again, remember, we're talking about markets that are 5 to 10 miles from the urban core in most cases. And where we look at it, at a property like Englewood, New Jersey, at a property like Currents on the Charles in Waltham, the rents are roughly 50% or even more than 50% below the rents in the urban core. So from our perspective, we're well positioned. And in theory, we're cushioned to some extent against the downturn in the market.

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Operator [51]

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

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Thomas W. Toomey, UDR, Inc. - Chairman & CEO [52]

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Well, thank you. And again, thank you for your time and interest in UDR. As you've read and as you heard, business is very good. What I will say is, we will continue to execute our strategic plan, as it's clearly working and producing growing cash flow and TSR that accompanies that. As we look to the future, we feel really good about the balance of 2019 and probably even a tick up from there as we build for our foundation for 2020.

With that, take care. We look forward to seeing you in the September conference events.

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Operator [53]

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