UDR, Inc.

Greetings and welcome to UDR's second quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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 call is being recorded. It is now my pleasure to introduce your host, Vice President 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, 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 the risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question and answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent, and welcome to UDR's second quarter 2023 conference call. Presenting on the call with me today are President and Chief Financial Officer Joe Fisher and Senior Vice President of Operations Mike Lacey, who will discuss our results. Senior Officers Andrew Cantor and Chris Van Enns will also be available during the Q&A portion of the call. To begin, the multifamily business continues to exhibit strength. In the second quarter, the industry experienced positive net absorption, demonstrating the health of the consumer and the attractiveness of the apartment's first alternative housing options, despite pockets of elevated supply deliveries. Our results reflect this strength. A few highlights. One, our second quarter year-over-year same-store NOI growth of almost 8%, led to year-over-year FFOA per share growth of 7%, both of which we expect to be near the top of our peer group. Two, early third quarter trends, including traffic, other income, and collections, have accelerated versus our June results. This supports our expectations of sequential same-store revenue growth above historic norms, and FFOA per share acceleration in the second half of 2023, as indicated in our guidance. Three, the joint venture partnership and portfolio acquisition of six communities we announced align with our strategic goals and demonstrates the strength of our operating platform by attracting capital from a sophisticated global institutional partner while finding a unique opportunity to deploy capital and grow the company. These transactions provide future cash flow accretion, enhanced ROE for investors, and offer additional scale and efficiency benefits for our operating teams. And four, our investment-grade balance sheet remains strong with over $1 billion of liquidity. This provides both safety and the ability to execute accretive transactions should our cost of capital improve. Looking ahead, we are encouraged by the continued job and wage growth combined with the prospects of additional clarity on the direction of interest rates. Regardless of the economic path forward, UDR is well equipped to succeed based upon our diversified portfolio, prudent capital allocation, and our leading operating and innovative platform, all of which should help us outperform versus peers. Collectively, the actions we are taking are poised to benefit our stakeholders, our associates, and the communities in which we operate. With a highly engaged group of associates and future utilization of innovative technologies I'm confident in UDR's ability to capitalize on the strength of the multifamily industry and expand our advantages amongst public and private peers. With that, I will turn the call over to Mike.

Thanks, Tom. The topics I will cover today include our second quarter same-store results, early third quarter 2023 results, and how they factor into our full year 2023 same-store growth outlook, and an update on operating trends across our regions. To begin, year-over-year same-store revenue in NOI grew at strong rates of 7.6 percent and 7.7 percent, respectively, in the second quarter. Similar to the first quarter, we continued to recapture apartment homes that were previously occupied by long-term delinquent residents. This temporarily high level of vacant units pressured pricing, and increased repair and maintenance expense relative to what was in our initial guidance. There's still some work to do on this front, but we believe these disruptions are now largely behind us as long-term delinquents have reverted to near our pre-COVID levels and in-the-month collections continue to improve. Next, we continue to see favorable fundamental trends to start the third quarter. First, demand remains relatively healthy Year-to-date job growth has been stronger than most anticipated, which is supporting solid levels of traffic. Second, the financial health of our residents appear robust as wage inflation has largely kept pace with rent growth in most markets, resulting in steady rent-to-income levels in the low to mid-20% range. Second quarter move-outs due to rent increases totaled only 8%, down from roughly 10% last quarter and 18% at its peak a year ago. Third, relative affordability remains in our favor. With mortgage rates hovering around 7% and low single-family home inventories bolstering prices, renting an apartment is approximately 55% less expensive than owning a home versus 35% less expensive pre-COVID. Only 6% of move-outs in the second quarter were due to home purchase, which is 50% less than our historical average. And last, Concessions remain minimal and average approximately half a week on new leases across our same-store portfolio. The concessions we've been offering remain primarily concentrated in certain submarkets where elevated levels of new supply are being delivered. With this backdrop, we have confidence in our ability to drive further sequential same-store revenue growth improvement in the second half of 2023. First, after a slow start to the year, sequential market rent growth of 3% over the last four months is above the pre-COVID average of approximately 2% over the same timeframe. July blended lease rate growth of mid 2% and occupancy in the mid 96% range are similar to our June results and are anchored by the most difficult year-over-year comparisons we face given June, July, and August 2022 blended lease rate growth of 15.5% on average. As the year progresses, our comparisons to 2022 results ease. This, when combined with our strong loss to lease and rent growth momentum, should result in acceleration in both new lease rate growth and blended lease rate growth throughout the year. This would benefit not only 2023, but also positively contribute to our 2024 earning. Second, our loss to lease at the portfolio level stands at 3 to 4%. Much of this is related to leases signed in the fourth quarter of 2022 and first quarter of 2023 due to greater than typical seasonality during those periods. New York, Boston, Washington, DC, Seattle, and San Francisco, which are collectively half of our same store NOI, have the largest upside with a weighted average loss to lease of approximately 5%. And third, resident turnover is improving, which has both revenue and expense benefits. During the first half of 2023, we had approximately 600 more unit turns from resident skips and evictions compared to the first half of 2022. This impacted our occupancy, turn costs, repair and maintenance expense, and administrative expenses, which collectively reduced our earnings by approximately one to two pennies per share. Now that we are closer to the pre-COVID norm for long-term delinquent residents, we expect less pressure on turn costs, a reduction in vacant days, and improved pricing in the second half of 2023 and into 2024. In all, we have positive operating momentum as we begin the back half of the year and expect to produce sequential same-store revenue growth of 2 to 2.5 percent in the third quarter, which compares favorably to pre-COVID averages, approximately 1 percent, an above level seen a year ago. Relating this to full-year 2023 guidance, Recall that the building blocks we provided to achieve the midpoint of our same-store revenue growth guidance included, one, our 5% earning, two, full-year blended rate growth of 2.5%, with the contribution to 23 being half of this, or 1.25%, three, 50 basis points from other income initiatives, and four, flat year-over-year occupancy. Thus far, Better realized year-to-date blended lease rate growth versus what was in our original guidance has been offset by 50 basis points of occupancy headwind from quicker-than-expected success removing long-term delinquents. We will continue to take a balanced approach between pushing rate and maintaining occupancy to maximize revenue in NOI. Turning to regional trends, the positive momentum we have seen on the coast has continued. On the East Coast, our Northeast markets of New York and Boston are portfolio standouts. Weighted average second quarter occupancy was 97.2%, and we achieved 9.4% year-over-year same-store revenue growth. Robust levels of traffic and minimal competitive new supply continue to support pricing power, with blended lease rate growth of nearly 5% during the quarter. On the West Coast, occupancy has remained consistent in the mid 96% range with stable concession usage. Seattle was a standout in the second quarter with a 70 basis point sequential acceleration in blended lease rate growth compared to a 30 basis point deceleration for the entire portfolio. Return to office mandates for various large employers in the region coupled with new jobs created by artificial intelligence companies has enhanced both traffic levels and pricing power. Lastly, the Sunbelt continues to face a pair of headwinds that has led to negative new lease rate growth in order to maintain occupancy levels. First is the relatively high level of new supply deliveries, which we would expect to continue through 2024. Second is an increase in skips to nearly twice the prior year level, attributable to compound and rent growth over the past few years outpacing income growth and affecting affordability for certain residents. Because of these factors, we expect pricing power across our various Sunbelt markets to remain constrained in the near term, though we continue to believe in the long-term growth prospects. Finally, I'm excited to operate the six communities in Texas that we are under contract to acquire. Our acquisitions team identified properties with in-place, controllable operating margins that are approximately 800 basis points on average below UDR communities in the same markets. By bringing these acquisitions onto our best-in-class operating platform, we can drive compelling upside and create value through our existing and ongoing innovation initiatives. In closing, thanks to our teams for your ability to execute our strategies as we continuously innovate and adopt new technologies to drive strong results. I will now turn over the call to Joe.

Thank you, Mike. The topics I will cover today include our second quarter results, third quarter and full year 2023 guidance, a summary of recent transactions and capital markets activity, and a balance sheet and liquidity update. Our second quarter FFO as adjusted per share of 61 cents achieved the midpoint of our previously provided guidance range and was supported by strong year-over-year same-store NOI growth. The approximately 2% sequential increase was driven by incremental NOI from same-store, joint-venture, and recently completed development communities. Year-to-date results are largely in line with our initial expectations. Operations are trending to the midpoint of guidance, and potential accretion from the LaSalle joint venture is offset by near-term dilution from the announced Dallas and Austin acquisitions. As such, we have narrowed our full year 2023 same store growth and FFOA per share guidance ranges. Looking ahead for the third quarter, Our FFOA per share guidance range is 62 cents to 64 cents or an approximately 5% year-over-year increase at the midpoint. The two penny or 3% sequential increase is driven by a combination of higher NOI from same store and recently developed communities. The implied fourth quarter FFOA per share guidance of 65 cents reflects another two penny or 3% sequential increase. This is driven by an increase in revenue from blended lease rates, occupancy, and other income initiatives, additional lease up NOI from developed communities, higher income from DCP investments, sequentially lower expenses, and improved bad debt trends. Next, a transactions and capital markets update. First, during the quarter, we completed the formation of a $507 million joint venture with LaSalle on behalf of an institutional client. UDR contributed a seed portfolio of four communities totaling more than 1,300 apartment homes at a low 5% yield. With the $245 million in proceeds, we reduced our commercial paper balance, which carries a mid-5% interest rate. We plan to grow the joint venture alongside our partner by targeting acquisitions with operating upside that are located proximate to other UDR communities to increase operating scale, densification, and earnings accretion. This transaction is expected to be accretive to cash flow and FFOA per share once dry powder is deployed and will enhance our future growth profile. Second, subsequent to quarter end, we entered into an agreement to acquire six communities totaling 1,753 apartment homes for approximately $402 million. In addition to the operating upside Mike discussed, we were able to finance the transaction through roughly $173 million of UDR operating partnership units issued at $47.50, reflecting a 2% premium to consensus NAV. Furthermore, we assumed nearly $210 million of debt at an attractive weighted average coupon rate of 3.8%. Due to negative non-cash debt mark-to-market adjustments related to the below-market debt rate assumed, The transaction is expected to be cash flow neutral and slightly diluted to FFOA per share in the near term. However, we expect to drive accretion once operations captures the significant margin upside. Third, during the quarter, we addressed three of our upcoming DCP maturities by funding a total of $39 million to pay down and extend the maturity dates of the senior construction loans. These fundings will earn a projected initial contractual weighted average return rate of 9.4% while having our first dollar exposure starting in the low 50% LTV range. And fourth, during the quarter, we achieved stabilization on one development community totaling 292 apartment homes for a cost of $102 million at a stabilized yield in the high 5% range. We continued the successful lease up at our two other recently completed development communities, which also have an expected weighted average stabilized yield in the high 5% range and will contribute significant FFOA accretion in the second half of 2023 and into 2024. Finally, our investment grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include, first, We have only $113 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities and our commercial paper program. Our proactive approach to managing our balance sheet has resulted in the best three-year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 3.2%. Second, we have $1.1 billion of liquidity as of June 30th. And third, our leverage metrics remain strong. Debt to enterprise value was just 27% at quarter end, while net debt to EBITDA RE was 5.5 times, down 0.7 times from 6.2 times a year ago, and more than a half a turn better versus pre-COVID levels. We expect these metrics to remain stable throughout 2023. In all, Our balance sheet remains in excellent shape. Our liquidity position is strong. We remain opportunistic in our capital deployment with balanced forward sources and uses. And we continue to utilize a variety of capital allocation competitive advantages to drive cash flow and earnings accretion.

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 would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that 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 keys. One moment please while we poll for questions. Thank you. And our first question comes from the line of Eric Wolf with Citi. Please proceed with your question.

Hey, guys. Maybe I missed this in your remarks, but where do you expect funded on growth to go in the back half of the year?

Hey, Eric. It's Mike. We're seeing some pretty positive trends. So just to kind of put in perspective, over the last few months, we've seen market rents rise about 2% in the back half of the year. We expect to see something similar. Right now, market rents, we've got some tailwinds, if you will.

Yeah, so market rents, you said 2% blended rent would be a bit higher than that given like a loss to lease?

Yeah, it's different by region, obviously. What we're seeing today is loss to lease in that 3% range. We're probably closer to 5% to 6% on the East Coast, around 3% to 3.5% on the West Coast, and then our Sunbelt's roughly flat today. So we do expect to capture a lot of that in the back half. And just as a reminder, when we were going into the back half of last year into the first part of this year, we had a lot of headline news, if you will, just around tech layoffs, the banking issues, put a little pressure on our market rents. But we expect to gain a lot of that back this year. So that's part of our confidence and where we're headed with both new lease growth and renewal growth as we move into the rest of the year.

Understood. And then just a quick follow-up on that. I mean, in your remarks, you said that you needed to adjust pricing to induce demand from some of the delinquent tenants that left earlier than expected, which obviously is a good thing. But when I look at where blended spreads went down the most, it was in the Northeast and the Sunbelt, which is where I would think you would see the least amount of delinquent tenants I would think would be on the West Coast. So just maybe help us understand sort of how much you – I think, you know, those sort of delinquent tenants and the price adjustments impacted your spreads during the second quarter.

Sure. I'll give you a little color, but I think we've gotten a few questions on this. So let me just back up a little bit and provide a few other points. I think it's important just to remind everybody there's varying definitions on blends out there right now. And as a reminder, we include everything first and foremost. And when we think about blends right now over the last three to four months and And really thinking about last year, we were about 200 basis points higher than the peer average. So we were really driving our loss to lease. We were pushing our renewal growth. And we've got a tough conference right now. As we think about it going forward, just getting rid of some of these longstanding delinquents, the fact that they're more or less behind us, we're starting to see that momentum in market rents. That goes to what I said with what we expect going forward, especially in those coastal markets. And that's truly what's going to drive that rent growth trajectory as we move forward.

Thank you.

Thank you. And our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

Great. Thank you. Good afternoon. My question is focused on the Sun Belt. Is it fair to say that the Sun Belt is a bit worse than expected so far this year? I know you've been flagging it, supply issues, but I guess how would you characterize the Sun Belt? And if you could be more specific on You know, is it certain cities? Is it urban, suburban? We're getting a lot of questions on the Sun Belt today. Thank you.

Yeah, Jeff, again, this is Mike. I would tell you we do experience a little bit more weakness in the Sun Belt than we would have expected. And as I said in my prepared remarks, I think it's twofold. It's partially due to some of the supply that we have in some of our submarkets, specifically what we're seeing in the Cedar Park area of Austin, as well as Addison and Dallas, where we have more exposure. So I think that's part of it. The other piece of it was really the skips that we experienced down there. As you all know, we've been pushing renewal growth pretty aggressively over the last couple years. We experienced about 250 to 300 skips in that part of the country, and that put a little bit of pressure on our occupancy, which obviously in turn has pressure on your market rents. That being said, skips are starting to slow back down at this point. And going forward, it feels like the Sun Belt's relatively stable. Today we're in that 96.5% occupancy range. not really seeing the concession levels pop up as much, and market rents are holding steady. So as we move forward, we expect that we'll see probably blends similar to what we just experienced in 2Q and the Sunbelt. That being said, we did see more growth in the coast, specifically the East Coast. We didn't expect New York, Boston, even D.C. to do as well as they have. And again, those are other markets where we're running close to 97% occupancy today. Concessions are basically non-existent in New York and Boston. Still a little bit to some degree in the 14th Street corridor of D.C., but pretty strong growth on just top-line rent. In addition to that, other incomes increased. doing really well. We feel pretty confident about where total occupancy is today. We think we can get a little bit more aggressive as we move forward on our rents. And we're seeing a lot of success return in some of our other initiatives that relate to other income as we move forward, too. So overall, a positive outlay as we go forward.

Thank you. And just to clarify, I know you had some comments on supply in the Sun Belt in 24. I guess You know, some of the data is showing that might remain elevated beyond 24. Any information or any color you could provide there on kind of that Sunbelt supply you were talking about through 24 potentially into 25?

Hey, Jeff, it's Joe. You know, I'd say overall for a portfolio as well as Sunbelt, I think we remain pretty stable when you go into 24. So you see a pretty big ramp here in 23 relative to 22. terms of deliveries taking place, we're kind of up 30%, really that kind of two and a half percent of stock number overall within our portfolio. It's a little bit less than that within our sub markets here this year. But you do have Sunbelt running up in the 4% range as a percentage of stock and even higher in certain markets like Nashville and some others. So they're facing a little bit more pressure. When you go into 24, it looks like it's going to remain pretty stable. There's not a lot of volatility either this year or next year as it relates to first half, second half stats. So I think you're kind of stuck with Sunbelt staying a little bit higher here through this period of time. I would say, though, from a total housing stock perspective, you've seen single family completions coming off fairly dramatically as starts have really fallen off a cliff in the last six to 12 months. And so total housing stock picture looks quite a bit better and generally is stable on a year-over-year basis in 2023 and likely into 2024. Plus, you got the relative affordability piece, which is clearly in Multi's favor. So I think generally Mike's comments on stability feel pretty fair in terms of as long as we continue to see that demand and household formation in the Sun Belt, I think we'll be in a pretty good place there. As it goes into a little bit longer, you were kind of alluding to, is that tail going to get stretched out? You're starting to see the early signs on the census data in terms of permits and starts coming off maybe 10% from peak. I would say anecdotally, We believe it's off quite a bit more than that. Just talking to developers in the space, talking to lending partners that we work with, obviously looking at DCP projects that honestly we're really not seeing much come through our pipeline. You look at the architectural billings index, which is off pretty dramatically. So a lot of good forward indicators that tell us it's about to fall off. Similarly, if you look at some of the third-party data and go away from census-based data, which is a little bit spotty from a survey perspective at times and somewhat lagged, If you look at third parties like Axio and their stat data, which has traditionally been very well correlated with overall starts, they're off as much as 50% from peak already in the last 12 to 18 months. So I think somewhere in between the down 10 and down 50 is probably closer to reality, but we are seeing that supply come down, which bodes well for 25.

Very helpful. Thanks, Joe. Thanks, Jeff.

Thank you. Our next question is from Steve Sockwell with Evercore ISI. Please proceed with your question.

Thanks. I guess still good morning out there. I guess, Joe, to kind of follow up on that question, I'm just curious, are you seeing any maybe early signs of any distress or investment opportunities maybe on the land side? My understanding is a number of Merchant builders are starting to scale back the size of their development teams and maybe looking to sell some land parcels. I'm just curious, is there anything that's come up or you think gets shaken loose over the next six to nine months that might be a 24 or 25 start for you guys?

Yeah, I'd say number one, just kind of thinking about the starts activity. Within our internal business plan, we had plus or minus six projects. that we had kind of penciled in to start either this year or next year. And just given our capital light strategy, the cost of equity, the cost of debt, where cost and rents are, and the in-place yields, we are kind of sitting on those and just building in the optionality so that either when rates come down, cap rates down, stock price up, end-going yields up, we'll be ready to really jump into our existing development pipeline. And so we have delayed that, which obviously helps sources and uses and is prudent, I think, to kind of sit back and wait. On the distress side, you know, be it land, be it acquisitions, we really aren't seeing distress within the multifamily space. I think there are sectors that have become much more capital starved and or have different fundamental profiles. But in multifamily with the GSE backstop, there's always liquidity available. And it is a preferred asset class as we've seen good performance going through COVID and coming back out the other side. So I'd say if you go to some of the tertiary land parcels, maybe they're trading off as much as 20%, 30%. But if you look kind of main and main core parcels, you're really not seeing anyone willing to transact. The developers are generally pretty decently capitalized and not in a rush to transact at potentially discounted prices. So nothing on that front. And honestly, really nothing on the acquisition front. Commentary really hasn't changed much from last quarter in that When you look at current NOI, we're still seeing plus or minus 5% cap rates on the deals that we've been taking a look at. We've shown a lot of deals to our new joint venture partner and have been working through those assets and seeing the market and what the returns are there. We're still seeing a lot of unlevered buyers out there, be it sovereign, high net worth, closed-end vehicles, PE, that are looking for kind of that 7 plus percent unlevered IRR. So We kind of think we're in that plus or minus five cap world right now. So not seeing much distress out there.

Great. Thanks. That's it for me.

Thank you. Our next question is from Austin Worshmuth with KeyBank Capital Markets. Please proceed with your question.

Great. Thank you. Just stepping back for the total portfolio, can you just give us a sense how far along you are in that eviction process and How do you expect you'll be able to backfill some of the vacancy you highlighted due to skips and evicts? I mean, is that a 23 event? Could you get back to the high 96% range later this year? Just trying to get a sense of how that trends and then also what you're assuming to get to that two to two and a half percent sequential revenue growth for the third quarter.

Yep. Hey Austin, it's Joe. So I'd say overall feeling really positive as it relates to that long-term delinquent picture. We're down to plus or minus 250 kind of longer-term delinquents at this point in time, which really isn't materially different than our long-term average. It's just that they are sitting there with a little bit higher balances because they've been able to stick around quite a bit longer than history would have allowed them to do. So we're feeling pretty good there. We've gone from kind of 750, you know, 9, 12 months ago down to that number. I think, as Mike said, between the evictions and skips as we worked through that process, we saw about 600 incremental delinquents. in the first half of the year, which definitely came at us quicker than we expected. We thought it may take a little bit longer either due to eviction moratoriums that used to be in place and or eviction diversion programs that have elongated the process. So we did get them back quicker. As Mike mentioned, it cost us maybe a penny or two in the first half between taking a little bit of the occupancy and pricing hit, losing some fee income, and of course you have higher turnover, higher legal, and then marketing costs to go acquire the new residence. So We did have that headwind, but overall, I feel like we're in a pretty good place now. You've seen our gross AR and net AR continue to trend down. And when you look at our collections, our end-of-month collections and end-of-quarter collections continue to trend higher. So overall, I feel good on that trajectory. So when you kind of think about that 2%, 2.5% sequential number, there is some occupancy pickup that we expect as we go forward. So you got that. You have blended lease rate growth that is positive. Mike already talked through some of the other income and reimbursement initiatives that we have out there that are going to help drive some of that sequential. And then you get into bad debt after taking more of the hit in the first half. It starts to improve from a sequential and year-over-year perspective here in the second half of the year in 3Q and going into 4Q. At the same time, on the expense side, we think we're relatively static in expenses in the back half relative to 2Q. So they'll pop up a little bit in 3Q and back down 4Q. And then beyond that, the other big driver that we have out there, which is non-same store but helps drive that increase in FFO from 61 to 63 to 65, we've got development lease up NOI. So we've got three assets that are in lease up right now, about $375 million basis. Two of you produced an annualized yield of just over 1%. Those are eventually going to stabilize in the high fives. So there's about a $3 million or $1. one penny pickup from 2Q to 4Q from that, plus probably another three pennies of accretion year over year by the time you get into 2024 from those lease ups. So it's kind of the roll up of kind of that walk forward from 2Q to 4Q.

A lot of helpful detail in there. It sounds like some occupancy pickup, but maybe not back to the high 96% range you were at. So as we think about then this improvement in lease rate, can you just give some detail around how new and renewal lease rate growth trended month to month in 2Q so we can get that picture of how things are trending into the back half, you know, now that the skips and evicts are, you know, further behind you.

Yeah. Hey, Austin, it's Mike. Throughout 2Q, we were hovering right around three to three and a half percent in the first part of the quarter. And then June, we were closer to two and a half. I would expect July and August to look very similar to June at this point, just because we're anniversaring off of those very high numbers from last year. And again, that being said, we do expect September to start to take off. Even with normal seasonality right now with market rents, we will see year-over-year market rent growth going forward, and that will obviously lead to higher new lease growth and higher renewal growth.

Just to clarify, when you say start to take off, is that sort of back to the 3% to 3.5% level, or do you think it could get better than that?

Right now, we're thinking that 3% to 3.5% range as we move forward. Once you get past this It's a July-August time frame.

Very helpful. And also, just to quantify that a little bit, when Mike talked about that seasonality we saw last year starting in September, when we saw a lot of those headlines pop up on the banking and the tech side, we saw seasonality dip pretty aggressively September through December. It actually dropped by 300 basis points versus typical seasonality. So a lot of that loss to lease that Mike is talking about of plus or minus 3%. That's embedded in basically September all the way through 1Q of next year. So the loss release that we're looking to capture isn't so much occurring here in the next couple months. As we go through kind of those blends, you're going to really start to see it pop potentially in 4Q and 1Q next year. So that's really the momentum piece. Part of it's better market rent growth year-to-date, and part of it's just a lot easier comp, both on an absolute and relative-to-peer basis.

That's good detail, and I appreciate the insights.

Thank you. Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.

Hi, this is Derek Metzler for Adam Kramer. I appreciate the comments on accretion for the JV and the subsequent property acquisition and the opening remarks. I wonder if you could talk any more about expectations for timing to deploy the dry powder that you mentioned in the JV? And any other puts and takes you can talk about for the subsequent six property acquisitions? So net-net, how should we think about accretions for these transactions? Thanks.

Yep, great question. So I'd say as it relates to guidance this year, because we've gotten a couple questions on kind of the implications of the two. Yeah, the JV is expected to be year one accretive, but contingent on deployment of that dry powder. Because once that dry powder gets deployed, that's when you start to earn the asset management, product management fees. It's also when we're able to redeploy and do assets that we can go capture operations upside and kind of enhance yield on. So, yeah, day one, it's kind of a push as we sold the low fives and then paid off. Got a low to mid fives commercial paper balance. So there should be some accretion coming there. We are pretty convicted in terms of our ability over the next 12 months to begin to get that capital deployed. As I mentioned, Barry and Andrew have teamed have been working pretty tightly with LaSalle and looking at a lot of different assets in the market, trying to make sure what fits for them, what fits for us. And as we've talked about, aside from kind of that just accretion from the fee side, definitely think it's beneficial to be able to have a partner that over the long term we can continue to grow with, redeploy proceeds with on an efficient basis, and get some of that operating upside from our platform, be it through the traditional initiatives or getting more deal next door and more densification plays. So I think over the JV, you'll see that accretion come in over the next 12 months. The counterbalance to that is obviously the OP unit transaction, which is day one dilutive for us. So the net of these two ends up being slightly dilutive here to 2023. But over time, both FFO and cash flow accretive in 24 and 25, we believe. So maybe just a couple comments on that OP unit portfolio transaction. We're obviously very excited. I think this is going to be a very fun test for the operational team to take what has been under managed assets and really lean into the operational upside there. So I'll make a couple points, but Mike will probably come over the top and give you some more specifics. But to the positive, the controllable operating margin here, it's about 800 basis points below the margin in our Dallas and Austin assets. That's the widest differential that we've seen of the $3.5 billion that we've bought over the last four or five years, so probably the most meat on the bone of any transaction we've seen. From a funding perspective, we really like this because it's basically self-funded in the sense that we have low-cost assumable debt combined with a very attractively priced equity issuance through OP units, and so we like the self-funding nature of it. On the debt side, that assumable debt carries a rate of about 3.8%. When you look at that relative to market today and the low fives, we've got six plus years of call it 150 basis point advantage on that debt, which if you think about a debt fair market value, it translates into about a 25 basis point benefit in terms of asset pricing. And then lastly, these are newer institutional assets that have been very well maintained. If you think about the CapEx profile on these relative to our legacy portfolio, the percentage of NOI is probably going to run at about half of our legacy portfolio. over the next five plus years. So that equates to about a 25 basis point improvement to the cash cap rate relative to the equity that we issued. So day one, we buy this at about a 4.5% NOI yield. Year one, it's probably about a 475. And that assumes that we capture about 200 basis points of that margin upside. But then when you adjust for that cash differential, you're basically issuing and buying in year one at the same cash cap rate. And from that point forward, you have all the revenue initiatives plus all the margin upside to go after, which we think ultimately drives much better growth from this portfolio relative to our legacy portfolio and gets to probably a penny or so of creation over the next couple of years. I'll turn to Mike. He can take you through some more details.

Yeah, let me just add a little bit more color around that. Controllable operating margin. Joe mentioned it. The team is very excited to get our hands on these assets. He mentioned 75%, 76% controllable operating margin. We run our properties in the same markets closer to around 84%. So we do believe in the next 6 to 12 months we'll be able to capture a good chunk of that. And obviously after two years we'll be able to capture the majority of it. A couple things just to give you more specifics around it. Four of these assets are basically in our backyard right next door to one of our wholly owned assets. So we intend to get a lot of efficiencies just as it relates to just the personnel side of the business. And we expect to capture that again in the next 6 to 12 months. Aside from that, we do have some positive in-unit amenities that we're able to get in there day one and add, such things as smart homes, washer dryers on a couple, two or three of these deals we're able to get in there and do that. That's a really good return for us. And in addition to in-unit amenities, there's also everything that's on the outside. So things that we've done in the past with parking initiatives, the fact that they do not have package lockers, we're able to order those and get those installed in the next few months. A lot of low-hanging fruit. And we believe between the in-unit and the amenity areas, there's probably 150 basis points alone in the next 12 months. Aside from that, more innovation on Wi-Fi. Over the next six months, we'll assess that and try to go hard on installations. And then just our revenue management alone, the fact that we can get in there and do more of our surgical pricing on in-units, we think there's a lot of upside. So I think it's safe to say that call it 700, 800 basis points will be captured in the next 12 to 18 months.

Great. Really helpful. Thank you.

Thank you.

Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.

Great, thank you. You know, a lot of moving pieces here on the guidance, you know, puts and takes. Just as you think about the back half of the year, where do you think there's the most variability? You know, where may you actually surprise to the upside and where are you most concerned about the downside?

Yeah, I think when you go to the non-ops lines, we generally feel pretty dialed in as it relates to interest expense variability. You know, we're running at maybe 6% floating rate debt plus or minus in the back half of the year. So minimal variability there. GNA feels pretty well dialed in. DCP, we did the $40 million of additional investment there. We'll have some additional fundings on a couple other deals as we fulfill commitments on a couple that are just working through construction. But minimal variability that we see on the DCP side. I think a couple variability aspects of on the OP unit transaction, just as we integrate, maybe you see a little bit of either positive or negative. Same with the joint venture. If we redeploy quicker those cash proceeds, we could start to earn those fees a little bit sooner and start to capture some of that upside. But I think most of it's going to come through on Mike's side on the same store piece. And so We do expect to see some upside in occupancy. We've talked about that pickup and blend starting in September, although that ends up being a little bit more of an earn-in and 2024 story at that point, given how many months are left. So I think that's your big variability. Real estate tax is pretty well dialed in at this point. We know 80 plus percent of those. I think personnel, R&M, especially given that we've gone through a lot of the high turnover, pretty well dialed in on the expense side. So We feel we're pretty tight. That's the reason we ended up going right back to the midpoint as overall we're tracking to where we're expected to this year.

If I could just add a couple things. I think to Joe's point, we feel pretty good about the blocking and tackling around the operating environment. In fact, we're sending out between 4.5% and 5% renewals through October. We intend to capture that. And again, market rents. should start to see that year over year bounce back. So overall, the blocking, tackling feels good. On the opportunity front, I think it's around innovation. And you've heard us talk a lot about what we've put in place this year in terms of rolling out internet. We've got about 9,000 units installed for bulk at this point. We've got another 9,000 that are coming over the course of the next five months or so. And we'll continue to push that forward as we move into next year. So I think there's some opportunity there. As far as unmanned sites, We're a little bit over 20% of the portfolio rolled out. We're going to be assessing that and looking at 2024 to see if we can add more. But overall, I'd say the things that we've rolled out have been successful. But where we're probably most excited about, and you've heard us talk a little bit about it, is the customer experience dashboard. And the fact that we have full transparency on the lifecycle of the resident with all of our data in one place, In chronological order, which includes things like text, surveys, phone calls, service requests, we can see exactly what's happening. We're testing different hypotheses right now, and we think there's a ton of opportunity as it relates to this. I think what's on the horizon, it's probably more of a 24-25, but obviously we expect this will increase our retention. We think it'll allow us to do a little bit more as it relates to capital decisions and how we spend money. And ultimately, it's going to lead to pricing power. So I think there's more opportunity with this in front of us, and we're just now scratching the surface.

Okay, thank you. And it sounds like you'll see some acceleration in the back half of the year on steam store and earnings. Rolling into 24 on the expense side, what do you think your growth rates look like there if you think about the major line items, at least from the visibility you have today?

Yeah, Jamie, I'd say it's pretty early to get into that, but honestly, I think with a 475 midpoint this year, you probably don't look materially different next year. I think it's a little bit above that long-term kind of 3% number, so kind of, let's say, 4% to 5%. Real estate taxes, you do have some lagged impact of valuations having come down and NOIs moderating. Insurance clearly is going to continue to be an area of pressure. although overall premiums are only about 2% or 3% of expenses. There's still some degree of wage pressure given the strength of the job market out there, so you'll still have wage increases as well as within R&M, but it probably doesn't look much different than it has here in 2023.

Do you see a scenario where it's materially higher?

Never say never, but some of the big pressure items that we saw here coming through this period of time, As you look at the level of turnover that we had driven by those long-term delinquents, those are exceptionally costly to us. And given how much they cost us in the first half of the year, it's hard to see how that would be the case. We do have some tough comps. I think everybody remembers in first quarter, we had the benefit of the CARES benefit in terms of the personnel reimbursement. That was maybe a 75 basis point impact. At the same time, we've got a lot of initiatives. Mike mentioned going to fewer headcount over time. We rolled out our maintenance technology suite here recently, which has vastly improved efficiency as well as resident communication, so there's probably more benefits there. We've got a number of ROIs that we'll be focused on, both from a revenue and expense perspective. So vastly higher would be challenging, I think, but it remains to be seen. I think six months from now we'll get into it on that guidance call in January.

Okay. All right. Thank you.

Thank you. Hey, Jamie. This is Toomey. I might just add, I mean, if you think about it long term, the advantages the publics have is sophisticated operating models that continue to put distance between us and the private owners. And so when we get a cost capital advantage, you're going to have a distinct advantage both on the revenue and the expense because of the investments these companies have been making. So I think When I look out on the horizon, 24, 25, when we get a cost of capital, there's going to be opportunities for these enterprises to continue to grow by making investments in their operating and innovation platforms. So while we might not be able to fight back all the expense pressure, it is by far a fraction of what private operators are having to deal with.

Yeah, no, that makes sense.

I guess, Tom, just while you have the mic, I mean, the whole Sunbelt debate, I mean, it seems like this quarter some portfolios have acted a little weaker than people thought. Some have acted better. I mean, what's the big picture on Sunbelt supply in your mind?

Well, I mean, I think it's always been we run a book of national, so we can't talk a region or up or down one. I think in the long term, the Sunbelt will have an equilibrium. It should have attracted a lot of supply, did attract it. It attracted a lot of jobs at higher paying ratios. And so we'll see how those higher paying jobs, other businesses relocating, if those grow and grow into that supply, it should perform very well. And so I think in the long term, housing as a whole is a great place to be invested in. And these markets go through these ups and downs cycles. But in long term, our business really comes down to the health of the consumer, their wage growth, and their ability to continue to be employment and grow that income that we want a piece of. So long term, I think it will equal out. Markets will cycle up and down. That is our philosophy about how we structure the company. Be diversified. These markets are going to go up and down. But if we can pick the right markets at the right time,

we're gonna do really well. Okay, all right, thank you.

Thank you. Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Hi, thanks for the time. In the opening remarks, you made some comments about maybe some stretched affordability in the Sunbelt. So I was hoping maybe you could provide a little bit more color on where those levels have gone from and to and how that compares to the other markets or coastal part of your portfolio, please.

Hey, Juan. It's Mike. Yeah, I think that's more specific to what we experienced with the skips in the Sun Belt versus the evictions in the coast. So we did see around 250, 300 skips, and a lot of that has to do with some of the supply in our backyard. So when we're tracking and we're finding out where people are going, they're pretty much sticking within that marketplace, but they're able to capture either a concession or a lower rent at someplace next door. So again, that put a little bit of pressure on us in the Sun Belt, and it's the opposite with what we experienced in the coast. That's where we're able to get in there, move through the eviction process. We did see more evictions than what we saw last year, and again, this put the same type of pressure on both our occupancy and our rents, but we feel like a lot of this is behind us now, and we're able to move forward.

It may be a dumb question here, but how do you determine if something is, quote, skip versus just a normal course move out?

A skip, typically somebody comes in and they drop off the keys. So they're not waiting to go through the eviction process. They're more or less giving up.

Got it. Okay. And then just a second question.

How are you guys thinking about the potential overhang from the end of the student debt relief and the strikes in LA related to the Hollywood business, the writers, actors, any impacts you guys are incorporating or thinking about with regards to your second half expectations?

Yeah, I guess as it relates to the student debt piece, I'll take that one and then Mike can talk to anything about the recent strikes in LA. On the student debt side, I wouldn't say we have great insights here. We're going to be holding to wait and see when August 29th occurs and payments go potentially back into place. Overall, you typically see about 20% of households in the United States that have some form of student debt with a median payment only being about $200. So as you think about our renter and their typical household income, Yeah, it is less than 2% typically of overall household income, so not a meaningful component. That said, I think we're just going to have to wait until we get into the fall and see if there are any implications in terms of pricing power on renewals or any demand impacts in terms of traffic coming through the door. But today, we don't have any great insights there.

Yeah, specific to LA, I think it's always important to note this is really just a about 3%, 3.5% of our NOI market. A lot of our exposure is in Marina Del Rey. And I'll tell you, the market's done well. We continue to see positive new lease growth, renewal growth still in that 5% range, and occupancy's hovering around 96.5% today. More concessions are downtown where we have our JV assets. But overall, LA feels good. I have gotten a couple questions around just our sequential growth. And I think it's important to note that without some of the evictions that we saw there, as well as some of the skips, we would have been closer to about 1 to 1.2% sequential revenue growth without bad debt. So again, this market feels pretty good to us today. Not really seeing a big difference in traffic. And I think we're in a good position as we move forward.

Thank you very much.

Thank you.

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Good afternoon. Thanks a lot for taking my question. Mike, the quantification of the new lease rent growth by region was helpful. Do you expect a gap in the new lease rent growth for the east and west coast and the Sunbelt? Do you expect that to widen through the back half of the year and by how much? Not much.

So what I would tell you is, again, in the back half of the year, we think there's more opportunity in the coast just because that's where we have the greatest loss to lease. And again, that's where we had some of the depressed market runs last year. So I think you'll see that continue to show well in the back half. But what we're seeing with the Sunbelt today is we've got through a lot of these skips. It did put pressure on us. We do expect that it to be somewhat stabilized going forward. It's not going to widen. So maybe the coast gets a little bit better, but I don't expect the Sun Belt to get materially worse.

That's helpful. And then have you seen any changes in the lease-up strategies from merchant builders who see their product delivering into a high-supply environment, or has pricing remained overall pretty rational around lease-ups?

It's been very rational. We see in some cases where concessions are in the four to six range, but we're not seeing people go as far as eight to anything past that. So overall, it feels rational. Sunbelt today, minimal concessions, and then I think there's just pockets. where you have developers offering a little bit more. But overall, we feel pretty good. I mean, we have a couple lease-ups of our own, and we offer right around four to six weeks, and we're ahead of schedule in terms of leasing. They've been leasing at about double the rate of what we see in our mature portfolio. So overall, promising.

Thank you very much.

Thank you. Our next question is from Nick Ulico with Scotiabank. Please proceed with your question.

Oh, hi, everyone. I just wanted to see in terms of the, you know, the acquisitions that were announced, you gave some perspective on the yield. Are these also under occupied assets? Any sense on what the, you can give us on the occupancy of the assets?

They're a little bit lower than what we would run. We see around 95 and a half to 96. And again, in the Sunbelt area, we're closer to 96 and a half today. So just slightly under where we typically run them.

Okay, got it. I just wasn't sure what, you know, the initial yield you talked about, you know, whether we should think that in reality, you know, the yield would be a little bit higher, you know, before what you've already mentioned was some of the margin improvement you expect to achieve.

That's right. Okay, thanks.

Thank you. Our next question is from Wes Galladay with Baird. Please proceed with your question.

Hey, everyone. It looks like you have a lot of opportunity on the acquisition you discussed earlier. But can you remind us, like, what is a typical value creation you can achieve just through the UDR platform within a few years?

Yeah, typically when you go back west and look at, you know, from 19 to early 22, we did three plus billion dollars of transactions. Usually the controllable margin differential that we saw in those was around 400 basis points. So back then, you know, we'd buy and we could typically get 10% lift excluding any market rent growth. And so that would be capturing that 400 basis point. Plus you're going to put on some occupancy upside, rev management. You're going to do other top line initiatives like parking and package and smart rent and Wi-Fi and all that that help drive top line as well as the expense piece helps the margin. So it's usually 10% lift that we can kind of take to the bank when it's managed by a typical third party. In this case, this is not managed by a third party property manager. It's really more of a mom and pop shop. So there's a little bit more meat on the bone there with that 800 base points of margin than we typically see.

Got it. And You mentioned not seeing any distress, but we did see you come in and help a few of your DCP investors. And I know you're a well-capitalized company. I'm just kind of worried. No, not worried. I just maybe want to get your view of the state of the average private developer. You know, they're probably getting a lot of accrued interest. Cap rates have moved up a little. Conversely, you know, why has it increased? Has that been sufficient to still have them with equity just for the broader industry based on the people you talk to? Or do you think we lose some developers this cycle?

I think you're definitely going to see some developers lose assets this cycle and lose capital. In this case, with these three assets, definitely not going to tell you that they're going to get the returns that they originally expected when they went into these transactions. But from a capital stack perspective, the cap stack on these was basically they were built for $360 million. After these paydowns, the senior loans at about $175 million. Our position is about $160 million. So we're kind of going to 50% to low 90% loan to cost on these assets. Obviously, originally they expected these to be worth substantially more than cost, but even if you use cost as a baseline, there's still some equity in there. In terms of the distress for those developers, we talked a lot internally about how to approach these over the last kind of three to six months. Ultimately, we didn't want to push either our lending partner or equity partner to the brink on this to find out was there going to be capital available from the equity or force them into the position where there are plenty of opportunistic lenders out there. The challenge with them is they charge much higher rates. You'll have points on the way in and on the way out, potentially interest rate reserves and just general terms that we as a PREF equity partner don't really want to have sitting ahead of us in the cap stack. So we like the idea of doing the refis with the relationship lenders, keeping them in place and just doing the pay down, which For us, doing it at 50% to 60% loan-to-cost is effectively where we're investing that new capital at a mid-nines. That felt like a pretty good return for assets. We know the assets that are still going through their stabilized NOI phase, they're 90% leased, less occupied, but NOI trajectory looks good on those. Overall, I felt good about them, but there probably will be some distress out there at some point in time for certain developers.

Great. Thanks for the time.

Thank you. Our next question is from Alan Peterson with Green Street Advisors. Please proceed with your question.

Thanks for the time, guys. Joe, maybe just a follow-up there on the DCP projects that you guys extended incremental capital to. In terms of the conversation with those partners, what's really holding them back from starting to market these assets for a potential disposition opportunity for them?

Just think timing-wise, when you look at the environment that we're in today, they're coming through lease-up. These markets, specifically relative to a lot of the rest of our own owned or DCP portfolio, have been more challenged. When you look at the Oakland market that has faced a lot of supply, Santa Monica has been a little bit more challenged, and even Philly, it is in a pocket where there has been a lot of supply delivered recently. From an NOI trajectory, there's a belief that as you work through that, that you're going to see rents continue to lift, those NOIs will stabilize, and you'll have a better number here in a couple of years to either refi off of and look at a different refi environment to potentially sell into or recap into. At the same time, you've got a lot of unknowns around where Fed has been, where rate's going to stabilize, and where buyers can actually underwrite these assets too. So today, while they have equity, they don't have the equity and returns they wanted. And so holding on for a potentially better environment makes a lot of sense to them. And we're happy to be along for the ride as we like where we're at in the capital stack.

Appreciate those comments. Maybe just shifting over to operations, Mike, in terms of some of the heavier supplied markets, I appreciate your comments on just the lease up concessions that are being offered right now. You started to notice a lot of stabilized concessions as well within some of these heavier supplied markets within the Sunbelt, whether you're using them. or some of your private peers are, and to what degree?

That's a very good question. I'll tell you again, just to remind everybody, we have been giving out less than half a week on new leases, so we're not really utilizing a lot of concessions on stabilized. That being said, in the Sunbelt, we have seen a few more people offer maybe two weeks here and there just to try to drive a little bit of demand, but nothing that's throwing us off, and I'm not really seeing a lot. on stabilized assets in some of the coastal, especially East Coast markets.

Alan, this is Timmy. I'd also add, I mean, part of this market is how owners operate and how they adjust their strategies. The other part is really the resident. And Mike had it in his opening remarks, but we're not seeing any stress with respect to our residents. Not seeing the doubling up impact. And we're kind of grateful that we've gotten through the long-term squatter issue and gotten that behind us. And so that really feeds a lot of our optimism from where we are, the facts that we are looking out 90 days and what we're seeing for renewals, et cetera. So that really does feed the second half story of what we believe is unfolding in the marketplace. And you continue, and like you have written, strong employment picture, good wage, no stress on the consumer. That's evident. That's our optimism, and it's turning into being a reality when we look out 90 days and what we're sending out for renewals and what we're getting back and our turnover numbers coming down again. So it feels good, really.

I appreciate those comments, and thanks for taking the question, guys.

Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question.

Hi, good afternoon. Maybe one more on the seasonality here. It sounds like you're saying that the first and the fourth quarters will be the highest for, you know, lease spreads and market rent growth, which is the inverse of a typical seasonality. So is that the case? And do you think that's unique to your portfolio or is that an industry-wide phenomenon we'll see adjusting from markets and geographies?

I think it's a little bit of both. So when you think about just the comps, we pushed very aggressively in the the middle of last year. And that goes back to one of the comments I made. Our blends were about 200 basis points higher from call it April through July. As we went into the back half of last year, we started bringing down our renewals. Our blends were a little bit lower than some of the peers. So I think we have more upside in terms of year over year as it relates to comps. But a lot of this is the seasonality we've talked about. If nothing else changes and we have normal seasonality going forward, September really starts to move. So you do see that inverse relationship as it relates to a year-over-year basis, and that drives your new lease and your renewal growth.

Got it. So you're pretty confident you'll see that higher rent growth even in a lower foot traffic environment kind of in September, October, November, given the comps and given what you're seeing in renewals and given the strong consumer?

Based on everything we're seeing today, yeah, and it goes back to Tom's point with the consumer being as healthy as they are and And again, where we're tracking today, we feel pretty confident.

All right. Thank you.

Thank you. Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Hey, good afternoon out there. So two questions. And first, your comments around the Sun Belt and the rent pressure certainly poke a lot of holes in the folks who would want to say that these pricing systems control the market. Clearly not. My question is, you know, when you guys were pushing rents, you know, aggressively, and I think you said you ended up with a bunch of skips in the Sun Belt. What went into the process on the on the on pushing the rent so aggressively? Presumably your your leasing team knew about the competitive supply nearby. So I'm just trying to understand better. you know, the strategy of pushing rent if you, in fact, knew that you were facing the supply pressure down there?

Yeah, Alex, I think that's a really good question. I'll tell you, it's more about what we did, not what we did in the last couple months. So the last couple years, we were probably more aggressive on some of our renewal increases in the Sun Belt. And I think that started to stretch people to some degree as we moved into this year. But over the last few months, you can see it in our renewal growth rates as well as our turnover. Renewals were going out at a pretty normalized 4.5%, 5% range. So it wasn't necessarily what we're doing recently. It's more what we did over the last couple years.

Okay, and then the second question is supply on the Sunbelt, you know, definitely seems to be more of a sub-market issue because it's not uniform. And you guys obviously just bought, you know, committed to buy more product down there. What are you guys doing as far as diversifying away, either buying older product or buying more in the suburbs or diversifying your holdings such that, you know, and this, by the way, I guess applies to, you know, the coastal infill markets as well. so that you diversify your product away from where people can build new supply?

Yeah, I think it's a good question. When you look at our existing Sunbelt portfolio, we are much more suburban and B quality. The new development rents that are coming online are typically 20 plus percent above most of our Sunbelt portfolio. So I think we're mildly insulated, but clearly not immune. from that activity. But we have talked about over time, do we want to become more diverse within those markets? You know, being more suburban and be quality. This trade obviously helps us go up in quality from an equality perspective. So newer product, obviously the potting aspect, we are potting for these six assets. So they're close or adjacent to existing assets. So it's helpful from an ops perspective, maybe not diversification, a sub market perspective, but it does help the ops team quite a bit. We do think about that, and we did think long and hard about the exposure to Dallas and Austin. It is adding to the Sun Belt in a period of temporary weakness, we believe. Tom laid out kind of the thesis longer term, or we do think Sun Belt longer term is a great place to be. And I would say Dallas has been kind of middle of the pack for us. It's not in the same level with the Austins, Nashvilles, Charlottes, Phoenix, etc., that have been getting hit as hard with supply and this whole kind of degradation and fundamentals. So Dallas, where four of the assets are, has been performing better for us.

Okay. Thank you, Joe. Thanks, Alex.

Thank you. And our next question is from Handel St. Just with Mizuho. Please proceed with your question.

Hey. Good afternoon out there. My first question is a follow-up on the JV with LaSalle. I guess three-parter, but quickly. First, how do the IRRs on the assets you're buying and underwriting compare with what you're selling into the JV? Second, can you discuss the market selection process involved? I understand that the assets that were contributing to the JV, there were no Sunbelts. It was Boston, D.C., Seattle, O.C. Was that a deal-breaker for the partner? Did he not want any Sunbelts? And then lastly, you mentioned there's a capacity or desire to contribute further assets. So curious how much larger. this JV could become. Thanks.

Hey, Andal. Good question. So a number of these actually kind of evolved as we went through the process, talking about this partner and others in terms of desired portfolio exposures, unlevered returns, future growth profile, et cetera. So I'd say on the unlevered side, generally not necessarily specific to this conversation, but a lot of the conversations that we had as we went through the partner selection process That unlevered kind of low to mid sevens IRR is where a lot of sovereign wealth funds were looking to transact at. So that with a typical kind of two and a half, three percent growth number really supported the kind of five cap environment that we're in. So I would expect these were underwritten about the same way on a go forward basis as we show assets. I do think we have the ability to capture outsized IRRs on an unlevered basis. if you're buying at market pricing, but then can put better than market operations onto that asset, you should have a potential to drive a little bit of incremental IRR relative to that seven plus number. In addition, I think they're going to continue to look at, our partner going to continue to want to look at kind of that 10 to 20, 25 year old asset that maybe has more of that operational upside, as well as potentially a CapEx plan, which could help juice returns further. So I think we're pretty well aligned because that's been our strike zone for a number of years on the acquisition front, so we should be good there. Market selection-wise, we really didn't try to cherry-pick certain markets. We tried to make sure it was diverse for all the potential partners we talked to, make sure it kind of looked like the UDR portfolio as a whole. I would not say that Sunbelt is redlined for this partner. Andrew and team have shown them a number of Sunbelt transactions already, so it's not a redlined market. It's going to come down to market, sub-market, and asset. So perhaps over time, we do see more Sunbelt assets come into that JV. And then just lastly, in terms of future growth, each of us have plus or minus $250 million of dry powder earmarked for future growth together on an unlevered basis. So that would take this JV from roughly a half billion to a billion. At some point in time, we may put leverage onto the joint venture if it becomes accretive and makes sense for both parties in the future. And then one of the pieces we're probably most excited about with this partner was They're pretty light on real estate allocation today and expect to continue to grow over time. And we'd love to be one of their preferred partners to grow with and continue to enhance this JV when returns and cash sources and uses make sense for us. So hopefully we see more growth going forward there.

And Handel, this is to me. What I'd add that probably hasn't been said enough is in the interview process, finding a partner was finding someone that thinks about the business the way we do. And what we found was a very unique partner that looks at it and says diversification, operating acumen, and ability to continue to grow these assets over time. So in targeting assets, you can see what we contributed, but what we're also looking at is buying assets over a 15-year cycle that have a couple opportunities to redevelop, continue to expand margin through our operations and innovation, And so they're looking at it from that standpoint and not just target a market and hope it rebounds, but who can actually drive cash flow growth over time and expand the investment because of their footprint. So it comes in as a very good partner who looks at the world a lot like we do.

That's great, Tyler. I guys appreciate that. The other question I had was on the insurance. market, the headwinds you referenced. I know it's not a huge component of OpEx, but I was hoping you could talk a bit more specifically about the level of inflation you're seeing there, what you're expecting near term. And then I guess, how much are you self-insuring today versus historically? And if there's any cost savings for perhaps doing that, how do you balance that against potential catastrophic risk? Thanks.

Yep. Thanks, Sandal. So Yeah, on the insurance program, so I'd say number one, we are locked in through mid-December with the existing program. So feel good about the kind of go forward rest of your insurance money or forecast. Yeah, the big driver of the number being down year to date, we did see about 20 plus percent premium increase last year. What we've seen though is that year to date claims have come off dramatically. Part of that's because we came through 21 and 22 off a very inflated number of claims activity is individuals simply happen to stay home more. We also put in place a lot of preventative maintenance and ROIs to help drive those claims down. So I feel pretty good about the number this year. I think going into next year's renewal, no doubt we're going to see continued pressure on the premium side. I wouldn't doubt to see a plus or minus 20% number again, but I think by next call we'll have a lot better sense for what that number is. We just got to do our best to either constrain that or continue to focus on claims through more ROI and preventative maintenance. On the self-insurance side that you mentioned, We've traditionally had a $4.5 million retention above and beyond our deductible that we have to eat through first. And then over time, we play with the different layers and evaluate what's our historical loss ratio relative to the premiums being charged. Last year, we took another $5 million of self-insurance risk in the primary $10 million from where we were at previously. And the thought process there was really, I think the premium we're going to be charged for that $5 million was something like $4 million for the year versus a loss ratio of maybe $2 million over the prior 10 years. So over the long term, it should be a net positive for us. So each year we'll look at which layers are potentially priced inefficiently and see what decision we want to make.

Thank you.

Thank you.

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.

And great. Thank you. Thank you for all your time, interest, and support of UDR. Clearly, we've established ourself as a full-cycle investment that delivers above-average growth and total shareholder return across a variety of macro environments. We remain enthusiastic about the apartment business and believe our operating, our capital allocation, our innovation advantages should deliver relative outperformance versus peers in 2023 and beyond. As a long-time veteran of this industry, what I'm struck by is actual results, where I find that we're number two in operating statistics from my viewpoint and look to be finishing that at the end of the year, and number two or three in cash flow growth. And so actual results is what matters in life the most, I've always found, and I think the team's very focused and enthused about those results. and we look forward to continuing to grow beyond those numbers. So with that, we look forward to seeing many of you in the upcoming events, and we'll hope you the best for the remaining balance of the summer. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.