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

Welcome to Bank of America's 2026 Global Real Estate Conference. I'm Jana Galan, BofA's residential REIT analyst, and we're pleased to have with us UDR's Chairman, President and CEO, Tom Toomey, CFO, Dave Bragg, COO, Mike Lacy, and Investor Relations, Trent Trujillo. I'll turn it over to Tom for opening remarks, and then we can get into Q&A.

Thanks, Jana. I appreciate that introduction, and you knocked off the first thing on my list, which was to introduce the team. From there, I want to make sure everybody's got a presentation if you're online, -- you can just look under udr.com presentation, and you'll be able to follow along should we reference that materials. Before I begin, thanks for your time today. Appreciate it. We've got about 30 minutes together. We'll make the best use of that and convey as much information as we can in that time frame. So let me start off with kind of maybe 3 topics. A brief overview of UDR. You can see it if you already don't know, 54 years as a public company, $20 billion enterprise S&P 500, about 60,000 apartment homes across 20 markets. So if you will, we are the remaining national apartment REIT. Second, kind of the apartment business. I have been at it for a number of years, probably over 35. So I'm looking around the room and saying, "I might be one of the more senior people in the room and have seen cycles, where are we at? And the truth is I like where we're at. I can unequivocally see I think '27 is going to be a better year than '26, as it references to the number of markets that are growing revenue next year over this year feels good. Second, why supply is finally abated? And when we build a 50-year high, it eventually gets absorbed. And we're seeing that inflection point across many of our markets and feel positive about that. And Mike would be glad to fill you in on more of those markets. Second rent to income levels. I want to say they're at record lows, but they are below the norms, giving us pricing power and the feeling that we can move rents and our residents have the capability to pay those higher rents. And then affordability, single-family ownership remains near its all-time lows, if you will, the affordability of alternative products. So we feel like those 3 drivers, coupled with what we would view as a robust economy. Paints a good picture for the future, if you will. So let's come to more current events. Talk a little bit about second quarter, third quarter and what trends we're currently seeing. Reminder, second quarter was a beat and raise that on a sequential basis, Mike and team produced #1 same-store revenue expense and NOI growth on a sequential basis. That's our primary leasing season at that window of time. So very good results. Something that we are very proud of and focus on is our relative performance by market. And Mike hit 70% winning percentage. I'm hopeful that my fantasy team wins that same percentage this year, but I'll take Mike's 70% over anything else. Second, looking towards the third quarter, it feels a lot like the same as the second, a very strong operational quarter, coupled with bottom line, it feels pretty darn good. So we'll see where we are and finish up the quarter in the next 15 days. On the capital allocation for a number of years, we've given you what we call our heat map sources of capital uses of capital, where do we see that Dave can go through. Clearly, we think the stock is very cheap at this point. And in fact, year-to-date, we've sold over $600 million of assets and purchase -- repurchased over $400 million in stock. So we think that's our current highest and best use, but Mike could go through it more -- I'm sorry, Dave will go through them more in detail. So with that, I'll stop, and we can open it up to Q&A.

Great. Thank you so much, Tom. Maybe turning it over to Mike first to kind of characterize how leasing season trended relative to his expectations which markets maybe were a little bit better and worse. And then maybe just a little insight on how you're going to approach year-end in terms of occupancy versus rate?

Great. It's a lot there, Jana, but I appreciate it. Maybe starting with Page 11, if I could direct your attention there and give you a little bit of color on where we've been, where we're going, cover some of the regions and also get into the strategy. Before I do so, I do want to just mention that 1.9% blend that we had in the first half of the year was about 15 basis points higher than our midpoint and about 70 basis points higher than the peer average, given the diversified portfolio, very strong numbers. I feel good about where that ended up. And to Tom's point, that translated into very strong sequential numbers, and it set us up for the back half of the year. So specific to where we're at and where we're going for recent update, still good with that 1.5% to 2% blends in the back half of the year. Expectations are we'll probably still run in that 96.5% range, still looking to drive our other income in that 5% to 7% growth. So about 3x what we've been achieving on blends, continue to see success as it relates to bad debt. And ultimately, this is leading to higher revenue growth and cash flow, which obviously we are very focused on. I think specific to maybe some of the markers that we're seeing out there today, we always look at current occupancy, but even more importantly, is that leading indicator of our 30-day trend. And our 30-day trend, just to kind of give you a color on that means if nobody else came in to run another apartment today, and I didn't get any more notices, we are at 96%, 30 days out, and that compares to 95.5% a year ago. So a bit stronger fundamentals as it relates to occupancy. That's led to market rents. Being about where we would expect this time of the year. And just to size that for you. Over the last 30 days, we've seen market rents come off about 50 basis points, which think about historically what you see typically this time of the year, they usually drop between 50 to 80 basis points. Last year at this time, they dropped 200 basis points. And a lot of that has to do with the backdrop of the occupancy. You can see the fundamentals are a little bit stronger today. It's leading to, I'd say, 1 to 1.2 weeks in terms of concessions, which is a bit better than last year, a bit more normalized, if you will, coupled with lower retention we have a lot of positive signs today compared to last year. So I feel good about kind of that guidance and where we're going. Specific to strategy, I think typically, what you've seen from UDR is running a little bit hotter in terms of occupancy in the fourth quarter, first quarter, usually in the high 96s to even 97%. We're looking to run again, closer to 96.5%, continue to test the market in terms of both market rents and renewals. And in fact, we're actually sending out renewals about 50 basis points higher in the fourth quarter compared to the third quarter. We want to test the waters. We have a little bit of a different backdrop, if you will. And just as a reminder, we actually have lowered our lease expirations in the fourth quarter to around 15% and which is typically running between 20% to 23%. So we just don't need as many leases. We've set that up to be able to try to test the waters on rents. Still have a healthy occupancy and ultimately drive our earn-in as we go into next year. We want to make sure the fundamentals, the foundation is set as we go into 2027. That's how we're thinking about it, Jana.

Very interesting kind of moving around your lease expiration schedule. Is that more now in that 2Q? Or how should we think for that percentage in 4Q moves?

Yes. So we effectively moved 5% out of the fourth quarter. I would say 2% went into the second quarter and about 3% in the third quarter. So we're running just over 30% expirations in 2Q and 3Q at this point, both quarters.

Great. Maybe if we could dive a little bit into the market performance?

Yes. I would start, let's go regions. And then if you want to go into some individual markets, I'm happy to give some color. I would tell you that there's a couple of ways to look at it. You can look at it in terms of year-over-year and then also sequential right now, rate of change the sequential momentum. There's a little bit more in the Sunbelt today. And so just to size that 2Q, we had blend of about negative 2% 3Q, we're looking at maybe negative 1.6%, negative 1.8%. So slightly better as we go into the third quarter. The coast is coming off a little bit. And when I say a little bit, almost comical when you talk about San Francisco where you had 13% blends in the second quarter, they're still 10% or 11%. They're still very strong, but they are starting to come down a little bit. So little bit weaker maybe on some of the coastal markets. I'd characterize it as more sustainable in the Sunbelt. And then there's puts and takes within those regions. It's not going to surprise you. I just mentioned that San Francisco is still our strongest market in the portfolio. New York is still doing very well on the East Coast. And then when you get down to the Sun Belt, places like Florida, outperforming Texas and Nashville today. So we like to think there's some winners in every region today.

Great. Thank you. And then maybe jumping over to capital allocation, your heat map framework. You increased disposition guidance and you remain active on the share buybacks. Let us how you're currently thinking about balancing dispositions, development, acquisitions and any additional buybacks?

Thank you, Jana. Great topic for us. We transparently provide what we're thinking. It's on Page 13. It's our heat map that depicts sources and uses of capital -- so in terms of sources, certainly the prioritization has been over the last year and continues to be the dispositions. We've successfully sold over $600 million of assets and we have more on the market that we're considering selling. We tend to put more on the market than we need to sell to provide us with optionality and remain disciplined as sellers. Disposition pricing has been favorable relative to our expectations with cap rates in the mid-5% range. Generally speaking, we are improving the quality of the portfolio as we do this. And what I mean by that is that we have 3 key criteria that we look at as we assess dispositions, but the same holds for acquisitions, although that's much less of a focus. First, we look at the proprietary signal from Orion, our predictive analytics platform, which looks out 6 years and assesses the relative rent growth potential very importantly, at the asset level, not the submarket level or the market level is not as much of a focus. It's an asset level exercise. And we look at the operating upside potential that Mike and team see or lack thereof in the case of dispositions, they tend to suggest they've squeezed the juice out of an asset, and that helps move it higher on the list. And then finally, CapEx and our perspective on that relative to buyers. So when we sell those assets, that screen inferior on all 3 of those metrics and then go buy back stock. And as Tom said, we've been very active as share repurchaser. We're generating that near-term accretion, but also very importantly, the long-term cash flow growth accretion as we improve the quality of the portfolio. So that playbook has been a focus over the last year and remains so today. So I would tell you that top source is disposition on top use would be the share buyback.

And I guess, because you have been so active in the market, maybe if you can kind of comment on kind of cap rates and buyer profiles and breadth and depth of that bidding activity?

It's a pretty diverse group in terms of the buyer profile and it certainly ranges by the type of asset that we're selling. For example, we've sold a 10-year asset in an urban area in Denver. And we've sold an asset in suburban Tampa Bay that is more than 50 years old. So you're going to get different buyer profiles depending on the asset. But in each case, we've received a favorable response the average age of the assets that we've sold is about 45 years old. And the rent level tends to be about 20% or so below that of the average for our portfolio. So those are just a couple of stats for you to paint the picture of the improvement in the quality of the portfolio. But it's an asset level exercise that we've taken and the buyer cap rates have been in the mid-5% range. More recently, as rates have moved, we've seen relatively stronger pricing for assets or markets where there's positive rent growth momentum.

And you guys have also done a little bit of acquisitions and development. You found your spots. Maybe if you can kind of let us know what was attractive about those deals relative to everything else is reviewed?

Absolutely. So as it relates to development, we have a narrow focus with the starts that we have announced. And it is essentially projects that are adjacent to an existing operating asset that we know very well. And so a recent example would be in Alexandria, Virginia. There is a project of roughly 400 units adjacent to 1 of more than 900 units -- so that allows for a few things, really good visibility in terms of underwriting the rents of the asset. That we're developing as well as some synergies on the expense side with our existing assets. So what we've done there, in our view, is really mitigate the risk associated with development -- and that's what you should expect us to the extent that we do new development starts, that's the criteria that we're focused on at this time. So limited activity in terms of development and then in terms of acquisitions, I'd point you to a couple of deals in Portland, Oregon that we are able to gather from PE partner a few months ago. And those checked all the boxes that I explained as it relates to dispositions, but in reverse, meaning that they had a very favorable rent growth signal from Orion, relatively low CapEx. And Mike and team were salivating that the operating opportunity to get in there and maximize the upside there. So acquisition activity has been limited, but when we do it, those are the boxes that we seek to check.

And I guess maybe just some more comments on the DPE program, the decision to maybe wind it down I don't know if recent rate activity has changed any of that. But it did serve as kind of a good way to get kind of more market intelligence, see more deals. Just kind of curious?

Yes. It has been. Over more than a decade, it has been a successful program in that regard and that it has allowed for market intelligence, some optionality in terms of grabbing some assets, as I cited with Portland. And also generating nice income. There is a cyclical consideration and a structural consideration in terms of our decision. Cyclically, on Page 16, we want to outline it for you. UDR has remained disciplined as it relates to DPE underwriting. The market has gotten more competitive. So we found ourselves over the course of the past year looking at opportunities with higher LTVs lower levels of current pay and lower rates than what we thought was appropriate for our capital. And we found ourselves in investment committee decisions looking at those opportunities and then looking, for example, at the stock buyback opportunity and deciding that the latter is a superior risk-adjusted return. And so those are -- that's the cyclical consideration. I say that because this will change eventually, right? But then there's the structural consideration, which is that we pride ourselves on our ability as an operator. And we generally don't get to operate the DPE assets. We also believe that we're in a new paradigm ourselves at UDR in terms of our ability to identify opportunities with upside from an investment perspective. Utilizing no volume in the process that we outlined. And so in the DPE business, we're capped in terms of our return. And as we go deploy capital via acquisitions or redevelopment, we find that there is disproportionate upside, and we want to be able to enjoy that. So the path from $380 million as of the second quarter to about $250 million at the end of this year, that's already contemplated in our FFOA guidance and then what we would suggest to you is over the course of '27 through '31, if you start '27 with a $250 million book and those proceeds come back and we redeploy at a rate that would be representative of the opportunity set on stock buybacks and acquisitions. It would be for every $100 million that comes back to us, it's about $0.01 dilutive -- so that's $0.025 to $0.03 or so over the 4 or 5 years. And finally, I would just mention that, that $0.01 is the maximum meaning that you're going to continue to experience growth in whatever area we redeploy into.

Maybe just kind of turning it a little bit more big picture, 2026 job growth wasn't as great as people would have hoped. I don't know if we know really what it was with BLS revisions all the time. But -- and you also had some headwinds in terms of immigration and H1B visas. I guess if you look out the runway with just a better supply outlook, and then we keep reading headlines about how many young adults are living at home. How are you thinking about future household formation and a lot of that younger household formation tends to be renters?

Yes. Mike, why don't you take them through the building blocks towards '27 and how we stack up at this juncture. Yes, it will be helpful.

I think the way we're looking at it, I think you have to look at foundationally, we talked a little bit about earn-in. And so the way that we would characterize 2027, the way it's shaping up right now, and we're going through the budget process. We're looking across all of our regions, all of our markets, and we're seeing green shoots -- we think that there is some momentum there that all markets could show some positive momentum as it relates to total revenue growth. So how you get there is how we think about it. Right now, if you think about the 1.5% to 2% blend in the back half of the year, simple math would tell you that our earn-in is between 60 to 100 basis points going into 2027. That compares to 0 for last year. And so we're already starting at a higher place just with that foundational building block of 50% of our rent roll. Some markets, obviously, San Francisco, New York, they will have a better building block than others. But then we look at things like blends. And when will you see that trajectory turn positive or to what degree in that inflection point that's what we're assessing right now through the budget process in addition to the plethora of ideas that we have in terms of other income, our initiatives, how we can continue to grow at plus 5% on that line item because -- at this point, it's 12% of our revenue, it makes a big piece of the revenue. So we see positive signs everywhere, but I think it does start with earning.

Yes. I might address a couple of things because 1 I would characterize every point, we don't know what jobs are, right? We get this number and it moves and immigration policy being a net negative people having kids later. Well, the whole mix in both of our underlying demand curve. I kind of look at it and say, it's a little bit like a wall of worry. What really makes our business tick is jobs. And when we look at the quality of our resident showing up, we look at our existing resident. We don't see any sign of stress and I've been through enough cycles you will have it, we don't see that. So our resident seems to be in a very good place. And yes, their wallet is getting squeezed in a lot of different ways and their alternatives for housing are even getting farther and farther away. So you can see it in our #1, our average age of our resident is 37. So they're established in the career they have the capability. They probably have some financial cushion to absorb things. That's a pretty healthy age professionally and economically. So we don't see it in all numbers. Second, I always do get a kick out of this conference. It seems to always climb a wall of worry. We're all sitting here in September. And a year ago, it was AI was going to get everybody's job. And this year, I show up and its AI is going to get humanity. I'm waiting for next year. What's AI going to get us next year. And yet, what we can tell you is our business is getting better. Yes. And when we operate in 20-plus markets and we say every market feels better next year, what I can say is a lot of years at this, very seldom b, I said, all our markets are getting better. Will they all be positive year-over-year? May not, but they're getting better sequentially. And that momentum seems to -- that's carrying through our optimism and the way we are looking at our business.