Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Year-to-date employment growth of approximately 1.3 million jobs has exceeded expectations, driving strong demand for housing.
- Household income growth has remained robust at approximately 5%, reinforcing healthy affordability metrics.
- Renting an apartment is on average 60% more affordable than owning a single-family home in UDR Inc (UDR, Financial)'s markets.
- UDR Inc (UDR) raised its full-year FFOA per share guidance for the second time this year due to strong performance.
- UDR Inc (UDR) continues to build on its position as a recognized ESG leader, recently being named a 2024 Top Workplace winner in the real estate industry.
Negative Points
- Slowing growth rate in recent employment data may affect pricing in the face of still elevated new supply through the rest of 2024.
- Occupancy has trended slightly lower to 96.2%-96.3% in July due to elevated new supply and typical seasonal operating trends.
- Sunbelt markets, which comprise roughly 25% of UDR Inc (UDR)'s NOI, continue to lag coastal markets due to elevated new supply.
- New lease rate growth in the Sunbelt markets is negative, with some markets like Nashville, Dallas, and Tampa seeing occupancy decline.
- Potential for macroeconomic volatility in an election year combined with elevated supply deliveries in the back half of 2024.
Q & A Highlights
Q: Can you talk a bit more about what you saw in June and July in your coastal markets versus the Sunbelt? I was specifically wondering about how much occupancy fell in the Sunbelt versus the coastal markets? And if that's impacting your pricing strategy for both going forward?
A: (Michael Lacy, Senior Vice President - Property Operations) During peak leasing from May to June through July, we averaged around 2.5% blend, which was 100 basis points over our original expectations. May was particularly strong, leading us to push our market rent significantly. We saw some occupancy loss over the last 30-60 days but it has stabilized. East Coast occupancy in July hovered around 96.5%, while the West Coast and Sunbelt were around 96%. Blended lease rate growth was 4% on the East Coast, 3% on the West Coast, and the Sunbelt stabilized at negative 1%.
Q: Based on your guidance for the full year, it seems like you're guiding around 0.9% for the back half of the year. Is that a conservative placeholder or reflective of a more conservative position?
A: (Joseph Fisher, Chief Financial Officer) We approached it by taking what was put in the bank for the first seven months and leaving the back half assumptions alone. The implied number for the last five months of the year is about 60 basis points in blended lease rate growth. We have factored in some conservatism due to supply, macroeconomic uncertainties, and typical seasonal slowdown.
Q: You raised the guidance for DCP funding from 0 to $15 million. Can we expect more on this front in the back half of the year?
A: (Joseph Fisher, Chief Financial Officer) The $15 million is the net of a $35 million investment in a recap portfolio in Portland and a $17 million payback on our Vernon investment. We have no major discussions for additional DCP deployments right now but expect to be active next year.
Q: I wanted to hit back on the July new lease rate growth trends. Were Nashville, Dallas, and Tampa driving the moderation in new lease rate growth?
A: (Michael Lacy, Senior Vice President - Property Operations) From May to July, we saw a deceleration in blends, with the Sunbelt being weaker. New lease growth in the Sunbelt was negative 5% to negative 6%, while the East Coast saw 2% growth and the West Coast 1%.
Q: You mentioned pushing rate because of platform initiatives related to data on customers. When did you start pushing harder, and how do you think about continuing this?
A: (Michael Lacy, Senior Vice President - Property Operations) We started pushing harder in May due to strong market dynamics. Our customer experience project has also improved our turnover rates compared to peers, giving us confidence to push renewals more aggressively.
Q: What are the other line items where you think you have the most room or are the most conservative on in your guidance?
A: (Michael Lacy, Senior Vice President - Property Operations) Expenses, including controllables and non-controllables, have been better than expected. We have sharpened our pencil on turn vendors and site personnel, leading to continued strength in this line item.
Q: How aggressive do you feel you need to be on the investment front given the current cycle?
A: (Joseph Fisher, Chief Financial Officer) We are continuing with a capital-light strategy. We are building up optionality within the development pipeline and evaluating potential starts. We are cautious about leveraging up for minimal accretion given current cap rates.
Q: With respect to the incremental 60 basis points rental rate growth for the year versus the initial guide, how did that change between your different regional exposures?
A: (Michael Lacy, Senior Vice President - Property Operations) The 60 basis points pickup was driven by better-than-expected performance on the coasts, particularly in DC, San Francisco, and Seattle. The Sunbelt markets have been operating as expected.
Q: Out of the 300 bps retention improvement achieved in 2Q, could you comment on particular markets or trends by strategy that might cap retention growth?
A: (Michael Lacy, Senior Vice President - Property Operations) Some markets like Monterey Peninsula have higher turnover due to migrant workers. However, overall, we have seen a decrease in turnover across the board due to fewer people moving out to buy homes and our customer experience project.
Q: Sunbelt market from where you sit today to see new lease growth hit flat or slightly positive soonest?
A: (Michael Lacy, Senior Vice President - Property Operations) Not Austin, which continues to see lease growth. We might see improvement in Tampa as we go into next year, but Texas and Nashville are more under pressure currently.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
