UDR, Inc.

Greetings and welcome to UDR's second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Director of Investor Relations, Trent Trujillo. Thank you, Mr. Trujillo. You may begin.

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 at 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 historic, and they constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance 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 FDC. We do not undertake any duty to update any forward-looking statements. When we get to the question and answer portion, we ask that you One plus a follow-up. Management will be available after the call for your questions that do not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent, and welcome to UDR's second quarter 2020 conference call. On the call with me today are Jerry Davis, President and Chief Operating Officer, Mike Lacey, Senior Vice President of Operations, and Joe Fisher, Chief Financial Officer, who will discuss our results. Senior Executives Harry Alcock and Matt Cosette will also be available during the Q&A portion of the call. First, the executive team would like to thank our associates in the field for ensuring UDR's continued strong performance and holding our culture to a high standard through the challenges we have faced these past few months. They are our frontline workers, for our company and have definitely adapted to a constantly changing health and regulatory environment, as well as continued the implementation of our next-generation operating platform, all while showing kindness, understanding, and accommodation to our residents. Reflecting on the challenges we have faced over the past four months only strengthens our belief that our next-generation operating platform be managed in the future and will remain a differentiator for UDR for years to come. Throughout this crisis, it has enabled the utilization of a variety of technology solutions to support our associates and engage with residents, and has allowed us to take a surgical approach to pricing our apartment homes, all while continuing to drive controllable expenses forward. We firmly believe our next generation operating platform continue to increase resident satisfaction and engagement, maximize revenues, unlock future cost efficiencies, and deliver strong cash flow in the years ahead. Next, operating a diversified portfolio across numerous geographies and price points affords us a deep and widespread understanding of market fundamentals. Mike will provide details later in the call. but a brief business update. Cash collections as a percentage of billed revenue are strong at 97.5%, with no deterioration in month-over-month trajectory. Physical occupancy remained solid at approximately 96%. Year-over-year resident turnover declined 620 basis points during the second quarter, and traffic continued to show well versus last year. These are just a few of the positive signs and an indication that our business is on solid footing to perform relatively well in the future. It would be easy to rush back into reinstating guidance, but for any guidance range to be useful, we need evidence that more stability in the regulatory environment we face, COVID caseloads and the impact they have on the cadence of state reopening, as well as more insight into the economic impact of currency by unemployment. Nevertheless, we have a sound strategy and a team to effectively manage through these uncertain times and are in a position of strength moving forward. Our balance sheet remains healthy with nearly $1 billion in available liquidity. Our dividend is secure, and thanks to our next-generation operating platform, We have the tools to meet evolving resident expectation, as well as enhanced margin and increase shareholder value. With that, I will turn the call over to Mike.

Thanks, Don, and good afternoon. Starting with second quarter results, our combined same-store NOI declined by 4% year-over-year, driven by a revenue decline of 2.1%, an expense increase of 2.5%. While not the results we expected coming into 2020, I'M ENCOURAGED BY BLENDED LEASE RATE GROWTH STAYING POSITIVE DURING THIS QUARTER, TRAFFIC VOLUME REMAINING ABOVE LAST YEAR AT THE SAME TIME, AND TURNOVER CONTINUING TO TREND BETTER THAN A YEAR AGO, ALL OF WHICH HELP US TO PRESERVE OUR RENT ROLL FOR FUTURE PERIODS. ON PAGE 3 OF OUR PRESS RELEASE, WE HAVE INCLUDED DETAILS ON THE SEQUENTIAL AND YEAR-OVER-YEAR DECLINE WE REALIZED IN OUR SECOND QUARTER 2020 COMBINED SAME STORE REVENUE RESULTS. AS YOU CAN SEE, Gross rents were positive for the prior period. However, primary drivers of the 2.1% year-over-year revenue decline included, first, concessions were generally elevated during the quarter, but particularly in urban areas of coastal markets where they reached upwards of eight weeks at some of our communities. This compares to the Sunbelt market that reopened more quickly with concessions between two to four weeks on average. Typically, we would see minimal concessions on stabilized assets during peak leasing season, but COVID has been anything but typical, with concessions driving a 50 basis point negative contribution to our year-over-year combined same-store revenue. Second, our physical occupancy declines 50 basis points year-over-year in the second quarter. However, the reliving of approximately 150 corporate units during the quarter in primarily high-rent coastal markets drove second quarter economic occupancy down by an additional 50 basis points. In total, lower economic occupancy accounted for 100 basis points of our year-over-year decline in combined same-store revenue. Importantly, our remaining corporate partners are well-capitalized, thereby reducing forward economic risk associated with the homes they utilize. Third, our fee engine was disrupted due to regulatory constraints. and will likely remain that way until the regulatory environment changes. This had a 50 basis point negative impact in year-over-year combined same-store revenue growth. The final negative driver of the year-over-year decline in combined same-store revenue growth was a bad debt reserve totaling $4.5 million, which negatively impacted our results by 170 basis points. As mentioned in last night's press release, absent our bad debt accrual, second quarter combined same-store revenue and NOI growth would have been negative 0.4 and negative 1.6% respectively. Moving on to recent operating trends. On page four of our press release, you can see that blended lease rate growth remained positive during the quarter. Cash corrections held up well, and more recent traffic and applications continue to compare favorably versus 2019. Additionally, annualized turnover during the second quarter 620 basis points lower year-over-year, which, along with our NextGen operating platform initiative, helps limit expense growth. Our teams in the field and their execution of our surgical approach to pricing homes deserves much of the credit for generating these resilient results. Next, high-level second quarter operating trends by geography and price point include. Across all of our markets, our suburban communities generally outperform urban communities in terms of occupancy, new lease rate growth, renewal rate growth, and traffic, more specifically. Physical occupancy in our suburban portfolio averaged 96.9% during the quarter, compared to 94.6% in our urban community. Occupancy in certain urban areas of coastal markets experienced the most pressure due to corporate lease exposure and short-term mobility trends because of work from homeland. Traffic in turnover remained better at our suburban communities. Blended rate growth in our suburban portfolio outpaced our urban portfolio at 1.3% versus negative 30 basis points. And collections generally followed an active regulation, with Los Angeles, Boston, and New York lagging the rest of our portfolio. These urban versus suburban trends are similar when analyzing our portfolios across different qualities. B quality outperformed A quality, and Sunbelt outperformed Coastal, and to similar magnitude as the suburban versus urban results. Turning to July, we have not yet closed the books on the month, but we expect physical occupancy to average 95.5% to 95.8%. Blended lease rate growth to be flat to down 50 basis points, and billed revenue to range around $105 million. As shown on page 4 of our press release, Month-to-month billed revenue varied by a couple of million dollars during the quarter due to, one, the timing of some fee and other income items, two, regulatory restrictions that impacted our operations, and three, an increased number of lease expirations in harder-hit, higher-ranked submarkets such as Manhattan, San Francisco proper, and downtown Boston. Moving forward, we expect that month-to-month billed revenue will continue to be somewhat range-bound, until emergency regulations are relaxed and there's more visibility around office reopenings in urban forests. Now, market level results. Demand characteristics in our markets have generally neared the cadence of each market's reopenings, with those markets that had more restrictive and durable stay-at-home orders guiding those which reopened sooner. Throughout the pandemic, our nimble approach to pricing our apartment homes has maximized revenue an important differentiator given that every market has reacted different to COVID. Highlighting some specific markets, Nashville, Salinas, and our Texas market exhibited the strongest pricing power during the second quarter. New York, San Francisco, and Boston were the weakest, with market rents down in the middle to single-digit range. Positively, we have seen markets such as Orlando, Tampa, and Orange County prove to be quite resilient throughout the pandemic, despite their high exposure to the hospitality . We attribute this to our largely suburban and portfolio . New York, San Francisco, both markets have experienced the increase turnover during the quarter as a result of short-term mobility trends due to work-from-home mandates as well as corporate lease exposure. While residents continue to pay rent, some have allowed their leases to expire and they will revisit their living situation when physical job requirements and the timeline for office reopening are better defined. Lower traffic levels in these markets due to more cumbersome regulation has resulted in generally lower occupancy, which has driven higher concession levels. However, mirroring a theme across all of our markets, our B quality assets are outperforming our A's, and suburban communities are outperforming our urban. A good example of this is in New York's MSAA, where occupancy at Leonard Point in Brooklyn and our One William deal in New Jersey remain in the high 90s. Moving on, the nearly 2 billion of community acquisitions we have made since the start of 2019 continue to perform relatively well, with cumulative NOI of these communities currently tracking above our original underwriting. Finally, I want to thank our governmental affairs and legal teams for their dedicated work tracking day-to-day regulatory changes. across our market. Being able to efficiently and effectively communicate our comprehensive understanding of eviction moratorium, rent regulation, and other regulatory changes to our team in the field has been critical as we continue to surgically price our apartment homes portfolio-wide. And to my colleagues in the field, I thank you for your hard work and adaptability to the daily changes in regulatory restrictions and to our operating strategies. Your jobs have not been easy, but I appreciate all that you do. And now, I beg to turn over the call to Jerry.

Thanks, Mike, and good afternoon, everyone. Echoing Tom's comments, our success in today's operating environment would not be possible without our next-generation operating platform. Because we were early in transitioning to an online self-service model, we have benefited from our associates' familiarity with the enhanced technological that our platform provides, including the installation of nearly 37,000 smart homes, which improve operational efficiency and increase resident engagement. These resources have been paramount to our success over the past four months given social distancing requirements and state shutdowns. From a resident perspective, the platform increases ease of use and delivers a self-service model which has become the new everyday standard in many aspects of our residents' lives. From a financial perspective, the platform drives more dollars to our bottom line by expanding our controllable operating margin. This is accomplished through efficiency gains via the centralization of certain functions, outsourcing of others, utilization of self-service, and integration of big data. Our focus on achieving these goals is not waivers. I'm proud to say that despite combined same-store revenue declining in the second quarter due to COVID-19, our controllable operating margin remained flat at 84.3%. This was driven by a 2% reduction in controllable expenses versus a year ago. In particular, combined personnel and repair and maintenance costs declined by 1.1% year-over-year, and we realized significant savings in its administrative and marketing expenses. Prior to the pandemic, platform implementation has driven approximately 80 basis points of expansion in our controllable operating margin, or nearly half of our stated goal of 150 to 200 basis points improvement by the end of 2022. While COVID constrained further margin growth in the second quarter, we're still well ahead of where we would have been without our next generation operating platforms. and continue to see long-term benefits, such as a 23% life-to-date reduction in flight level headcount through natural nutrition, a 28% improvement in controllable NOI per associate, and a 15% increase in resident satisfaction as measured by NPS scores. We have realized approximately 60% of our staffing level efficiencies to date and expect to capture the remaining 40% two years. Looking ahead, we are rolling out the next phase of our self-service smart device app for residents that will continue to mitigate the need to visit our on-site offices, shifting self-guided tours to a web interface versus an app to increase ease of use, and integrating more data science-supported revenue growth and expense reduction opportunities into our platforms. I look forward to updating you on our progress on future calls as we continue to innovate over the years ahead. Bottom line, our next-gen operating platform has allowed us to run our business efficiently and successfully throughout the crisis and puts UDR in a position of strength as we move beyond COVID. A big thank you to everyone in the field and at corporate for continuing to push forward and make our platform a success. With that, I'll turn it over to Joe.

Thank you, Jerry. Topics I will cover today include our second quarter results, an overview of our bad debt reserves, and a balance sheet and liquidity update, inclusive of recent transactions and capital markets activity. Our second quarter FFOs adjusted per share of 51 cents declined by only one penny or less than 2% year over year. The three penny sequential decrease in FFO per share was primarily driven by $9 million total company bad debt reserves, with $5.5 million of this from residential and $3.5 million from retail, in addition to lower property revenue due to occupancy, concessions, and fees, partially offset by lower GNA. Regarding guidance, as Tom mentioned, we are not reinstituting our full-year 2020 guidance outlook at this time, given continued uncertainty around how the coronavirus pandemic will impact the economy and our business. However, as disclosed in our press release and as Mike discussed, we have presented an operating update to provide stakeholders with additional insights into recent trends. On to collections and how we are reserving for potential bad debt. As we outlined in our operating update on page four of last night's release, during the second quarter, we billed $322.6 million of revenue. As of quarter end, we had collected 96.1% of that revenue, leaving $12.5 million uncollected. We established a bad debt reserve against that uncollected revenue and the amount of $5.5 million, or 1.7% of billed revenue. Since quarter end, we have collected additional cash towards second quarter billings increasing our collection percentage to 97.5%. That leaves our total billed but not yet collected revenue at $8 million, which, set against the $5.5 million reserve, leaves 2.5 million, or less than one penny per share, of recognized revenue that has not yet been collected. We are comfortable with this level of recognized but not yet collected revenue based on our assessment of collection trends, interactions with our residents, and the probability of future collection, including approximately a half million dollars of outstanding second quarter rent subject to payment plans that we expect to collect. Moving on, our balance sheet remains strong due to ongoing efforts to reduce debt cost, improve liquidity, extend duration, and enhance cash flow. As such, we are in a position of strength to weather the continued effects of COVID-19 and the downturn that has accompanied it. Some highlights include, first, as of June 30th, our liquidity, as measured by cash and credit facility capacity, that of our commercial paper balance, was $974 million. When accounting for the roughly $105 million of previously announced forward equity sales agreements, we have nearly $1.1 billion in available capital. Second, The refinancing of our final 2020 debt maturity will close at month end, after which we will have no consolidated debt scheduled to mature through 2022 when excluding principal amortization and amounts on our credit facilities. Additionally, subsequent to quarter end, we issued $400 million 12-year unsecured debt at an interest rate of 2.1%. Proceeds were used to prepay $246 million 4.64% secured debt originally scheduled to mature in 2023, as well as complete our previously announced tender for $117 million of 3.75% unsecured debt originally due in 2024. All of these actions have improved our liquidity profile and duration. Looking further ahead, when excluding balances on our credit facilities, less than 15% of our consolidated debt is scheduled to mature 2024. Please see attachment 4B of our supplement for further details on our debt maturity profile. Third, identified 2020 uses of capital remain minimal and predominantly consist of funding our current development and redevelopment pipelines. The aggregate cost for these projects totals only $308 million, or less than 2% of enterprise value, and they are nearly 50% funded. with approximately $157 million remaining capital to spend over the next several years. Fourth, our dividend remains secure and is well covered by cash flow from operations. Based on second quarter 2020 AFFO per share of 47 cents, our dividend payout ratio was 77%. This implies that our earnings would need to decrease by an additional 20% before approaching cash flow parity. Taken together, Our balance sheet is in great shape. Our liquidity position is strong, and our forward sources and uses remain very manageable, as is detailed on attachment 15 of our supplement. Next, the transactions update. First, as previously announced, we sold two communities in the greater Seattle area for a combined $143 million at a low 4% gap rate, reflecting pre-COVID pricing. Second, subsequent to quarter end, We funded a $40 million GCP commitment for a community in Queens, New York, at a 13% yield and with profit participation upon a liquidity event, which we expect to occur in approximately five years. Construction of the community began eight months ago and is fully capitalized, including $62 million of developer equity, or approximately 18% of the $342 million total project cost. UDR's investment provides enhanced economics compared to pre-COVID deals and effectively backfills the upcoming 2021 maturity of our mezzanine loan on the portal in Washington, D.C., which carries an 11% yield and no profit participation. Moving forward, we remain highly selective with where and how we choose to invest your capital with a focus on both current yield as well as future value creation. Wrapping up, as is evident on attachment 4C of our supplement, we have substantial capacity before we would reach noncompliance with our line of credit or unsecured bond covenants. As of quarter end, our consolidated financial leverage was 34.2% on unappreciated book value and 30.6% on enterprise value, inclusive of joint ventures. Consolidated net debt to EBITDA RE 6.2 times, and inclusive of joint ventures was 6.3 times, which looks slightly elevated due to the still outstanding settlement of our forward ATM proceeds. With that, I will open it up for Q&A. Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Your first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thank you. It's obviously a dynamic operating environment, but how do you think about the pricing strategy between offering concessions or holding rates and having potentially lower occupancy?

Hey, Nick. This is Jerry. I'll take that one. I would tell you we've strategically elect it. few life concessions rather than take significant rental rate cuts on new leases in order to maximize, and I'm gonna repeat that, maximize both near-term and long-term results. By keeping lease rates higher, we preserved our rent roll for 2021, which is a key factor in why we did this. Because we take concessions up front for same-store reporting purposes, we incur the charges beginning in the lease term. This is consistent with how we have historically reported and accounted for concessions. If we elected during the second quarter to offer no concession but instead reduce stated rents by an equivalent amount, our same store revenue would have been more than 100 basis points higher than what we reported. Using our strategy, the difference will be made up over the remaining lease term and we'll be in a better position at the time of renewal than we would have been if we had just cut rates. You know, to give an example of how this works, and I think a lot of people get it, but if you had two units and one was priced at $3,000 per month and two months free rent, and the second was priced at $2,500 per month and no concessions, Both result in 12 months of revenue at $30,000 or effectively at $2,500. In the first three months, the unit with a concession would recognize revenue at $3,000 compared to $7,500 for the unit with no concession. And over the next nine-month period, the unit with a concession will pay rent that's $4,500 higher cumulatively. So, you know, as we look at it, obviously... We like to keep occupancy at a pretty significant level. Mike was in the 96s during the quarter, dropped a bit in July. But when we look at our pricing strategy to maximize that revenue, we elected to go more with the concessions so that when we get to next year, we're going into it with a higher rent roll that we'll be able to apply renewal rates to. I think Joe's Can I add something? I know a lot of this sector does concessions on a straight line basis, and I think Joe can walk you through what we would have looked like with that.

Yeah, perfect. Any next afternoon? Maybe just some additional clarifications. Jerry gave the example there of if we had simply shifted strategy from our current approach of giving concessions to no concessions and 2Q, but keeping the cash reporting methodology that we have for same store. That would have been the up 100 basis points. If we continue to utilize the same concessionary strategy that we have been utilizing, but switch from cash reporting to gap reporting or straight line reporting, we would have had about a 40 or 50 basis point better same store number. So I just wanted to clarify that. So it would take us from a 2-1 down up to about a 1-7 to 1-6 down in same store revenue on a year-over-year basis.

That's very helpful, thanks. And then maybe just in terms of, you know, in the past we've talked a lot about your investment model and kind of trying to make better decisions around MSA exposure. I recognize in the near term maybe external growth will be a little more muted, but if and when you return to that, how do you think about the ability of that model to be dynamic given all of the changes that we've seen in different MSAs over the last probably six months?

I'll kick it off, and then maybe some others may have some thoughts on this as well. But I'd say one thing we've obviously learned over time and throughout this downturn is diversification is key. So diversification remains a core part of the portfolio strategy. Everything we're seeing today in terms of ability to withstand downturns in certain submarkets, certain markets overall, or even A versus B, continues to hold true and support the idea of being diversified in nature. So... No change there. The quantitative process or the predictive analytics process we're talking about has always been supplemented by the qualitative overlay. And so the idea of both of them is simply that it helps you avoid what I'll call recency bias or herd mentality or kind of gut reaction that I would say is pretty prevalent in today's environment. And so we continue to have those tools to lean on. I think as we continue to get more data in, obviously it will influence the quantitative model But there's a lot of issues out there that we've got to spend time thinking about. There's the binary outcome of what takes place with the vaccine and what that may mean to reopenings and closings in markets. I think the regulatory environment, clearly more prevalent today than it's been in the past. Things like fiscal health and some of the budgetary shortfalls that you've seen, trying to understand those and how municipalities try to correct for that and solve for those budgetary shortfalls through different forms of taxation. And ultimately, income migrations. trying to figure out where those jobs are going to shift to if they do, in fact, shift at all. So that's all going to come into play. I think the piece that's always forgotten about it here, we've talked about it in the past, is just second derivative flow of capitals. At the end of the day, you're going to see supply shift, and you're seeing it today when you look at the permanent start activity. You can look at out in the west, permits are down about 30% from where they were. The east, down 20 plus or minus percent. Sunbelt, generally flat to up 10%. So I think there's already been an outcome on the supply side, or at least trending towards, that shows a shift in capital, and that's an offset to where we think demand is going to be and balances out the rent impact. So it can give you some thoughts. I think at the end of the day, we've got to remain patient, remain disciplined, and ultimately we'll see where it will come out on the other side of this.

Hey, Nick, this is Hey, this is Chris Bennett, and I just wanted to add, you know, one or two other things on that. You know, I think it's important to note Joe talked about the quantitative versus the qualitative. On the qualitative side of our portfolio strategy process, you know, we were already incorporating variables like regulatory environment, fiscal health, which he spoke to, market desirability, affordability, et cetera. So as we're kind of digging into how maybe some of these trends are changing and seeing where they go, both near-term and long-term, you know, that's really just going to augment what we already have out there. So I think we're already a little bit ahead of the curve when we're thinking about some of these things, and now we're just seeing how those variables are going to change going forward. Thanks, Rick.

Your next question comes from the line of Rich Hightower with Everscore. Please proceed with your question.

Good morning out there, guys. I guess just to follow up on that prior question, as far as the contribution to the investment process from predictive analytics and some of the particulars there, you know, look, clearly – the sands are shifting in a lot of ways, as you guys have described and alluded to, but you're still investing and making capital allocation decisions on the buy and the sell side. And so, you know, are recent deals or deals in the pipeline currently, are those more deal-specific and just about the economics of that particular transaction, or is there still sort of that macro or predictive analytics overlay there? that you take into account understanding that COVID is sort of wrecking all the models, you know, as we sit here and talk about it.

Yeah, thanks, Rich. Afternoon. Yeah, I'd say historically we had always had the two pillars of the organization to lean on, meaning the operational platform and all the pieces that go with that, as well as the transactional platform and the value created through either a buy or sell, a development or DCP. So those haven't changed, so I think when you reference what's in the pipeline today and are we leaning more on just good old-fashioned, you know, what can we do on the operational side? Can we make good deals? And what are the economics of those deals? It's probably a little bit more so that and a little bit more so diverse in terms of the markets that we're looking at today than we have in the past. So trying to ferret out opportunities such as what you saw with the Vernon DCP deal. You know, we're not making a bet on New York necessarily and putting a stake in the ground. and saying we're going to, to a large degree, expand our New York exposure. This is a very strong return for the risk that we're taking. It's one of the few areas that we've seen disruption in this environment, meaning that the mezzanine lending space, the construction lending space, and the LP equity, the fund development has been disrupted. So us being able to go out there and take advantage of a deal, and you see the returns on that at 13% prep, Most of our participating deals that we've done over the last couple of years have been in the 8%, 10%, 9% PREF range. So, again, another 400 basis points of PREF as well as upside participation. On a deal that we have $60 million of equity, it's a little bit lower in the stack than some of the other DCP deals we've done. And also, you know, from a start standpoint, you know, it started eight, nine months ago, so you could de-risk the timeline, de-risk the buyout on the cost, et cetera. So... I wouldn't take that from a capital allocation standpoint as a bet on New York. It's a safe bet on a return that we think has been due risk to a degree.

Okay. Yeah, that's helpful color, Joe. And maybe just to ask another quick question on concessions and bad debt accounting. So, first of all, did something change about the way you accounted for bad debt or maybe pulled forward some of the – you know, some of the write-offs during 2Q, just any changes quarter over quarter that we should be aware of, and then likewise on the concession side. What drives the choice to go to cash accounting versus a more traditional straight line, just so we understand the decision-making there? Thanks.

Yep, understood. So I wouldn't say there's necessarily been a change to the bad-ed approach, but we have definitely enhanced our approach. as we view the collectability of built rents in this environment. Historically, our approach had been that upon eviction, we would write off that rent and then go to basically a cash basis recognition of revenue on a go-forward basis. In this environment, given that we're dealing with a completely different regulatory environment than any of us have ever seen, meaning that you have very extended eviction moratoriums, You have extended payback plans in certain markets, such as California, Oregon, Seattle, D.C. proper, et cetera. We thought we needed to enhance that process and really try to understand, down to the resident level, what was their financial situation? What type of regulatory environment are we in with that individual? What has been their payment history, et cetera? So I would say we just put a more robust process around this. We did have write-offs in the quarter, as we typically would as individuals move out. but those are hindered by the fact that eviction moratoriums are in place. So the 1.7% or $5.5 million reserve that we put up, we thought that was a very prudent reserve given the number of unknown items that are out there today. So while it's supported by the high degree of collections that we've seen in April that we disclosed and the number of payback plans that we have and the number of individuals that continue to put forth efforts to collect, we did think that was the appropriate reserve I do think hopefully one thing that came out of my commentary was the subsequent collections that we had in July, which continue to whittle away at accounts receivable balance that we have out there. So we are down to about $2.5 million of recognized but not yet received revenue. And I think that's important to think about from your perspective in terms of how much risk is out there to the revenue that we've reported. So less than a penny per share of only about $2.5 million at this point in time, and we do expect to continue to get collections in over time. In terms of your second piece of the question, concessions and recognizing those on a cash basis, it is consistent with how we've always approached that. We felt that giving investors the view of cash recognition gives you the best view of what's going on in the market today. It is in compliance with GAAP. It's a non-GAAP metric. And so, therefore, we don't have to align perfectly, although we do report on NOI overall and adjust for straight line per gap. So everything there is compliant, as you would expect. So it's compliant with this historical approach, no change there. Got it. That's great. Thanks, Joe.

Your next question comes from the line of Austin Werschmidt with KeyBank Capital Markets. Please proceed with your question.

Hey, everybody. Thank you for the time. Just hitting back on that last point around bad debt, do we start to see rent collections improve then in the coming months as, you know, the non-payers or those impacted by COVID either, you know, begin to vacate or you no longer factor them in to, I guess, maybe the billed rent number? Like, how do the numbers work from that perspective as we think about... you know, and you reverse the collection data going forward.

Yeah, I think where you're going, Austin, and correct me if I'm wrong, when you say the non-payers related to COVID, so what we affectionately refer to as squatters here, as those individuals turn in their keys or decide to skip on us or as eviction moratoriums come off, as they have in about 20% of our markets, as we can move through that process, those red squatters, may be written off, but they basically net against the reserve that we've put up. So we would not expect a future negative impact to revenue. We've already effectively incorporated it through the reserve we've taken this quarter for those rents that we previously built.

Okay, that's helpful. I appreciate the thoughts there. Just switching gears a little bit there. So during this past cycle, you guys have been opportunistic on various initiatives on the short-term rentals and furnished rentals, corporate leases. So I'm just curious, you know, if you're reconsidering any of these initiatives, given some of the volatility in those income streams you've seen during this downturn, and what you think, you know, that income stream looks like on a go-forward basis.

Hey, Austin, this is Mike. I'll take that. Just to be clear, and I'll back up a little bit, the miss to our other income this quarter was around $1.3 million, and it had an impact of negative 0.5%. to our total revenue. And just to put it in perspective again, we have about $10 million in other income. It's 10% of our total revenue stack. And other income was down about 3.5%. So some of these initiatives that we've been very successful at executing over the years, they did take a small hit during the quarter. And I can tell you the short-term furnace program was about $900,000. Our common areas, that was about $250,000. And aside from that, our late fees, which were more regulatory mandates put in place, that was down 1.1 million. So when you look at that total, it's around 2.3 million. On the flip side, the parking initiative that we put into play about two years ago continues to do well, and that was actually up $500,000 year over year. And our transfer lease break fees were also up about $500,000. So in total, we were off, again, by 1.3 million. And some of our more sticky initiatives continue to do well. And we think when things bounce back, we get a vaccine, we can expect that the short-term furnished program, as well as our common areas, will bounce back too.

And what about some of the others that maybe still fall under other income, like the corporate items and furnished rentals? Can you repeat that, Austin? Yeah, sure. Maybe some of the other items that don't fall into the other income bucket but are still more unique initiatives like the furnished rentals or the corporate leases. Are you rethinking those at all? I don't think so. I think right now with business travel stalled out, obviously, as Mike just said, we've taken a step back. We do believe that once the economy gets going, the vaccines back in play, or is out there, that, you know, you'll see short-term rentals come back into play. So right now, again, it's a line of the business that did very well for us for a couple of years. Right now, I think we continue to have a little over 100 residents in short-term furnished rentals, but that is down from what it was last year. It will continue to be a drag this year. But, you know, I think it's a business that served us well, helped us have outsized occupancy compared to peers. And, you know, when times are good, it's a good business to be in.

Thank you for the time.

Austin, this is Jimmy. A little bit of color. It's been good to have the resource on that side of events for corporate rentals, for example, because we can swing that team around and work renewals, work pricing, so they're familiar with our system, familiar with our products. It's actually given us a boost. in terms of resources that we can pivot. The day will come that those businesses will reemerge and they'll pivot back to that. And we don't think we'll miss a beat on that opportunity. And it's going to be market by market opening up that gives us that capability.

I understand. Appreciate the additional thoughts.

Your next question comes from the line of Rob Stevenson with Jannie Montgomery. Please proceed with your question.

Good afternoon, guys. Talk about where the biggest pieces of the new leases that you're currently signing are coming from. Is that people trading down by price point or people trading up by unit size within the same market? That people moving from urban to suburban, people moving from the northeast to the Sunbelt, or people living with roommates going solo? Can you characterize where the biggest chunks of your new leases are coming from?

Yeah, hey, Rob, it's Mike. I'll tell you, one of the biggest trends we've seen over the last few months is Our occupancy on our studios, that is a little bit lower than what we're seeing on our ones and twos. So when I referenced on our other income that our transfers are up, it's because we're seeing people doubling up in some cases. But as far as migratory patterns and things of that nature, we're not necessarily seeing people coming from different markets. They're still within their own markets. We're seeing them jump around them.

Yeah, I do think you're seeing a bit of, Movement from urban over to suburban. I think when Mike looks at our New York portfolio, for example, our deal at One William is doing quite a bit better than our downtown Manhattan. You're seeing as you go down to Silicon Valley some movement from Soma down there for pricing reasons as well as to escape some density. But we're not seeing people totally leave the major markets.

Okay, helpful. And then given Joe's comments earlier about the Queens DCP investment, are you guys willing to take your exposure to DCP higher if you could continue to get 12%, 13% returns? You know, how are you guys thinking about that, you know, versus, you know, acquisitions or future development starts at this point in the cycle and given what you're experiencing on the operations side?

Yeah, hey, Rob. So just to put the sizing of DCP in context, We have disclosure on 12b of where we stand today. So you can see on 12b, we're sitting right around $420 million of exposure. I think we're adding Vernon for $40 million. We've got about $10 million of funding remaining for Thousand Oaks. But you do have two negative adjustments to that to take off. You have portals out in D.C. for about $50 million that will be coming out sometime in the first half of next year. In addition, while we show it on this page, It's not really a traditional DCP deal. As we've talked about in the past, it's real up in Bellevue, Washington for $120 million or so of accrued total balance. That was really a loan with a purchase option, so we called it a bridge loan to get into that purchase option sometime in most likely first half of 21 as well. So once you adjust for all those factors, while we're doing Vernon, you've met those other guys out. We're at about a $300 million DCP portfolio. We've consistently talked about, you know, being willing to go above 300 million, i.e., the 350, 400 range. So I think as we continue to find opportunities, you know, we've been opportunistic at pivoting in the past between things like DCP, shrinking development when appropriate, shifting to acquisitions when we have a cost of equity, and even doing buyback previously. So I think we'll keep looking for opportunities. And as I said earlier, this is one of the few areas that you're seeing distress just given that stabilized operating assets The financing market is very well and functioning today, and you're just really not seeing the stress on that side of the pricing environment. So I think we're happy to do more there if we can find opportunities.

And how does that evaluate versus, you know, an incremental dollar, about $400 million there, versus an incremental dollar of, you know, a 6% development or a 4.5% acquisition? How does that, you know, for you guys from a risk and from a, you know, long-term standpoint of the portfolio, sort of how are you thinking about that?

On a risk-return spectrum, DCP today makes the most sense, given that you do have the yield, where your location is in the stack, and the fact that there is some distress in that area allows us to get outsized returns relative to the risk that we're taking. Then you'd probably step down to development, where we previously delayed two projects, the Tribune West 3 down in Dallas, as well as Union Market out in D.C., to get a little bit more visibility on this environment. We've been able to whittle out some costs there, so we probably are going to have starts in the next quarter or two on those two, which in combination, about $200 million of additional starts. So I would put those as the next spectrum. Then acquisitions being last, although you really have to whittle through and talk about what type of acquisition you're thinking about, i.e., which markets. Are you thinking about a lease-up where a developer may want to get out of it earlier? Maybe we're willing to take that dilution and that lease-up risk but get it at a discounted price. So There's wrinkles to every deal that we're going to look at, so we're not going to redline any piece of the investment spectrum. Rob, this is to me.

I would emphasize that the one aspect of capital deployment that is first and foremost in our mind is the platform and the value that it creates, not just to deal with this environment, but the fact is it will be by de facto probably the way business So the quicker we get that fully implemented and the enhancements in a version 2.0 as we're drawing those up today, I see that as the real differentiator with respect to capital deployment and implementation. The other items come and go. The good news, we've got 20 markets to look at for opportunities. We weigh them against what we think of the market, what we think against the opportunity, and Joe gave you a pretty good insight into our waterfall of and execution. Okay, thanks guys, very helpful.

Your next question comes from the line of Neil Malkin with Capital One. Please proceed with your question.

Hey guys, how's it going? There's been a resurgence of COVID cases over the last month. I'm just wondering if you can talk about how leasing foot traffic has performed or fared. You know, with those cases rising, you can talk about that in the context of your coastal versus suburban portfolio.

Hey, Neil, it's Mike. I can take that. Just generally speaking, our traffic and act count for the month of July is up around 9% and 7%, respectively. And we did see a little bit of an impact within the Sun Belt. We were seeing upwards of 15% to 20% at times year-over-year increases in traffic. And when that second wave, if you will, came about in those markets, it was still above year-over-year, probably closer than that 5% to 10% range. But that being said, in some of our other markets, they started to get better. And what we're seeing today is similar. So when you go coast over Sun Belt, I'll tell you, our traffic today, coastal, down about 20%. Our Sunbelt is up around 8%. And when you look at the urban versus suburban, traffic is down around 12% to 13%, and suburban is still positive 7% to 10%.

Okay, great. Thank you for that. The next one I have is related to everything going on in the coast, like at Portland, Seattle, You know, New York, you know, some of these markets are meaningful and alive. Contributors, I mean, there's been, you know, significant, you know, violent riots, jazz, shop, all those things happening. And I'm just wondering how, you know, A, you deal with that as a company, as an industry, and B, you know, are you seeing an increase in people sort of moving out because of those things? or citing that as a reason to move out, seeing an impact in operating fundamentals in any way. You just kind of talk about all those things going on. It seems to get more extreme and not less.

Yes, Neil, it's a very good question and one we debate here. And you're trying to operate a company and be compassionate and thoughtful about your interactions with each individual resident. And I think Mike and the entire team have been very accommodating, whether that's payment plans or people wanting to move or health reasons. And that's the first place you start. The second, I would suppose, is it challenging? No question about it. We have weekly calls with the entire associates in the field in Denver and talk through some of the challenges that they're facing on the ground and reassure them that we're going to help them through it. Their safety is first. first in Paramount and then our residents. So you manage through that, and that has taken a great deal of time. And at the same time, I'm very grateful for the people, if you will, adapting to that environment, which may persist for some period of time. But I do note that the election is over in three and a half months. COVID will be cured. There will be a vaccine. And on a long-term basis, we think that the troubles and struggles we have with Joe and Chris have highlighted with respect to the portfolio is people are not going to live in neighborhoods that aren't safe. Whatever the political affiliation, whatever. And so honing in on when that piece of the equation gets solved and how it gets solved. And will it be solved before the election? Probably not. But we're hopeful it is. If it's not, we're prepared to deal with that. I think it does finally settle itself when there is more communication rationally and things return to a normal cycle. And then these cities that are challenged today, when they get their security, their safety solved, their transportation, we'll all be waiting for the vaccine to help us get to the next level. It doesn't change the long-term dynamic of people wanting and choosing their lifestyle, their balance. So I do believe the urban cities will reemerge. Can't put a timetable on it, but I know the factors that need to be in place for that to happen, and that's what we're honing in on.

No, I appreciate that. I guess, you know, the other part of that question is, are you seeing or are you able to discern a difference in leasing or, you know, setting reasons to move out as some of those issues going on, or is it, you know, kind of harder to leave that out?

Yeah, there's a couple of things there, Neal. First of all, no real damage to the properties, and we're very thankful that none of our residents and or associates were harmed in any of these demonstrations. So that was kind of the first thing. And as far as move-outs, we do track that very closely. We haven't really seen any impacts. from this and not really seeing it on the traffic either. So, so far it's been minimal impact.

Okay, thank you so much.

Your next question comes from the line of Nick Ulico with Scotiabank. Please proceed with your question.

Hi, guys. This is Sumit here in for Nick. A couple questions. One related to the provision or the reserve that you took. How much of that is related to tenants who requested deferments versus potential credit risks identified by your internal analysis? And then, you know, how much of the delinquent tenants are related to corporate tenants as well as students?

Yeah, we'll probably have to follow up with a little bit more of that detail. But in terms of the payment plans you referenced, we do have approximately half a million related to 2Q, half a million dollars related to 2Q that is on payment plans and that account's receivable. So it does get lumped in there, but a higher probability placed on that given payment history from those individuals. The biggest reserves being taken against by market is going to be about 80% in our top six markets, meaning L.A., San Fran, D.C., Orange County, New York, and Boston. So the bigger markets or the markets that have more regulatory, meaning that if you take L.A. as an example, that's over 10% of our accounts receivable and a much bigger portion of the reserve, but it's only about a 4% market for us. So certain markets that have more delinquency due to regulatory issues are going to garner more than their lion's share relative to the percentage of the portfolio that they have.

This is to add on some color. That's interesting, and we've talked about it with a number of investors over the last couple months on calls. Take, for example, what's going to happen when the eviction moratorium is lifted. And to put it in context today, the number of people that if we had the right to go to eviction would be 2%, about 800. Okay? So it's not a big number, and there's not a tsunami of people of eviction pending, but an interesting data point. Mike's operations in Florida, there was a 72-hour window where we could move to eviction and we filed. There were 75 residents on that list at the time, and two-thirds of them showed up and paid immediately. The other one-third said, hey, I want to enter into a plan. I think that same dynamic, I don't know if those percentages will hold, but we're somewhat hopeful that when we can proceed to enforce the contract, we will be compassionate about it. We will try to work with people. But if that is not the case, we expect that some have already saved up the money and or have other means to do so. And they're just using this float for a variety of other reasons. We'll find out. Florida then didn't put the eviction moratorium back on, and we'll comply with the laws. So it's hard for us. I think we've been cautious about the AR balance and the related reserve, and I think that's prudent on our part. We'll see how it plays out.

Understood. And I guess the background on this question was more around something you just spoke about, which is that delinquencies are usually not related to credit risk or default risk overall. I was just wondering at what time do you guys internally say these group of tenants become a part of the reserve of the provision? Because essentially it happened when somebody walked in and said, I can't pay this month. So I'm just trying to get a sense of that. I think any color you could provide could be good on that.

Yeah, so we took what I'll call a free-pronged approach to that and came at it a number of different ways given the unknowns that exist in this environment and trying to make sure we got to the correct place at the end of the day. We look at it from a typical age receivables approach where if you were over two months delinquent, you had the greatest reserve applied to you. If you were less than that and had been making efforts to make payments, then you would have less and so on and so forth. We looked at it down to the market level of trying to go down to each resident, what is their payment history, what is their AR, and what type of market are they in from a regulatory standpoint, and adjusting for that. And then we did a very high-level top-down approach as well. So you triangulate through all those, and they all came out to about that same place. So hopefully that gives you a little bit of color on the robustness of the process overall and comfort that we got to the right place.

That's really great. Thank you so much. And one last one for me. In terms of concession activity, could you help us understand what unit types, that's one bedroom, studios, two beds, three beds, and possibly what markets related to the unit type are seeing the biggest amount of concession activity?

Sure, Mike. I think what you're going to see is when you go to markets and you go down to that property level, which we've stated before, that's our surgical approach is you're going to see the concession on all of those unit types. So in places like New York and San Francisco where the concessionary environment's higher, we are seeing it across the board. That being said, I mentioned earlier on one of the questions that our studios are down more than others. So we're running around 91% occupied on our studio units, and in some cases we're trying to move those, and we may be doing loss leaders things like that, just to try to get those leased and moved before the fall.

Got it. Thank you so much. Your next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Hey, good afternoon, guys. Quick question for me. Looking at your effective renewal release rate growth, it's pretty impressive, particularly given the downturn and turnover. So I'm wondering if you could just revisit your strategy for renewals across markets. I think you talked about this to some degree on your last earnings call, but just an update of how you're thinking about that and if you're thinking about each market individually.

Sure. Thanks for the question. Just to go back to the beginning of COVID and what we did, we elected to go out at market at that time. And since then, about 20% of our NOI has been regulated to the point where we have to send out 0% increases. So that leaves 80% of our NOI the ability to push to market. So you have the regulatory environment, and then what we're having and seeing today is what's happening in the markets. When they're very concessionary, market rents are coming down, and we're having to negotiate to some degree. That being said, we have pushed our renewals, and I can tell you it's between 2.5% to 3% that has been sent out through September. I expect we come in probably about 50 basis points less than that, just based on negotiations and, again, the fact that there could be more regulatory restrictions put on us. It does differ by market. It goes as low as 0% to as high as 5.5%.

Got it. And if we think about your July commentary that effective rents, combined effective rents, are going to be flat to down 50 basis points, and I'm sorry if you gave this, but can we assume that the renewals are going to be in the same range and that maybe slight downtick in the negative tax territory is going to be driven by new leases?

Yeah, I think that's fair. What we're seeing is very similar to what we saw in June. So I would tell you our new lease growth is probably somewhere between negative 3% to negative 4%, while our renewal growth should hang in there probably closer to 2.5% to 3%. All right.

Thanks, guys. I really appreciate it.

Okay. Your next question comes from the line of Rich Anderson with SMBC. Please proceed with your question.

Thanks. Good afternoon. So you guys are too nice. I have a tenant. She was 10 days late. She's 70 years old. She's currently washing my car.

I don't know where to go with that.

So you know the analogy when you're getting chased by a bear, you don't have to be faster than the bear. You have to be faster than the people that you're with. And I'm wondering if... You can apply that to here longer term where you guys and your peers that are, you know, the most financially capable in the business own collectively maybe about 10% of the apartment units in the country. Is there a long-term opportunity where some of the financially vulnerable that own multifamily real estate could really suffer substantially depending on how long this goes in that you as an industry and UDR as a company could get the two of the larger, even if there's not really a negative event from a yield perspective on transactions. So I'm just curious if you've got your antennas up about getting bigger and all of this at the end of the day.

Rich, it's a really good question and one we talk about with respect to how do the REITs occupy space compared to the privates and where pain will be. Our first thought goes to long-term ability where the customer is to grow cash flow. And hence, the platform was born and our ability to increase our margins. And that's relatively... Pretty straightforward, you can see our operating margins this last quarter held pretty solid in the 84%, 85% range. I can guarantee you that private investors generally going to run 10%, 12%, excuse me, 10% to 12% below that because of their inefficiencies, either scale or technology. So we think the long-term play is to have a better operating model for the customer, and our cost structure. With respect to financial hardship and what it shakes out, I kind of harken back to the four or five last recessions I've been through, and they always poke out at about the same place. Developers are the first to show the pain, and that is an opportunity for us, either in the DCP front or acquisitions of lease-ups, And it's not that deep of a pool of capital that's going to compete with us on that front. The real hardship, maturing debt, everybody and their brother right now wants to refi. And I congratulate Joe and the team for $400 million in 12-year paper at 2.1. You can hang on a pretty long time. if you're able to stabilize and get to that. So I don't know if their stabilized assets are going to have a lot of hardship. And then it's a function of where else it might poke out, a market, an employer, somewhere in there. I'm not sure the REITs are that competitive on that front because of our leverage profile versus the PE shops who can use a higher leverage borrow on an international basis. and we'll probably be able to buy a lot of stuff. And I think that's going to play out with this current environment. And so you can see our game plan is straightforward. Platform, long-term cash flow margin, pick-off opportunities that the PE shops probably are overlooking or not interested because it doesn't support their investment thesis. Joe, anything to add? Nope. Governor Hall? I think just family...

It's necessary, just on private market values. I mean, as Tom mentioned, there's still plenty of capital that's very interested in apartments. I mean, interest rates are very low, which is obviously stabilizing apartment values. There is a divergence in markets, we know. The markets that are performing well, particularly not urban, pricing is relatively stable, probably hasn't changed much at all. So markets like New York and San Francisco, you're not going to have much of a bid. Buyers and sellers are unlikely to come together. So at least in the short term, you're unlikely to see many trades in those assets. Okay, great. Thanks, Harry.

And then just a quick follow-up. You know, the spread in Texas, California, and Florida kind of starts to get real ugly post-second quarter. Are you seeing anything there that is troubling post-second quarter and to this period of time now where the threat of kind of reclosing or whatever sphere generally might be impacting those specific states, or is it just not apparent? And if the answer is no, then we can move on.

Really, the answer is no. They've been very resilient, and I can tell you that traffic really hasn't changed much, so they're doing well. Okay, that's good enough for me.

Thank you very much. Your next question comes from one of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Oh, hey, good morning. Out there, maybe it's good afternoon. So just two questions. First, Tom, you mentioned sort of an affirmation that people want to live in the urban areas, that people want to come back to the cities. You led on that, you know, people want to live in safe places. But if I look at, like, the markets that are really impacted, Boston, New York, and San Francisco, San Francisco has some of the lowest COVID, certainly in California and in the country, whereas obviously New York speaks for itself, and Boston is a bit elevated. So I guess, you know, the question is, how much of this is an absolute belief that these are markets that return, more principally New York and San Francisco versus San there's a bigger fundamental shift that's gone on because you've had higher COVID and other higher COVID cases in other markets where you guys have products and you're not seeing the same impact on your property. So what gives you the confidence that like a San Fran and New York proper, just those urban metros, not the surrounding areas, but the urban metros will bounce back in the near future?

Yeah, Alex, I'll take a shot and ask anyone else to clean it up. I guess the belief I have is simply that the markets that you cite in statistics are all correct. What's underlying that is the simple fact that businesses have shut down, given people the option to work from home, that our belief is that when business opens up, whatever the conditions are, that they will reassemble their workforce. And so the theory would be when businesses and cities open back up, the repopulation of those cities will occur, our leasing season will be an unusual window, if that were to be fortunate by the end of the year. We're going to have a rush of November and December leases, as an example. So we're really hanging around the hoop, waiting for businesses and the vaccine to make the connection. If that takes three months, six months, a year, I think we have to run our company under those conditions. Long term, People sought the urban for lifestyle, surrounding, and I would think if I had been in Wyoming, buried in my parents' basement, working remotely, that I cannot be anxious enough to get back to life and what I enjoyed before. First, Wyoming, as an example.

Wyoming has good fishing, by the way. Fair point.

I would agree with that. And probably not a lot of people to date. That's the long term. You guys have anything to add to that?

As I talked about earlier on the port stress side, the quant and qual work that we do, it's meant to keep us disciplined. It's meant to keep us away from knee-jerk reactions and headlines and disruption such as this. So, you know, four months ago, New York was the finance hub of the world. San Francisco was the tech hub of the world. Boston, the biotech hub of the world. So you go through all that, and has that changed? Has the venture capital dollars completely disappeared from those markets? Has the intellectual hub that exists there disappeared? I would say no. Now, if you say we never find a vaccine for COVID and individuals can never come back to work in an urban environment, then that's a different set of rules. But we're not ready to start investing with conviction based off of that premise yet at this point in time. So we think being patient is the appropriate place to be. Some of these outcomes are going to be pretty binary in nature. Do we get it or not? What's the financial situation on the other side of this for a lot of these municipalities and states? What's the taxation situation? What's the regulatory environment? It's just too early to make a convicted view one way or the other, which is the beauty of being a diversified portfolio. We don't have to make the call today and say we've got to uproot and shift half our portfolio. We feel like we're in a good place, and as long as we stay focused on the platform, we think we're going to win on a relative basis over time. So we're just not there yet. We'll hopefully get there as we get more information. We'll have more conviction to speak to, but just not there yet.

Right, but you did say something interesting earlier, which is that a lot of your residents have stayed in the general metro area, so you could have a shifting of where people live. still working in the same area, but they're shifting their living habits. Joe, second question is, on the regulatory front, the November election coming up in Washington, clearly potential for the Senate and White House to go Democrat, which would then bring with it a lot more housing regulations. How do you guys feel that your position, both from UDR as well as industry, to try and fend off, you know, ever-tightening legislation that seems to be coming, whether it's eviction moratoriums, rent control, et cetera?

Yeah, I'll maybe start it off, and then maybe Tom or Chris may have something to jump in here on. You know, I think, again, we go back to that diversified approach. If we were wholly concentrated in only blue states or red states, perhaps we'd be more exposed to the risks there. So again, diversification helps out. I think the industry as a whole, the trade groups that we work with and support are trying to lobby and help the powers that be understand the need for affordable housing, the need for more supply out there, and the need to eliminate some of the red tape and restrictions that exist. And that's at a national, state, and local level. So I think the industry as a whole is doing that and trying to educate people And so I think we're in a good position from that sense. You know, Chris, who oversees the regulatory side as well as his other roles, may have additional thoughts on, you know, upcoming elections either on a national basis or, you know, even coming down to what we're seeing in, you know, a state like California or some of the recent regulations that we've seen have been bantered about. Yeah, sure, Joe.

Yeah, I guess a couple thoughts from me. You know, I think, Alex, there's kind of two different types of regulatory. As I think about it, we really saw it in a number of our coastal markets kind of throughout the pandemic. You know, I would say first, you know, back in March, April, so early on, I think there were some very valid emergency regulations that were enacted to, you know, combat COVID hardship. I think as the pandemic progressed, some of those valid regulations came really became, you know, ways of different groups advancing more of their kind of tenant-friendly and personal agendas in assorted markets. Yeah, so as we think going ahead and, you know, outside, we'll see what happens if the Democrats take the Senate and obviously the presidency. But, you know, the things that we're really trying to assess in these markets and obviously don't roll up to the state level and then also to the federal level at some point is, you know, do these policies eventually expire When do they expire? And at the end of the day, you know, could they transition from emergency ordinances to some sort of long-term policy? You know, and secondarily, and Joe kind of talked about this in the second derivative, but, you know, what does this do to capital formation in our markets at the end of the day as well in investment? You know, I think as we talked about with some of the port strat stuff just on the regulatory side, you know, we're going to fight anything that comes up, but it really is too soon to have a definitive view on emergency regulation versus long-term policy, how sticky all that stuff is. But at the end of the day, I think we can probably all agree that none of this helps to improve, you know, long-term affordability, which is obviously one of the biggest issues that's pushing a lot of this. Alex, I think we could have a separate call at great length on this because it's a great topic.

And at the same time, I think when you get past the election, you'll have a little bit more calmness, vaccine, cooler heads will prevail. I think a lot of the actions right now are knee-jerk and reactionary. But long-term, if you look at cities that thrive, they thrive through growing housing stock, variety, affordability, and that is generally brought on by friendly business environment and supply being brought into the market. Those that shut down their supply and capital flow tend to gentrify and become less progressive. So I think people will start to realize, and they watch California, one city housing restrictions, another who lifts it, all of a sudden whose tax base grows, where do more people want to live, where is more entertainment, amenities, et cetera, being presented. And they don't have to look far, but usually their neighbor. And we see it time and time again. An example is Huntington Beach, where for 30 years nothing was built, and the city woke up and said, you know, we have availability to build, and we're doing quite well there, versus the surrounding cities that have still shut down. So we're going to have to get smarter about what market we operate in. We made investments in the government regulation. Chris leads that effort, has a great team, and it helps being thoughtful on a long-term basis, not just reacting to today. Thank you, Tom. Thank you.

Your next question comes from the line of John Kim with BMO Capital Markets. Please proceed with your question.

Thank you. Jerry and Mike mentioned a shift in strategy that was previously discussed at Mayweek to now prioritize occupancy over holding off on the market concessions. Can you just elaborate what drove, or what was the tipping point that drove that change in strategy? And also, do you see the current 95.5% occupancy to drop this year as well?

Hey, John. Just to be clear, we don't focus on rents or occupancy in a vacuum. So we are trying to maximize total revenue. And what you've seen from us and you can see in our supplement, some markets are operating at lower occupancy today and some are still operating at a very high occupancy. That being said, the other side of it is our rents and what we're doing with the blends. What we're trying to do is maximize our total revenue. for not only the rest of this year, but it's going into next year. So, again, we do this as a function of trying to optimize the whole thing and not either of them in a vacuum.

And as far as the occupancy levels, are you willing to go lower to maximize rental revenue?

I think in a couple of our markets where we're still having a little bit more trouble, it's too early to tell kind of where that is, but I will tell you occupancy has come down a little bit as we've seen move-outs elevate, and in some of the other markets, again, where we have the opportunity to hold rate and push occupancy, we're doing that. So I think today we're closer to the high 80s in places like downtown San Francisco and downtown New York City, and it's a little bit more challenging. We could see that come down a little bit over the next 30 to 60 days, but aside from that, it's too early to tell where those go.

I would just add, John, coming off of that comment and a comment that Tom made earlier, we do have approximately 2% of the resident base that we would potentially look to evict today if regulations allowed. So when Mike talks about not managing the occupancy, if we have non-payers sitting in there, we're not going to be worried about keeping them in from an occupancy standpoint We're going to be focused on getting them out and getting good, high-quality rental payers into the system. So you could see temporary disruptions on a market-by-market basis as you see regulations roll off. So I wouldn't take that as a sign that we're letting occupancy dip. It's just managing total revenue and total NOI.

Okay. On a similar level, can you discuss your willingness to provide shorter-term leases, just given the uncertainty that many tenants may have to sign a long-term lease or, like, a one-year lease?

So the way that our pricing system works today is that we can offer upwards of three to, in some cases, 18-month leases. And I can tell you with some of the ordinances and the regulations that have been put in place over the last few months, they limit our ability to do that. So the best example today is San Francisco. You are not allowed to do anything in downtown proper less than 12-month lease. So we can't do it. In other places, the way that the pricing matrix works, we will open that up. They will pay a premium depending on where our lease expirations fall. So we are constantly managing that.

That's helpful. Thank you.

Your next question comes from the line of John Polowski with Green Street Advisors. Please proceed with your question.

Hey, thanks. Just one for me. I appreciate you guys keeping the call long here. The D.C., Mike, you touched on just trends in San Fran and New York softening into the summer here, but D.C., your urban assets, are they assuming the work-from-home kind of environment persists to the balance of the year and the social scenes of cities stay shut? D.C. Sorry, I'm going to Getting a lot of feedback here. Does D.C. behave like New York and San Francisco over the balance of this year?

Thanks for the question, John. Let me give you a little color on D.C. Obviously, you know, it makes up 19.3% of our same store in Hawaii. I can tell you our 2Q revenue growth, you saw it was down 1.2%. Our suburban B portfolio has held up relatively well, and it's been positive over the last few months. Our urban A properties struggle the most, and this kind of goes along with a lot of things we've talked about today is the D.C. property assets were more restricted based on regulatory environments, and we had to go out with a 0% renewal for half those properties. So again, hopefully out in the suburbs, positive. What you're seeing down in the heart of D.C. is a little bit more of a challenge, and I think a lot of that has to do with the regulatory environment. But I will tell you today, blended growth remains positive. our turnover's down, traffic's up, so lots to be excited about in that market compared to somebody like New York City or San Fran.

Yeah, I'd say from an intermediate perspective, you know, when you look at continuing claims and job forecasts, D.C. definitely holding up better than the nation as a whole, given they do have a diversified base of employment, but also the government, the education, cyber defense, et cetera, as well as the growing tech scene there, so The demand side probably looks better than our portfolio as a whole over the intermediate term. And then supply-wise, that's been a little bit difficult in D.C. for most of the cycle. During this downturn, it's one of the markets that you've seen permit activity come off by far the most. So to the extent that holds, hopefully you see a little bit lighter supply picture going forward as well.

Okay. Thank you. Thank you.

Your next question comes from the line of Handel Just with Mizuho. Please proceed with your question.

Hey there. Just a couple quick ones for me. I don't think you mentioned it, but what's your appetite here for the stock buyback? You mentioned comments about asset values, your favorite liquidity profile. So I'm curious, given your balance sheet, what your appetite here is. And then if it's this position here, as a source of capital and where perhaps you'd be more inclined to call the portfolio.

Thanks.

Hey, I know.

Afternoon.

It's Joe. You know, as I said earlier, it's one of the items that we look to in deploying capital. We've been pretty diverse in our approach between platform development, GCP, acquisitions, and buyback as recently as 2018. It's not something that today we're jumping out there on. You didn't see any activity here in the quarter. We do feel very good about the balance sheet, the liquidity, etc., but being only about one quarter into this crisis, I'm not sure we have the conviction levels yet to go out there and pursue that avenue from a use of capital perspective. We'd like to see more conviction in the economy, the trajectory there, more conviction in the direction and level of NOI, and therefore future liquidity and debt metrics, as well as what we've seen asset values hold in very strongly to date. make sure that that continues to hold in this capital markets environment. So not sure we're quite there yet, but we've shown our ability in the past, and we'll try to do the right thing as we move forward.

Okay, thanks for that, Joe. My second question is, the gap between your better Sunbelt markets in New York City and some of your coastal markets was pretty darn wide this past quarter, right? Over 1,000 basis points in some cases on a same-store revenue basis. So I'm curious... If you guys expect that will get wider here the next few quarters, then when we could see that gap start to narrow.

Again, one thing we're looking at today is when you see July trends versus June trends, as a whole, they're very similar. So our traffic continues to improve in a lot of ways on a year-over-year basis. Our new lease growth is very similar to what it was in June, and our renewal growth is impacted a little bit just based on what's happening in the markets today as well as the regulatory environment. So that being said, you do have different markets doing different things. I would say it's too early to tell, but we look at this as a property market, and we've been encouraged by some of our markets' bottoms already. So about 20% of our NOI is in markets that bottom previous to this month. We've got about 50% of our NOI markets that appear to be bottoming, and that leaves about 30% of the NOI TBD. And that's where we're kind of watching that to see what happens over the next few months.

Okay. Fair enough, guys.

Thank you. The next question comes from the line of Alex Kalmas with Zellman & Associates. Please proceed with your question.

Thank you for taking my question. Just looking at the signals ending this week and given what you know about your tenant's employment makeup, how consequential will additional signals be for collections on a go-forward basis?

Hey, Alex, you were a little bit muffled on our end. Maybe if you could repeat, I think what we were hearing was perhaps expiration of unemployment benefits and impact on resident base? Correct. Correct. Thank you. Okay. Perfect. Yeah, I guess when we started in the past, and Mike and Jerry will probably jump in here, when we've looked at our resident base and the need for us to accommodate them and help them out from a rental deferral or payment plan, it's been relatively minimal in terms of the number of residents that have come in and requested that. So while we don't know exactly how many residents are still employed or are on unemployment, the percentage that proactively come to us and request for the assistance is under 2%. So I think that gives us a pretty good degree of conviction when we look at collections as well as their own actions that roll off of unemployment benefits if in fact it does happen for an extended period of time that our portfolio is still in a good place given that we're higher income, higher quality overall relative to typical apartment product out there in the market.

Got it. Thank you very much. Just looking back at regulation in California, looking at Prop 21, is there any, other than the obvious pandemic, what on the ground is different than in 2018 when Prop 10 was rejected? And is there concern around this proposition, or are you guys thinking it will be a similar result?

Sure, Alex. Hey, thanks for the question. This is Chris again. You know, I'll kind of give you just a rundown, because we've had a couple updates over the last couple months, so probably a good time for a rundown of what's happening there. So for Prop 21, I would tell you right now, the coalition and really our plan going forward, you know, we think we're in pretty good shape. I say that for, you know, really a couple of reasons. You know, first, I think the coalition is much deeper, and I would say, you know, more widespread participant-based than last go-around, so back in 2018. You know, obviously there's going to still be multifamily owners, operators, who are the big guys there, but also affordable housing groups, business organizations, big labor veterans groups, et cetera. So much more expansive from that perspective. If they second, you know, the last update we received from CFRH, California for Responsible Housing, indicated that fundraising has remained strong versus where it was in 2018 at the same time. So definitely feeling good on that point as well. And then third, you know, recent polling results, you know, they're about a coin flip as far as, you know, yes, no right now, but they do definitely tilt more in our favor once the for and against arguments are discussed with the polling respondents. You know, on the flip side, potentially going against us is that, It is a presidential election year. You know, we all know that Democrats comprise, I would say, a majority of California's voter base, and turnout tends to be significantly higher in California than it does in a lot of states in presidential versus gubernatorial years. So we'll see how that goes. But, again, in general, we feel pretty good about where we are right now on Prop 21.

Thank you for the great follow-up.

There are no further questions in the queue. I'd like to hand the call back over to Chairman and CEO, Mr. Toomey, for closing comments. First, let me express thanks for all of you for your interest in UDR and certainly the extra time today. And I want to wish you be safe and healthy.

To our associates on the call, I just want to reiterate in a heartful way Proud of the job you're doing, the adaption, the skill, and always want you to know we're here to help in any way, shape, or form. Turning to the business side, you know, we've said it many times. It's a challenging environment, and if you will, a storm on a lot of different fronts. But our strategy remains the same. It's the right one. And what has adjusted is our tactics. and we will continue to adjust as the environment evolves, proud of the team's ability to adjust to a daily changing environment and executing at a high level. What does remain constant at UDR and will remain constant is the long-term focus on our cash flow growth, maintaining our diversification, our transparency, and certainly managing risk in this environment. With that, We always welcome your questions, dialogue, and we will see you soon.