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

So good afternoon, and welcome to Bank of America's Global Real Estate Conference. I'm Josh Dennerlein, and I cover the residential REITs at Bank of America. I'm joined by Jeff Spector who runs the REITs team. We're pleased to have with us UDR's Chairman and CEO, Tom Toomey; and President and CFO, Joe Fisher; and SVP, Property Operations, Mike Lacy. Tom will start with a few opening remarks, and then we can jump into Q&A. And as always, I encourage questions from the field. With that, I'll turn it over to Tom.

Great. Thanks again for having us this year. I appreciate it. Boy, it's been a year since we were here last, and quite a bit has changed in the world. We're going to catch you up on that. But just a quick couple of minutes about UDR, 60,000 apartment homes, 21 markets, a 75% coastal representation, 25% in the Sunbelt. Average rent about $2,500 a month. And we're an S&P 500 REIT, 52 years as a public company, and about $22 billion to $23 billion in enterprise value. So that's an overview of the enterprise. I think you handled the introductions already, so I appreciate that. Joe is going to catch us up on a little bit of current events and give an overview. And then Mike and I and Joe will chime in to your questions. So with that, Joe?

All right. I'll kick it off here. So hopefully, everybody got the update there in front of them. If you don't, we got Trent Trujillo sitting over here to the side, so just give a holler. Really, 3 main things we've been focused on over the last day or so kind of trying to make sure that we communicate, one, at the sector level and then, two, more UDR specific. It's a -- at the sector level, for those of you who want to follow the space, it's a multifamily, generally doing quite a bit better than we probably expected coming end of the year. So we knew about the record levels of supply that we are facing. What we have seen to the positive, of course, is on the demand front, both jobs and wages, as well as I think one of the key variabilities is going to be relative affordability. That has really been the tailwind for the sector that's driven a lot of more absorption than probably all of us thought coming throughout the year. And so fundamentals holding up better. And I think at this point in time, instead of looking up the mountain at the peak of supply, we're now looking down the other side as we go into fourth quarter and into 2025. So I think we're all a little bit more optimistic fundamentally as we transition into '25. Same time for the sector. I think you're seeing this play out in the capital markets. So now that NOI has leveled out or is going positive on a go-forward basis, there's a lot to talk about in terms of capital flows coming into the sector. We've seen a lot of big players start to make very big portfolio purchases and commit to the space. That's gotten a lot of the smaller private players off the sidelines, so bid intensity expanded. We've seen cap rates continue to compress. We're seeing very routinely mid-to-high 4 cap rates into the low 5 cap rates, depending on product and market. So overall, I'd say multifamily feels pretty good at this point in time. For UDR, I guess, what I would say is a couple of things, one on fundamentals, one on capital plan. Fundamentals, when you look through the update we provided, we continue to see blends generally performing better than expected. And so when we put out guidance at end of July, we had said we needed to see a certain level of blends to hit the midpoint. Quarter-to-date, we're at about 2.1% on blended lease rate growth. The rest of the year, the next 4 months, we only need to see about 50 basis points to get to the midpoint. So we feel we -- like we are appropriately cushioned at this point in time. And hopefully, we outperform that number on blends. Occupancy continues to hold in pretty much where we expected at plan, so no issues there. Bad debt wise, continue to see improving collection trends, so a little bit of a positive on that front. On the turnover side, we continue to see retention stay high on a year-over-year basis, a little bit better than we expected as our customer experience project continues to pay dividends. And so that's leading to better expense numbers than we expected. So we brought down guidance on expenses a little bit or brought down expense guidance a little bit in 2Q. Still see continued momentum there as we go into the second half. And so I think NOI wise, overall, feel pretty good about where we stand this year. On the capital side, I mentioned the transaction markets. What it means for us really is a little bit more of the same of where we've been. We've been pretty capital light for the last year or 2 as we haven't had the cost of equity to be on the offensive side. I don't see that changing right now. While stock price has been nice, we're still not at a level that we need to be to go out there and consider equity issuance and go deploy accretively. And so we are exposing more assets to market and bring in some capital into the enterprise. We are looking at more recap opportunities within both the pref and mezz space. So that's deployed under some of these safer operating assets that have a nice cash current pay. We're looking at JV opportunities with the JV partner that we formed a deal with last year in LaSalle. And then we're actually looking at a number of OP unit transactions. We completed one of those middle of last year. These are somewhat episodic, but we do have an opportunity to potentially get a couple of those completed over the next 6 to 12 months that we're having discussions on. So we're trying to pick and choose our points to create a little bit of value and accretion. But overall, that's kind of where we're at as a company. So I'll pause there, Josh.

Yes. No. Thank you for that opening remarks. I had a couple of questions on the back of that. And maybe just was the first was you mentioned multifamily has been doing better than expected since the beginning of the year. I guess, what is it that you saw or you initially thought the year would progress like versus what actually came through? Where has that incremental demand kind of been better? Or what's driving that?

Hey, Josh. I'll take that. I think, first and foremost, if you refer to Page 3, you can see where our blends are today. You can see it against historical averages as well as what we experienced last year. But to your question, we really expected blends of about 70 bps in the first half of the year. We actually ran around 170 bps, so we're 1% above that. In the back half of the year, we had pretty similar expectations right around 80 bps. As you can see and Joe mentioned, we're running around 2.1% blends through August. We feel very good about that trajectory. Only need 50 bps through the last 4 months of the year to get to our midpoint. But it was very similar, call it, 70 bps to 80 bps, first half, second half. Ideally, we run about 1% better. So that's kind of as a whole. But where I'd point you to is Page 4. We were able to break this down a little bit more by region. And you can see here, we give our East Coast, West Coast and Sunbelt exposure. And pretty much across the board, we raised our guidance by about 50 basis points here a couple of months ago. And how we're getting there is a little bit different. I would tell you, and it should be no surprise to any of you, in the coastal markets, East and West, rents have been running ahead of expectations. And the Sunbelt, for us, it's been running about where we thought it would be, right around negative 1%, negative 2% blends for the year. The difference is other income. And this is where the teams have really been leaning in, driving innovation. We're seeing around 12% to 13% growth on our other income lines within this region compared to 6% to 7% growth on the coastal markets. And so across the board, about 40, 50 bps higher than original guidance. Feel pretty good about where we're going, and the teams are doing a great job in terms of beating their competition within these markets.

So that 50 bps for the rest of the year, that seems -- if you're already quarter-to-date at 2.1%, that either signifies like a significant slowing in the back half of the year or maybe something I'm missing. I guess, just when you put that 50 bps out there to get to the midpoint, like was there something different that you're seeing on the ground? Or is there something -- some kind of headwind that we should be kind of aware of?

The biggest thing for us, we thought it was prudent just given the fact that we have record levels of supply ahead of us. I mean through the first part of next year, probably 1Q, 2Q, you're going to have elevated supply, especially in the Sunbelt for a given period of time, in a period of time where demand is coming down, right? So even though we have an easier comp on a year-over-year basis, you still have to eat through a lot of the supply. And so our expectations were that we were going to follow kind of historical norms, typically see blends come down through the rest of the year. Ideally, it stays somewhat elevated, but that's just our expectations.

I think to a little historical context going back to a year ago at this conference, I think all of us came in feeling very good exiting the summer leasing season, and so weren't seeing really any warning signs on the demand side. Supply was elevated. But then also, we walked out of this conference and literally weeks later, our dashboards and I think a lot of the other sector started to see some market deterioration in terms of rents, the offering and concessions. And so there were guidance cuts for us and a number of others that happened kind of in the 3Q earnings. Our approach this year has been, let's make sure that we under-promise, over-deliver. It's not about kind of where we start the year but where we end the year. And so we've had the question of, are we being a little bit conservative? Potentially the case. We hope what a lot of the peers guided to the rest of the year of accelerating blends into the back half, hopefully, that comes to fruition. But if it doesn't, I think we're really well positioned both from a same-store rev, NOI and FFO perspective to make sure we weather any storm. If it does occur, we're not seeing it today. But if you go back to last year, a very different environment, right? We had rate surging, credit availability coming down, we're talking about a 6 cap world back then versus a high 4s world today. You had a macro environment, where consensus expectations were hard landing, not soft landing, so as a recession was coming. And then you had a bunch of developers that were sitting at the front end of the mountain, looking up at supply next year and saying, I've got maturities coming up. There's no credit available. We're going recession, and I got heads in beds and they start giving 2 or 3 months free. We're not seeing any of that today. So our hope is that none of it comes to fruition, but still prudent to be cautious until we can see the actual results. And I think when we get to 3Q results late October, at that point, you got 60 days left. And we'll have this a little bit more in the rearview and we'll be able to talk about where we're at.

Is that in September, October, you think, the big risk just given what happened last year? Or was that just more of a macro backdrop? I guess I'm trying to think through like that -- the demand is going to weaken seasonally or maybe supply is still trickling on. Just trying to think through like the dynamic here. I know there's other factors last year, but just any kind of thoughts on how this progresses?

I think the other factors that Joe mentioned are definitely something we're watching very closely. But what I would tell you is September is actually one of our highest lease expiration months. And so we have 10% of our leases that are actually expiring in that given period of time. October, it starts to come off pretty significantly in that 7% range. But you're dealing with 17% of your lease expiring in that time frame, and so a lot can still happen. That's why we watch it so closely.

Okay. And then for the midpoint, you mentioned the 50 bps blends for the rest of the year. What does your high end and low end assume on blends?

I mean right now, if you look at, again, Page 3, you can see where we track normally. Historically speaking, let's be honest, the last 5 years are anything but normal. So we went back and looked at 2011 and 2019 just to get an idea of how blends start to come off. And you can see, if we follow that same trajectory, that you should be anywhere from 0 to 1% in the back half of the year, if you just follow that same curve.

Okay. Any questions from the field?

Maybe just on the organic, better year to date. It's better than expected. You talked about affordability. Where do we stand today on affordability? And that varies by region?

Yes. I think we have a good slide in here. If you go back to Page 20 in the back, there's a top slide to give you a little bit more of a historical context of the dynamics between both single-family and multifamily, and then a little bit more relative of less expensive, more expensive at the bottom left there. And so yes, as we've seen home price appreciation continue to surge over the last couple of years, at the same time, rents have stagnated a little bit here for a period of time. And then mortgage rates obviously going significantly higher. We've seen a change versus long-term average of renterships, typically 30% cheaper than ownership. It's gone 25% more to the cheap side. So we're seeing that as a pretty big tailwind at this point in time as move-outs to buy is about half of the long-term average. And a lot of that's taking place in the Sunbelt where traditionally, you see higher move-outs to buy. But it's also when you look at top-of-the-funnel traffic, we're seeing really good traffic trends coming in. I think part of that is just because there really isn't a great alternative given the housing shortage in the country. And so when you think about the setup here, we've gotten a number of questions of congrats on 2024. That's great that you got the backdrop. What about '25? What about '26? Because if rates come down, are you going to see a lot of people starting to leave in the part to buy a home? Our view is that's a very long time away. Just given that the delta, that 25% difference versus pre-COVID, that's worth about 2% in rate. And so while we all expect Fed funds to come down, the long end probably is a little bit more anchored than that. So trying to get a 2% benefit from rates seems challenging. And at the same time that you're probably going to see continued home price appreciation during this period of time, that makes it more expensive. So we think this is a multiyear tailwind for us, similar to what you saw kind of coming out of the GFC, where you got really expensive housing. You also obviously had a psychological impact that is very different than versus it is today. So we don't have that same tailwind in that sense, but we think this is a multiyear issue. But for us, we're a little bit of a price taker, if you will, from a macro perspective. It kind of goes back to what are we trying to do, and a big focus recently has been on retention. How do you focus in on the customer experience? How do we take our relative turnover versus peers, which have been running higher than peers? And you see that on Page 14 in this presentation. We've been running pretty consistently higher than peers on retention because we weren't focused in as much on customer experience. You can see we've really changed that trajectory when you look at Page 14. We've brought it down absolute. But relative to peers, brought it down a bunch too. And so Mike can probably take you through kind of the value proposition we're talking about there, how we think about dollars on the table and kind of what's driving that. But I think that's, for us, what can we do because we'll end up taking whatever the macro gives us in that sense.

Yes. Maybe if I could just spend a second on this because this is one of our biggest opportunity sets. We've got a few that we're really going after over the next couple of years. But to Joe's point, we do believe that we can capture a 5% to 10% sustainable turnover advantage against the peer group here. We've already captured that 200 to 300 bps over the last 12 months or so. And by capturing this, we believe it's between $15 million to $30 million in value. So a lot of opportunity there. We have a dedicated team of analysts that are actually looking at our dashboards every single day. They've created about 20,000 different touch points. So we're actively going out there to these individuals, our current resident base, identifying what's a positive experience, a negative experience, and trying to change that trajectory. That's led to about 300 to 400 basis points improvement in year-over-year turnover and again, about 200 to 300 basis point improvement against the peer average, just from about a year ago. So this is really starting to play out. It's something the teams are really focused on. And I can tell you, every time I go to a property, instead of them telling me how many leases they got, this is what they want to talk about, how they're changing the trajectory of our retention for the company.

What are the key factors that you're doing that are changing the retention?

So a lot of it's control. We went back through millions of data points to understand exactly why people are leaving and where they were going. And we identified that the majority of them, 50% of this is actually controllable. They were moving across the street. They were going to competitors, and so they were quitting us. And it's for reasons like pet waste or noisy neighbors or package lockers, things that we can actually go in and make better for them, make that experience a much more palatable experience for them and change it. And so that's what's really been driving this, and that's what the team has been focused on.

So we're pulling in data from every text exchange, e-mail exchange, voice recording, all your NPS scores, public reviews, your service request, all of this goes in. And so we'll be able to go back and correlate, was that a positive or negative experience and then you stay or depart. And so the differential in stay versus go, like high score, low score, that's a 20% delta in retention. That's what gives us conviction that we can go after those individuals. And when you have the sentiment analysis running through the algorithm that says, bad experience yesterday for that individual, it triggers somebody on Mike's team, either centralized or on-site, to reach out to that individual and be proactive with them. We see what happened. How can we actually help solve this issue and make it better for you? That's what's driving the change in trajectory on their scores and, therefore, the retention probability.

What's the value if you knew what your customer thought of you every day? Period. And we do. And so therefore, it kicks into can we change their trajectory? Oh, by the way, we're getting ready to send out a renewal notice. Can we warm the pot up, so to speak? Can we solve a problem? And that's going to lead to better retention, higher-quality residents over time and a better service level, both ways. For the perspective, 1% turnover is about $4 million a year.

In NOI?

Correct. Total cash flow. Cash flow. You got a -- there's current costs as well.

Cash flow and CapEx.

Right. So there's CapEx savings.

The biggest piece so far is the vacant days. And so we average right around 21 days vacant. If you can avoid that, that's the biggest piece.

Okay. Why do you think you were like higher than peers for a while?

A couple of things. I think for us, we were probably a little bit more aggressive with renewal increases at that time. And then quite frankly, I don't think we were spending enough time on this, talking to our residents, understanding kind of where they are in their life cycle. And just putting a flashlight on it has been a huge difference, and it's also been a cultural change going out there and again talking to the teams, making sure that this is the most important thing that they're talking about. It's making a difference.

Josh, if I can give you a little bit of color and a history lesson. So we approached the business in 2018 with a strategic shift to say self-service was going to be ours. Why? All of us have experienced self-service. Some of it good, some of it bad. All self-service business models, when you break them into 3 dimensions, 3 time lines, the first is cost structure and savings, right? And we did that. 40% of our sales force went away. We centralized that net-net. We run at one apartment, 45 apartment homes per employee. That will lead the industry. Okay. So the self-service aspect became -- and you saw it, it's self-guided tours, et cetera, et cetera. The second phase is enhancing your customer retention service level. Well, we've spent 2 years piling up all the data, 7 years of every interaction with every resident, figured out exactly what the formula for controllable failures, noncontrollable failures. And that's what we've been working on for the last 2 years is getting this effort up, rolled out about a year now. And you've seen 300, 400 basis point improvement in turnover, just embraced by the workforce. The next is to shift your pricing engines to a demand-buying opportunity instead of a [ solved for ]. And that is on the drawing board, but we've got to finish the second phase first. So what's the margin expansion potential inside of this? Mike thinks he can bring down turnover 500 to 10,000 -- excuse me, 5% to 10%. Every percent is worth $4 million, so that's the opportunity set we're chasing. And we think we can solve a lot of that.

Can you explain that last thing you mentioned, the pricing and demand? You said demand [ process being solved for ]?

Yes. I mean pricing engines today, if you think about it, are really about their third generation, which is a [ solved for ] occupancy. They have no real-time demand data in them. They kind of revert to the past and then make an estimation. And that's how it determines what price should be sent out. The difference is today, I'm capturing -- I can tell you down to every apartment home and style, how many people have looked at it online, how many have visited. What if I reverse course and call those 10 people back and say, guess what, 10 people have visited and looked at a 1-bedroom, do you want it today at this price? Or do you just want to take a gamble that it won't be there tomorrow? So that's a demand. The best way to do it is -- I love Brooks running shoes, right? Every time there's a new model, they come out. Why do they send me an e-mail? There's only 3 left. You have to buy. There's only 3 left. So they sense -- they shift me from a shopper to a buyer just by creating scarcity or market knowledge. And then so that's the data system that we're building up. And I think we'll be ready with the new pricing engine at some point in the future, but I really want to get the customers' experience down. And why do all this focus on operations? These are all great companies that are public. When I go to the private space, not so much sophistication capabilities. And generally, what we find -- and you've heard us for a number of years, we like buying the one next door. Why? I know what my operating margins are. I can look at their number and go, I can get that. And what's the lift? Anywhere from 500 to 1,000 basis points on margin, which is basically 10% NOI growth out of that. And I know I could get that with a high degree of certainty because I'm the one next door. And so that's what the long-term competitive advantage would be from having a sustained advantage over the private space.

Tom, how much of that -- you were talking about your pricing model evolving and improving NAV. How much of that would be offensive, as you were describing, and potentially defensive in light of...

Both ways. It goes both ways. It's where you look at your customer retention aspect and you'd say, this resident is worth X and they've been with us Y period. What should be the appropriate retention pricing?

Theoretically, if there were policy judgments then [ for being used in revenue software ].

Most likely. Yes. You have to move off of it, and you're just -- the public company is going to have the sophistication and capabilities to cope with that. It's the private operator that won't. So we see a long-term opportunity gap being created because a lot of the private operator, 1,000 doors, 5,000, how do they set pricing? Solving for occupancy. And where Mike has made great inroads into other income, which represents 10% of our revenue stream, most operators won't even venture into that camp because they don't have either sophistication or capability to execute.

I think one of the next questions we get often is when that day comes, how disruptive is that to the enterprise, i.e., the revenue stream? As a -- we've got a dozen assets that we've been beta testing behind the scenes for -- what, 3 to 4 months now?

That's right.

And going through and looking at that relative to the submarket peer set and testing without that function. How did we perform? As a -- we performed just as well with our own approach. And so it may take a little bit more time and people from time to time, but we do have enough data to operate an algorithm on our own. It's just how is it, the transition? And I think we're in a pretty good place there because we've all been working through it, and so some of this legislatively will have to be forced upon us like it is in San Francisco.

But does that make the market less rational?

Yes.

When you're competing with very irrational pricing, does that bring down the whole market in certain circumstances?

Temporarily. I mean it will temporarily, but it'll also be where some of your poorer-quality residents will find those homes first versus sophisticated operators. So I think the quality of the rent rolls will spread out dramatically in a market as this is implemented.

And keep in mind, too, while we think of these pricing engines as being representative of all users, they represent a subset of the users. So majority of the marketplace today is not utilizing that pricing algorithm. We still buy a lot of institutional quality real estate from individuals that don't have a pricing engine in place. That doesn't even count the moms and pops that are out there operating. So it's not as if 100% of market rate units are using that, go off the next day, and there's a lot of disruption. It may impact a subset, so it creates risk potentially on pricing from less sophisticated owners and operators. The flip side is it creates a heck of a lot of opportunity for us to keep buying from those individuals that can't compete in the same way we can with our scale.

The sum is greater than the parts.

Yes. It takes a while to build. And often, we get asked the question, well, why can't somebody go buy this? I challenge all of us in our companies. We've all bought software and then what happens? Do we optimize it? Probably not. We try to figure it out over time. This is a little bit a combination of building systems as well as culture that enable you. Most of our ideas -- Mike has 60-plus ideas, and there's a page in here on our idea list, those are mostly from our people. And where do we get most of them? From our residents or our people tell us how we're going to get better.

A follow-up to Paul's question on like how the market might change if pricing has to be set at company levels and not through like a software. Does that suggest bigger is -- could they get -- become a bigger advantage? And so like you want to add more scale, more data points, whether it's across markets or across the whole platform to like -- because I would think, like in a way, like if you have like a lot of density, you would really kind of own the market's data points and have like ability to kind of push harder. Just how do you think about that and balancing your current strategy and maybe where the industry is going?

Well, I think first, we've already got enough scale and scope, 21 markets, pretty balanced. I would think our growth would always be taking a look at the one next door and the inefficiency in the market. At the same time, we're always looking at Joe's analytics and his team with respect to where is the next great city to invest. It may not be a direct answer to your question, but it's kind of where I start to go to is inefficiencies next door down the street will become very apparent. Why? You look at your rent, you look at theirs, and you go, they're under-renting the place. Or their occupancy pulls because they missed the market, that's another opportunity. So the market dynamics, because of its transparency, the web, we'll be able to see where the inefficiencies are.

You mentioned earlier that the West Coast, it sounds like also outperforming. Maybe you can provide a bit more color on the various cities on the West Coast.

Yes. West Coast has been a pleasant surprise, I'd say, all year for us, and it really comes down to places like San Francisco and Seattle. And I'll start with Seattle. Seattle for us, our exposure is more Bellevue. And you don't have a lot of supply down there. You do have the light rail that's running to Redmond. You are seeing more people with the ability to kind of bounce around. They can live in Bellevue. They can work in Redmond. They can be there in 10 minutes. So that's opened up the funnel that's created a little bit more demand for us. And we've been, I'd say, very successful in Seattle this year. It's been one of our strongest markets year-to-date in terms of blends as well as our occupancy. Specific to San Francisco, that one is a little bit different. That one feels a little bit stronger than even Seattle today, quite frankly. I'm seeing blends of about 3% to 3.5%. Occupancy, above 96% today. And a lot of it's coming down along the Peninsula. We're seeing AI jobs are coming back. We're seeing people just return back to the office. And so that's allowing us to drive rents. And then I'd say, in addition to that, supply has been kind of a non-factor for us in San Francisco. So West Coast, a little bit stronger than we expected. You go down to the Southern part of it. Orange County has been decent. It hasn't been one of the standout markets for us this year, but it's been a steady-state market. I'm happy we don't have a lot of exposure to downtown L.A. or San Diego today. That's where we are seeing a lot of supply, putting a lot of pressure on a lot of individuals. But again, we don't have a lot of exposure there.

I guess, I'm sorry, just one follow-up. And I guess comparing to the Sunbelt, you mentioned in the Sunbelt had been also better than expected. But last year at this time, entering October, start to see more concessions from developers again, offering free rent. Is there anything that we should be aware of on the West Coast as we enter the fall of '25 as a something to watch for, potential red flags? Or it really comes down to job growth?

I think it always comes down to job growth. We know what kind of supply we're dealing with out in the West. And so it's the normal things. You want to keep an eye on concessions. You want to keep an eye on your traffic. If concessions start to go up for one reason or another, that's typically your first sign that rents are going in the wrong direction. Right now, it feels like concessions are stable state. I'm not really seeing any in our parts of Seattle where we compete. They're minimal in San Francisco, and they're minimal down in Southern California. So those are kind of the things that we keep an eye on.

Other questions from the field? I noticed on Slide 11, your heat map of where you see like the opportunities. It seems like it's screening high for JV acquisitions. Is this something looking to lean into at this point? How do you balance like JVs versus maybe balance sheet and...

Yes. JV acquisitions, so we have 2 existing large-scale JV partnerships. We have one with MetLife and then one with LaSalle and their capital out of Japan. And so the LaSalle relationship, we put in place middle of last year. We went through about a 6-month process, vetting potential partners, sovereign wealth funds, pension funds, investment managers, ultimately landed on that group, given that they had a lot of capital and a very big interest in growing that capital base within real estate. They thought similarly about the world of transactions as we did, really appreciated the operating platform. And so we put the [ 4-seat ] assets in there, got one asset last December done in suburban Boston with them. And then we've kind of been on hold a decent amount of this year with them, just given that they're going through or their capital partner have been going through kind of their every 5-year reassessment of global allocations for a $2 trillion fund. That's coming to the end now, so we think we'll get back on offense here, hopefully, in the next 90, 180 days with them and, hopefully, have more to talk about on that front. So we like the idea of growing with them. It grows accretively. It gives us additional scale and unit base. So more data is helpful, more scale, obviously, to help with cost in terms of deals next door for personnel, more pressure on vendors, whatever it may be. So definitely, on the JV front, the recap side within our DCP portfolio will have natural payoffs occurring in the next 12, 18 months as we're preparing for those. We're thinking about trying to redeploy and mainly on recap. So operating assets that have positive cash flow get a nice current pay portion on our pref, get 10%, 11% returns. Still have access to get the asset someday down the road potentially from a buyout, as we've done in the past, but kind of shift the composition of that book a little bit, so still looking at recaps. And then the OP unit side, we did that one deal middle of last year on 6 assets across Dallas and Austin. Those take a long time to come together, but there's a lot of estate planning, tax planning, kind of end of running a business type of situations that take a while to work through. But having a couple of those discussions too that are really just 1031 transactions where, hey, you want this price, well then, we want this price for our stock. It's just a lot of back and forth on that front.

So we're out of time. We've been asking 3 rapid fire questions every company. They're very difficult. So the first one is, do you expect real estate transactions to increase once the Fed starts to cut? Yes or no?

Yes.

If yes, when do you expect them to pick up? A, 4Q '24; B, first half '25; or C, second half '25?

The first half of '25.

How would you characterize demand for space today? Improving, steady or weakening?

Space?

Yes. Demand.

I'd say, steady.

Last year, the majority of companies at our conference stated they expected to ramp up spending on AI initiatives in 2024. How would you characterize your plans over the next year? A, higher; B, flat; or C, lower?

I'd say flat. We're constant.

You passed. Thank you.

Thank you.