UDR Inc (UDR) — Q3 2019 Earnings Call Transcript

Welcome to UDR's quarterly financial results conference call. A 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've 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 is 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 and follow-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Thank you, Chris. And welcome to UDR's third quarter 2019 conference call. On the call with me today are Jerry Davis, President and Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results, as well as senior officers Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call. Our robust third quarter results highlighted by same-store NOI growth of 3.9% and FFO as adjusted per share growth of 6% continue to demonstrate strong execution across all aspects of our business. 2019 has been a very active and productive year for UDR. First, we accretively grew our business through $1.8 billion and completed our announced acquisitions that have significant operational and investment upsides in markets targeted for expansion. These were funded with premium-priced equity and low-cost debt. Second, we continue to make great progress implementing our next-generation operation platform that has and will continue to drive controllable margin expansion by fundamentally changing how we interact with our current and prospective residents while also creating efficiencies throughout our cost structure. Third, we simplified our business by winding down the KFH JV and announced an agreement to have our relationship with MetLife via an accretive asset swap. And fourth, we de-risked our enterprise by proactively taking advantage of low interest rate environment to repay high-cost debt, extend our consolidated pro forma durations to over eight years, and reduce aggregate maturities to just 5% of our total debt over the next three years. In short, the team has done a great job in 2019 of executing on all aspects of our value creation capabilities, which will set up 2020 for continued strong NOI and cash flow growth, all of which fits into our strategic objective of being a full-cycle investment. Last, we received good news on the ESG front with our public GRESB disclosure score improving to an A. This compares favorably versus our comp set and further exhibits our commitment to consistently improve our ESG framework. With that, the senior management team would like to extend a heartfelt thank you to all UDR associates for our continued hard work and for making 2019 a very special year. I will now turn over the call to Jerry.

Thanks, Tom, and good afternoon, everyone. We're pleased to announce another quarter of strong operating results with the same-store revenue and expense and NOI growth of 3.7%, 3.1%, and 3.9%, respectively. Before delving into the quarterly details, let me take a moment to comment on how we view operations from 10,000 feet. We prioritized cash flow growth, which is primarily driven by sustainable and consistent operating margin expansion and accretive capital allocation. Over the coming years, we expect that the ongoing implementation of our next-gen operating platform will not only satisfy our customers' desire for self-service but will also drive the majority of our margin expansion by limiting controllable expense growth through a variety of efficiency initiatives and technological solutions. To sum up, we are somewhat agnostic as to how margin expansion is achieved, given that the drivers of that expansion will oscillate over time, but we care deeply about achieving it. We think about revenue growth similarly; lease rates, occupancy, and other income are the primary variables in our revenue growth equation. At different points throughout the year and the real estate cycle, the importance of each variable's contribution to our revenue growth fluctuates. As such, our goal each and every quarter is to optimally manage these variables to maximize revenue growth, not fixate on a specific component of revenue growth. In the third quarter, we continued to run an occupancy-first strategy and harvest above-trend other income growth, both of which offset new lease rate growth that was impacted by tough year-over-year comps and elevated supply levels in some of our high-rent markets such as the San Francisco Bay Area. 2019 deliveries have been back half-loaded across the majority of our markets, and we saw some impact during the third quarter. For at least the next couple of quarters, we expect that this dynamic will continue to play out. Positively, we have not seen widespread irrational pricing on this new supply. Absorption has remained strong, up 5.3% renewal growth during the quarter was just 30 basis points below that of the second quarter. And third-quarter resident turnover declined by 60 basis points after excluding the impact of move-outs from our short-term furnished home program, all of which reinforced that the lower-than-expected new lease rate growth was not a demand issue. At the market level, the Monterey Peninsula, Seattle, and the San Francisco Bay Area, which represent 26% of our same-store NOI, performed well, generating weighted average revenue growth of 5.9% in the quarter. Demand, occupancy, and other income contribution from items such as parking, short-term furnished rentals, and rentals of common area spaces generally remained strong in these markets. Although, as previously referenced, supply did impact new lease rate growth in the Bay Area. Conversely, New York, Orange County, and Dallas, which comprise 23% of our same-store NOI, continued to lag our portfolio growth with weighted average revenue growth of 1.7% primarily due to competitive supply. Although, New York continues to incrementally improve versus the past couple of years. Moving on, the ongoing implementation and execution of our next-gen operating platform continue to drive the expansion of our controllable margin through initiatives that will reduce expense growth, thereby dropping more dollars to our bottom line. Year-over-year, our same-store controllable margin grew by 40 basis points due to controllable expense growth of just 1.2% in the third quarter and 1.4% year-to-date. On a normalized basis, we would expect these costs to be growing at an inflationary rate somewhere in the 3% range. More specifically, the combined growth rate of personnel and repairs and maintenance expenses during the quarter was negative 0.1%, a solid achievement and representative of how limiting controllable expense growth will continue to expand our operating margin. As a reminder, once fully implemented, our Next Gen Platform will fundamentally change how we interact with our customers and operate our portfolio. This will occur in stages and will include, first gaining efficiencies through process improvement, outsourcing of certain non-customer-facing tasks, and the centralization of sales operation. Second, the installation of SmartHome Tech. We are currently over 27,000 homes into this program. Third, a push towards self-service via smart devices. This will include self-touring of our properties and a wide variety of other tasks. Lastly, using big data and machine learning to drive revenue growth and greater efficiencies throughout our operating structure. Finally, with regard to this topic, to achieve our goal of expanding controllable margin by 150 to 200 basis points by year-end 2022 or $15 million to $20 million in incremental run rate NOI, we need the right team and the right culture in place. Over the years, our operating teams have accepted and supported the wide variety of other income initiatives we have implemented, and our strong same-store growth results have reflected that. While advancements like SmartHome Tech are fully replicable by any multifamily competitor willing to spend the necessary capital, the operating team that embraces consistent evolution and a culture that thrives on it is not. We have both. Taken together, we tightened our full-year same-store revenue growth guidance range and reduced our same-store expense growth guidance by 15 basis points at the midpoint. Combined, these increased our full-year same-store NOI growth guidance range by 7.5 basis points at the midpoint. Last, our $1.8 billion in year-to-date completed or announced acquisitions are performing in line with underwritten expectations. Nuts and bolts operating improvements, CapEx investment, and historical operating initiatives are all in the initial phases of implementation. While this level of growth has at times stretched our teams in the field and at the corporate office, we have a deep bench at UDR, which has allowed many of our outstanding associates to advance their careers through our expansion. We are excited to overlay UDR's best-in-class operating platform onto these acquired properties and look forward to creating value over the next several years through the implementation of our next-gen platform. In closing, I would like to thank all of our associates in the field and at corporate for producing another quarter of robust operating growth, while also continuing to embrace the future through our Next Gen Operating Platform. It has been an extremely eventful year, and I'm immensely proud of all of you. With that, I'll turn it over to Joe.

Thank you, Jerry. The topics I will cover today include our third quarter results and updated full-year guidance, a transactions and capital markets update, and a balance sheet update. Our third quarter earnings results came in at the midpoint to above the high ends of previously provided guidance ranges. FFO adjusted per share was $0.52, approximately 6% higher year-over-year and driven by strong same-store and lease-up performance, accretive capital deployment, and lower interest rates. Next, our full-year guidance update. We raised our full-year FFO as adjusted guidance range by $0.005 at the midpoint to $2.07 to $2.09, driven by solid operations, interest expense savings, and capital deployment. A full guidance update including sources and uses expectations, the same-store updates Jerry referenced, and fourth quarter guidance ranges, is available on Attachment 15 of our supplement. Moving on to transactions and capital markets. We have continued to drive long-term value creation and FFO accretion by remaining disciplined in our capital deployment and simultaneously match-funding with low-cost equity and debt capital, all while pivoting to the best available risk-adjusted returns. During the quarter, we acquired three apartment communities located in Norwood, Massachusetts; Englewood, New Jersey; and Washington, DC. The closing of the latter, 1301 Thomas Circle, fully wound down our JV relationship with KFH. The three communities were acquired at an all-in valuation of $541 million and a weighted average year-one NOI yield of 4.9%, moving to the low 5s in year two. In August, we announced a $1.8 billion transaction with our JV partner MetLife that further simplified UDR structure, will cut our JV exposure to just 5% of total NOI, will be accretive to future cash flow growth and increased exposure to target markets, and replaced lower multiple management fee income with higher multiple real estate income, all while minimizing cash needs. As structured, we are under contract to acquire the approximately 50% interest we did not previously own in 10 UDR/MetLife JV operating communities, one community under development, and four development land sites, cumulatively valued at $1.1 billion or $557 million at UDR's share. We will sell approximately 50% interest in five JV communities valued at $645 million or $323 million at UDR's share to MetLife. After accounting for the assumption of in-place debt, our net cash outflow to complete the asset swap is expected to be approximately $105 million. The transaction is expected to close during the fourth quarter subject to customary closing conditions and closing price adjustments. Our year-to-date completed and announced acquisition activity now totals $1.8 billion, including land for future development. These transactions are NAV accretive, have IRRs that exceed our weighted average cost of capital, were partially funded with the $962 million of equity issued in the last year at a weighted average 6% premium to consensus NAV and will be accretive to FFO per share growth rate in 2020 and beyond. In addition, the acquired communities all have significant operational and investment upside, are primarily located in targeted expansion markets, and fit well with our Next Gen Operating Platform. In September, we entered into a forward sales agreement under our ATM program for approximately 1.3 million common shares during the quarter. Expected proceeds are earmarked for another transaction, which we will provide additional information on at a future date. The final date by which shares sold under the forward sales agreement need to be settled is March 31, 2020, as currently structured. Moving on to debt, where we continue to take advantage of the low rate environment. During the quarter and subsequent to quarter end, we issued $800 million of long-duration unsecured debt at a weighted average effective rate of 3.1%, $300 million of this debt qualified as a Green Bond and represented our first use of this ESG-friendly product. Proceeds have been or will be used to prepay $700 million of higher-cost debt with a weighted average effective rate of 4.23%. Once completed, we will have only 5% of our debt coming due over the next three years, and our consolidated weighted average years to maturity will be eight years versus the 6.9 years reported at the end of the third quarter. Please see our third quarter earnings press release and supplement for further details on our transactional and capital markets activity. Lastly, the balance sheet. At quarter end, our liquidity, as measured by cash and credit facility capacity, net of the commercial paper balance, was $1.1 billion. Our consolidated financial leverage was 31% on undepreciated book value, and 24% on enterprise value inclusive of joint ventures. Our consolidated net debt to EBITDA ROE was 5.5 times and inclusive of joint ventures was 5.8 times. We remain comfortable with our credit metrics and don't plan to actively lever up or down. With that, I will open it up for Q&A. Operator?

Thanks. Jerry. I appreciate the operating strategy color, which I guess helps to explain why blended lease rate growth was flat year-over-year versus positive in the first two quarters. When you compare the current environment, I think your comments on supply, do you expect it to remain roughly flat going forward for the next few quarters or is there anything indicating an acceleration or deceleration from here?

I think it's going to be dependent, market by market. We do have several markets specifically San Francisco, Los Angeles, Orange County, and Orlando, where new supply has driven down new lease rate growth compared to where it was last year where we had strength in those markets. On the opposite side, you've got strength in New York City, the Inland Empire, and Seattle. So it's all going to be dependent on the effects of that new supply. Currently, we see in the fourth quarter, new lease rate growth is probably going to be down compared to where it was last year. But when we look at renewal rate growth, which was at 5.3% this quarter that's the highest level, these past couple of quarters since it's been in 2016, I think it's going to continue to be strong. The other thing we looked at, Nick, is when you look at the next quarter. Over the last four years it averaged probably about 0.3%; in 2016, it was very low single digits; in 2017, the fourth quarter was actually negative 0.5%. It rebounded the following year in 2018 to a 1.1%, and this year, we expect it to be somewhere closer to the average. So it will be less than it was last year. But I think that's more indicative of the effects supply had back in '17, which kept new lease rate growth down. So when you anniversary 2018 it was elevated, and now we are seeing that supply hit us in a couple of markets. And we're also comping against tougher numbers from last year.

That's helpful, thanks. And then you've been active on the capital raising front and in terms of equity doing a handful of different ways. So assuming you have a use, how do you think about executing going forward between marketed deals, the ATM, and then on a forward basis?

Yes. Hi, Nick, this is Joe. I think the critical part of that that you referenced there is assuming that we have limited use, we've endeavored over the last 12 months to make sure that when we do raise capital on the equity side, we do have a match-funded use teed up for it. So we haven't done any special lot of equity that we sit on and then force our transaction team to go out there and execute upon. So I think you'll continue to see that from that front. From a pipeline standpoint, Harry may have some comments here, but I think our pipeline today is probably a little bit lighter than we've seen at any point in the last 12 months, but if we do go out there again, we're going to make sure that we have premium cost of capital relative to NAV from a used standpoint, make sure it's in our target markets, and make sure that we can deploy it accretively year one, and on a forward basis, and make sure that the assets have either operational investments or a platform story with them to keep driving 2020 growth and beyond.

Thank you. Just a follow-up on the leasing spreads, which were healthy but down sequentially and then also it sounds like the fourth quarter will be down year-over-year, how should we think about the translation of that into same-store revenue next year and then also were the leasing spreads this quarter in line with your projections?

Leasing spreads in the third quarter were down a bit from the original projections, mainly because we didn't fully anticipate the effect that new supply, specifically in places like San Francisco, were going to have on our new lease rates. On a blended basis again, they were down a bit, not as much as on the new because the renewals were higher, but we're not currently ready to give any indication or any numbers on 2020, we're in the midst of the budget process right now. I can tell you, when we look at supply next year, it's probably going to be slightly higher than it was this year, specifically a few markets that we operate in. We think Boston will be a bit more impacted by supply; you're going to have Los Angeles continuing to be affected by supply; I think the San Francisco supply issues that I've talked about earlier on this call, I think they probably persist through the first half of next year, but I think you see a little bit of relief in New York as well as in Orange County next year. And I think Seattle will feel some supply; I think the demand side of the equation should stay strong there.

Yes, I think, John, this is Joe, just beyond as you asked about 2020, obviously going through the fundamental side of the equation, but what we've really been focused on this year, when you look at activities that were taken for '19 to try to impact '20, what we've been doing on the balance sheet front to improve the quality of the balance sheet and also drive accretion, all the transactional activity trying to drive accretion there, and then all the platform work that Jerry talked about in his opening remarks trying to drop more cash to the bottom line next year and on a go-forward basis. So we're still working through on the fundamental side, but I think, on a relative basis, we're doing everything we can to set up the portfolio and platform to be in a better position next year.

Okay. And then, Joe, with your cost of new debt declining by 140 basis points over the past year, can you quantify how much that changed the yields you're willing to take on investments, including both acquisitions and Mezz debt?

Yes. I think on the Mezz debt side, I think the compression and yields that you've seen out there have actually, to some degree, worked against us, meaning that developers and other capital constituents have either more access to capital at lower rates or the competition for deploying that capital gets a little bit more difficult, so you've seen us do a little bit less on the DCP side. That said, you do see guidance on Attachment 15; we did take up our guidance range for Developer Capital Program. I do want to point out, however, that at this point, that is a speculative transaction, nothing has been signed, so there are no guarantees that it gets to the finish line nor any guarantees on the exact timing, but I do think it's important to note that that is not a typical DCP deal for us, meaning it's more of a bridge loan with the ability to access the asset in about 12 months upon stabilization. So the yield we will receive on that if in fact we get that done, it's going to be decidedly lower than what we've done on other DCP deals. So just from a modeling standpoint, keep that in mind. Aside from that, the cost of capital coming down and improving on both the debt and equity side, clearly has allowed us to be more competitive and be out there with an external growth signal that we've received. And so, we're still trying to make sure we make good deals, we don't pay beyond market, and every deal has a story to it whether it's the target markets or the operational upside that go with it. So I wouldn't say it's given us just a free pass to go out there and be overly aggressive just because our cost of capital has come down. We still got to be disciplined on that front.

Thank you.

I was wondering if you could provide more insight into the rent regulations, specifically in California. How will this new regulatory environment impact your strategy, especially with the discussions around Prop 10 2.0? Are you reconsidering your exposure to California?

I'll start with the effect of maybe 1482; we went back and looked at it, and I think everybody's familiar with it, but it said for properties over 15 years old, that renewal rates will be capped at 5% plus CPI. So when we went back and looked at the effect for next year, it's probably somewhere in that $250,000 to $350,000 range, which for our California portfolio would impact 2020 same-store revenue growth by, call it 7 or 8 basis points, so not overly material. Can you repeat what your second question was?

Yes. Just back on Prop 10.

About bringing Prop 10 back. So does that, have you guys talked about it, are you reconsidering exposure to California?

Yes. Hello, it's Joe. Yes, just from an overall portfolio standpoint, I think it's fair to assume that all markets are going to go through their micro cycles, whether it's demand, supply, or regulatory environments. So it's clearly going to be something that we take into effect when we think about transactions in California. We continue to believe that anything that restricts economic or rent growth or economic value creation, it's probably not the right solution to affordability. But it's a qualitative factor that plays into our process, and some of the benefits of having the diversified portfolio that we do that we don't end up overexposed to any one regulatory environment, and gives Harry and team more degrees of freedom from which to transact over time, but I would say it's not as simplistic and binary as blue states bad, red states good. Given that there is a second derivative impact on capital flows and capital formation, so if capital does shift from, say California, to a red state or non-rent-controlled state, you may see more development in those states, and therefore less rent growth, and so we're trying to factor all those pieces together, but it's not quite as easy of a binary decision as some may think. So it's something we're contemplating and thinking about.

Good morning out there, guys. So, Joe, I want to dig in a little bit to these two big JV deals during the quarter; it’s pretty clear from a strategic and financial perspective why these are beneficial, just maybe walk us through the genesis of the transactions, unwinding one, and significantly reducing the involvement of the other, is there anything related to the partnership or to the timing of sort of a finite life sort of agreement, just walk us through maybe some of those other elements as to why this happened at this moment in time.

Hi, Rich, this is Tom Toomey. Let me try to address those questions. With respect to the KFH, the JV had run 10 years, and KFH wanted to explore what the market value of it was, and we exposed the assets to the market and as you can see over this year two of them were sold, and one of them we purchased, and on a net cash basis, not a lot of capital. And so I think it's not more complicated than that with KFH. On Met, we're 10 years as partners, and we've done a lot of business with Met over the years, and it's a constant dialog about how we create win-win situations whether at the development, acquisition, or swapping assets, or selling them, and that dialog started up probably late in 2018, and it just takes time. No strategic rationale other than a constant dialog with a good capital partner and one that we hope will continue to do a lot of business with in the future. So very grateful for them as a partner. And I think we've always done win-win transactions with them; they think a lot about real estate the same way we do, a long-term operating business that creates a lot of wealth and value over time. So good group of people.

Okay. And that's helpful. So there is nothing specifically related to sort of simplicity as a strategy for UDR, in that sense, I mean there is an equal chance another round of JVs could form at some point in the future. Is that what you're also hinting at there?

No, I'm not hinting at anything. I'm giving you kind of the facts as we see them with respect to our JV footprint and the future of it. And I think JVs are always about what problem are you trying to solve or what skill does someone bring to the enterprise or to the relationship that can help you grow UDR. And we've got a good cost of capital. We've got a growing capable enterprise that has a lot of different ways to add value, if we felt that someone could help us enhance that, certainly, we would be back into a joint venture. Right now, I don't see any needs. Don't see any part of the organization that we would like to grow faster or more. So I think we're right now probably not overly engaged in joint venture activity as much as you can tell from the activity of this year. Got a lot of value creation mechanisms in the enterprise; we're playing them all; they're all doing well. I'm really looking forward to 2020 and the continued growth of the Ops platform.

Hi, good morning, everyone. Jerry, I guess with some of the softening in market rent growth hitting your markets and some new lease rates pulling back, have you guys pulled back at all in the SmartHome spend and revenue-enhancing CapEx? And would you consider pulling back, I guess, next year because maybe the returns aren't as attractive today in light of some of the supply, near-term supply headwinds?

Yes, I guess, starting with the SmartHome spend. As we said, we're about 27,000 units in, and just to remind you, we're doing the SmartHome for a few reasons; we're not doing it purely to get rent growth out of the residents. We do think they value it; we think it's part of what has helped drive our outsized renewal growth so far this year. But the primary purpose of doing it is some of the expense reduction capabilities it gives us. First of all, it has benefits on leak detection; it also makes our maintenance guys much more efficient. But one of the big things it does, it sets up this operating platform that we're building to allow us to more actively and efficiently do self-guided tours, which we plan to roll out more through automation. This year, we've been doing self-guided tours, but it's an old school; we've paper maps, we see throughout next year, and we'll get much more automated, and we think the ability for prospective residents to be able to access units through a SmartHome rather than through a hard physical key is going to be beneficial. So while we underwrote it based on rents, there was plenty of extra juice on the expense side and what we expect to get on the operating platform that would enhance that. So I would tell you, we haven't finalized our budgets for next year of how many SmartHomes we will continue to add, but I would expect that you will see a continuation of the program into 2020. As far as revenue-enhancing spend, which over the last couple of years has been at that $40 million range, yes, we still think you get paid for that. On incremental dollars, it really isn't overly affected by market rents. We underwrite these things to get an IRR that's at least 150 basis points of our WACC. There is a discipline to doing this; we look to do it in markets that show strength over the next 4 to 10 years, not just over the next year. So for long-term, we are looking at ways to increase the value of our real estate by deploying this capital. And I wouldn't expect next year for the total spend to change much.

Great, appreciate your thoughts. And then Joe, just curious why include the speculative DCP investment in guidance today if conditions are more competitive? I think you referenced, returns aren't quite as attractive. And why not just use that available dry powder to fund the transaction that you reference, that you have good line of sight on, that you intend to fund with the kind of forward equity?

Yes, the transaction that I referenced in my opening remarks is, in fact, that DCP transaction. So the forward equity commitment that we made there of $64 million, we raised that with the intention and desire and hope that we get that transaction to the finish line on the DCP side, and that ultimately takes care of the majority of that funding and our capital plan. So those are one and the same. So don't consider the DCP as a speculative unknown transaction. It's known; we're working towards getting that papered and hopefully have some to talk about in the coming months.

Hi, good morning. Jerry, one of your peers spoke about piloting an amenity-light model. Is that something you'd consider particularly in the context of your recent commentary of renting out common area and some amenity spaces?

Yes, I'll start and I'll let Harry or Tom jump in. We haven't talked definitively about any of this, but we have looked at what amenities residents value, and we've actually gone out in the last year or two and looked at our properties that we felt were somewhat over-amenitized, and we've been able to convert some of those amenities into apartment homes. At one of the Vitruvian Park assets, Savoye and Savoye II, we converted three common areas into five or six rentable units, and we do look for those types of opportunities. But I think at the high end of the market, you do get paid for amenities, but I do think in some places people are just looking for an inexpensive place to live, and there probably is a product that fits that; Harry, you can talk to whether you've really been looking at that for future development opportunities.

Yes, I think, I mean it really gets into sort of a return on investment type analysis where whatever the customer will pay in rents is determined by the location of the product, the quality of the finishes, and the quality of the amenities. So when we look to buy an asset, when we look to develop an asset, or when we look to convert these types of amenity spaces into units, we're entirely rational in our approach. I think for certain assets and certain locations that gets an interesting model, but again we look at each asset on its own merits.

Hi guys. Jerry, the Dallas weakness you alluded to the fact it's supply driven. Is that weakness across basically all the sub-markets or is it submarket specific and how does it sort of trend by price point?

I would tell you it obviously is not as weak at the lower price points; we have some old legacy assets in our Vitruvian Park location that are doing well; our product up in Legacy Village, though Plano is badly new supply, both in North Plano, but probably a little bit more in Frisco, so while there's good job growth up there, it's been going head to head with new supply. You also have supply pressures at one property down in Uptown that’s feeling that as well. Our newer assets that are in the Met JV and Vitruvian Park, they're doing better, the net same-store average, but they are still also battling new supply. So I would tell you supply tends to be occurring or being delivered up and down at the Tollway, and our entire portfolio is up and down the Tollway. So we may be feeling that more than some of our peers, but it's definitely more at the high end; the B, B minus properties that we have in Addison are doing much better than the A product; there’s probably a couple, several hundred basis point differential in revenue growth.

Yes. Hi, thanks, Rob. Throughout the year, we've done a lot of activity that's going to incrementally improve balance sheet in terms of extending weighted average duration, continue to improve the three-year liquidity profile where we have minimal debt maturities coming during next couple of years, and then trying to stay relatively stable on things like debt to EBITDA, fixed charge, debt to enterprise, and all those have improved slightly relative to 2018 levels keeping us at a very solid BBB plus, so we probably have a little bit of capacity today. I wouldn't say nearly on the magnitude of you referenced even a $0.5 billion, $100 million, $200 million if we want to utilize it, but it's also good to have that for a rainy day and keep that capacity in the back pocket. So we'll continue to evaluate, do we want to utilize it for additional acquisitions, DCP, etc., or do we utilize dispositions, free cash flow, or equity. So we'll keep looking at it.

Thanks, good afternoon. So, Jerry, on the margin expansion initiatives, looks like you can get to controllable margin of 85-ish percent in a couple of years. I'm curious if there is any incremental more or less impact on the total margin in the kind of 70% range; does that go up at a faster rate because of all this effort or slower rate versus controllable?

I believe it will likely increase at a similar pace with the changes, possibly a bit more significantly, but you are effectively impacting everything except real estate taxes and insurance. Therefore, I would say it may be somewhat higher than it would be on the controllable side.

Yes. If we want to bring all of those in-house, you're looking at an asset value clearing to $1 billion. We already have $260 plus million of that stack; if you think about what our typical leverage profile would be, the $260 million would be a portion of our equity stack, so you're probably looking at a $400 million to $500 million check. You also have participation on three of those transactions, which depending on if we buy or if we sell, either way, we're going to participate in the upside on those. So the good thing is though, we stack those up as a typical debt maturity profile. So some come into 20, 21, 22, 23 so you don't have a whole series of decisions coming at you at one point in time by design so that we aren't in a box in terms of not having a cost of capital but wanted to own all of those assets. So we'll make the decisions over time.

I just add one, thanks for hanging on for the hour and 10 minutes. The second part of that is clearly, anything that we would look at, a 1031 option would be one avenue to pursue within a marketplace. And all the DCPs have always been entered under the premise of an asset that we would like to own at the right price at the right time. So it's a very good question, and I think we'll play them out as Joe has highlighted; they come to every year one or two deals, and we'll look at them at that time.

Hi guys, just taking a step back, high-level question for me. I'm thinking about some of the commentary you've said in the past about predictive analytics and focusing on underserved markets. I was struck by how well Baltimore did this quarter, but I'm wondering if you could maybe just expound upon your predictive analytics and what that's telling you about what markets you should be in and maybe what markets you shouldn't be in?

Thank you, Rich. Baltimore is not currently a major market for us, so we don't have a large number of properties there. Our use of predictive analytics is aimed at guiding our decisions over the next 4 to 10 years, meaning we're looking at longer hold periods. Just because it performed well this quarter doesn't guarantee it will do the same next quarter. We're trying to take a different approach, somewhat contrary to the conventional trend by focusing on what the underlying demographics and economic indicators suggest regarding rents and affordability. Many markets can become overheated, attracting more capital due to the excitement, but we're looking to adopt a more contrarian stance, as you can see from our actions. Baltimore is one example of this; we've also been active in Philadelphia, New York, Boston, and Tampa. These are some areas where we're engaging, while I notice less aggressive capital inflow from both private and public sources. We also have an interest in Southern California, so it's not solely focused on the East Coast. This strategy, combined with our transaction team finding the right sub-markets and assets, and our operations team maximizing asset performance through our initiatives, should give us a competitive advantage.

Hey, guys, thanks for taking my question. I have a more general operations-based question, I guess. We've seen turnover go down year-over-year for a while now, I think it's been a trend pretty much. Will you have your turnover basically stable this quarter? Do you think that's just an aberration or it's just a shift in trend, obviously overall on an LTM basis it's still very low, but just wondering how you see that change, or are you seeing something in the market that is different from the rest of the cycle?

No, I don't think we're seeing anything different. I think what you're seeing with all of this, seeing turnover go down, it's a few things. One, I think all of the REIT peers are listening to the residents better, doing a better job on customer service and resident ratings. Second, I think you've seen predominantly rational pricing of lease-ups over the last couple of years. So it's not enticing people to leave multi-family and jump ship for two months free. One thing that makes us a bit different than the peers is we've got this short-term furnished rental program that has grown quite a bit year-over-year. And this year it's up about 50%. So if you backed the effect of short-term furnished rental move-outs, and these things usually stay occupied for 80 or so days. So it elevates your turnover rate, but if you back it out of both years, we would have actually been down 60 basis points. And then, I guess the third point when people say, how low can it go? I think part of it is, what level of renewal increase are you going to send out, and I think when you look at the renewals, we've been sending out in 2Q and 3Q, both north of 5%. We look to maximize revenue. We're doing that while still maintaining occupancy at 96.9%, which was 10 basis points higher than it was in last year's third quarter. So, I think you got to look at it at the entire revenue stream and not just what's turnover and what's rate growth, and we try to balance all of those factors.

Hardik, this is Toomey. Just to add a couple of things that come to mind from me. When I look at the last decade, our average resident has gone from 28 years of age to 38. People in their 30s, 40s, are not inclined to just move at a high turnover rate; they're pretty established and stay. Second, you look at their income levels. And third, I think about the product that we're offering them and the variety of amenities, lifestyle, and service levels that have grown over the last decade. And I think that combination of just a better place to live, the stage in life, and higher service levels have combined to drive that number down, and I don't see a particular reason why I would see it revert back to the norm or the past, if you will. So, I think we're just doing a better job and we've got demographics and our customer on our side.

Thanks. That's a really thoughtful response. Jerry, just one quick follow-up. You mentioned, excluding furnished housing, it's down 60 basis points. What percentage of the leases that turn, percentage of turnover is furnished housing? Just so I have a rough sense.

Yes, let me get back to you on that. I don't have that; I don’t want to make a guess, we'll get back to you with that number.

Hi, thanks for taking my question. Wanted to touch on the acquisitions during the quarter briefly, I think it was mentioned that there is some CapEx opportunity or some under management at these properties. I was just curious, it looks like the Windsor Gardens, 50 years old; obviously, CapEx is probably part of that story. Do those amounts in the release include the potential CapEx going into them to get the yields that were discussed or I think just in a general sense it might be helpful if you elaborate on them, how you view those acquisitions from a core value add standpoint, kind of what the unique opportunity is?

Hi Drew, this is Joe. I’ll respond quickly and then turn it over to Jerry and Harry to discuss the transaction dynamics further. The figures mentioned in the release on Attachment 13 and in our guidance do not include any initial capital expenditure budgets we plan to implement over the next year or two to enhance properties, KMBs, smart homes, or similar initiatives. You will see that spending reflected over time. The amount listed on Attachment 13 simply indicates the price we paid for the acquisition.

And I guess I'll give you a little bit of insight on Commons at Windsor Gardens, Drew. First, it's a 30-minute train ride into Boston's Back Bay, and the train stop is on our property. Rents are 50% or less of what Boston rents are, so I'd say it's a good price point for a short commute. On the CapEx spend, there are about 200 of the 914 units that have never had their interiors renovated, meaning it has original kitchens and baths. We see opportunity to invest some money in those and get a rent increase somewhere in the $250 to $300 range. The property has not been sub-metered, so we are going through the process of scoping that out and ideally, we'll get sub-meters installed over the next several months and be able to start recouping some of the cost of our water sewer utilities. We expect to put SmartHomes into this property, which will make it much more efficient to manage plus give the property more of an update. And then we're going to spend some money just getting some of the systems back up to speed and upgraded so that R&M spend that's been occurring over the last 5 to 10 years is reduced. After you do that, I think the entire UDR operating platform that you've heard us talk quite a bit about fits perfectly with a property like this. It's a good size at 900 units to probably gain even more efficiency than we would on a typical 300-unit deal. So this one definitely has some capital upgrades. And then on the operating side, we think there's a lot of pricing opportunities where the prior owner did not give any locational premiums. So being close to the train versus being a 15-minute walk from the train stop, price was the same. No pricing differential between being on the third floor and the first floor or near the amenity buildings. So I think there's a lot we can also accomplish there. Currently, there are no charges for parking spaces there, and as you know, over the last several years, we've been able to implement that and see good growth. So a lot of things we've done over the last five years, I think we'll be able to lay over onto this property. And then I think again, when you look at the operating platform as it gets rolled out throughout UDR over the next couple of years, Windsor Gardens will participate in that also.

And Drew, this is Harry. I guess I'd just layer on and I'd probably step back from the more macro standpoint. As we've talked about, most of our acquisitions this year have had some sort of operational or capital upside; I think Joe mentioned that the first year cap rate for this year's portfolio of acquisitions is somewhere around 4.9%. However, year two, 7.5% or 8% higher than that, and we're talking about something around 5.25 to 5.3; then the third year is incrementally better than that as the sort of operational platform initiatives and the capital spend that starts to manifest itself in the yield.

Hi, thanks. Back to the MetLife assets that are being bought in wholly owned; I presume that your ability to asset manage those increases with full ownership, and I guess what do you find most opportune or most excited about being able to fully control those assets and get in there and apply the strength of the platform?

I think some of it is going to be in revenue-enhancing CapEx spend; several of these assets are hitting that 10 to 12 years old level, and we think a refresh will help them better compete against new supply, and on that incremental spend, we still think we can get a return in excess of our WACC. So I think that's one of the components. I think some of these properties are very approximate to existing UDR product, for example, the one in Towson is directly across the street from a wholly-owned property, and to be able to manage those somewhat together and share staffing and other costs, I think will make both properties more efficient. Some of the other things we've done historically whether it's common area rentals or short-term furnished, I think given more leeway, we may be able to garner more benefit there too. So I think it's a little bit on the capital side, a little bit on the operational side, and with initiatives and some on the efficiencies of sharing team members.

Hi, good morning out there. I'll be quick; it's been a long call. So two quick ones. First for Joe. The ESG bonds that you referenced before, did you guys get any pricing advantage with those or is it more just sort of check the box and for marketing purposes to have sort of an ESG issuance out there?

It's hard to tell whether or not we got an explicit pricing advantage. I will say when you look at the composition of the investors on that offering, about 25% of them did come in from an ESG focused fund. And so having obviously a bigger order book helps drive pricing at the end of the day. I'd like to believe that there was some benefit, although it's very hard to quantify what that clear benefit is.

Okay. And then the second question is for Jerry, regarding the mobile self-help initiatives you are implementing. Do you think you will still achieve the rent premiums you anticipate for your properties, or as Avalon mentioned on their call, could there be properties where the rent is lower but the advantage is reduced operating expenses, resulting in a better net outcome?

I will tell you the things we're doing, it's more on the service side; it's not that we're taking away an amenity. So we believe our residents prefer self-service; I think it's enhanced service. So when you look at what we've done so far this year, and I mentioned it in my prepared remarks, if you look at our repairs and maintenance and personnel cost combined, year-over-year growth was slightly negative. It should be growing at probably at least 3%. So, a lot of people would say, well, that's a reduction in service. No, it was just a reallocation of how we provide service, and it was predominantly done through outsourcing and centralization. At that same time as we drove those costs down, our NPS scores went up 10% to 34%. As we noted earlier, our turnover, if you back out the effective short-term furnished rentals, was down 60 basis points; we're running at 96.9%, which is 10 basis points higher than last year’s third quarter, and I think if you look at the revenue growth that we put up to 3.7%, it's sector leading. So I think when you factor all of those in, it's clear that when we're doing this, the intention is to improve customer service, not take it down, but to make a more efficiently run organization through this, either through outsourcing, centralization, or automation. So our intent is, it will not be a reduction in service, and it will not drive rents lower.

Well, thank you. And first let me thank all of you for your time and interest in UDR. Second, as you heard throughout the call today, during 2019, the team has executed on all aspects of our value creation capabilities, which I think will set up 2020 for continued strong NOI growth and cash flow growth. And again, lastly, these results are really achieved through the efforts of our exceptional associates and their continued effort every day, as well as our culture of constantly trying to find a way to do it better every day. So with that we look forward to seeing many of you at NAREIT in a couple of weeks. Take care.