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

Welcome to the 8:15 a.m. session at Citi's 2022 Global Property CEO Conference. I'm Nick Joseph with Citi Research. Pleased to have with us UDR and CEO, Tom Toomey. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast and at the AV desk. Those joining us here today in person to ask management any questions, please step up to one of the mics we have located in the center aisle of the room. [Operator Instructions] Tom, I will turn it over to you to introduce the company and the management team, and then we'll get into Q&A.

Thank you, Nick, and it is great to be together after 2 years of virtual conferencing. So it's really exciting to be seeing people again. With me today is Joe Fisher, our CFO on my right; and Mike Lacy, Senior Vice President and Head of Operations on my left. And in the audience, Trent Trujillo and Chris Van Ens, who have done an exceptional job of preparing materials, which I believe all of you have and for online you can access. So with that, let me get started. Last week, we posted this updated presentation to our website, which includes both the strategic and operating updates that summarize how UDR has performed in the past and is positioned to continue to perform well in the years ahead thanks to our best-in-class operations, continuous innovation and capital allocation competitive advantages. A brief overview of UDR's business. We're now celebrating our 50th year as a company. I might note that I've been here 21 of those 30 years. UDR is a $25 billion S&P 500 Apartment REIT that operates a diversified portfolio in 20 markets with over 57,000 homes, diversified by markets, submarkets, urban, suburban, AB, quality and price point. We utilize the diversified capital allocation opportunities to create value. Our best-in-class operations and flexible approach to capital allocation allows us to perform well in any environment. And we have an investment-grade balance sheet with nearly $1.5 billion of liquidity. Our durable operating capital allocation competitive advantages and execution have contributed to success to in essence what we consider ourselves a full cycle investment consistently generating above-average cash flow, translating to superior TSR. We've generated better-than-average FFOA per share growth in those 7 of last 9 years. And over the course of my 21 years as a CEO of UDR, we delivered an average annual total return of 13%. We're excited about our business obviously, and our outlook. A few reasons. First, multifamily fundamentals remain as strong as I've seen in over 30 years in this industry. Let me repeat, multifamily fundamentals remain as strong as I've seen in over 30 years. With year-to-date results we shared on Page 4 of the presentation, '22 looks to be off to even a better start than how we finished '21. Mike can go in more detail as we get into that. Second, we continue to innovate and improve our already best-in-class operating platform and peer-leading controllable margin. Third, we have additional value creation opportunities from the $2.7 billion of acquisitions that we completed since 2019. So not only were we challenged by COVID and adapting to that environment, we also grew the company. Fourth, our balance sheet liquidity are in excellent shape with sector-leading 2.8% weighted average interest rate and minimal financing risk. And lastly, our strategy enables us to capitalize on opportunities, which drive our ability to generate strong earnings, NAV and dividend growth and total shareholder return for not just the near-term, but the long-term. Maybe for some of you, I'll give you a quick recap of '21 and our '22 outlook. First '21, we completed the rollout of what we call Platform 1.0 across our markets. In layman's terms, this is simply moving to a self-service business model that exists in many of your lives today from either your Uber driver, your airline, your banking relationship or your retail. We brought it to the multifamily industry, and it's working quite well. And again, we'll field questions on that. Second, we accretively grew the company through $1.5 billion of acquisitions, utilizing many of our repeatable operating capital allocation competitive advantages. Third, we published our third annual ESG report. Further supports our ongoing commitment to improving our corporate [ citizen ] REIT. GRESB, global leader in sustainability, gave us their highest rated public listed residential company worldwide with a score of 86. Strategically what worked in '21 should continue to work in '22. We will advance our high-level strategic goals, but remain nimble and pivot as opportunities present themselves. Nick, I'll kick it back to you.

Thanks, Tom. I think you touched on some of these, but we are opening every session with the same question. What are the top 3 reasons an investor should buy your stock instead of any other listed property company?

Same 3 questions, 28 years later, I'm still able to answer them, I'm feeling good. One, innovation -- that innovation is our future, and particularly embracing the tech and changing the way the industry does business to lead to higher margins. Second, competitive advantages for future growth. And third, our ESG industry-leading results.

Great. We'll certainly get into all 3 of those. But maybe, I don't know, Mike, if we want to start with the operating update. I know everyone has the presentation in front of them. You guys put out an operating update I think last Thursday, so maybe we can hit some of the highlights and then dive in from there.

Yes. Great, Nick. I would point you to Page 4. I think that gives you a good idea of where we're at. And I'll tell you, first and foremost, we are very excited about our blended growth, kind of the trajectory of where it's been trending. We've seen sequential improvements January, February and March. So we expect around 14% blends for the quarter. Started off with 13% in January, 14% in March and we -- in February, and we expect 15% growth in March. So things look very good. I will tell you we are sending out renewals in that 14% to 15% range in April and May. So things continue to move in that trajectory. And just to size that for you, thinking about where we're at and where we said we were going to be, if we can maintain these 14% blends through the first half of this year and still have, call it, that 4.5% we talked in the back half of the year, we expect to hit the high end of our guidance. So we are in a good place today. What's interesting is when you think about what happens in the back half, it starts to build for next year. So we're already thinking about 2023 at this point. And you've heard us talk about our earn-in over the years going into this year. We had a 2.7% earning. If we can maintain those 14% blends, the 4.5% in the back half, we actually expect high 2s to possibly 3% going into '23, all else being equal. So overall, I'd say things are very strong on the operating front today.

If we think about individual markets, is that strength broad-based? Is there anything either from urban, suburban individual markets, maybe call out some of the top and bottom?

Sure, Nick. Over the last 6 months or so I think you all have heard us talk a little bit about that convergence. We've seen across ABs, urban, suburban. You can really see that in our deck on Page 13 with the loss to lease that's starting to compress to some degree. And what we're seeing and experiencing is the West Coast has been accelerating across the board. We're seeing in Seattle, NorCal, SoCal as well as D.C. and New York. So on a sequential basis, those blends continue to move up. And then on the flip side, we're seeing more of a plateauing in places like Florida and Texas, still incredible numbers, 15% to 20% blends just starting to slow down to some degree. So that's kind of what we're experiencing across the portfolio today.

We have a question from [ Live QA ] specific to your comment on blended rate growth and the trend throughout the year. Can you talk about kind of what's underpinning your assumptions between that first half of the year that you talked about, then the 4.5% in the back half?

Yes. As you start to get into the back half, we want to see the leasing season kick up and see how it transpires. So basically, we put in normal seasonality, if you will, on the back half. So that's that 4.5% we talk about. That's looking at normal market rent growth, kind of the state of the macroeconomics, what we know with supply. So that's, to some degree, baked in based on normalcy, I'll tell you, this is anything but normal, what we're seeing today. So there could be some conservatism there. But again, we want to see just how the leasing season progresses a little bit more.

Tom, you mentioned in your opening comments, I think you repeated that it's the strongest fundamentals that you've seen in your career. What stops it? What has historically stopped previous periods where you've seen not as strong but very strong operating fundamentals?

I think over time, how do these cycles unwind? Two things, I think, come to mind first, recessions. And however they manifest themselves through a high interest rate environment, an industry that takes a hit, and it always leads to employment or capital constraints that pull back. So -- and the other is oversupply. And again, oversupply generally strikes a market. So I think we built the company with our diversification and portfolio mix to be an all-cycle investment. And so if there is a recession and inevitably, there will be one, and how severe and when no one really knows, we're prepared for it.

And how do you think about, obviously, short lease duration, the ability to price into inflation, but just given some of the macroeconomic concerns that we've seen kind of impact the market for the last few months, how do you think that impacts fundamentals on the ground, if at all?

Well, I think inflation, and I'll let Joe expand on it, is probably a net-net positive for our business. And you mentioned one reason is a quick turn on the lease terms, and we can re-price. But it's always the shape and what's the form of the inflation. And in this case, it's obviously across the spectrum of cost, energy and wages, which is a net-net positive for us. I will say, having lived through one inflationary cycle like this, my view is this one is going to be here for a while. It is the things that have built this inflation into the system are not just going to evaporate overnight. And so I think, as Mike mentioned, we're really looking at '23, this pricing power continuing. Obviously, it's compounding math, and the numbers won't sound as big, but the earnings per share numbers will be. Joe?

Yes. Thanks, Tom. So I guess beyond inflation, so I think where your question is going a little bit is can we transmit that inflationary pressure into the revenue stream? And I think historically, absolutely, you can. Obviously, we're seeing plenty of wage inflation today. When you look at our employee and associate base, when we look at what's taking place with contractors and subcontractors. So there's plenty of demand for labor out there. So wages being the #1 determinant of where rents go, we feel very positive about that. I do think if you have inflation based off of simply supply crunches and see the cost of certain goods and impact the cost of living negatively for our resident or the consumer, there is that risk of course out there that you squeeze their pocket book and maybe you don't transmit that inflation directly into our rents. But historically, we've been a pretty good pass-through for that. And say also, you have a couple of other things going on just broadly speaking in terms of strength of the consumer ability to continue to pass-through above long-term average rent growth increases. So you go into the wage growth side, the balance sheet piece, we kind of touched on that. I think demographically speaking, still a lot of tailwinds in terms of the renter age cohort today. Immigration-wise, we do expect this administration to be much more friendly from an immigration standpoint on a go-forward basis, so more positive on immigration. I think relative affordability at the end of the day, multifamily, while being on a terrific run has not -- had quite the same run the single-family housing or single-family rentership housing has had. And so the relative affordability gap has widened out pretty significantly as the widest that it's been for the last 12 or 15 years. So we think we're setting up well for more of a rentership nation. I think 2, we've seen actually a decoupling during the last several years. So we have a stat in the presentation where average number of residents per unit right now is 1.7. That's down from 2.1 pre-COVID. And so you've seen this decoupling take place as individuals needed more space coming out of COVID, more work from home, just wanted to get away from roommates, had more of a financial wherewithal to be able to afford more. But we think that's a secondary tailwind at some point in time that even as you start to see rents go up, maybe you see a recoupling which gives another tailwind. But today we're really not seeing the pressure. We're not seeing that number reverse, not seeing traffic reverse. Rent-to-income ratios continue to be in line of long-term averages. So those haven't gotten to a point of concern. So overall, it looks like we're set up for a multiyear run as Mike kind of talked about in terms of high to single-digits loss to lease probably heading into next year and a good earning.

So we actually have a lot of inflation-related questions in here. So I do want to get to them. I guess the first is kind of the correlation as you see of market rent growth with inflation, assuming supply and demand are favorable. Do you think that rent growth should outstrip inflation in this environment? Or should it just keep up with inflation I think is the essence of the question?

Yes, I think historically, when you look at it, there's been actually very high correlation, but you've actually had long-term rent growth exceed long-term inflationary growth. So if you go to a historical context, yes, we should outpace inflation. Again, it comes back to what form is that inflation coming for yourself. If it's supply chain crunches that's just driving up cost of food, energy, kind of your daily pocketbook for the consumer, they do have to adjust for that somewhere. It could be in rents. But at the end of the day, when you look at our typical resident household income of around $140,000 and typical rents around $30,000, if you're getting a 10% increase on income and you're up $14,000 and 10% increase on rent of $3,000, your net positive $11,000 to spend on other items. And so I do think our type of consumer has that financial wherewithal to overcome some of these inflationary pressures, given that we play a lot in the kind of AMB space.

And there's a question about kind of outsized rent growth and the ability to end up with more either regulation or government involvement just as rents grow at such a high clip?

Yes, on the regulatory front, I'd say number one, we actually are seeing some generally positive trends taking place. So for most of the last several years, we bought a number of items, there were rent caps in place in many markets. There were restrictions on fees. Courts were closed down. And of course, we had plenty of eviction moratoriums and city shutdowns, mass mandates, things of that picture. So by and large, I'd say we're seeing on a week-by-week basis. A lot of these are starting to roll off. So rent caps in our portfolio are relatively de minimis today. So they still do exist in certain places, but not a big impact. Eviction moratoriums have primarily sunsetted, although at the end of this month, California's moratorium does roll off and allows individual cities to potentially put them back in place so keeping an eye on that. So we'll see kind of where that goes over time. I think the fact that rent-to-income ratios have actually stayed static, it tells you kind of the consumer is not getting stretched, at least at our rent level. And so are they truly feeling that pressure to the point that we need to have rent caps in place on more eviction moratoriums, more restrictions? Probably not. But we do see things like good cause of eviction. Those continue to be out there. We see certain states and municipalities continue to consider it, even down here in Florida, over in Tampa and St. Petersburg. They recently took up discussion on it, although it hasn't yet to go anywhere. So we're keeping an eye on it. But again, that's one of the benefits of being a diversified portfolio. Yes, you're always going to have certain issues, be it supply regulatory, macroeconomic environment by market. It allows you to diversify around it and manage that risk.

And then maybe just the final question was on utility reimbursement and what percentage is reimbursed of your utilities?

It's I believe around 70% to 75%.

Perfect. Why don't we turn to the operating platform? It's obviously been a big focus of yours. You talked about kind of completing 1.0. Kind of what is the opportunity from here? What should we expect in 2022 and maybe in the medium-term as well?

Thanks for the question, Nick. With respect to the operating platform, you think about a self-service business model in your lives and all of you interact and you're probably not going backwards. The first generation of any self-service model is generally focused on cost structure. Why? Because it's the thing you control the most. And as a result of that, you saw us over the last 1.5 year reduce our workforce by 40%. So we're managing more communities with less people, and the gap is filled primarily by our residents' actions through technology-enabled activities, whether that is a service or lease or renewal, any aspect of it, we actually have less people involved in the equation. The second generation -- if you will, call it 2.0, built by our innovation team is focused on the revenue side of the equation. And this industry is -- 15 years ago introduced itself to pricing engine algorithm, which does not have any real-time data to demand or its demand curve, but makes a guess and solves for occupancy. And in 15 years, that has not evolved. If you look at other companies, industries that have the pricing algorithms, they're somewhere in their 5th or 6th generation. So there's an enormous amount of opportunity inside of that equation. The second is, and Mike can go into more detail, we have 21 million rentable days. Every day that we can rent an apartment is generally $75 to us at our present, and we're pretty effective at this, but nowhere near the inefficiencies of a fee manager or a private owner. We have 600,000 available days of renting. And how do you close that? A variety of ways. But again, I think that's the next generation is focused on those 2 primary areas. And lastly it's customer satisfaction. If the customers are not happy, we're not going to rent our apartments at premium prices or keep them full. So Mike, what would you say about 2.0?

Yes. First and foremost, I'd tell you, it took us 3 years to come up with Platform 1.0 and achieve that $20 million in NOI to really build the foundation to get to us where we are today. And the fact that we are able to move as fast as we are to come up with another $20 million in value that's more top line related over the last, call it 6 to 9 months, has been pretty impressive. So to Tom's point, we are focused more on the customer. We're identifying what will allow them to stay longer, how we can identify people that will come through the door and live with us longer. And that's going to help us with things like controllable expenses. It's going to help us with the share of wallet. And it's going to push us towards that $60 million to $80 million that we're going -- after over the next, call it, 12 to 24 months. And there's a lot of opportunity here. And again, to Tom's point, the vacant days, you've heard us talk about that over the years. We continue to get a little bit more efficient on that. There is $40 million to $45 million in value that's just sitting out there in, call it, 3% vacancy. And then there's things like the pricing system, creating those buyers versus shoppers. We're really driving all of this information that's coming to us in terms of, say, 10 people come to a property at a given time, we can identify who's looking at the units, how long they're looking at it. We reach back out to them through our pricing and our marketing teams to again create that urgency. And it's allowing us to drive our pricing up. It's allowing us to reduce our vacant days and just be more efficient as a whole. So we think there's a lot of opportunity on our $1.4 billion in rents this year, next year. And we think, again, on the customer service side of things, there's a lot of improvement out there. We're going to identify who is going to live with us longer and continue to drive those retention rates higher.

And then Nick, if I could jump in, maybe give a little more meat to the numbers, too. But I know you were kind enough to host us out in Brooklyn, but last November, and so we got to go into a lot of this in a deep dive. But I just want to give a little bit more knowledge to the audience here if they're not familiar with kind of where we're going with 2.0 in terms of the $100 million plus Max potential, what we've identified on the $20 million already, which we would qualify as kind of quick hits. And then the $80 million that remains that we're going after. So on the $20 million, that's a lot more of what UDR has historically done. So that's a lot of our typical initiatives, some of the 1.0 type things at the foundational tech set up. So that's Net Promoter Score is allowing us to react more quickly through those dashboards to understand what's taking place at a property or with our resident. It's things like working with Rhino on lease deposit insurance doing forced placement on package lockers to create additional revenue there. There's purchasing activities that we have in there, additional centralization and automation, including elimination of additional head counts. Today, I think we've got, what is it, Mike 19 properties sitting there with nobody that shows up on a day-to-day basis. We're going to take that up to approximately 28 within the next 6 to 9 months. And so it's additional head count reductions there through more automation and tech. And so the $20 million that you see in the presentation consider that in our minds, we would say that's money good. It's been identified. It has a work plan. It has the resources allocated to it. It's coming into the run rate later this year and into '23. I think the bigger piece then comes into the -- how do you go get the $80-plus million that's still out there. And Mike and Tom both touched on a number of those, but didn't want to dive into the data side of it. Because we mentioned data up here and having control of our data through the data hub as one of the foundational tech pieces of 1.0. But what we're really doing there, we're working with a third-party consultant that's big data, consumer focused, works with a lot of the Amazons and Walmarts, Starbucks of the world. We've opened up our data hub to them. And they've looked through 8-plus years of leases, 400,000 total leases, 250-plus data points per lease and across the whole spectrum of different data points that you can track by individual property and market and what they found is a couple of cool things for us. One is based off that data. They can tell you with 90% probability, who's going to stay and who's going to go, which is critically important to some of the initiatives that Tom and Mike talked about. They've also shown us that there's 50% of retention that's in play. So 50% of the individuals that depart actually, we should be able to control that decision. And 40% of turnover actually goes within the same submarket. So they've already chosen their submarket and where they want to live. They've just chosen at that point not to live with us any longer, which tells you we did something wrong. And so we're actually going to utilize that data, operationalize it. We're creating individual dashboards by resident that shows where you're at on your customer journey and then tells individuals in the field or at corporate. What action to take place that next morning when they come in, see that dashboard, how do you go engage with that resident to change their trajectory, because the goal ultimately is to turn someone that was a go into a stay. So drive up retention. If you're a 90% probability of staying and the reality is that rent is only one of kind of 15 top factors. It's not the renewal rate that's going to force you to leave. So why don't we push renewals more aggressively. You start to shrink your vacant days when you push up retention, which helps the pricing power and what you have to do on the front door. Obviously it helps with resident wallet when you have longer-term residents that have a greater trust and belief in the UDR partnership and what we offer. And so also helps with expenses across the board. And so that's that, the $80-plus million. It's really hinged upon data, our control of data and the way we're going to use it. And today, I'd say we road-mapped about $60 million of that $80 million is where we're going after right now that we're already kind of talking through. Here's the roadmap, here's cost, here's time lines. So over the next 3 years or so we'd expect to try to get that into the run rate.

And as you think about this kind of platform and kind of future initiatives, how much of that is replicable from either public or private peers? And how much do you think is proprietary?

Yes, it's a good question. I'd say the first thing, in terms of leadership and innovative culture that is difficult to replicate. We started 1.0 back in 2017, started really talking about it -- to the public in 2018 in terms of the vision and what it was. I'd say at this point, we've come through 1.0 we put up the stats on the $20 million, the 250 basis points controllable margin, more headcount efficiencies, better customer service scores. But you're now seeing a lot of the peers in the industry start to follow suit. So I think 1, the innovative culture is tough to replicate. And you consistently have that and you want to lead the space. I think that's difficult. When you talk about some of the things that we're doing with package lockers with Rhino deposit insurance, anyone can go out there and do that. Is everyone going to probably not. There's a lot of third-party managers that are incentivized. That's a huge opportunity set for us to go after over time. So there's, absolutely things that are not proprietary. I do think the data piece of the equation, how we utilize that data to focus on the customer experience, the resident retention and build all of this data into our pricing engine because all of us use a base pricing engine that certain groups provide. But we then augment them ourselves through things like heat maps, additional dashboards, additional data inputs. This is just another way to keep refining ends with that. So there's, proprietary aspects in here and then there's nonproprietary.

Maybe if we overlay this with capital allocation so you were very active last year. Obviously, it's a competitive market to acquire properties. How do you think about the additional yield either day 1 or either the first year or first few years of implementing this platform on top of acquisition opportunities?

Yes, so one of the reasons we've been probably the most active in the space over the last 3 years have done approximately $3 billion of third-party acquisitions really hinges back to not just cost of capital, but really what we can do with certain assets. All of us are great operators of the multifamily space on the public side. But I can't say the same necessarily on the private side. So on the private side of the equation, when we're -- when we have an advantage of 250 basis points of margin relative to our public peers, usually in the public space that gets up to 500 to 1,000 basis points. And so when you think about what that is for numbers, typically, we can get about a 10% to 15% NOI lift on an acquisition coming from a third-party through core blocking and tackling. And there's a great page in here if you take a look on Page 12 in the presentation that we try to help visualize this for going back to the '19 and '20 acquisitions, but really breaks down how we think about kind of our business plan by asset. When the acquisitions team is looking at opportunities, they're going through and trying to stack up as many value creators as we can find. And so its core blocking and tackling, it's historical innovation activity. It's Platform 1.0. It's division for 20, its CapEx plans. We've been very big on podding assets if you look back at our '21 acquisitions. I think median distance was around 2 miles -- median drive time was around 10 minutes. So trying to be able to operate more of these assets with nobody on site each day and then put in CapEx plans and then predictive analytics from a market selection standpoint. So 12 does a great job of kind of laying out how we internally think about how to attack assets and go after what fits with our platform.

I want to get these questions in. What is the biggest growth opportunity that you believe the market is not giving you credit for?

Well, Nick, I don't know if they're giving us credit or not, but I think Trent and Chris do a fabulous job in communicating with investors. But I think the thing that has the most potential, and it's hard to measure is really the operating platform and the margin expansion, not just in the public arena, but when we take that and overlay it in a private market, that 1,000 basis points of margin expansion upfront pretty valuable.

And then what is your number 1 ESG priority in 2022?

I think at the end of the month of April, we get our SBTi measure report that gives us a road map to really look at where our carbon footprint is by a third-party and how we're going to tackle that.

Maybe just quickly on DCP opportunities, how are you seeing the environment today? They've obviously kind of been higher yielding and provided some acquisition opportunities as well. But are you seeing more competition there?

Yes, the competition is pretty consistent, I'd say, since we kind of came out of the downturn. So markets shut down for 9 months or so you saw a pullback in capital, but it has come back. And just for edification of the group, our DCP or developer capital program, that's really mezz and pref lending to apartment developers. And we play in kind of 65% to 85% of the stack. What we're doing today, typically looking for 10% to 12% IRRs. We've expanded that book of business to look at operating recaps. And so those returns typically down in the plus or minus 8% range. But we do want to continue to grow that piece of the business. We've had a lot of success there going all the way back to our first deal in 2013. Since that time, we bought approximately half of the transactions out of that typically at discounted prices and/or with upside participation through back ends. And so expect to continue to do that. We had one payoff in the first quarter, but we're working hard to replace that and then kind of grow the portfolio.

Great. We do have our rapid fire questions to end every session. What will same-store NOI growth be for the apartment sector overall next year in 2023?

I think sector-wide better than 7%.

Every single residential company has said 7%.

We sat around a memo.

What will the 10-year U.S. Treasury yield be a year from today?

I haven't been right in 25 years. I don't know why I'm right now; 2%.

And then will the apartment sector have more or fewer public companies a year from today?

If you are counting MTRs as public entities, less.

Great. Thank you very much.

No, thank you, Nick. Thank you for all of your time. Have a good day.