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

Thanks, everyone, for joining our last roundtable session of the day. Welcome to the UDR Roundtable. I'm Jeff Spector. And I'll be hosting the UDR team. We have Chairman and CEO, Tom Toomey; CFO, Joe Fisher; and Head of Operations, Mike Lacy. Just to remind the audience that if you want to enter questions, please enter those into the Veracast system at the bottom. I'm happy to ask those questions on your behalf when the time is appropriate. So similar to the other roundtable sessions we're hosting, we always like to give the companies an opportunity to introduce themselves to our audience, given it is a broad audience. And so again, thanks to the UDR team, I'll pass it on to you to briefly discuss the company and any key messages you're hoping to get across today, and then we can get straight into Q&A.

So just a little bit of intro. First off, for those that may not know us on UDR, we own 55,000 units across the country. We're in approximately 21 markets. So we are a diversified portfolio, meaning that A/B quality, urban, suburban, business for that is, we believe it provides diversification. Dampening the volatility of our cash flows and the returns for our investors, but also provides us a number of different opportunity sets to there and invest in different markets, pivot our capital allocation strategy when opportunity set themselves and investment in certain markets. What kind of the piece that we're most known for and that we believe is the strongest competitive advantage for us. That's going to be our operational platform. You've seen that historically in terms of same-store outperformance, the same-store wins on markets, initiatives and efforts that we've had, controllable expense lens that we've had relative years over time expenses. We're just looking and control operating margins with our portfolio role. Just recently, a lot of those efforts since 2018 have been focused on the operating platform or next-gen platform, which we call it, which is really, really a new way of doing business. We have our residents and our customers in terms of having to deliver our product, how we engage with them, ultimately, how we become more efficient in terms of our operations and cash to the bottom line. At this point in time, we've rolled out that next-gen platform throughout all of our 20 markets. So we are seeing the benefits that having reduced headcount by approximately 40% in the field, improved NPS scores throughout the portfolio and generated over $20 million of incremental NOI from the effort. On a go-forward basis, and we're not going to rest on our laurels there. We do have our innovation team geared up. And we've been spending the last year or 2, working on what's next. So we'll get into that kind of what we think future opportunity set is there. But what really drives for us not just the core performance for the legacy portfolio. But really, everything you can see us doing on the capital allocation side. We spend a lot of time in terms of sourcing and deployment of incremental capital into our markets and the returns and the accretion that you see from that, really driven by that operational platform and the transactions team work together on the business plan around acquisition, PCP investment or development, but it really gives us a leg up relative to private market and will assess growth relative to our public peers. You have seen over time, there's a closeout. That's what you get and why you get it, and the cash flow growth over time we've outperformed 7 of the last 9 years relative to your average TSR, when you look at it on a rolling 2-year basis over the last 5 or 10 years has consistently outperformed as you see in our presentation that we put out a couple of days ago. So we believe the building blocks of all that still remain in place to drive that relative outperformance, both our cash flow and TSR. And finally, just near-term updates, the highlights for [indiscernible] I'm sure Jeff will get into it a little bit, but operations for us do an absolutely fantastic at this point in time. All-time highs in traffic and occupancy and pricing power, loss of lease, good success on controllable expenses, really good success on government assistance and helping up our residents to round our portfolio and the rolling out of the platform, it's continued to migrate as we would expect. And then some new announcements on capital allocation, acquisitions, utilizing that previously disclosed and raised foreign equity that we've done in the first quarter and second quarter of this year. And so I continue to find opportunities there to accretively deploy capital at 4.5 cap to 5.5 cap for the first 3 years. And so in totality, I think a very good update with recent on the high end, as we spoke about here in the presentation.

Great. Thank you, Joe. That was great. I think you've answered several of the key points for our first question of why investors should buy the stock today. But I guess anything else specific to that question you would say, you talked about diversification of the portfolio throughout the conference. We're hearing about Sunbelt versus coastal markets. Obviously, you have a good diverse portfolio. I don't know if you -- if there was anything else you'd want to answer to that question, why buy UDR today?

I think a couple of things that I would add, and Joe covered very thoroughly, which is obviously the operation, capital allocation, the culture, the innovation piece of it. What does that add up to in the last 20 years that I've been leading the company, we've averaged to over 12% annualized return. Second, I'd add ESG, extremely important to us. We're about ready to publish our Corporate Responsibility Report in the next couple of weeks. In there, you'll probably also see a press release related to our recent score on GRESB. I think both of those will make our investors, our Board, our management team very proud of the scores we've achieved and successfully achieved on that front. So I think we're pushing all the right buttons. We've got the wind at the back -- at our back, or sales, if you will, and we feel very good about the foreseeable future, '22 and beyond. We're excited about where things lie next year post COVID and feel like we're well positioned to take advantage of the marketplace.

Tom, if we take a step back, and again, this is a broad audience, so some folks might be a bit newer to the apartment sector in the U.S. What are your thoughts on rentals, demographics, millennials are aging, we saw them moving into -- moving out of urban [indiscernible] cities pre COVID. It accelerated a bit. It will continue, you have Gen-Zs. I mean how should people think about the U.S. as a renter nation and then the next-generation coming in Gen-Zs.

Yes. I'll start that off and ask Chris, Joe, if they want to contribute to that. But first and foremost, for a house, we're a commodity, but also the necessity. And if you think about just pure business model, supply and demand, we generate 4 million new households a year in the U.S. process spectrum generations. We're only supplying about 2 million. So there is still an imbalance in supply demand nature for this business of shelter. Second point I would make is 90% of the multifamily investment-grade stock in America is held by noninstitutional hands, which focus primarily on what I would call high occupancy, low-margin type orientation. Public companies, we think we lead this space are focused on margin and margin growth, but people may not realize and for some of you that are renting on the phone, be careful, 83% of your rent is our NOI margin. After CapEx, we're in the mid-70s. So $0.70 out of every dollar of rent, we get the key. High-margin business is in commodity, who wins that in the long run, one of 2 business models, those who can operate the best, deliver the highest margin. And second, those who are willing to accept a lower return on cap. So questions about demographics.

I think right now, we have 3 really strong tailwinds, just that we're looking at potentially posed by 2 headwinds. On the tail end side, you have demographics, you have wages and balance sheets to the consumer and you have relative affordability. So on the demographic side, at Gen Z, when you look at the actual board component of that, it's roughly equivalent to the millennial natural market component, which means the additional tailwind of demographic really come from changes to immigration policy as well as decoupling in individuals off a couch, giving them out of the bar space than getting them to deep [indiscernible] if you will. And so I think with a more friendly immigration policy, which typically buys ownership, you really won't see a drive of demographically between millennials and Gen-Zs. On the wage and income side, wages obviously coming out of this. It is a employee market. Seeing wages depend on our portfolio, well above where they're at pre COVID. So hope we can drive our potential pricing power. In addition, balance sheets are better. You can see stimulus checks during this downturn, had additional credits from a tax perspective where simply like most of us could not go out and spend dollars during that 18 months and so. Balance sheet is in a great position. I think incomes are in a great position. The last one relative affordability that we talked to strong about how good we feel about our business right now. There's 2 businesses that have been doing a little bit better than us, single-family rentals and single-family ownership. And so the relative affordability trade looks much better for ownership than it had been pre COVID. So that's helping us keep our back door closed, seeing less individuals here don't have to buy or moving on to friends and family homes. And also helping on the front door with individuals that they have want to go out on the format to do a household in a single family home. And then they come to ownership route. So 3 very good tailwinds that we see in this one-time and hopefully continue to carry forward beyond just this next 12-month period. The couple of headwinds that we're looking at on the regulatory front, definitely more micro in nature, very dependent on each municipality or state. But there are certain headwinds that we face there, offset by the benefits of the government assistance programs that we set up. And then the other pages from that had one perspective is the supply. We didn't see the big drawdown in the starts and with the downturn, very good. But we continue to run at kind of 1.7%, 1.8% stock in line with where we've been. So it's not a negative relative to where we've been in the current environment. I think it's just more of a status quo, continue to see global supply in atypical demand. But right now, I think the tailwinds have outlined the headwinds.

Thanks, Joe. The sector seems really well poised, let's say, as we emerge from the pandemic, but -- or just -- this is the status quo, I should say, living with the pandemic. On the supply front, our channel checks and even during this conference, we've consistently heard that in '23, there could be a significant decrease. So let's say, lower supply of '23 over '22 for various reasons. I guess could you provide your latest thoughts on supply in '22? And is it too far to look out at '23? Or just given the construction time line, do we have a fairly good feel for what's going to play out over the next, let's say, 2 years?

Yes. Near term, I'd say what we're facing is supply in '21 in our markets is kind of flat to up 10%, but we are facing less supply within our submarkets, some competitive supply environment looks pretty favorable for us right now in terms of year-over-year growth coming down a little bit. As we get into '22, I think the picture looks a lot the same. It generally looks like about the same overall level as a percent of stock within the portfolio. There's a couple of markets that are going to get a little bit worse. And Seattle does, Austin, DC a little bit, offset by some of the positives like Tampa, Boston, Dallas, in all the markets we've been really aggressive buying in the last several years with the capital books, of course. So next year, overall, the portfolio look is not the same. I'm not sure we'd agree with the '23 statement. I think you're going to see a large decrease in supply. I think there's definitely potential for increases given the permanent and starts activity from the second half of 2020 and through the first quarter of '21, given the life time from start to delivery. But it's not a 20% or 30% decline. Maybe a 10% decline in overall supply. Various markets is going to look different than that. When you look at the Sunbelt look at the Phoenixes, Raleigh, Austins, Nashvilles, they definitely continue to increase given very much have been pretty strong. That starts look pretty strong because the coastal markets could look a little bit better.

Thanks, Joe. Yesterday, I hosted a panel with our equity strategists and global economists and the -- one of the key topics, inflation potentially moving into late cycle. And one of the top incoming questions we've been receiving for months now, but in particular, more recently since earnings season into this conference is on pricing power. How would you answer the question on pricing power for UDR? Where are you today in terms of pricing power?

Jeff, thanks for the question. I'll start. I think for us, we're seeing something that we don't normally see this time of year. So typically, you start to see market rents come down as you go into August and September. We've been able to buck that trend. And if you look at our stats today, we recently hit a high of 97.7 in terms of occupancy. That's actually a high point for us. We've been actively trying to push that down, while at the same time driving our rent growth. So I think you're going to see more of the same as we go forward. As we go into September, that should be closer to 97.5 blends that you saw for us in August of 9% should be slightly higher this month, and we're getting aggressive as we move forward, trying to build that rent roll for 2022. So we're in a pretty good place as it relates to pricing power today.

This is Toomey, I would add this. Our pricing power is driven by employment status and what people make. You look at both of those. We got 10 million job openings for people in America. So those are probably going to eventually get filled, we hope. Second, our -- when we look at our resident, they're actually better off today on an income level than they were pre COVID. So actually, our customer is in better shape on its balance sheet with respect to its income level, and I would expect in '22 and '23, they are expecting raises that they haven't seen in the past, given the tight labor market. So if our customer is in good shape, that translates to pricing power that keeps going for us for '22, '23 as we're looking at it.

Yes, Jeff. We're really seeing in 2 aspects, too. When you look at our concessions at this point, we only have them really in a few pockets around the country. It's around 10 or 12 properties as a whole. And then you're really seeing it with that loss to lease. I mean at this point, we're seeing close to mid-teens as far as the loss to lease. We've been chipping away of that, and we expect we don't do that as we move forward. So those are some of the leading indicators, if you will, that show that we've got that pricing power to Tom's point earlier, that wins at our bag, and we're going to take advantage of.

Just to make you late there, Jeff, the hostiles is an industry term. And the best way to communicate to non-industry people is if we raised the market rent, what we could lease an apartment for today $100, okay? What is the in-place revenue stream or signed leases that we have that will move to that market number we may mature. Our average resident has a 12-month lease. The average stay is 26 months with us. So we know they're going to renew or have a high probability at that new rent. What is that gap? That's his mid-teens number.

Thank you for the explanation. Is it fair to say that pricing power is accelerating.

It's not decelerating. I would tell you that. So again, it's bucking that trend of the seasonality where you normally expect it to go down. We've actually seen it slightly increase over the last couple of months. And again, with our -- the fact that we're 97.7, we're able to push a little bit more than we would otherwise. So we're seeing a slight increase, if you will.

You would see -- you would have seen market rents start to tail off seasonally 2 months ago. We've been able to continue to push up market rents for 2 months and typically seasonality pull them down. At the same time, our blends, the blended lease rate for renewals. We disclosed it and report here about coming on. Right now, we've been able to push market rents higher, and we're coming up on easier comps given where we in the fourth quarter of last year. So honest, the blend should continue to improve from here. So it depends on which angle you want to look at pricing or from in terms of reported stats or just market rent growth, but feel good about where they're both that.

Okay. Thanks, Joe. And I think the next question on pricing power that we get is typically the dividend growth and I guess for this audience, can you talk about x factor -- I don't know how you think about the dividend and growing the dividend versus some of the other needs that you have internally or again, external growth, dividend growth has definitely become a key topic as well.

Yes. So when we think about dividend policy, traditionally throughout the cycle, we've stayed around a low 70s payout ratio relative to our earnings. And so today, we're a little bit higher than that just kind of out of the cycle. But given the trajectory that we see on earnings on a cohort basis and we do believe that the dividend is an important component of the shareholder return that we provided to them and the safety of that. So we do want to continue to raise that dividend. We raised it slightly during COVID. And expect that when we come out with guidance in January, you'll see another increase for 2022. But we'll address kind of the percentage increase that went in after more robust discussions with the Board.

Given your national exposure, you have a great perspective on many key markets throughout the U.S. any strategy shifts or changes that people should be aware of for UDR when you think about your 5-year plan or 3-year plan, I'm not sure what you guys set out, but are you happy with portfolio positioning or any changes because of the pandemic we should see coming forward?

Large-scale changes for us on the portfolio. We came into it with the diversified asset base, diversified market base and still feel very, very comfortable that that's a go forward with strategically. On the margin, what you'll see is incrementally when we source and deploy capital, the markets that we're biting more prune to source from. And it is going to be use dependent and opportunity dependent to it's going to be buy a little bit more West Coast. You've seen a little bit of that in the last couple of years. We've sold a couple of Seattle assets, one downtown LA asset, a couple of large county assets. So on the margin, maybe pruning a little bit in West Coast. And generally, we've been deploying them to Sunbelt markets as well as our East Coast markets, so which is a little bit more capital in that direction. But it's very much incremental amount of margin for the market exposure. The bigger kind of more convicted value creation piece of the story is not necessarily which market or which asset in the market are we able to buy. And so going out there and buying from a private market operator. It doesn't have our skill sets from a top line rent management, the initiatives, expense controls, headcount reductions. And then, of course, they don't apply that next to an asset we already own. That's the most high conviction for a capital that so it tells us right off the bat. So we go spread 50 to 100 basis points of cash flow spread relative to a cost of capital. So on the market, a little bit of shift, may, but most of the capital allocation focus is go after that deal next door, you'll find that underpinning the surprise market asset in that into the portfolio, so we can drive growth that way.

And is that tougher today or it's always tough. We so much capital out there chasing apartments. But again, it always feels like it's been a long time there's a lot of capital chasing U.S. apartment. So you're still finding transactions.

Yes still able to find transactions that kind of our consistent clip of maybe 1 deal every month or 2. So we are finding opportunities, we'll deploy well over $1 billion of capital this year. But it is competitive out there. GAAP rents have continued to take lower on the margin, still capital coming in the space, asset value is still going higher. So we got to sift through a lot of deals to be able to find the ones that actually a deal down the screen and check a lot of boxes for something in operational front or in make some potential front so we can actually go get that cash accretion day 1.

How should we think about the balance between acquisitions and development?

I mean development as well as our development capital program. We'll put those in the one bucket because they all are focused on the development piece of the equation. That's really the core recurring part of the business to us, meaning that it's less episodic than the acquisitions might be. And so development, $500 million today. I think when you invest 4 and 12 months, you're going to see a number of projects added that take us at in $700 million to $800 million range. At that level, we feel very, very comfortable with percent of enterprise and relative to our forward sources and uses. And we, of course, feel comfortable even got higher than that $2 billion range given we've been there before on a smaller enterprise. But we do have a number of opportunities setup on development. We have a densification play Northern Virginia on one outlast land on an existing asset, 30% of you that's go vertical of almost 400 units. We've got another phase or 2 in Dallas that will be looking to start. Adjacent is in a fairly large project that we have there. We have a deal with Tampa. That's right down the street from an asset that we acquired last year. And then we also have a couple of pipeline another one, Tampa, another one in Philadelphia was the pad there, another deal with inland Empire less across the street for existing assets. So you'll see some growth there. And right now, underwriting, kind of 5.5% current yields. On to a 6 on stabilized basis over the next 3 to 4 years. So we'll get under the development. And DCP, I mentioned, to get a $300 million, $350 million book of business there. For the listeners, just a reminder, that's really a new mezzanine or preferred equity lending program to developers, where we went from a 65% to 85% of the stock. New developments on assets, we don't want like them on. And typically, we're getting anywhere from a 10% to 12% IRR. So that could be all current fixed rate or it could be a lower fixed rate with no big back end participation, which is typically most of our transactions. So we're still looking to deploy more capital there, like the returns like where we're at in the cycle from a perspective of that. That optionality creates a lot of great optionality for us to go out and buy assets potentially at discounts on market pricing, given that we do have certain structural obligations in terms of what we put into that of when the seller or the developer can sell our assets. Still looking at that piece of the business grows well.

Jeff, to add a little bit of color about the transaction market a couple of things come in mind in our investment committee. Maybe first, you have this pending tax law change, but it's clear rates are going to go up. And so that usually gives a lot of people off of and saying, I'd rather transact now at these rates versus higher rates in the future. So I think you're going to see a lot more opportunities hit from me in the last 4 months of the year than we've seen in the first 9 months. So that potentially gives us more opportunities, things out or spreads out the bidding pool, and we'll still continue to execute on our strategy of 5 to one next door, why we know the ramps, we know what our cost structure is going to be. We know what our margins are going to be. So -- but I think that will be helpful in the last half -- last quarter of the year.

Thank you. Good point. On markets, and New York City has rebounded much faster than most people have thought. San Francisco has lagged many are blaming it on the restrictions in place longer and things should rebound. But I think San Francisco has had some issues pre COVID and I think for New York City, it gets down to crime, safety. I guess what are your thoughts on San Francisco today? And do you believe it will rebound, start to rebound similar to what we've seen in New York City with New York, again, young renters have returned before employees even announced returned to work plans, and we just haven't seen that as much in San Fran.

Long term, I'd say this, San Fran is the tech capital of the world. And so therefore, its long-term faith is tied to technology, formation of capital on mines. It's going to take them a little bit longer to open up, but it will open up. And that will be a turnaround story. Will it be as quick as New York or some of the other cities, no, but it is still a long-term extremely viable business climate, and they'll get out of their way eventually.

Are you -- do you think it's more tied to crime at this point or…

I think it's a function of variety of things, A, people are not going to live where they're safe. And so certainly, you can look across many cities in America and that are challenged by that front. And it will be just a matter of time before they bring that back in line. The second is the remote work balance and trying to settle it how much is 100% remote, how much is hybrid, how much of it is in office. And they lean more towards the remote workforce type template. And they're going to just like all businesses on a rolling basis relies better when they're closer together and more dynamic. And there's no urgency form to force it, but that will come around. And so the return to the office piece of the equation and being there 2, 3 days a week, the hybrid models, will just have to play out. But I do think that they are ideas people, they're innovative people and they work better in that type of setting. And this is just a matter of time before they get there. All of us have worked remotely and ask ourselves are we better as a team, culturally, growth in talent, long-term innovation, if we're together from time to time? And the answer is yes. It's just the work through it. Do they get it done this year? Or is it next year? It's probably next year. But in our attitude, San Francisco is going to be a nice rebound story. We've seen it go through cycles before. This is just one of those. And that's the benefit of UDR. We have broad-based exposure, we're able to absorb these types of situations. And yet the company marches forward because we have a diversified portfolio.

Jeff, if I could just add, in San Francisco, credit perspective, it's about 80% of our total NOI. And I would tell you that, that market today, while it's still a little bit behind. That's the one market that's not those pre COVID. It is doing better. It feels more sustainable today. We're back to around 96.5% occupancy, and that's pretty much across the board. So that's all the way downtown, all the way down to the law. And it feels like answer that 2 week range in terms of concessions today. So that's a more sustainable level. And I think as we get through this, as people start to call people back to office, our lease expirations are relatively low for the next 4 or 5 months. We should have an opportunity as we go into 1Q, 2Q to be able to start to move up our rents again and to ideally get back above those pre COVID levels.

Great. I know we're almost out of time. I think in the opening remarks, Joe, you talked about next year and maybe some things to come. Was there anything more to discuss there? Or is that something you're saying you're going to discuss it in the future?

Yes. We'll be definitely speaking about more of the details and the execution implementation of the next wave of ideas in the future. But the way the innovation investment focused on, there's a [indiscernible] categories that we're looking at. You can look at what's the vacant days opportunity. So we have about $40 million worth of vacant day opportunity. We look at the average vacant days which is approximately 20 days. So process wise, making sure we understand all the drivers of that, how to shrink that down over time and cash cure some of that $40 million. We're looking at a lot of customer experience. So both our data science team internally as well as the third-party that we deployed are working through the last 7 years worth of interactions with those 300,000 interactions. They see between surveys, segmental and maintenance requests, different every interaction that we've had with the residents, understanding what makes them debt, what makes them want to run with us to renew at best, a more top with us. So spending a lot of time on that, and therefore, are ultimately the customer acquisition process as well. Thinking under the customer wallet and the share of wallet, we have a got revenue shares, additional sales ads to gain more revenue from them or just get more revenue out of our existing space through renting sites to third parties such as our common area [indiscernible] program. And then we have $300 million of controllable expenses out there that we've done so now we are attacking, and we've been able to lead the space on that front, but there's still more work to be done. So when we roll it all of them, we see opportunities. So right now, $125 million to go after. We're not going to get all $125 million, but we're going to get more than 0. And so over the next 3 to 5 years, we're going to continue to put those plans and plans to get the innovation team, built out. We're already implementing some of the initiatives that will drive those big bucket ideas, making sure we continue to drive that because that's going to drive the legacy portfolio, but it also continues to put that bigger and lighter moat around our business from operational perspective versus the private market and with the fragment of industry, where we have an advantage there, the more we can grow our enterprise, create that cash flow growth, we can create the virtual cycle of consistent outperformance on cash flow GSO that we got in the last 5 to 10 years.

Excellent. Thank you. We're out of time. But if we could just quickly answer 3 quick questions that we're asking all of the management teams, just quick responses. First, which is the following is the greatest challenge facing the U.S. public REITs today: A, Fed action and higher rates; B, supply chain issues, which includes labor and logistics; or C, flows to non-traded REITS.

I hate to do this to you, but it's D, government regulators.

Okay. But if you had to pick one of the e would you choose at any of the ones I mentioned or put you down for D?

I would put A, B and C in the bucket of D government regulators.

All right. Next question. Over the next 5 years, which markets will outperform, urban coastal or Sun Belt.

I think the next 5 years, they all balance out about the same result.

Okay. And last, for your company's office plans post pandemic, I think we've talked about this already, will you 1, have no change from pre pandemic 2, leave it up to individual teams at your company; 3, offer hybrid or 4 go full remote.

Work through our leadership and have been already from last year on a hybrid model in future.

Okay. Great. I want to thank the entire UDR team for allowing me to host this roundtable today. If we didn't get to ask some of the -- any questions out there that you have on -- please use their email me or the UDR team. And I wish you guys a great rest of the afternoon with your meetings. Thank you very much.

Thank you. We hope to see you in person soon.

Yes, definitely. Sounds good. Thank you.