UDR, Inc.

Greetings and welcome to UDR's first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will be taken after the presentation. If you need operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Director of Investor Relations, Trent Trujillo. Thank you, Mr. Trulio. 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, 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 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 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 over the call to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent, and welcome to UDR's first quarter 2021 conference call. On the call with me today are Mike Lacy, Senior Vice President of Operations, and Joe Fisher, Chief Financial Officer, who will discuss our results. Senior Officers Harry Alcock, Matt Kozad, and Chris Van Enns will also be available during the Q&A portion of the call. To begin, first quarter results met our guidance expectations, and we anticipate same-store growth and FFOA per share will improve from here. As evidenced by our guidance increase and the demand trends which we will speak to during the balance of our prepared remarks. We are often asked the reason for our optimism on the recovery of the multifamily sector and the magnitude of the potential upside UDR can capture. Our response is twofold. First, on the macro front, we expect to see the typical demand and growth cycle witnessed in the past recoveries. The U.S. economy appears primed to accelerate growth, As additional fiscal stimulus kicks in, vaccination rates continue to improve and the return to office plans crystallize. Business conditions across most of our markets returning to more normalized levels. These factors should have a positive impact on job growth and wage growth, which drives demand for multifamily housing. It is difficult to put a range on the potential economic benefit from this unfolding, but recent operating trends put us in great position to realize this upside as we enter peak leasing season. Second, this recovery will have an additional tailwind that no past recovery has had, the potential relaxation of regulatory restrictions. These COVID-related regulations cost UDR an estimated $8 to $10 million of NOI during the first quarter alone. Mike will further detail this opportunity in his remarks, but we are optimistic in our ability to recapture this income as restrictions sunset and the recovery ensues. Collectively, our macro view is the acceptance of our next generation operating platform by our residents, and our ongoing ability to accretively source and deploy capital drove the full year 2021 guidance increases provided in our release. Joe will discuss this further in his remarks. Let me take a step back. and look at our business over the intermediate time horizons of 2019, 20, and 21 and into the future. I firmly believe we have the correct strategy in place to outperform. Our business model is somewhat unique in the multifamily space as we are widespread diversification, innovative culture, and a focus on operations makes UDR a full cycle investment capable of performing well across a variety of macro backdrops. This proved true in 2019 when we accretively acquired nearly $2 billion of properties with attractively priced capital. In 2020, amid a pandemic, we made tremendous strides implementing our next generation operating platform. which represents an entirely new way of conducting business in the multifamily industry that has and should continue to drop more dollars to the bottom line. For 2021, we believe we are well positioned to take advantage of the accelerating economic recovery and eventual relaxation of regulatory restrictions in many of our larger markets. All in, UDR has generated better than average FFOA per share growth in seven of the last nine years, a track record I'm immensely proud of. In closing, I remain highly confident in the strategic direction of our company and our team's ability to execute on an opportunity set that's in front of us. The ongoing commitment of our team has delivered increasingly higher performance levels of service and satisfaction to our residents as we progress towards the full rollout of our platform, while also making more efficient. For this, a heartfelt thank you goes out to all our associates for skillfully adapting to a new way of conducting business and executing our strategy. With that, I'll turn the call over to Mike.

Thanks, John. A little over 60 days ago, when we provided initial 2021 guidance, we believed the reopening cadence of markets and therefore the pace of recovery in multifamily demand indicators that we track would be largely tied to how rapidly vaccinations proceeded and how quickly regulatory restrictions were subsequently relaxed. Our best guess was that meaningful positive inflection would most likely occur in the second quarter for our portfolio in total. and the second or third quarters for assorted markets more negatively impacted by COVID. While the regulatory backdrop has yet to exhibit material improvement, I'm pleased to say that we are seeing core operating trends improving a bit earlier than expected. This quarter, we added a new page to our supplement that illustrates these key operating trends. Let me take you through our first quarter results and positioning ahead of peak leasing season using those charts on page two of our supplement. First quarter results were solid, as evidenced by occupancy continuing to tick higher, blended effective lease rate growth turning positive, and revenue growth improving sequentially. These trends have continued into April and give us confidence that results can further improve as we reprice 60% of our portfolio in the second and third quarters. In terms of demand, traffic was 35% higher year over year during the first quarter, Positively, we witnessed residents migrate back to harder-hit urban areas in greater numbers, while residents leaving these markets declined. This has resulted in physical occupancy of 96.8% in April, our highest reading since April 2020. Higher occupancy is usually a precursor to future pricing power, and our effective blended lease rate growth has improved following occupancy gains. Strategically, we continue to improve occupancies in our harder-hit markets, but are also actively driving rents across numerous markets and communities that held up better during the pandemic. Regarding blended lease rate growth, the transition from vacancy to occupancy in some harder-hit urban areas of coastal markets has had a near-term anchoring effect on our blended rate growth. However, I expect our blended growth to trend higher during the second and third quarters as market rents across our portfolio continue to rise. As of today, we have a weighted average loss to lease of 2%, a significant improvement versus October 2020 when our gain to lease topped out at 6%. We have priced our May and June renewals at 100 to 150 basis point average premium to the 2.7% growth we achieved in the first quarter. And we are forecasting effective new lease rate growth to turn positive portfolio-wide during the summer as markets reopen and return to office hits full swing. A material positive development we saw during the first quarter and in April thus far is the continued downward trend in concessions. As a reminder, our strategy through the pandemic has been to maintain gross rents and offer concessions to not diminish our future rent roll in anticipation of a rebound. As demand has improved across our markets, so has pricing power, and we have been able to reduce the amount of concessions granted on new leases from a peak of three and a half to four weeks on average in November 2020 to 2.7 weeks today. Each week of concession equates to approximately 2% in effective rate growth, and we should see this benefit more clearly in our results as we reprice a large portion of our portfolio over the next two quarters. These factors have contributed to higher sequential billed revenue, which we anticipate will improve further in the coming months. Importantly, Cash collection rates rose by 50 basis points between February and March, with further improvement in April, as we benefited from reopenings, job growth, stimulus programs, and $2.5 million in rental assistance received from a variety of programs. We expect these trends to support revenue collection rates in the high 90% range going forward. Taken together, our same-store cash revenue growth turned positive on a sequential basis. Based on the most recent trends, I expect our year-over-year same-store revenue growth to be less negative in the second quarter and turn positive in the third quarter. In addition to these core trends, our future same-store and earnings growth prospects are bolstered by the potential to recover lost income opportunities directly tied to the pandemic. As Tom mentioned in his remarks, we estimate reduced collection levels and regulatory restrictions accounted for approximately $8 to $10 million in lower NOI during the first quarter, or $0.03 per share. Breaking this out further, despite recent sequential improvement, quarterly rent collections have trended around 2% lower versus pre-COVID, resulting in $6 to $7 million in quarterly run rate bad debt reserves and write-offs. Another $1.5 to $2 million can be attributed to the other regulatory restrictions that have limited our ability to monetize our real estate through initiatives such as short-term rentals, amenity rentals, and late fees. The balance of lost potential income comes from mandated flat renewal pricing across 15 to 20 percent of our portfolio. As markets continue to reopen and regulations are eased, we anticipate recapturing these revenue streams over time. While these big picture trends demonstrate our strong execution and the opportunity ahead, it's always helpful to provide some color at the market level. Briefly, New York and San Francisco are collectively 14% of our same-store NOI. During the quarter, we observed higher levels of demand from favorable migration patterns into and out of these markets. This dynamic and its positive impact on market rents and concessions helped to drive occupancy higher and therefore sequential revenue and NOI growth. Washington, D.C., and Seattle are collectively 24% of our same-store NOI. These markets experienced relatively high levels of competitive new supply during the first quarter, which resulted in a near-term reduction of pricing power. We anticipate sequential NOI growth improving in these two markets as concessions decrease over the coming quarters. Our Sunbelt markets are collectively 25% of same-store NOI. These markets continue to exhibit strength of occupancy above 97%, and we are actively increasing rents to maximize our rent growth. Moving on, our next generation operating platform, version 1.0, has now been fully rolled out to 16 of our 21 markets. Our residents have embraced our move to a self-service model as evidenced by 96.5% of our tours conducted during the first quarter being self-guided or touchless. With the widespread introduction of automated self-touring and easy-to-use resident interfaces across our communities, we remain on target to achieve headcount reductions averaging 35 percent on our communities by year-end 2021, primarily through natural attrition. When coupled with other platform initiatives that also mitigate controllable operating expense growth, we remain confident in our forecast that the platform can increase our annual run rate NOI by 15 to 20 million by the end of 2022. Finally, I want to thank my colleagues in the field and at corporate for their continued hard work to make the platform a reality. Every UDR associate should take pride that we have created a new way of doing business in the multifamily industry that improves resident satisfaction, increases engagement and career mobility for top talent, and delivers strong bottom line results. Although we have been working on the platform for three years, we are just scratching the surface of what is possible. And now, I'd like to turn the call over to Joe.

Thank you, Mike. The topics I will cover today include Our first quarter results in our improved outlook for the full year 2021, a summary of recent transactions and capital markets activity, and a balance sheet and liquidity update. Our first quarter FFO is adjusted per share of 47 cents, met the midpoint of our previously provided guidance range, and was supported by same store revenue and NOI growth in line with our internal expectations. For the second quarter, Our FFOA per share guidance range is 47.49 cents. The one penny per share sequential increase is driven by our expectation for improving sequential same-store NOI growth and accretion from recent capital allocation activities. Our year-to-date results, when combined with our expectation for continued sequential improvement throughout the year, drove the increases in our full year 2021 FFOA and same-store guidance ranges provided with our release. We now anticipate full-year FFOA per share of $1.91 to $2, with the midpoint representing an approximate 1% increase from prior guidance. This increase is driven by half a penny from a 25 basis point midpoint improvement in same store revenue growth, half a penny from a 50 basis point midpoint improvement in same store expense growth, and a one penny accretion from accretive financing activity and transactional activity offset by half a penny from increased G&A expense. For same store guidance, we are now forecasting full year 2021 revenue growth of negative 2.0% to positive 0.5% with concessions on a cash basis and negative 4.0% to negative 1.5% with concessions on a straight line basis. This difference is due primarily to the residual impact of concessions amortizing during 2021 that were granted in 2020. Additional guidance details, including sources and uses expectations, are available on attachment 15 and 16E of our supplement. The low end of our full year 2021 FFOA guidance range suggests we achieve the midpoint of second quarter FFOA guidance of 48 cents per share and experience flat sequential growth for the balance of the year. As Mike discussed, We are encouraged by the trajectory of several forward-looking operating trends and believe we are well-possessioned to drive rate growth as we enter the peak leasing season. We are optimistic that these dynamics, when combined with the accelerating economic recovery and eventual easing of regulations, will provide a growth tailwind as we progress throughout the year. As such, we plan to revisit guidance on our second quarter call once we have further evidence of the sustainability of recent positive operating trends, are deeper into the leasing season, and have a clearer view of the regulatory environment. Next, a transactions update. A primary objective when we undertake transactions is to remain diversified by market mix, price point, and location within markets. While our portfolio-wide urban-suburban and AB quality exposures will oscillate over time, as we pursue higher return deals, the 21 markets we operate in provide ample flexibility to utilize our value creation drivers to enhance earnings and NAV growth. We believe these tools allow us to pivot to the right capital allocation decision and consistently generate outsized yield expansion over time on investments, which provides a repeatable, enduring, and compounding set of advantage versus private operators and public peers. These drivers include, one, our ability to improve core operations. Examples include implementing revenue management software, charging view or location premiums, and using our scale and markets to secure lower vendor cost. Number two, implementing legacy operating initiatives such as parking optimization, short-term furnished rental programs, and renting out common areas. Number three, overlaying our next-generation operating platform, which reduces headcount needs, improves resident experience, adds smart home capabilities, and brings data science into the mix. Number four, renovating apartments and common areas, as well as increasing curb appeal where appropriate. And number five, utilizing predictive analytics and qualitative assessments to provide a better jumping-off point for our investments and markets that are likely to produce better rent growth over the coming years. We have found that the greatest opportunities for outsized accretion come from acquired communities that are mismanaged, located proximate to other UDR communities, those with renovation upside, or a combination of the three. Pairing this with premium priced equity, like what we did in 2019 and during the first quarter of 2021, only serves to further enhance returns. This form of value creation is repeatable in any environment given our ability to pivot sources of capital between dispositions, free cash flow, and equity. Proof of the accretive nature of our transactional value creation strategy is evident on the $1 billion of third-party acquisitions completed in 2019. Thus far, the weighted average yield on these properties is expanded by approximately 35 basis points, or 7% in terms of NOI growth, to a 5.1% yield. This is a stunning result. Let me say again, this is a stunning result given this upside was realized during COVID, a period during which NOI generally declined. On the first quarter transaction activity, during the quarter, we sold two communities, one each in Orange County and Los Angeles for total proceeds of approximately $187 million at share and a low 4% weighted average cap rate We acquired or are under contract to acquire three communities, one in suburban Boston and two in suburban Dallas, for a combined $360 million. All three communities are expected to generate outsized returns once fully integrated onto our platform, with the weighted average initial yield projected to increase from mid-4% in year one to mid-5% by year three. This equates to an approximate 20% uplift in NOI. And lastly, we committed to fund two DCP investments totaling $50 million. Each investment yields 9% and includes profit participation upon a liquidity event, which we expect to occur in approximately five years. Please refer to yesterday's release for additional details on recent transactions. Moving on, our investment-grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include, first, During the quarter, we entered into Ford sales agreements for approximately 9.3 million shares of common stock for a combined $405 million of future expected proceeds. We anticipate using these funds on accretive acquisition, DCP, and development opportunities, some of which we have completed and others we expect to close in the coming quarters. We plan to over-equitize these investments, which should improve our leverage as measured by debt to EBITDA RE by 0.1 to 0.2 times. Second, after using the proceeds from our $300 million 2.14% unsecured bond issuance in the first quarter to redeem higher cost 4% debt originally scheduled to mature in 2025, we have only $640 million of consolidated debt or approximately 3% of enterprise value scheduled to mature through 2025 after excluding amounts on our credit facilities. Our proactive balance sheet management puts us in a position of relative strength with the best three-year liquidity outlook in the sector and a weighted average interest rate of 2.8%, the lowest amongst the multifamily peer group. Third, we recently announced a 1% increase to our dividend. Based on our 2021 AFFO per share midpoint of approximately $1.78 per share, Our dividend payout ratio is forecasted to be 82%, resulting in approximately $100 million of annualized free cash flow after accounting for dividend payments. And last, as is evident on Attachment 4C of our supplement, we continue to have substantial capacity under our line of credit and unsecured bond covenants. As of quarter end, our consolidated financial leverage was 35% on underpreciated book value and 28% on enterprise value, inclusive of joint ventures. Net debt to EBITDA RE was 7.0 times on a consolidated basis, but would be 6.5 times if outstanding forward equity agreements were settled during the quarter. As of March 31st, our liquidity is measured by cash and credit facility capacity, net of our commercial paper balance, and including the future expected proceeds from the potential settlement of our forward sale agreements was $1.35 billion. Taken together, our balance sheet remains healthy, our liquidity position is strong, our forward sources and uses remain balanced, and we continue to utilize a variety of capital allocation options to create value. Finally, subsequent to quarter end, SmartRent, which is one of the investments held by RETV 1 and 2, of which we are one of the lead investors, entered into a definitive merger agreement with a special purpose acquisition company. Consummation of the merger is subject to regulatory approval, stockholder approval, and other customary conditions. As many of you know, UDR was an early adopter of SmartRent's smart home technology across our portfolio as part of the foundation for our next-gen operating platform. We are pleased to see the rest of the industry following our lead in its utilization and the benefits SmartRent has provided to our investors through tangible bottom line results to our operations, and yet to be realized appreciation within our RET investments. At this time, there are still many conditions to be satisfied, including those mentioned moments ago, before the merger is closed and SmartRent becomes a public company. Related to implications to UDR, the approximate $25 million valuation of our RETV interest presented on 12 of our supplement will continue to be presented in accordance with GAAP, utilizing fair market value accounting and the valuations provided to us by RETV. Based on information provided to us by RETV, the valuation presented on 12 of our supplemental could increase to approximately $75 million on a pre-tax basis at the publicly disclosed transaction price, but depends on a number of factors. We do not intend to provide any additional commentary on this topic until it is appropriate. With that, I will open it up for Q&A. Operator?

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone when you take your line is in the question 2. 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. In the interest of time, please limit yourself to one question and one follow-up so we may get to everyone's questions. Our first question comes from the line of Nick Joseph with Citi. Please proceed with your question.

Thanks. I was hoping you could compare the recovery you've seen thus far in San Francisco versus New York and then your expectations from both markets over the next few quarters.

Hey, Nick, it's Mike. Thanks for the question. It's been interesting. I'll tell you just in general, New York, San Francisco, Boston, those markets have performed a little bit better than we expected to start the year. And when you look at New York specifically, we've been able to bring our occupancy from around, I want to say, 94.5% during the quarter, around 96.5% today. And it's been promising to see the concessions continuously drop. And really the last few weeks, I would say, In general, we've seen a remarkable improvement. So just to break it down a little bit, New York, average concession still zero to eight weeks, and it's very different by different parts of the city. We're seeing two to four weeks in Chelsea, and then we're right around six weeks down in the financial district as well as midtown. We're still upwards of around six to eight weeks around Columbus Square. But overall occupancy today is hovering around 96.5%. and we expect to see our blends continue to improve. San Francisco specifically, that's been a little slower to recover. We're starting to see some of that availability transition to occupancy as evident by our new lease growth down around 11 or 12%. But we're excited to see the occupancy go from 92.8% in 1Q to 94.5% today. And again, Concessions in this market have also come down in the last couple of weeks, averaging between four to six weeks as a whole. But I would tell you downtown, as well as Selma, is closer to that four to six weeks today, which is a significant improvement compared to just 45 days ago.

And from the new move-ins that you have seen and that picking up of demand, are there any kind of interesting trends that you're seeing in terms of who's actually moving back in to new apartments?

Yeah, we do have some interesting trends. For New York specifically, move-ins coming out from outside of the MSA, we saw about a 25% number there, and that compares to about 10% the year before. And I'll tell you something that jumps out to me is our 25- to 30-year-old age group in that market is twice as likely to live alone now. We've seen stats go from 14% to 27% in that market. And then San Francisco is Not as big of a difference. We're seeing 20% come from outside of the MSA. It's pretty comparable to what we saw last year. And the age demographics haven't changed as much in that market.

Thank you.

Our next question comes from the line of Austin Werschmidt with KeyBank. Please distribute your questions.

Hey, good morning, everybody. So, Joe, appreciate all the details you gave on guidance. But just wanted to check and see if the math here was right, that if we look at the billed revenue figure you had in April of around $95.5 million and sort of apply a collection rate, as you mentioned, the high 90 percent range, and assuming that remains stable, does that get you pretty close to the midpoint of the revised range for same-field revenue guidance?

No. The way it kind of works, and it actually tracks a pretty similar trajectory, is our FFOA guidance. If 2Q, if you take the midpoint of expectations both for FFOA and then our internal expectation for build revenue and same stores, which we do expect to see a sequential improvement on both same store revenue and NY as we move into 2Q, if you flatline those for the rest of the year, you get to the low end of expectations. So that effectively assumes that the reopening is paused, there is no further improvement or pricing power, and that all the trends that we've seen that we're talking about on the second page of the supplemental effectively cease to exist. So I think a somewhat conservative assumption there, but probably prudent given where we're at in terms of timing of the year with 70-plus percent of leases left to be signed, the economic recovery is still ongoing, and, of course, the regulatory environment. To go to the midpoint, you need to see that continued improvement as we move throughout the year. via occupancy, pricing power, getting the collections number up, and bringing back some of those other income numbers. So you do see a continued improvement from 2Q into 3Q and 4Q to get to the midpoints or high ends of those guidance ranges.

Okay, got it. That's helpful. Appreciate it. It kind of coincides with some of the commentary you guys had in the prepared remarks. Secondly, just on traffic and demand, You provided some good detail in there on how traffic and visits have trended. Curious how conversions rates compare versus historic levels. Really, what's driving that big leg up? What markets are really driving that leg up in traffic and visits? And then, is that really for people that are looking for units, call it April-May timeframe, or are you seeing people kind of start to look further out as some of these back-to-office dates firm up?

Great question, Austin. I'll take that. I would say very market-specific, probably one of the best trends I've seen over the last few weeks is in some markets I have a 30-day trend that's higher than my current occupancy. So that tells me that there's some people that are looking to move sooner rather than later. And when you have that type of trend, you can really start pushing on your market rent. So that is places like the Sunbelt for us, it's Richmond, Baltimore, just phenomenal results over the last few weeks. But specific to traffic, when you look at that chart that we provided on page two in the SUP, New York, San Francisco, Boston, our traffic was up about 120% on a year-over-year basis most recently, and that compares to the rest of the portfolio around 90%. And then as it relates to converting, we've been seeing As a percent of our home count, 1.6% lease conversion, which typically in a normal time, when I compare it back to, say, a time like 2019, it's closer to 1% this period of time. So I'm seeing leasing that's more typical of an end of May, early June timeframe.

Hey, Mike, this is Toomey. Maybe a follow-up. How much of that does the platform enable? to deal with one, more traffic, doesn't cost us anymore, and two, are people more likely to lease with the platform versus our prior stabilized period with leasing agents?

Yeah, that's a good point, Tom. Obviously, we've opened up the funnel, right? We've talked about this in the past. By allowing more people to come to the property, we can send out sometimes upwards of five, six, seven people at a time versus one to go see different units on the property. So, Obviously, that's had a pretty big impact on our traffic. You can see it in the numbers. I would say it's increased twofold in a lot of markets. So that's probably one of the bigger factors going forward on how we're able to just kind of continue to drive that traffic number and convert at a high rate.

That's great detail, and I appreciate the follow-up to the follow-up. Thank you.

Our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

Thank you. Good afternoon. First question, I'd like to turn to supply. Can you provide some comments on supply nationally this year and any initial thoughts on 22 and, if possible, if there's any, you know, key watch markets or even regions, you know, Sunbelt versus, let's say, COSE?

Yep, of course. Hey, Jeff. Good morning. It's Joe. You know, starting with 21, MSAs in terms of UDR's portfolio, we think we're probably going to be up about 10% to 20% in terms of supply growth this year. That equates to roughly 1.5% of stock. That number has come down plus or minus 10% from, you know, what we would have been talking about a quarter ago, as we have seen continued revisions and delays taking place in some of the coast. So the picture is getting a little bit better there in that sense. Sub-market-wise for us in terms of competitive supply, overall for our portfolio is looking like it's going to be flat to down, actually. So competition-wise, looking a little bit better than the MSA as a whole. I'd say the markets that probably look best for us in 21, Boston, Orange County, Baltimore, and Inland Empire. Those that look a little bit more difficult, Northern California, L.A., New York, Nashville, Orlando, and Seattle. If you start to fast forward into 22, 23, I think all of us have been a little bit frustrated by the stubbornly high number of permits and starts. So we probably don't have quite the tailwind that you've seen in historical recoveries coming from the choking off of capital and supply as we get into those years. You know, relative to starts and permits, they're down plus or minus 10% off of peak levels. I think regionally, as you look through, clearly the coastal markets have come down more, while Sunbelt has remain relatively static, and that's a trend that you see even when you cross over into the single-family housing market as you start to think about total housing supply that's out there. So markets that are kind of best and worst that we're keeping our eye on, markets that look to be a little bit more troublesome, markets like Raleigh, Phoenix, Charlotte, Austin, Denver, Nashville, so a lot of the Sunbelt markets. The coast, I'd say the ones that look a little bit better, Boston, New York, LA, San Fran, and then even within the Sunbelt, Dallas looks a little bit better, Orlando looks a little bit better, and then the IE looks a little bit better. So generally speaking, high level though, Sunbelt just not seeing the same reprieve and supply on a forward basis.

Thanks, Joe. That's very helpful. And then my second question, Joe, on some of your opening remarks, really appreciate some of the color and the details you provided on the the value UDR has created and the growth on assets you've acquired, especially as you mentioned during the pandemic, the NOI increase. What limits UDR from doing more, more acquisition? Is it capital, competition, resources? Have you considered to do an open-end acquisition a fund business, something similar to Prologis to really grow that business, to get back into that?

The biggest inhibitor for us in terms of external growth is probably going to be the opportunities that are available to us. When we go through that list of value creation mechanisms that are available, be it the ops, the initiatives, the platform, the CapEx programs, it's not as if every deal that crossed Harry and Andrew's desk presents that opportunity. So the ability to ferret through a wide swath of opportunities across the markets that we're targeting, have them figure out the sub-markets that we want to be in, and then put together the business plan around those assets so that ops can go operate those assets and execute upon it and get the upside from that 4.5 cap to 5.5 cap over time, those are not a dime a dozen. So I think the opportunity set is probably the biggest inhibitor to go out there and continue to take advantage of the competitive advantage that we have in place. You know, the sourcing of capital, we always have assets that we can turn around and sell that we think may be maximized from any one of those perspectives. So we can always go find assets to sell and recycle into additional accretive opportunities. But I think the external piece is limited by that. As it relates to the second part, the fund business, We do have a great JV partner in MetLife that we continue to be partners with and pretty much enjoy operating with, so we don't have any plans to change from that perspective. But fund-wise, it's not an avenue that we've explored. Keeping the value creation in-house and having it fully accrue to our shareholders is generally beneficial in complicating the business, generally not something that we've tried to look to do. So something maybe down the road we'll explore and discuss with the board, but no plans at this time.

Thanks, Joe.

Our next question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Hey, good morning, guys. I wanted to maybe pick your brain about squaring same-store revenue compared to some of the operating metrics that you're comparing, notably the blended spreads. I think blended spreads have remained really solid and stable. over the past several quarters. But same-store revenue growth has remained much more negative. And if I'm, you know, looking at CoStart data, it looks like new lease spreads troughed, or effective rent growth, should I say, troughed at a similar level to peers, but you've had a steeper recovery. So I guess it's a long way of asking, you know, with renewal spreads, with where they are, where occupancy trends are going, and taking into account the bad debt, why shouldn't we expect to see same-store revenue growth even better than where it is right now?

Yep. Thanks, Richard. Joe, maybe I'll turn it to Mike for some details. I think in terms of expectation of revenue growth, Clearly, we do expect to see, given the fundamentals that we've displayed on page two of the supplemental, we do expect to see an acceleration in our year-over-year performance as we move throughout the year. 2Q likely remains in the negative territory, but we do believe we flip over maybe even as early as June on a year-over-year basis, but definitely in third quarter given the trends that we're seeing. So we do think all the efforts that we put forth on operations will start to show through on that year-over-year number pretty soon here. As it relates to, I think your comment specifically starts to come into a little bit on page four as a press release in terms of the blends that we show at plus or minus down 50 bits throughout most of the cycle versus within the page four table, the year-over-year contribution to growth, that minus 2.6% for gross rents. You know, spend some time on that as I think concessions, occupancy loss, bad debt reserves are probably a little bit more self-explanatory. But the walk from how you get your blends to that down 2.6%, Keep in mind that blends are lease to lease. So you have to have a new lease in place to actually capture that metric. So the 50 basis points down really explains only about 20% of that down to six. What you're not seeing here is that we do have a lot of units that were occupied in one queue of 20 that were higher rents in the urban coastal markets that are sitting vacant today. And so that is not captured in the blends. When they do get leased up, they will start to show up in blends. So if you have four or five, 600 units out there in some of our major coastal markets that are at much higher rents that are sitting vacant, that revenue stream has been lost. And that really explains the other 80% of that down to six. Over time, obviously, as you start to lease those units, it's going to be a positive to build revenue, positive to occupancy, positive to same stores. but could potentially weigh as you put new leases in place in some of those more distressed markets at lower rents. It could weigh on new lease pricing depending on where they're going, but I think you heard from Mike in the opening comments there, the trajectory on those markets clearly headed in the right direction, retaining pricing power, driving concessions down. So we hope to not see that negatively impact blends, but do think it's a positive for year over year as we move forward.

Got it. I guess I have just a follow-up question, and you're fair to call me an idiot. It wouldn't be the first time that I've been called an idiot today, and certainly not the first time in my career. But why wouldn't that be included in economic occupancy? I'm happy to take it offline if it's too wonky of a question, but just trying to square it with our sort of horseshoes and hand grenades math.

It's okay. You can call me an idiot. Close enough is okay, Rich. We can take it offline and walk through the definitions in a little bit more detail in terms of how we allocate the different dollars between physical and economic. So why don't we take it offline and we'll take it through there. And then if others have questions as well, we can go into kind of the details and the minutia on it.

Got it. Fair. So one more question as we just think about looking forward. you're obviously pushing rents at a really nice pace at this point. It looks like the recovery is clearly in. You know, we can debate how good same-store revenue is going to be in the second half of 21 and early 22. But I guess the question I have for you guys is, as you start looking beyond, you know, the next 12 months, what's to stop you from pushing rents even more? And what I mean by that is, you know, there seems to be a lot of demand coming from millennials and Zs, you know, maybe supply pressures begin to abate a little bit. But is there a scenario where full occupancy actually allows you to push rent, maybe even higher than where you were in 2019 or beyond that? So I guess I'm ultimately asking a question about, you know, longer term, you know, can you outpace inflation? And it seems like given the backdrop, maybe that's a reasonable scenario.

Yeah, Rich, listen, Mike, I'll take that. I think just generally speaking, again, we are pushing rents, and we like to push it until it breaks, if you will. Some markets we're able to push a little bit higher. Others, it's a struggle, and it comes down to what's happening within these markets. So I think a good example for us today is a place like Orlando. We compete with a lot of private operators, and We can push so hard, but at some point they start doing something with concessions or start lowering their market rents. It puts pressure on us. So we manage to call it that 30-day to even an eight-week trend. And as long as our occupancy is stable, we're going to keep pushing. And then it comes down to the regulatory environment, just in terms of what we actually can charge. In some places we, specifically to renewals, we're still 20% of them, we can't charge anything. So we're limited by that. We're watching that very closely, and as soon as that opens up, that's going to give us a bit of a liftoff.

Okay, guys. Thank you very much. I appreciate that additional detail and follow-up. Thanks, Rich.

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

Thanks. Good morning. So first question for me is sort of what was just alluded to about the private Part of the problem with the multifamily business is you have 80%, 90% of the ownership in private hands, and a lot of that is maybe not so sophisticated, particularly relative to your next-gen platform. And I'm wondering if this environment, besides them kind of acting inefficiently and screwing up the math for you guys with concessions and whatnot, have people thrown in the towel? and gotten out of the business to somebody. We're seeing that in New York. A lot of the condo sales that we're hearing about are actually former investment properties by mom-and-pop owners that have just decided not to rent apartments anymore. Are you seeing a silver lining from COVID potentially that you get a little bit more sophistication in your competitive set?

Hey, Rich, this is Toomey. You know, I would say this. There's always going to be inefficient operators in the marketplace as long as it's a fragmented industry. And certainly you can see from our purchasing over the last couple of years, we're very adept at finding that opportunity and executing on it. With respect to seeing operators in the marketplace pull product off, well, let's hope they do so. It gives Mike an operating opportunity. tailwind that he can take advantage of, and we'll see where that plays out. I think the bigger question on most investors' minds that own today is what are interest rates going to look like and what is the new tax law going to look like? And I think we're going to find that out over the next six months, and both of those may, if they break a certain way, free up a lot of assets for purchase. has typically been the pattern. Cap gains going up, the level they're talking about would be one thing. The 1031 potential elimination would be another. Those probably push a lot of assets from the hold pattern to the sell pattern or the exploratory, the pricing. And you couple that with potential interest rate increases or proceeds constraints, it pushes more assets into the middle of the table. So I think we're well positioned to take advantage of that should it unfold, and I think we'll have our answer in the next six, nine months.

Okay, good. And then a somewhat unrelated question, but a bit related, I guess, talking about multifamily. So I guess, Joe, you went through the discussions about investing and acquisitions and cap rate and returns and all that. But what value do you guys place on kind of the snapback of performance in various markets over the next couple of years, which we all expect to see, which may be an unnatural level of growth as we kind of recoup lost ground? Or are you looking past that when you're underwriting deals and not putting as much value on that kind of short-term phenomenon, really thinking 10 years out?

Yeah, we're really trying to look more in that 4- to 10-year time frame when we're thinking about these assets. Clearly, you've seen depressed NOIs coming in some of the more harder-hit markets. But if NOI was down 10% or 20% in New York and San Francisco, we never saw asset values adjust to that degree. So you're not seeing a one-to-one adjustment in NOI and asset value. So it's not as if you can take advantage of the upcoming NOI stream by buying at depressed pricing. So while we do fully expect that you'll see that short-term phenomenon of Coming off a low base, you see the momentum in our press release for some of those more harder-hit markets on a sequential basis. We believe it's coming. We're seeing it's coming. But we're not necessarily factoring that into how we think about our diversified portfolio. We're trying to think more in that four- to ten-year time frame. And you can kind of see the incremental deployment and sourcing that we've done based on our portfolio strategy work here in the recent quarter. So buying some more in Boston and D.C., Philly, Dallas, Tampa, et cetera. and then sourcing a little bit in Southern California as well. So a little bit of changes on the margin, but it's very much on the margin. It's not going to be a big shift, given that we're already starting with a pretty strong position with a diversified portfolio.

Does the snapback almost cause a distraction, make it harder to underwrite and see through to that four to ten year time frame? Does it muddy the vetting process, is my question.

Rich, this is Harry. I think I'll jump in. I mean, I think what we focus in, we realize we're going to get market rent growth, and that's going to vary, and it should be priced in the assets. But the assets that we're buying, we're sourcing properties where we believe we can push NOI above market rent growth. So the market rent growth, the theory is priced. There might be some inefficiencies, but primarily we're focusing where we can do something with the asset, either with the platform, we buy a property, near other UDR properties through some capital program so that, you know, we generate outsized NOI growth over and above the market and, therefore, outsized returns.

Got it. Thanks very much.

Thanks, Rich. Our next question comes from the line of Rich Hightower with Evercore. Please proceed with your question.

Hey, guys. I don't know if I'm the third or the fourth Rich in a row, so I don't want to confuse anybody, but thanks for taking the question here. So one quick housekeeping one. I apologize if I missed this earlier, but tell us what's driving the 50 basis point midpoint reduction in expense growth this year, if you don't mind.

Hey, Rich, it's Mike. I'll tell you, it's two things. So we're actually seeing benefit both on our controllables and our non-controllables right now, and a lot of that I would attribute to the platform on the controllable side. For example, our expense growth in the first quarter was around 2%. A lot of that had to do with what was going on with the snowstorms down in Texas, as well as in Richmond, Baltimore. If it wasn't for that, our controllable expenses would have been closer to flat. So we're seeing pretty good trends as we move into 2Q and 3Q, just as it relates to personnel reductions and things of that nature. And then on the non-controllable side, our taxes have been coming in better. Joe can elaborate that on more, but it's both components for us today.

Yeah, overall on the real estate tax side, Rich, you know, we came in at 2.7 and a quarter. If you look at attachment six within the SUP, for the full year, we think the number is probably around 4% growth. That's down about 100 basis points from our original budget, really driven by some of the valuations coming in better. and then some of the appeals work that we've had. So out in California, we've had a number of appeals and valuation wins. We've had some others throughout the portfolio as well, but still some risk out there as it relates to Florida and Tennessee and Texas, as well as Boston and New York in the back half of the year. But we feel a lot better. We've kind of de-risked that piece of the equation, feel better about where we're going at that point.

Okay, that's helpful. And then, Mike, maybe just to follow up on some of the platform-related improvements, you mentioned, I think, in the prepared comments that as a company, you're just scratching the surface of what's possible. I'm curious to be here to expand on that at this time.

Yeah, Rich, we've talked a lot in the past. We're really starting to get into some of the data science and I gave a very brief answer on kind of what we're seeing with demographics. I can tell you we have a lot of information that's going into the system with all of our data sets. And we're starting to really, again, just scratch the surface on what we can tap into. And it's pretty exciting just to get an idea of what opportunities are out there. We're starting to put an ROI on them, if you will, understand kind of how much returns there, how much time it's going to take. But we've got Over the next couple of years, some leeway here, and we'll continue to push on it. But we've been very excited about Platform 1.0. I did mention in my prepared remarks we've transitioned 16 of the 21 markets. We're getting close to 30% reduction in headcount at this point. Our heat maps are up and running. We're starting to see that play through in our blended rate growth. Our residents and our prospects like what we're doing, evident by the NPS scores continuing to increase. And at this point, we've rolled out 43,000 smart homes. So we're getting close to finishing that up, too.

Hey, Rich, this is Toomey. Just to add on to Mike, because I can get in trouble and he can't on these things, in a self-service model, which is really the core of the platform, you find opportunities in the following areas. And immediately is the cost structure of the organization, but beyond that is the customer satisfaction potential and understanding in more depth. And we've hired a group to help us work through understanding the sales cycles and our opportunity set and where we fail today. And so in today's leasing online or in a touchless, we actually touch the customer seven times. The truth is we probably don't need to touch them that much, but we're trying to figure out which points of that touch cycle in a sales cycle actually lead to a successful sale, as an example. Second, Mike's demographics. You've seen our power of our pricing by home because we're tracking 10 years of data and can figure out what the right renewal strategy should be for each individual to and not a holistic mail out an offer and see what they think, but actually customizing it to their situation and their patterns. So those are just two real simple examples. I think others in a self-service model go into the speed and ability to interact. You won't want to sit at a kiosk at an airline industry and wait for 10 minutes for service. You want it to be three clicks and done. As we learn more and more about those things, we're obviously focused on the margin customer service angle of it. We think there's plenty of room to run down this because a lot of other industries are way ahead of us. And fortunately, I think we're in the lead on the multifamily space about thinking about it, executing on it, and we want to maintain that.

Okay, great call. Thank you. Our next question comes from the line of Neil Malkin with Capital One Securities. Please proceed with your question.

Hey, everyone. Thanks for taking my questions. First one is on, I guess, capital allocation this quarter and then subsequent, you know, a lot of activity in the Sun Belt, specifically Dallas and the suburbs of Dallas. Obviously, you sold some California product. So, you know, being that you guys have excellent technology and data science and you look at analytics in various ways, you know, what does that say about, you know, how you think these markets are going to shake out and how demand trends are going to shake out over a, you know, medium to longer term period? Because before you said, you know, you don't want to make any, you know, big moves or big decisions. You want to see how the dust settles, so to speak. And so, you know, Tom or Joe, you know, Are you guys any closer to making that sort of move or decision? And what does the investments you made recently kind of say?

I think the recent capital markets activity effectively demonstrates how we're thinking about the portfolio on the margin. We've talked about the principle by which we operate, which is maintain diversification. So we think that's worked in the most recent down cycle. We'll work in the up cycle as it has historically worked. It provides a good jumping-off point for us and our investors to deploy capital and create value over time, which you've seen us continuously outperform on cash flow growth for the last almost decade now. So I want to maintain that. As it relates to Dallas, Dallas ranks, I'll say, middle of the pack in our quantitative models, but it ranks very well on the qualitative side, be that the affordability, the corporate headquarters, corporate reloads. the new higher-income jobs that they're attracting, and the demographic growth that they're seeing. So we do have a pretty high degree of positives on a market level related to Dallas. Then it comes down to the opportunity within those markets in terms of making sure that it checks all those different value creation boxes. So that's a little bit about how we're thinking about it. But again, it's going to be very much on the margin. Overall, though, I think all these markets have the ability to do well going forward. It's not as if we're saying Southern California, Northern California, New York, et cetera, cannot perform on a go-forward basis. We think they have a near term, a very strong rebound coming as demand comes back and hopefully as regulatory restrictions come off. Longer term, they'll remain hubs in their respective industries. It's just that they're not going to get the monopolistic share of jobs and incomes that they've had historically. So instead of outperforming 70%, 80% of the time on a rolling 10-year basis or maybe they're more in line with some of these other markets that are becoming more of a hub or more of an ecosystem, some of these future drivers of economic growth and job growth.

Yeah, I appreciate that, and that's a really good way to look at it, and that's my view as well. Turning to maybe DCP slash development, I think it's well understood that material pricing has gone up quite a bit on the lumber side especially. Just wondering if you are – seeing the DCP pipeline or potential get harder, you know, I guess decrease a little bit? And how do you – how does that, you know, the sort of rising price environment affect your on-balance sheet development decisions?

Neil, it's Harry. I'll start and then Joe may jump in. On the DCP side, the number of opportunities remains elevated. There's a ton of developers that are looking to capitalize their projects. Capital overall is more difficult for the developers. We've talked about this before. Debt proceeds are lower. LP capital is more difficult, all of which increases the demand for DCP. However, it is taking a long time to work through these projects as developers work on their capital stack and the overall economics. And I think Maybe it's worth just touching a little bit on lumber and other material costs. I mean, lumber, obviously, we're in the midst of what we hope and expect is a bubble in terms of lumber pricing. But lumber overall is only about 3% of total development cost on a normal wood frame project. So even if lumber doubles, you're talking about, you know, a $100 million project goes to $103 million. That's 15 or 20 basis points, and that's obviously an extreme outcome. Other material costs also are increasing, as you mentioned. As we think about materials, we think that typically is call it 15 to 20 percent of total development cost. So, again, even if materials increase 10 or 15 percent, you know, that's 2 to 3 percent increase in total development cost. So it's meaningful. but it doesn't necessarily kill these deals. And if you think about it, that's maybe $50 to $75 a month rent increase, which, you know, in a recovery market, often we can overcome it. We continue to see material shortages, that type of thing. So we are operating in a difficult environment. But I can tell you as we look at on-balance sheet development projects, we don't change our long-term strategies as a result of short-term cost bubbles. We believe we can create value through our development capabilities. And if lumber and other material costs were to stay high, we would just consider that in the context of our overall economic analysis before we start a project.

Our next question comes from the line of Amanda Schweitzer with Robert W. Baird. Please proceed with your question.

Thanks. Appreciate it. Following up on development, your development guidance did go down a bit this year. Is that just less optimism about your ability to add new projects to the pipeline beyond PAMPA, or are you seeing other more interesting opportunities within DCP and acquisitions?

Hey, Amanda, it's Joe. Yeah, when we originally put that guidance range together, we put a fairly wide range out there. At the lower end, even up to the midpoint, it effectively encapsulates all the known spend. So when you look at attachment nine, that $500 million, it encapsulates that spend. And then we have a number of shadow projects, if you will, that are sitting out there and that we may potentially start. But it really depends on, you know, is it third quarter, fourth quarter, even into the first half of next year. So we do have a land site that we're working on in Tampa that we hope to get on the balance sheet and hopefully start within the next 12 months. There's the densification opportunity we've talked about at Newport Village in suburban D.C. that we've talked about, which is a $140 million project. There's the Alameda parcel that we took on the balance sheet in Northern California here subsequent to quarter. So we have a number of other projects that we're just working on timing and hopefully get started, but brought down the top end of the range slightly.

That's helpful. And then following up on that, I hear you on rising construction costs not impacting overall development costs that much, but where have you seen development yields trend this year, either pre-COVID to today, and how does that stack up with what you're seeing in other opportunities?

Yep. Maybe two things on that. On Attachment 9, that current pipeline, just in terms of costs being locked in, we've already bought out all the lumber that we need for the next 18 months for these projects. So we do not have the risk associated with these. So in terms of cost estimates, cost overrun risk, we see that as the minimus for the existing pipeline. So the bubble in lumber prices that we see today, it really factors into the forward underwriting and future starts, which As I mentioned, we're going to start another project for another two, three, or four quarters here at this point. As it relates to the yields that we're underwriting, we have not adjusted from what we've talked about historically, which is high fives, low sixes type of stabilized yield. Most of the projects that we look at are somewhere in the five and a half range on an untrended basis. And when we say untrended, we're talking about current market rents as we look at the current NOI stream off of that asset. relative to a trended cost. So we look at the forward cost at which point in time we would start and deliver that asset. So the untrended that we look at are five and a half over time. Of course, we expect rents to grow and catch up to that cost and grow to a 6% stabilizer.

That's helpful. Appreciate the time.

Thank you. Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your questions.

Good afternoon. Just hoping you guys could give a little bit more color on the renewals and the impact on regulation. You said that there's 20% of the portfolio you couldn't push, but do you have an estimate as to what that would have been had you had the flexibility to drive those renewal prices?

Yeah, it's about 70 basis points. So we would have been 70 basis points higher if we weren't at 0 percent and 20 percent of our .

Great. Thanks. And then on just the new lease spreads or rate growth, you improved kind of 30 bits from the fourth quarter to the first. It's down 2.4. But can you give us any color on how that trended through the quarter or maybe where April's standing today just to give us a better sense of the momentum for the new lease rates?

Sure. So January, we were negative 2%, followed by February at negative 2%, and then March was negative 3%. April is looking very similar to March, just as we, again, transition some of our vacancy to occupancy in some of these harder-hit areas. And then after that, I expect it to start actually improving significantly as we go into June and July. As far as renewals go, we averaged 2.7 for the quarter. January was 2.5. February was 2.6. March is 3.0, and going forward, we expect it to be about 50 to 80 basis point increase throughout the rest of 2Q.

Super helpful. Thank you very much.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, and thank you for keeping the call going. Two really quick ones. First, Mike, you mentioned something earlier in your discussion about on $15 to $20 million of savings or improvement to NOI. And I think part of that you referenced as maybe it's cost-cutting or maybe it's just employee attrition, but just a bit more color on what the initiative is and the timeframe that we should think about that $15 to $20 million in savings.

Yeah, sure. Hey, Alex, that $15 to $20 million is really as it relates to our platform, so Platform 1.0. And again, we started this back in 2018. We will see about 75% of it come to fruition by the end of this year. And then we have about $5 million that remain in 2022 that come from additional cost savings as well as some of our revenue increases based on some of the data science that we're seeing.

And I do want to point out too, Alex, that 15 to 20 that we always talk about is related just to the base portfolio that we had back in 2018. Obviously, we've continued to add assets, so the true benefit is above and beyond that amount, but that really gets reflected in the upside that we talk about on new acquisitions in terms of the 10% plus upside. That's reflected in those as well. So there is even more upside from the platform than what we typically quantify.

Okay, but the point is that 75% of this is already reflected by the end of this year, so effectively it's in your guidance. So there's another 25% of this into next year. Correct. Okay. Second question is the wonderful joy of New York and rent control. So, you know, the good cause eviction legislation seems to be alive and well in Albany. Whether or not it passes, we'll see. But with that in mind, regardless of what happens, would you guys think about culling your New York and Manhattan exposure and then increasing in Jersey and Connecticut?

Hey, Alex, this is Chris. You know, Let me take a – it's a really good question, and New York is a part of it, but let me take a step back real quick and, you know, provide maybe just a high-level overview on a couple of regulatory topics because, you know, I would tell you over the last year I've provided a lot of negativity to people listening on the call. I've provided a lot of negativity to Mike and his team, which I'm sure they've appreciated. But there's some really clear positives now that we want to make sure people understand. You know, first of all, it's not really good news to anyone to clearly – businesses reopening, return to work, vaccinations continue in earnest across our markets to, you know, varying degrees. And, you know, we really do think while people get very focused on things like eviction moratoriums, et cetera, but these will be the biggest drivers of, you know, kind of how our business performs going forward. And once again, we continue to see incremental progress with those. Second of all is rental assistance. And Mike talked to a little bit in his prepared remarks about But we have been actively pursuing rental assistance dollars, whether at the local, state, federal dollars, whatever it is, really since the beginning of the first quarter. And, you know, we've seen some success, as Mike talked about. You know, we've kind of recovered about $2.5 to $2.6 million thus far, which I think is a pretty phenomenal result, given the fact that a lot of programs really just started opening up in the last month. Right now, in current application process, about 11 million of our AR is actually in application process. You know, we're not sure exactly what our hit rate on that is going to be going forward, but we feel good about that. And really, you know, all these numbers, you have to remember, before we've gotten most anything from California, really up to now, it's just been local programs there. You know, so that's kind of on the positive side. On the negative side a little bit, As I said, eviction moratoriums, obviously we're probably going to see an extension in New York because their program is not up and running yet. We're looking at mid-May there. You know, but I would remind people that we've operated under those for a year now. We feel good about our ability to continue to drive growth, even with those restrictions in place. And then rent control, as you spoke about, we have yet to see if 3082 passes in New York. You know, it really hasn't moved out of committee yet. I think everyone kind of understands or should be aware of the fact that, you know, it really is kind of universal backdoor rent control disguised as just cause eviction. You know, and once again, we'll see where that goes. We had some success this year in the state of Washington. A couple bills for rent control got defeated. But really, it's been a topic that has been put on the back burner to a certain extent, I think, as people have focused more on digging out of COVID. So that's kind of just a little bit of a regulatory overview of positives, negatives. Joe can kind of talk about capital allocation in New York going forward.

Hey, Alex, just really briefly. Obviously, regulatory is one of the qualitative factors we incorporate into the port strap process. So New York and some of these other coastal markets don't necessarily screen well on that factor, but may on a multitude of other factors, both quant and qual. But at the end of the day, are we going to fill out of those markets? No. We want to maintain the diversification. We're not going to run away from just one negative factor when there's still a lot of positives to look to in these markets. So I think that's one of the keys of diversification, the ability to insulate from the ups and downs that come with each market. And I think you also got to remember the second derivative impact of this. To the extent that it scares away capital from certain markets such as this and new supply and the affordability that comes with that, clearly capital will find a home somewhere else and You may have supply pop-up in the Sunbelt markets, as we've seen with the permit data. So it's not a one-to-one relationship of regulatory is bad, therefore don't invest.

Well, that's why I was mentioning Jersey and Connecticut, because obviously if New York becomes rent-controlled, then Connecticut and New Jersey presumably would have accelerated rent growth to offset the lack of turnover in New York as people hold on to their apartments.

Correct. Okay. And we take a look at all those markets. We actually do a subset with Import Stratum, New York, Jersey, and Connecticut. Speaking of New York, probably.

Okay. Listen, thank you.

Thanks, Alex. Our next question comes from the line of Handel St. Just with Mizzou. Please proceed with your question.

Hey there. Good afternoon now. So I want to go back to the beginning of the call here. I was intrigued by some comments on what you said where some of your renters are coming from, 20% to 25% outside of the New York and San Francisco MSAs. So I guess I'm curious if more people are migrating back to some of these coastal markets and the number of residents leaving those coastal markets is decreasing, at least in the short term, any reason at all to be concerned about maybe the near-term demand in any of your non-coastal markets? And then maybe as you front that, you can share some nuggets on where broadly the rent-to-income ratios are across perhaps some of your sunbelt and coastal markets.

Thanks. Sure. And Mike, first, just so I can remember those questions, I'm going to start with the last one. Our rent-to-income hasn't really moved. It's still around 24%. We screen based on a gross number. And if you recall, our strategy was to keep gross rents high and really use concessions. So it's been nice to see kind of a stabilized number on that front. In terms of the move-ins and move-outs and where we are with occupancy and demand, you know, we're still coming off of some pretty big lows. So while things are improving, it still has a little ways to go in some of these harder hit areas. But I'm telling you, the last three weeks have been very promising. Demand has been stronger than we expected. And again, one of those markets that I referenced earlier, New York had a higher 30-day trend than our current occupancy. So We're actively pushing rents right now to see what we can do.

It's Joe. I think also embedded in your question just on the pricing power risk related to Sunbelt as you potentially see migration back. I know early in the cycle it was kind of topic du jour that everyone was going to result in a mass exodus out of the urban coastal cities. I think there's been enough research now at this point, Don, that That proves that didn't really take place. A lot of those individuals simply moved home, stayed within the markets, moved out to the suburbs. So I'm not sure there's risk to the Sunbelts in terms of reversion trade. I think the Sunbelt performance relative to the Coastals was really driven by a different way of operating, meaning you keep those states and cities reopened, keeping individuals employed, which I think as long as that continues, which it looks like it will, those will continue to maintain pricing power. At the same time, it kind of gives us the game plan for what's going to take place in the coast that we're seeing today. We're going to get the demand. We're going to get the pricing down. Rents and occupancy will come surging back and have near-term outperformance.

I appreciate that. And a bit of a twist to another question on capital allocation. I guess I'm curious on, you know, if Dallas is in the middle of the pack in your proprietary model, I guess I'm curious what's at the upper end today as you contemplate, you know, existing or new markets. And then the IRR that you're selling out of, you know, that you're getting when you're underwriting and selling out of places like California. I guess I'm curious comparatively how that compares to what you're buying in Boston and Dallas. And I guess I'm more interested really in what it would take for you to get more intrigued to invest more capital in places potentially like coastal California or New York where there are pockets of supply that could create opportunity and some regulatory relief ahead. So I'm just curious on, again, you know, what you're seeing that's attractive in your investment model here today, and then the thinking on places like coastal California, New York, relative to places like Boston and Dallas.

Thanks. Yep. I think if you look at some of our actions over the last year or so, it kind of gives you a sense for what price screens a little bit higher within our call process. So you've seen us adding to D.C., so be it Northern Virginia, suburban Maryland, Baltimore continues to screen well. Philly screens well. You go down to Tampa where we've added a number of assets, and that market's been absolutely on fire for us. So it kind of gives you a sense for what screens well, but it really does come down to deal specific. Given the competitive advantages we have and the ability to pick up that extra 10%, we'll look at a deal in any market. There is the ability to outperform market average no matter where we go, So I don't want that to get lost, that we're only going to myopically focus on, you know, five of our 20 markets. The team here is always looking across the entire portfolio for opportunities to create value. So I don't see that dissipating anytime soon.

Appreciate that. Any color on comparative IRRs or is that not available?

Yeah, I mean, you know, when we do our underwriting comparisons, typically we'll utilize a baseline 3%. in terms of forward market growth, independent of which market it is. And then we'll do a gradient that looks at the best and worst markets for where we think it could outperform and underperform, just to scenario analyze those numbers. So the IRR differentials primarily come in through your ongoing cap rate in that analysis, given similar long-term growth profiles that we assume when we do the IRR math. So you're really talking about selling at a four and a quarter, and then you throw a 3% growth on there and get around a seven IRR, or you go and buy a 4.5 that has outsized growth for the first three years, getting up into the 5.5 range and then steady growth from that point forward. So you're definitely picking up, call it, 50 to 100 points on IRR spreads between the buys and the sells.

Okay.

Appreciate it. Thank you.

Our next question comes from the line of Alex Thomas with Zellman. Please proceed with your question.

I think to take my question, we spoke a lot about the, you know, next-gen program that you guys have developed internally, and obviously you're into the technology space. I was curious if this is at all licensable and if that's a potential ancillary revenue stream you guys have discussed going forward.

You know, we continue to look at a lot of this. I will say that the vast majority of it can be replicated. The challenges might be cultural as well as implementation. But we'll continue to explore any piece of it that is licensable or IP, and we'll report on that later.

Got it. Thank you. And one other quick one. You have DCP deals. this past quarter had a return around 9%, a little below the average, but you have that upside participation. Is that sort of the dynamic, the trade-off there, where essentially a little lower return for the upside, or was there some more competition in the market for pressuring the spreads?

Yeah, I think when you look at those, we've talked historically about our ability to bifurcate and work with the equity partner on what may fit their expectations and desires best. So we're pretty flexible on our program in terms of going 100% fixed rate at a higher coupon or doing a lower fixed with more of a back-end. I'd say as you look at the deals today, I'd call it 80-plus percent of that business has back-end participation, which we are excited about given cycle location, coming in early in the cycle, beneficial to have more back-end participation. Economics overall, I think, are reflective of some of the difficulties Harry talked about earlier in terms of LP capital as well as financing. You know, we're typically underwriting the 13%, 14% IRRs on those versus 11% or 12% pre-COVID was our typical deal. And then the optionality, you know, the way we structure these in terms of the timing for a capital event, the ability to have back-end participation, gives us a lot of optionality down the road on each of these assets as they get through their development and use that process and come up towards maturity. Ultimately, we'd like to own a handful of these, and it gives us a chance to get to know them a little bit better.

Great. Thank you very much.

If there are no further questions in the queue, I'd like to hand the call back to Chairman and CEO, Mr. Toomey.

Thank you, Operator, and just some quick comments on closing, recognizing. We ran a little long today, but I thought it was very beneficial. Again, thanks for your interest and time today in UDR. Certainly you can see from our tone, our results, that we're very excited about our business prospects and looking forward to talking with you more as we execute in this recovery cycle. And so with that, please take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.