UDR, Inc. (NYSE:UDR) Q4 2022 Earnings Call Transcript

UDR, Inc. (NYSE:UDR) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Greetings and welcome to the UDR, Inc. Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Trent Trujillo, Director of Investor Relations. Thank you, Trent. You may begin.

Trent Trujillo: Welcome to UDR’s quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurances that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC.

We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone’s time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR’s Chairman and CEO, Tom Toomey.

Thomas Toomey: Thank you, Trent and welcome to UDR’s fourth quarter 2022 conference call. Presenting on the call with me today are President and Chief Financial Officer, Joe Fisher and Senior Vice President of Operations, Mike Lacey, who will discuss our results. Senior officers Andrew Cantor and Chris Van Ens, will also be available during the Q&A portion of the call. To begin, 2022 was an exceptional year for UDR. First, our same-store revenue growth was near the top of the sector and we achieved record high full year same-store NOI growth of 14% and FFOA per share growth of 16%. Second, we further advanced our already industry leading operating platform by investing in our people, which included establishing a 16-person task force to generate and execute innovation initiatives.

Additionally, we engaged in various PropTech and ClimateTech investments. Together, these resources should further expand our peer-leading operating margin into the future. Third, we adhered to the capital market signals, growing opportunistically when our equity was attractively priced early in the year and actively pivoting to a capital-light strategy when our cost of capital increased. Being a good steward of your capital is paramount. Fourth, while we had next to zero debt maturities in 2022, we continue to reduce leverage, strengthen our balance sheet and enhance our liquidity. And last, we were honored to be recognized by a variety of organizations for our ongoing commitment to our associates, stakeholders and the environment. These include UDR earned a 5-star ESG designation from GRESB, the highest rating possible.

Company was named by Newsweek as one of America’s most responsible companies for the second year in a row and institutional investors recognize our ESG program, our board, IRR team and numerous executives being top three in the respective categories among all U.S. REITs. In short, we have the right strategy and leadership in place to continue to propel UDR forward. Looking ahead to 2023, we are very aware of the wide range of economic scenarios that are forecasted to play out, but we build our strategy around diversification and the ability to perform in any environment. This is well demonstrated by our history of cash flow growth and TSR outperformance, specifically an 11% TSR compounded annual growth rate over my 22 years at UDR. The constant over this time is our focus on what we can control and how that sets up for relative long-term outperformance?

This includes: first, the strong relative setup of U.S. multifamily industry. Housing is a needs-based business, supply is stable, demand and traffic remain healthy, job growth has remained positive, rent to income levels are steady, and relative affordability versus single-family ownership and rentership remain near all-time highs, while the cost of capital across the industry continues to improve. Second, the favorable setup for UDR within the industry. We entered 2023 with approximately 5% earnings, the second highest amongst our peers and the highest in UDR’s history. Innovation initiatives and prudent capital allocation should enhance this growth through margin yield expansion. Furthermore, our balance sheet remains highly liquid with $1 billion of capacity and we have no debt maturing until 2024.

And finally, we increased our dividend by a robust 10.5% this year, enhancing our already strong return profile. Taken together, we feel confident that we will effectively manage whatever macro environment we face and continue to produce strong absolute and relative results. In closing, I am very optimistic on the relative strength of the multifamily industry and UDR’s relative advantages within the industry. We have a strong talented, experienced and innovative team, with a track record of strong relative performance. The key that unlocks our potential is our drive to continue to listen to our associates, our customers and stakeholders, which enables us to determine where we excel, where we can improve and how we can better innovate for the future.

To my fellow associates, thank you for all you did during 2022 again to make UDR a successful year and I look forward to what will come in 2023. With that, I will turn the call over to Mike.

Mike Lacy: Thanks, Tom. The topics I will cover today include our fourth quarter same-store results, early 2023 trends, our full year 2023 same-store growth outlook, including factors that could drive results to either end of our guidance range and an update on our continued innovation and operating efficiencies. To begin, strong sequential same-store revenue growth of 2% drove year-over-year same-store revenue and NOI growth of 12.1% and 14.5% in the fourth quarter. Results were driven by: first, robust blended lease rate growth of 5.4% was well above historical norms for what is usually our slowest leasing period of the year. This growth locked in our approximate 5% 2023 earn-in, the highest level in our history by more than 200 basis points.

Second, sustained strong occupancy of 96.8% exhibited our ability to efficiently convert traffic into signed leases. Third, we remain focused on enhancing our rent roll, which resulted in higher turnover than expected from twice the usual volume of resident skips and evictions. And fourth, collection rates held steady. The number of long-term delinquent residents across our portfolio continues to trend closer to our historical average, with approximately 400 residents today or less than 1% of total units. This is down from over 700 delinquent residents earlier in 2022, helping to reduce our bad debt reserve. Next, early 2023 results and trends. In my experience, there are four primary indicators that help inform us of the strength of the operating environment.

These include leasing traffic, concessions, absolute affordability and relative affordability. Thus far in 2023, we continue to see favorable trends. First, demand remains relatively healthy. Traffic is roughly in line with the elevated levels we saw a year ago and well above the long-term average, but prospective residents are taking longer to make their rental decisions. Second, concessions remain minimal and have been primarily concentrated in certain submarkets of San Francisco and Washington, D.C., averaging around 2 to 3 weeks. Recently, concessions of 1 week on average have appeared in Austin, Dallas and Denver. Third, our residents’ balance sheet appear to be holding up, portfolio-wide wage growth has largely kept pace with rent growth since COVID began, resulting in steady rent to income levels in the low 20% range.

To-date, we have seen scan evidence of residents doubling up. In fact, 42% of our households are single occupants, up slightly compared to pre-COVID levels. And last, relative affordability remains in our favor. Renting an apartment is approximately 50% less expensive than owning a home versus 35% less expensive pre-COVID. Only 8% of move-outs in the fourth quarter were due to home purchase, roughly 30% less than typical. With this backdrop, blended rate growth for the first quarter is expected to average between 3% and 4%, similar to historical norms and driven by renewal rate growth of 7% to 7.5%. New lease growth of negative 70 basis points in January was slightly below the pre-COVID average, but it is positive in February and we expect further improvement as we enter peak leasing season.

Turning to full year 2023, our same-store revenue and NOI growth guidance is 6.75% and 7.5% respectively at the midpoints. We are also forecasting expense growth of 4.75% at the midpoint, with real estate taxes and insurance, the largest pressure points. Underlying the midpoint of our guidance range is a 2023 blended rate growth forecast of approximately 2% to 3%. We triangulated into this estimate using third-party forecast, input from our field teams and the output from a multifactor rent growth forecasting model we developed internally. Through our predictive analytics work, we have found that total income growth is the primary driver of market rent growth. Within this model, consensus expectations that job growth will be slightly negative in 2023 are fully offset by the expectation of approximately 3% wage growth.

In addition, a declining homeownership rate and slowing, but still positive, consensus real GDP growth should continue to benefit market rent growth this year, offset somewhat by increased new supply. In short, even if job growth goes slightly negative, we still see a path to positive rent growth in 2023. With this in mind, our 6.75% same-store revenue growth guidance midpoint can be achieved through our approximate 5% earn-in, a 125 basis point contribution using a midyear convention from blended rate growth comprised of new and renewal rate growth of 1.5% and 3.5% respectively, an approximate 50 basis point contribution from our unique innovation initiatives. The high end of 7.75% would be achieved through improved year-over-year occupancy, additional accretion from innovation and blended rate growth similar to the pre-COVID average of 4%, comprised of new and renewal rate growth of 3% and 5%, respectively.

Conversely, the low end of 5.75% reflects a 75 basis point contribution from full year blended rate growth of 1.5% comprised of flat new lease growth and 3% renewals, which is approximately 250 basis points below the pre-COVID average renewal rate. Because of the relative strength of our January and February blended rate growth, we need only nominal blended rate growth of 1% on average through the rest of the year to achieve the low end. For reference, even during past downturns, our lowest trailing four-quarter average renewal rate growth was approximately 2%. Ongoing regulatory challenges could impact our views as 2023 unfolds, but we should have visibility into 65% to 70% of our full year same-store revenue by the end of April. We plan to reassess our guidance assumptions at that time.

Finally, we continue to drive forward on innovation with the intent of further expanding our 300 basis point controllable operating margin advantage versus peers. Initiatives underway are expected to generate at least $40 million in incremental NOI by year end 2025. $5 million to $10 million of this is included in our 2023 same-store guidance ranges and will largely be focused on revenue upside, such as our building-wide WiFi project that enables seamless whole-building connectivity, our customer experience project to enhance satisfaction and drive property-level ROI initiatives, and the expanded use of big data to improve our pricing engine. Innovation has and will continue to drive more dollars to our bottom line as we rollout initiatives across our legacy portfolio and on external growth over time.

As an example, on the $2.6 billion of third-party acquisitions we completed between 2019 and 2021, innovation has accounted for an additional 50 basis points in yield expansion above what the market alone would have provided or around $13 million of incremental NOI. This translates to approximately $275 million of value creation. In closing, a special thanks goes out to all of our teams for their relentless efforts to drive the best results possible across our markets. Your performance in 2022 was exceptional. And with your help, we will continue to leverage new and the innovative tools to drive results in 2023 and beyond. I will now turn over the call to Joe.

Joe Fisher: Thank you, Mike. The topics I will cover today include our fourth quarter and full year 2022 results and our initial outlook for full year 2023, a summary of recent transactions and capital markets activity, and a balance sheet and liquidity update. Our fourth quarter FFO as adjusted per share of $0.61 achieved the midpoint of our previously provided guidance range. Full year 2022 FFOA as adjusted of $2.33 was 16% higher year-over-year, reflecting the company’s second strongest year of earnings growth in its 50-year history. Similarly, our Board authorized a robust 10.5% increase to our dividend this year, enhancing our total return profile. Based on our AFFO per share guidance, our 2023 dividend of $1.68 reflects a payout ratio of 74%, in line with our historical average.

Looking ahead, our full year 2023 FFOA per share guidance range is $2.45 to $2.53. The $2.49 midpoint represents a 7% annual increase supported by mid to high single-digit forecasted same-store NOI growth. The $0.16 increase versus our full year 2022 result of $2.33 is driven by the following: a $0.20 benefit from same-store and joint venture NOI, a $0.04 benefit from non-same-store communities through the continued successful lease-up of recently developed and redeveloped communities, offset by $0.06 from higher interest expense and a higher average share count, and $0.02 from increased G&A expense and other corporate items. For the first quarter, our FFOA per share guidance range is $0.59 to $0.61 or a 9% year-over-year increase at the midpoint.

The slight sequential decline is driven by higher average share count from the settlement of forward equity agreements at the end of the fourth quarter and the higher interest expense. Next, a transactions and capital markets update. First, in alignment with our shift towards a capital-light strategy in mid-2022, we made no acquisitions or DCP investments during the fourth quarter. And second, we generated approximately $220 million of capital from dispositions and forward equity settlements. Specifically, during the quarter, we sold 1 community in Orange County, California for approximately $42 million and settled all remaining forward equity sales agreements at roughly $57 per share or a 20% premium to current consensus NAV and a 35% premium to our recent share price.

We used the proceeds to further improve our balance sheet and execute approximately $21 million of share repurchases at a 20% discount to consensus NAV and a high 5% implied cap rate. Next, our investment grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: first, we have only $115 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities and our commercial paper program. Our proactive approach to managing our balance sheet has resulted in the best 3-year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 3.2%. Second, we have $1 billion of liquidity as of December 31, providing us ample dry powder and strength.

And third, our leverage metrics continue to improve. Debt to enterprise value was just 29% at quarter end, while net debt-to-EBITDAre was 5.6x, down nearly a full turn from 6.4x a year ago and a half turn better versus pre-COVID levels. We expect these metrics to improve further throughout 2023. Taken together, our balance sheet remains in excellent shape. Our liquidity position is strong, we remain selective in our capital deployment with balanced forward sources and uses and we continue to utilize a variety of capital allocation competitive advantages to create value and drive earnings accretion. With that, I will open it up for Q&A. Operator?

See also 20 Best For-Profit Colleges in the US and 35 Most Expensive Countries in the World.

Q&A Session

Operator: Thank you. Our first question is from Anthony Paolone with JPMorgan. Please proceed with your question.

Anthony Paolone: Thank you. First question is for Mike, you went through some of the markets where you are giving out some concessions. Can you maybe just step back and give us a sense as to which markets you see as being strongest and weakest in the portfolio in €˜23?

Mike Lacy: Yes. Hey, Tony. How you are doing? It’s a good question. I think probably starting at a high level you have heard us talk a lot about just the convergence of trends over the last few months as it relates to both the Sunbelt and the Coast. So let me start there. I think with the Sunbelt, you have heard us talk a little bit about that earn-in. We are right around 6% going into €˜23, the Coast, for us, just over 4%. And when you think about it, East Coast was around 4.5%, the West Coast around 3.75%, the difference in what we are seeing today though, is we are seeing higher market rents as well as a higher loss to lease in the Coast. So we are seeing a little bit more forward strength and leading indicator there, if you will.

And what we are experiencing and expect to see is the Sunbelt will probably have higher blends to start the year, and a lot of that is driven due to renewal growth and what’s been sent out in the foreseeable future. That being said, we do think the Coast, given the market rent and locales, could catch up and potentially surpass that sometime midyear. But what it’s coming down to is what we are doing differently. And a lot of this has to do with what we have done with the pricing system, the fact that we are able to see current demand trends coming through the door. We are able to price a little bit more efficiently there. But we are also utilizing a lot of feedback just in terms of what the customers are saying, what our teams are saying. And we think that this is going to continue to drive outperformance as it relates to our customer experience project.

So a lot of exciting things to come on the innovation front that will continue to differentiate us.

Anthony Paolone: Okay. Thank you. And then just my follow-up is, you didn’t put much in the guidance with regards to, I guess, nothing on the acquisition side and just very little on the sales. But to the extent capital markets or investment sales markets perk up here the next few quarters, what would you look to either sell or buy?

Joe Fisher: Hey, Tony, it’s Joe. We did not. We took a relatively conservative approach on guidance as we typically do when it comes to sources and uses. So we really look strictly at what do we have identified in terms of development, DCP, redevelopment NOI enhancing spend and then have that funded primarily with free cash flow plus potentially some disposition in the DCP repayment. So pretty conservative on that front. I’d say, as we kind of go through this period of price discovery in the broader market, a number of our team were down to NMHC last week and you still do have a bid/ask spread out there, call it, 10% or 15% with sellers kind of looking for that mid-4s type cap rate, buyers kind of looking for more in the high-4s.