UDR, Inc. (UDR) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to BV's Global Real Estate conference. Our first apartment roundtable of the day, UDR. Thank you to management for getting up extra early today just to kick things off. Again, this is UDR presentation and roundtable. This is a global audience. We're going to make some introductory remarks and allow UDR to present on the company, and then we'll get into Q&A. UDR is a leading multifamily real estate investment trust with a history of successfully managing, buying, selling developing and redeveloping properties in targeted U.S. markets with over 51,000 units in the portfolio. With us today, we have the entire UDR team, Tom Toomey, Chairman and CEO; Jerry Davis, President and COO; Joe Fisher, CFO; Mike Lacy, Senior Vice President of Operations; and Trent Trujillo, Director of Investor Relations; and Chris Van Ens, VP. I before I turn it over to Tom for any opening remarks, I want to remind everyone that if you want to ask a question, please use the Veracast software to input your question at the bottom of the screen. We'll be looking for those questions, and we'll ask on your behalf. I will now pass it on to Tom off with any prepared remarks.

Thanks, Jeff, and good morning to all of you, and I hope you're all doing very well. And also, Jeff, I appreciate you doing all the introductions. You got those guys right. What I'll start in is just so that we have enough time for Q&A and can answer all of your questions fully, we'll just get started. We've recently posted an updated presentation on our website, which includes the operational updates, our pricing strategy, and our surgical approach towards pricing homes and how that's resulting. The initiatives from our next-generation operating platform and what we're accomplishing there will be given an update by Jerry Davis. So an overview of UDR, $17 billion S&P 500 Apartment REIT. We operate in 20 markets and 51,000 apartment homes. Keys to our strategy, diversification, in markets, submarkets as well as urban suburban mix as well as AB quality. Second focus in our strategy is best-in-class operations with a flexible approach towards capital allocation, an investment-grade balance sheet, which allows us -- our primary goal is to perform through all cycles. And I think we have a good track record on that front, but we'll talk more about that. Focusing on our operations platform. As I mentioned, Jerry Davis, probably can talk through you that in a great deal. Mike Lacy, who runs operations on a day-to-day basis, will give you that operating update and Joe will cover a wide range of topics, balance sheet, capital allocation and performance metrics. In short, why should you invest in our stock, first and foremost, full cycle company with a proven track record of outperforming both in up and down markets. The value proposition and the upside potential of our next-generation operating platform and the margin expansion it contains. A flexible and disciplined capital deployment strategy. Lastly, a culture that thrives on progress as well as our ESG metrics. So with that, I'm going to turn it over to Joe.

Excellent. Good morning, all. Thanks for taking the time here to join us. I think just to summarize a little bit in terms of recent discussions and highlights that we've been having. We have a presentation out there available on the website. If you go to Page 4 of that presentation, we provide a summary of the recent highlights of activity and Mike and Jerry and team will be available to dive into some of these more deeply when we get into Q&A. But primary highlights being the operational results, both in 2Q and quarter to date. The next-gen platform advancements that we continue to see and what we see for the future as well as capital allocation of the balance sheet. On the operational front, I would say that 2Q was a little bit messy in terms of reporting for the sector given the differentials in terms of how different groups report straight-line versus cash on a same-store basis and those that do utilize concessions from a strategic standpoint and those that don't. But I think once we got through all of the information and normalize it, we felt very good about where we stood on a relative basis. And I think when you take a look at Page 5 here in the presentation, what we view as a good proxy for current pricing power and where we're going in the future. Effective blended lease rates as well as occupancy trends. What you can see there is that we stack up relatively well versus the peers on both stats, both in 2Q and here on a quarter-to-date basis. So I feel very good that the approach that we're taking, which Mike has talked about a lot in terms of the resident-by-resident, unit-by-unit approach that we are really getting into the details and using the operational platform as well as the next-gen platform to help drive pricing power and maintain occupancy better than overall peer set. Yes. From a market standpoint, Mike will tell you that about 80% of the markets to date feel relatively decent, meaning they're flat or on the uptrend, and we have 20% that are still a little bit more difficult. Those being New York, Downtown Boston and San Francisco. So whereas we feel relatively good on a relative basis. On an absolute basis, we're still trying to find that bottom that as you can see, when you look here in the presentation on Page 5. Occupancy seems to be leveling out, on kind of the low to mid 95s. Blended lease rates kind of trading down in that minus 50 to 60, 70 basis points over the last 3 months or so and cash collections continue to turn up to that 98% range. So overall, we feel pretty good about the operational side. On the next-gen platform, we've been talking about this since back in 2017. We envisioned a new way for the industry to do business. It's a way that we thought would be advantageous for us relative to both public and private peers, but also delivered to the resident. A better way of doing business. We didn't, of course, envision the pandemic when we set out and made all the progress over the last couple of years, but we're very happy that we did. It was set out to be a self-touring, touchless self-service type of model. And one that we can deliver better customer service to, but also with fewer individuals on our platform that allow us to enhance our controllable margin and controllable expenses, all of which we've been doing. We're about 40% of the way through that process and residents have definitely spoken with their feet when you look at the occupancy, look at the blended lease rates and look at the NPS scores or resident satisfaction scores that are out there. So overall, feel very good that we made that move. You've seen that in the results over time, both for the legacy portfolio as well as every asset that we buy, we believe we can typically get an additional 5% to 10% upside relative to what that private market operator would have been able to do. So Jerry will take you through more of what we're seeing there in terms of 1.0, but also we have a vision of 2.0, trying to think about what is next and what's to come once we get out to '22 and 2023. Lastly, balance sheet and liquidity. Feel very good about all the activities that we've taken in the last 2 to 3 years. We spent a lot of time focused on extending duration, improving liquidity, driving down interest expense and increasing cash flow in the enterprise, while also taking advantage of a very good cost of equity there for a period of time to grow the enterprise and grow the cash flow base of the company. So today, we sit here with $1 billion-plus of available liquidity between our line of credit and forward ATM that we've yet to draw down of just over $100 million. We've been relatively patient and disciplined when you look at the activity thus far in this crisis. We've had 2 dispositions up in the Seattle area that we believe we're at pre-filling pricing in the low 4 cap range. We've done one developer capital program transaction, which is effectively a mezzanine or preferred equity type of platform that we have here at UDR, and we've done a minimal buyback. So we've been fairly patient. We do expect to see more activity going forward as we are finding a lot of opportunities in terms of the platform, when we look at our development capital program that is an area of distress out there in the market, given the construction financing market has pulled back. Developer equity has pulled back, alternative lenders have pulled back. So we think we have an opportunity set there to go out there and find outsized returns relative to the risks that we're taking. So you will see us probably, hopefully get more active there in the next 12 to 24 months as well as continue to be disciplined around increasing the development pipeline, focusing on redevelopments in that price on churn from an acquisition-disposition standpoint as we try to get into assets that have more operational upside, more platform benefits and are generally adjacent to or nearby existing assets to help with the synergies on that front. So with that, I think we'll close out kind of opening remarks and then turn it back to you, Jeff, if you guys want to start firing off some Q&A.

A little bit of background noise. That's better. Thank you. All right. Thanks so much for the opening remarks. [Operator Instructions] And Tom, how did UDR differentiate itself from its peers? Have a peer yesterday that announced the transaction trying to do that? It's different divisions under one roof, but how does UDR differentiate itself from your peers?

Jeff, I think we heard bits and pieces of that question, but it was coming through pretty choppy. So we'll address the question and maybe in the meantime, if you guys could try to dial back in on your side. And see if we can get a clear reception, that would be helpful or try a different line. But in the meantime, we'll address the differentiator piece for UDR.

This is Toomey. How do we differentiate our self? I think, first and foremost, you've got a company that's focused, it's greatest value creation capability is within its operations, okay? If you think about the multifamily business, first and foremost, what it is, is very fragmented. The top 20 companies in the space control about 10% of the inventory. So it's very fragmented. Fragmented industries that are commodity-based, companies usually win 1 of 2 ways. Operating margin or cost of capital. And in this business, cost of capital on a sustained basis is pretty darn hard to sustain. But operating margins, and you can look at our exhibits and where we're at the NOI line, 73%, 74% is a pretty strong operating margin business. So we focus on how that margin expands, and we have, for the 20 years I've run the company. Primary focus is through innovation, and so there's lift page X, I'll get a reference for you that shows a number of initiatives that we've undertaken over the year. And we're talking about our biggest one today, which is primarily the operating platform. And if you think about what that is, is pure and simple, a self-service model. All of you and your lives today interact with a number, whether you travel, hotels, pay your bills, they're all self-service models. We're undertaking a very deep effort in that area. We had started it in 2018, and so far, it's already led to about a 25%, 30% reduction in the workforce and improvement in customer satisfaction at the same time. So why don't I bring those 2 points up, fragmented industry, a differentiated operating capability that can grow margin. And there's a number of examples, and Jerry and Joe will go through them, where we bought assets and improved margins anywhere from 5% to 10% and the value that's created out of that. So that's one. Second, the diversification. It is truly a diversified portfolio, both in price point and product. They're either 50-50 or 60-40. Urban, suburban, same type of metrics. Like real estate is a cyclical business. Markets will get oversupplied. Markets will go through recessions, our key is to be able to sustain cash flow growth through all parts of the cycle. That's the point I would say. You have great companies operating in this space. Yes, we do compete for cost of capital and talent with them. I think everybody does a very good job. But our best opportunity is to continue that operating platform and continue to grow by acquiring privately held real estate and increasing the value. That's my overriding points of differentiation. I hope you've gotten back online. Joe, did I miss anything? Jerry?

I think I got it. Again, this is just -- Jerry, just to reiterate, we're about -- we announced back in '18, the operating platform, which our expectation is it's going to add 150 to 200 basis points to our controllable margin. As Tom said, where we've reduced our site level head count in the last 2 years by about 23%, 24%. We expect by the end of 2022 to reduce it by another 10% to 12% to get up to about a little over 1/3 of our headcount as we go to the self-service mode. Things are going well. As Tom said, COVID proved to us that the resident base of all of our customers, whether existing or prospective customers, are really looking for and accepting of the self-service mode that they're utilizing in other parts of their lives. What we're looking forward to is over the next year, fully implementing the staffing models at our community. But then at the same time, we're creating self-service, we're also creating a data hub that allows us to really aggregate all of our information, whether it's from the property management system, accounting system, personnel system and come up with better ways to drive margin even further. And we're looking at things like continuing to increase occupancy through reduction of vacant days, focusing on retention, loyalty programs, customer behaviors. But as we're getting more of the people management part out of our business by reducing headcount by 35%, we think the leadership of our property management group will have time to really implement on all of this new data that we're able to use to understand the customer and the business better. So there is a next phase coming to this. We'll probably be talking about it next year as well as the year after. But again, all we've talked about previously was this first stage of self-service and more efficient use of the workforce. The next phase is going to be more utilizing the data that we collect.

This is Jeff. I hope that it's coming across clear now. That was very helpful. I'm seeing some questions around what you've discussed so far to make sure it's clear to those listening and I'm assuming most people have not actually operated apartments on the line, except for your team, to confirm -- and this ties into, I think, Joe's initial comments and opportunities, are you saying this is a competitive advantage when you're looking to buy -- when you say private, these private operators just don't have this operation expertise, the systems that UDR has and that's how when you buy the property, you're able to operate them more efficiently and create value.

Jerry, you can start off.

Yes, I'll go first. I can tell you, Jeff, we bought quite a few deals last year. We saw firsthand with this new platform out there, how much more efficient we can run deals. And in a minute, Joe can kind of tell you what the accretion to the yield is. But you go in there, whether it's pricing home, we find most of our private competitors while they may use LRO or YieldStar, they still don't adequately price homes based on location and quality as efficiently as we do. So when we bought deals like up in Boston last year. We found significant opportunities there. Rolling on some of the initiatives that Tom had spoken about that we've done over the last several years, such as charging for parking, reserved parking. Typically, I think private guys haven't looked at that as a revenue source. We look at every piece of the real estate as an opportunity to drive value. And over the last several years, parking has driven that. So as we bought these deals, that's incremental benefit. On the staffing side, most people will run properties at 1 person per 100 units in the office, 1 person per 100 units in maintenance. And that's just kind of a standard. A lot of times, it's even less efficient than that. And what we've determined over the last couple of years is that there's a definite benefit in outsourcing certain tasks, centralizing certain tasks and automating certain tasks. And as we roll our platform that allows us, again, to operate with a headcount that's 35% less than we were doing previously. And I would tell you, I think previously, we were more efficient than a private guy, you get that incremental benefit. So I think when you look at all of those factors, we've seen the ability to really benefit. I think when we get -- are fortunate enough to be able to find the property next door or close to us. There's a lot of efficiency we can get there. I mean, you can actually operate new communities with next to no people. Customers want to deal with you electronically now. So they're not coming down to the office to do face-to-face conversation. So frequently, you can roll a smaller or contiguous community into an existing community with little to no additional headcount and gain that efficiency to margin. So there's a lot of benefits that I think because we've looked at every part of the business and try to trim the fat, get the efficiency in there that we've eked out small parts of margin expansion. But Joe, do you want to give an example of a couple of deals that we did last year and what the attrition was?

Yes. I'll jump into that. And maybe first, I do want to make clear, though, we've talked a lot right there about our advantages relative to the private market. As you know, Jeff, in times like these, we don't necessarily have the cost of capital to go utilize it to the same degree that we have in the past several years. But I think it's also an advantage relative to the public market to keep in mind. And when you look back at our performance over time, even pre platform 1.0, we are focused on a lot of these operating initiatives that Jerry spoke to. And you look at our same-store NOI, our FFO growth, our TSR, all relative to the public peer set. You've seen outperformance over time, be it 1 year, 3 year or 5 years. So it's not just an advantage relative to private. We believe the culture here in the nation taking place is an advantage relative to public peers as well. So on that front, what we're trying to do is what helps drive some of that FFO growth of TSR. Last year, you saw us take advantage of a good cost of capital. We traded above NAV at a good earnings yield, fairly consistently from late '18 all the way up until first quarter this year. Issued well over $1 billion of equity and did a number of transactions, both outright acquisitions from private operators as well as some asset swaps within a large joint venture that we have. Net-net, we ended up purchasing almost $2 billion of assets. And when you look at the accretion coming off of those, we had estimated additional accretion of approximately 1% to 2% of the entire enterprise, which is really driven by going from mid 4s type of yield on acquisition to a mid-5s over a 3-year period. Some of that was expected to be standard market rent growth, but approximately 5% to 10% of that incremental growth really came out of some of those initiatives and the platform benefits that Jerry has spoken to. We think that's pretty repeatable as we continue to look at assets throughout the market, we can consistently find upside opportunities and acquisitions. So we think that's a repetitive competitive advantage on a transaction standpoint.

It's -- please.

This is Toomey. That's all right. To come over-the-top of couple of things, and I know a lot of the focus is on operations and it should be in this current environment. But you also look at the disciplined capital allocation and what I would call rainbow or menu of options that we can invest in. So if you take 20 markets, you can create value not constantly through operations. But you also have to have areas that you can redevelop, develop, you can develop a capital program, if you will, mezz, capital structures. Those are 3 other areas that we create value. And I know one of the earlier questions was how does this differentiate yourself from the announced transaction of yesterday? When you have the availability of a footprint of 20-plus markets, you have markets going through cycles. You can always move capital amongst those markets to the most efficient and highest return capability. So having that embedded inside the company enables it to act better than just a bond or an inflation-indexed portfolio. So that little bit is what we strive to accomplish on a risk-adjusted orientation. So right now, our highest and best use of our capital is our operating platform. The technology that we outlined and you've heard and you can read in our presentation, is a $30 million investment. Jerry mentioned on our business model 200 basis points, that's equivalent to $20 million to $25 million of NOI. Not a bad return. So for a little bit of capital, we can move the dial a great deal. Anything else I missed there, I'll turn it back to you.

No. That's great. And to confirm, and I think this ties into some of the questions I'm receiving on markets, so we could maybe hit it on the high level. UDR in 5 years, 10 years, Tom, you mentioned again, a key differentiator diversification, where is UDR in 5, 10 years? Is it still diversified urban, suburban within market? And I guess if we could even turn it into -- I guess, a follow-up would be maybe a little bit more color on some key markets like New York, [ Stannard,] San Fran and Boston today?

Jeff, it's Joe. I'll kind of kick it off, and then Mike Lacy, you could bring -- clean up all the operational side of the equation. So the diversified strategy, when you mentioned the 5 to 10 years down the road, I think once again throughout this downturn and throughout the upturn of last cycle, the diversified portfolio works for us. So from a strategic standpoint, really don't see the need to become more concentrated. I think we probably get enough diversification with the plus or minus 20 markets. I don't think we have to go to 25. I don't think it would hurt to go to 15. So we're not saying we're not going to lose a market here or there. But we do believe diversification works. It gives us that operational diversity to dampen the volatility of the cash flows. But at the same time, our transactions team, being able to have more degrees of freedom from which to go out there and source capital through dispositions or deploy capital through one of the avenues that Tom mentioned, I think it's a value-accretive thing for us to be able to do. When you think about that urban suburban AB mix, if you look at our actions over the last 15, 18 months with all that transactional activity we did, we've talked about our willingness to pivot and go where returns take us. So if we can find better cash accretion, better long-term growth, better, IRRs, we'll go there. And what you saw over the last 18 months, once we got a little bit more kind of B plus to A minus type of assets, a little bit more suburban, a little bit more mid rise and low rise and wind up a little bit on the urban, high-rise, A plus-plus type of product. But that was really driven by the fact that we want to maintain diversification, but also to be able to find the returns. I think in terms of us committing to expanding contracting markets or any one of those kind of subsets, i.e. urban suburban, A or B. It's still too early to say. We have our predictive analytics model, which is a quant-based model, but we overlay that with a qualitative model that has a number of factors that go into it. And we think there is a number of binary outcomes that are coming up here. You look at fiscal health in some of these coastal states and cities, which today looks concerning, but dependent on the outcome of the election, you could see an additional stimulus bill that could potentially remedy the fiscal health situation. When we think about migration trends, we're very focused on income migration, not just population migration. So if income start to shift from coastal markets to Sun Belt markets, then we would be more concerned. What we've historically seen is simply low-income typically migrates to Sun Belt, which doesn't necessarily drive pricing power. When you look at the regulatory environment, clearly, much more focus on today's world than it has been ever in the past. But we want to wait and see, does that become a temporary issue or a longer-term issue that we're facing. Similarly, on the vaccine and what that means from work-from-home, transit, the urban environment overall and I think that's somewhat binary. So we're being patient in terms of determining whether or not we want to expand or contract certain markets or go more urban suburban. But right now, focused purely on operational platform and finance some good DCP deals to do. So with that, I'll turn it over to Mike, and he can kind of talk you through 3 of those troublesome markets.

Thanks, Joe. First, let me back up a little bit. One thing we've really been watching is build revenue. And Joe referenced this on Page 5 of our update, where we're experiencing about 80% of that NOI today where things have either bottomed or starting to bottom. And then we have the 20%. Obviously, that's been a little bit more of a struggle. But just to break that down a little bit further. When you look at that 80%, 40% of that is markets that, over the last 60 days, have bottomed. And for us, that's really Monterrey. It's Richmond, it's Baltimore, Nashville, Florida and Texas. Then you have that second tranche of 40% of our NOI, that's kind of bouncing around the bottom. That consists of L.A., Orange County, D.C. and Seattle. That leaves us with the 20% where we're, again, struggling, San Francisco, New York and Downtown Boston. To give you a little bit more color on what we're experiencing there, it's very different by market and within the market, it's very different property by property. So as an example, in New York City today, the assets we've purchased over the last year in New Jersey and Brooklyn, they're still hovering around 97% occupancy today and seeing concession levels around 2 weeks on average. You get down to the financial district, that's where the struggle is a little bit heavier and that's where we're seeing upwards of 8 weeks concession. And in some cases, we've seen 10 to 12 weeks really from some of our competition. That's not something we have done as of today. And then you get to San Francisco. And again, it's a little different by submarket. So if you're in downtown heading to that SoMa area, concession levels again, typically on average in 8 weeks compared to like a San Mateo or Santa Clara, where in some cases, we aren't offering concessions and in some cases, we're on average 2 weeks. So very different by submarket and that goes back to our approach in very beginning of taking this asset-by-asset, resident-by-resident has been a true difference maker for us.

I know we only have 2 minutes -- 2, 3 minutes left. I'm going to quickly try to ask a couple of these investor questions. If you could respond with quick responses. Do you expect sequentially less demand for multifamily over the next 5 years?