UDR Inc (UDR) — Q2 2020 Earnings Call Transcript

Welcome to UDR's quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon and posted to the Investor Relations section of our website at ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not 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 you no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake any 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 do not get answered during the Q&A session today. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

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

Thanks, Tom, and good afternoon. Starting with second quarter results, our combined fee store NOI declined by 4% year-over-year, driven by a revenue decline of 2.1% and an expense increase of 2.1%. While not the results we expected coming into 2020, I'm encouraged by blended lease rate growth staying positive during the quarter. Traffic volume remaining above last year at the same time and turnover continuing to trend better than a year ago, all of which help us preserve our rent roll for future periods. On Page 3 of our press release, we have included details on the sequential and year-over-year decline we realized in our second quarter 2020 combined same-store revenue results. As you can see, gross rents were positive versus the prior period. However, primary drivers of the 2.1% year-over-year revenue decline included: first, concessions were generally elevated during the quarter, particularly in urban areas of coastal markets where they reached upwards of 8 weeks at some of. This compares to the market that reopened more quickly with concessions between 2 to 4 weeks on average. Typically, we would see minimal concessions on stabilized assets during peak leasing season. But COVID has been anything but typical with concessions driving a 50 basis point negative contribution to our year-over-year combined same-store revenue. Second, our physical occupancy declined 50 basis points year-over-year in the second quarter. However, the reletting of approximately 150 corporate units during the quarter in primarily higher coastal markets drove second quarter economic occupancy down by an additional 50 basis points. In total, lower economic occupancy accounted for 100 basis points of our year-over-year decline in combined same-store revenue. Importantly, our remaining corporate units are well-capped, thereby reducing forward economic risks associated with the homes. Third, our fee income was disrupted due to regulatory constraints and will likely remain that way until the regulatory environment changes. This had a 50 basis point negative impact on year-over-year combined same-store revenue growth. The final negative driver of the year-over-year decline in combined same-store revenue growth was a bad debt reserve totaling $4.5 million, which negatively impacted our results by 170 basis points. As mentioned in last night's press release, based on our bad debt accrual, second quarter combined same-store revenue and NOI growth would have been negative 0.4% and negative 1.3%, respectively. Moving on to recent operating trends. On Page 4 of our press release, you can see that blended lease rate growth remained positive during the quarter. Cash collections held up well, and more recent traffic and applications continue to compare favorably versus 2019. Additionally, annualized turnover during the second quarter was 620 basis points lower year-over-year, which, along with our next-gen operating platform initiative, limited expense. Our teams in the field and their execution of our surgical approach to pricing homes are due much of the credit for generating these resilient results. Next, high level second quarter operating trends by geography and price volumes include across all of our markets our suburban community generally outperformed urban communities in terms of occupancy, new lease rate growth, renewal rate growth, and traffic. More specifically, physical occupancy in our urban portfolio averaged 96.9% during the quarter compared to 94.6% in our urban communities. Occupancy in certain urban areas of coastal markets experienced the most pressure due to corporate lease exposure and short-term mobility trends because of work-from-home landing. Traffic and turnover remained better at our suburban community. Growth in our suburban portfolio outpaced our urban portfolio at 1.3% versus negative 30 basis points. Any questions generally followed on regulation with Los Angeles, Boston, and New York. These urban versus suburban trends are similar when analyzing our portfolio across different qualities. B quality outperformed A quality and some performed and to similar magnitude as the suburban versus results. Turning to July. We have not yet closed the book on the month but we expect physical occupancy to average 95.5% to 95.8%, blended lease rate growth to be flat to down 50 basis points and billed revenue to range around $105 million. As shown on Page 4 of our press release, month-to-month billed revenue varied by a couple of million dollars during the quarter due to, one, the timing of some fee and other income items; two, regulatory restrictions that impacted our operations; and three, an increased number of lease expirations in further hit higher ramp submarkets, such as Manhattan, San Francisco proper, and Downtown. Moving forward, we expect that gross revenue will continue to be somewhat muted until emergency regulations are relaxed, and there's more visibility around office reopenings in the market. Demand characteristics in our market have generally narrowed the focus, with those markets that had more expectative and durable homeowners performing better. Throughout the pandemic, our nimble approach to pricing and operations has maximized revenue growth, an important differentiator given that every market has reacted differently to, highlighting some specific markets. Nashville, Seattle, and our Texas market exhibited the strongest pricing during the second quarter, while New York, San Francisco, and Boston saw market rents down in the middle to single-digit range. Positively, we have seen markets such as Orlando, Tampa, and Orange County prove to be quite resilient throughout the pandemic despite their high exposure to hospitality and retail. We attribute this to our largely suburban and following portfolio markets. New York and San Francisco are both markets that experienced an increase in annualized turnover during the quarter as a result of short-term mobility trends due to work-from-home mandates, as well as corporate lease exposure. While residents continue to pay rent, some have allowed their leases to expire and will revisit their living situation once fiscal job requirements and the timeline for office reopenings are better defined. Lower traffic levels in these markets due to more cumbersome regulations have resulted in generally lower occupancy, which has driven higher concession levels. However, mirroring the theme across all of our markets, our B quality assets are outperforming our A quality, and suburban communities are outperforming urban ones. A good example of this is New York and for occupancy at point in Brooklyn and our One William deal in New Jersey remain in the high 90s. Moving up to nearly $2 billion in community acquisitions we made at the start of 2019 continue to perform relatively well, with cumulative NOI for these communities currently tracking above our original underwriting. Finally, I want to thank our governmental affairs and legal teams for their dedicated work in navigating the day-to-day regulatory changes across our markets. Being able to efficiently and effectively communicate our comprehensive understanding of eviction moratoriums, rent regulation, and other regulatory changes to our field team has been critical as we continue to surgically price our parks, and to my colleagues in the field, I thank you for your hard work and adaptability to the daily changes in regulatory restrictions into our operating strategies. Your jobs have not been easy, but I appreciate all that you do. And now I'd like to turn it over to Joe.

Thank you, Jerry. The topics I will cover today include our second quarter results, an overview of our bad debt reserves, and a balance sheet and liquidity update, inclusive of recent transactions and capital markets activity. Our second quarter FFO as adjusted per share of $0.51 declined by only $0.01 or less than 2% year-over-year. This $0.03 sequential decrease in FFO per share was primarily driven by $9 million in total company bad debt reserves; $5.5 million of this from residential and $3.5 million from retail, in addition to lower property revenue due to occupancy, concessions, and fees, partially offset by lower G&A. Regarding guidance, as Tom mentioned, we are not reinstituting our full-year 2020 guidance outlook at this time, given continued uncertainty around how the coronavirus pandemic will impact the economy and our business. However, as disclosed in our press release and as Mike discussed, we have presented an operating update to provide stakeholders with additional insights into recent trends. On to collections and how we are reserving for potential bad debt. As we outlined in our operating update on Page 4 of last night's release, during the second quarter, we built a total of $322.6 million of revenue. As of quarter-end, we had collected 96.1% of that revenue, leaving $12.5 million uncollected. We established a bad debt reserve against that uncollected revenue in the amount of $5.5 million or 1.7% of billed revenue. Since quarter-end, we have collected additional cash towards second quarter billings, increasing our collection percentage to 97.5%. That leaves our total billed but not yet collected revenue at $8 million, which, when set against the $5.5 million reserve, means $2.5 million or less than $0.01 per share of recognized revenue that has not yet been collected. We are comfortable with this level of recognized but not yet collected revenue based on our assessment of collection trends, interactions with our residents, and the probability of future collections, including approximately $0.5 million of outstanding second quarter rent subject to payment plans that we expect to collect. Moving on, our balance sheet remains strong due to ongoing efforts to reduce debt costs, improve liquidity, extend duration, and enhance cash flow. As such, we are in a position of strength to weather the continued effects of COVID-19 and the downturn that has accompanied it. Highlights include: first, as of June 30, our liquidity, as measured by cash and credit facility capacity, net of our commercial paper balance, was $974 million. When accounting for the roughly $105 million of previously announced forward equity sales agreements, we have nearly $1.1 billion in available capital. Second, the refinancing of our final 2020 debt maturity will close at month-end, after which we will have no consolidated debt scheduled to mature through 2022 when excluding principal amortization and amounts on our credit facilities. Additionally, subsequent to quarter-end, we issued $400 million in 12-year unsecured debt at an interest rate of 2.1%. Proceeds were used to prepay $246 million of our 4.64% secured debt originally scheduled to mature in 2023, as well as to complete our previously announced tender for $117 million in unsecured debt originally due in 2024. All of these actions have improved our liquidity profile and duration. Looking further ahead, when excluding balances on our credit facilities, less than 15% of our consolidated debt is scheduled to mature through 2024. Please see attachment 4B of our supplement for further details on our debt maturity profile. Third, identified 2020 uses of capital predominantly consist of funding our current development and redevelopment pipelines. The aggregate cost for these projects totals only $308 million or less than 2% of enterprise value, and they are nearly 50% funded, with approximately $157 million remaining capital spend over the next several years. Fourth, our dividend remains secure and is well covered by cash flow from operations. Based on second quarter 2020 AFFO per share of $0.47, our dividend payout ratio was 77%. This implies that our earnings would need to decrease by an additional 20% before approaching cash flow parity. Taken together, our balance sheet is in great shape, our liquidity position is strong, and our fourth sources and uses remain very manageable, as is detailed on attachment 15 of our supplement. Next, the transactions update. First, as previously announced, we sold two communities in the Greater Seattle area for a combined $143 million at a low 4% cap rate, reflecting pre-COVID pricing. Second, subsequent to quarter-end, we funded a $40 million DC commitment for a community in Queens, New York at a 13% yield with profit participation on a liquidity event, which we expect to occur in approximately five years. Construction of the community began eight months ago and is fully capitalized, including $62 million of developer equity or approximately 18% of the $342 million total project cost. UDR's investment provides enhanced economics compared to prefilled deals and effectively backfills the upcoming 2021 maturity of our mezzanine loan on the portal in Washington, D.C., which carries an 11% yield and no profit participation. Moving forward, we remain highly selective with where and how we choose to invest your capital with a focus on both current yield as well as future value creation. Wrapping up, as is evident from attachment 4C of our supplement, we have substantial capacity before we reach noncompliance with our line of credit or unsecured bond covenants. As of quarter-end, our consolidated financial leverage was 34.2% on undepreciated book value, and 30.6% on enterprise value, inclusive of joint ventures. Consolidated net debt to EBITDA was 6.2x, and inclusive of joint ventures, was 6.3x, which was slightly elevated due to the still outstanding settlements of our forward ATM proceeds. With that, I will open it up for Q&A. Operator?

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

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

Yes. Perfect. Maybe just some additional clarifications. Jerry gave the example there that if we had simply shifted strategy from our current approach of giving concessions to no concessions in Q2 but keeping the cash reporting methodology that we have for same-store, that would have been about 100 basis points better. If we continue to utilize the same concessionary strategy that we have been implementing, the switch from cash reporting to GAAP reporting, or straight-line reporting, we would have had about a 40 to 50 basis point better same-store number. I just want to clarify that. So take us from a 2.1% down to about 1.7% to 1.6% down in same-store revenue on a year-over-year basis.

That's very helpful. In the past, we've discussed your investment model and how to improve decisions regarding MSA exposure. I understand that in the near term, external growth may be somewhat subdued. However, if and when you return to pursuing that, how will your model adapt to the changes we've observed in various MSAs over the past six months?

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

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

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

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

Okay. Yes, that's helpful color, Joe. And maybe just to add another quick question on concessions and bad debt accounting. So first of all, did something change about the way you accounted for bad debt or maybe pulled forward some of the write-offs during Q2? Just any changes quarter-over-quarter that we should be aware of? And then likewise, on the concession side, what drives the choice to go to cash accounting versus a more traditional straight line? Just so we understand the decision-making there?

Yes, I understand. I wouldn't say there has been a significant change to our approach, but we have definitely improved it, particularly regarding the collectability of billed rents in the current environment. Traditionally, when an eviction occurs, we would write off that rent and shift to a cash basis for revenue recognition moving forward. However, given the unique regulatory landscape we are facing, with extended eviction moratoriums and payback plans in places like California, Oregon, Seattle, and Washington D.C., we felt it necessary to refine this process. We aimed to better understand each resident's financial situation, the regulatory context affecting them, and their payment history. This has led us to implement a more thorough procedure. As usual, we did have write-offs in the quarter as residents moved out, but these were impacted by existing moratoriums. The reserve of 1.7%, which amounts to $5.5 million, was deemed prudent given the many uncertainties we currently face. While this decision is supported by the strong collection rates from April and the payment plans in place, it seemed appropriate to maintain that reserve. Additionally, I want to highlight that the collections we achieved in July have lowered our accounts receivable balance. We are now at roughly $2.5 million in recognized but not yet received revenue. This is an important number to consider when assessing the risk associated with the revenue we've reported. It amounts to less than a penny per share, and we anticipate continued collections over time. Regarding the second part of your question on concessions and cash basis recognition, this aligns with our long-standing approach. We believe that providing investors with a view based on cash recognition offers the clearest picture of current market conditions. This method complies with GAAP, and while it is a non-GAAP metric, we do not need to align perfectly, although we do report on NOI overall and adjust for straight-line according to GAAP. So everything here remains compliant with our historical practices.

Just getting back on that last point around bad debt. Do we start to see rent collections improving in the coming months as the non-payers who are impacted by COVID either begin to vacate or you no longer factor them into, I guess, maybe the billed rent number? How do the numbers work from that perspective as we think about when you report the collection data going forward?

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

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

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

And what about some of the others that maybe you don't call into other income like the corporate items and furnished rentals?

I don’t believe so. Currently, with business travel at a standstill, we've had to take a step back. However, we are confident that as the economy recovers and vaccines are distributed, short-term rentals will return. Right now, this line of business had previously performed very well for us over the past few years. We still have just over 100 residents in short-term furnished rentals, though this is a decrease from last year. This situation will continue to be a challenge this year. Nonetheless, it has been a profitable business for us and has contributed to our higher occupancy rates compared to competitors. In favorable times, it proves to be a beneficial business to pursue.

Austin, it's been beneficial to have resources allocated to corporate rentals as an example. We can leverage that team to handle renewals and pricing, since they are already familiar with our system and products. This collaboration has actually provided us with added resources that we can shift as needed. Eventually, those businesses will return, and we expect to seamlessly transition back to that. The reopening will vary by market, which will give us that ability.

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

Yes. Rob, it's Mike. I would tell you one of the biggest trends we've seen over the last few months is our occupancy on our studios; that is a little lower than what we're seeing in our 1s and 2s. So what I referenced on our other income, our transfers are up. It's because we're seeing people doubling up in some cases. But as far as migratory patterns and things of that nature, we're not necessarily seeing people coming from different markets. They're still within their own markets. We're seeing them jump around.

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

Rich, it's a really good question and one we talk about with respect to how do the REITs occupy space compared to the privates and where pain will be. Our first thought goes to long-term ability where the customer is to grow cash flow. And hence, the platform was born and our ability to increase our margins. That's relatively pretty straightforward. You can see our operating margins this last quarter held pretty solid in the 84% to 85% range. I can guarantee you that private investors are generally going to run 10% to 12% below that because of their inefficiencies, either in scale or technology. So we think the long-term play is to have a better operating model for the customer and our cost structure.

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

Rob, this is Toomey. I would emphasize that the one aspect of capital deployment. That is first and foremost, in our mind, is the platform and the value that it creates not just to deal with this environment. But the fact is it will be by default probably the way business is conducted in this business going forward. And so the quicker we get that fully implemented and the enhancements in a version 2 as we’re rolling those up today, I see that as the real differentiator with respect to capital deployment and implementation. The other items come and go. The good news is we've got 20 markets to look at for opportunities. We weigh them against what we think of the market, what we think against the opportunity, and Joe gave you a pretty good insight into our waterfall of where things fall out in that scheme. The platform is the most critical piece of our capital deployment and execution.

There has been a resurgence of COVID cases over the last few months. I'm just wondering if you can talk about how leasing foot traffic has performed or fared with those cases rise? And maybe you can talk about that in the context of your coastal suburban portfolio?

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

Okay. Great. Next, I want to address everything happening in the coastal cities. If you look at Portland, Seattle, and New York, some of these markets contribute significantly to our NOI. There has been a notable increase in violence and cash flow issues, among other factors. I'm curious about how you manage these challenges as a company in this industry. Additionally, are you observing a rise in people relocating from these areas due to these factors, and are you seeing any effects on operating fundamentals as a result? Can you elaborate on these developments, especially since they seem to be intensifying?

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

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

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

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

Yes. We will likely need to provide additional details on that. Regarding the payment plans you mentioned, we have around $0.5 million related to Q2 that is on payment plans within accounts receivable. This amount is secured but carries higher profitability due to the payment history of those individuals. The largest reserves are concentrated in our top six markets—L.A., San Francisco, D.C., Orange County, New York, and Boston—with about 80% of the total. In markets with more regulatory constraints, like L.A., which represents over 10% of our accounts receivable, the reserve is significantly larger, although it accounts for only about 4% of our market. Markets that experience more delinquencies due to regulatory challenges will require a disproportionately larger share relative to their portfolio percentage.

That's interesting, and we've talked about over a number of investors over the last couple of months on calls, for example, what's going to happen when the eviction moratorium is lifted. To put it in context, today, the number of people that if we have the right to go to eviction would be 2%, about 800, okay? So it's not a big number, and there's not a tsunami of evictions pending, but an interesting data point. Mike operations in Florida, there was a 72-hour window where we could move to eviction, and we filed. There were 75 residents on that list at the time. And 2/3 of them showed up and paid immediately. The other 1/3 said, 'Hey, I want to enter into a plan.' I think that same dynamic. I don't know if those percentages will hold, but we're somewhat hopeful that when we can proceed to enforce the contract, we will be compassionate about it. We will try to work with people. But if that is not the case, we expect some have already saved up the money and/or have other means to do so, and they're just using this flow for a variety of other reasons. We'll find out. Florida then to put the eviction moratorium back on and we're complied with the laws. So it's hard for us. I think we've been cautious about the AR balance and the related reserve. And I think that's prudent on our part. We'll see how it plays out.

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

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

That's really great. And one last one further me. In terms of concession activity, could you help us understand what unit types that one-bedroom studios, 2 bed, 3 bed? And possibly, what markets related to the side are being in are seeing the biggest amount of concession activity?

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

I have a quick question. Your effective growth in new or renewal lease rates is quite impressive, especially considering the decrease in turnover. Could you provide an update on your strategy for duals? I believe you discussed this to some extent during your last earnings call. How are you approaching this and are you considering each market separately?

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

Gary and Mike mentioned a shift in strategy that was previously discussed at NAREIT to now prioritize occupancy over holding off on the market concessions. Can you just elaborate on what drove that change in strategy? And also, do you see the current 95.5% occupancy to trough this year?

John, to clarify, we do not consider rents or occupancy in isolation. Our goal is to maximize overall revenue. As seen in our supplemental information, some markets are currently experiencing lower occupancy, while others are maintaining very high levels. Additionally, we are focused on our rental rates and how we manage blends. Our aim is to enhance our total earnings both for the remainder of this year and into the next. We do this with the intention of optimizing our overall performance, rather than isolating either aspect.

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

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

Just one for me. I appreciate you guys keeping the call along here. The DC, Mike, you touched on just trends in San Fran and New York softening into the summer here. But your urban assets, are they assuming the work-from-home time environment persists through the balance of the year and the social cities stay shut? Does DC behave like New York and San Francisco over the balance of this year?

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

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

I have a couple of quick questions. I don't think you mentioned the year for stock buybacks. You talked about asset value and your liquidity profile, so I'm curious about your appetite given your balance sheet. Also, if you're considering dispositions as a source of capital, where do you think you might be more inclined to adjust the portfolio?

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

Okay. My second question is, so the gap between your better Sunbelt markets in New York City and some of your coastal markets was pretty darn wide in the past quarter, right, over 1,000 basis points associated on a same-store. So I'm curious if you guys expect that will be wider here over the next few quarters? And when could we see that gap start to narrow?

Again, Haendel, one thing we're looking at today is when you see July trends versus June trends, the fold, they're very similar. So our traffic continues to improve in a lot of ways on a year-over-year basis. Our new lease growth is very similar to what it was in June. And our renewal growth is impacted a little bit just based on what's happening in the market today as well as the regulatory environment. So that being said, you do have different markets doing different things. I would say it's too early to tell when we look at business is property and market, and we've been encouraged by some of our markets bottoming already.

Just looking at sinuses ending this week, and given what you know about your tenant employment makeup, how consequential will additional singles be for collections on a go-forward basis?

Yes. You were a little bit bubbled on our end. Maybe if you could repeat? I think what we were in was for exploration unemployment benefits and the impact on the resident base?

Correct, correct.

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

Got it. Looking back at regulation in California and considering Top 21, is there anything besides the obvious pandemic that makes the situation different in 2018 when Top 21 was rejected? Is there concern regarding this proposition, or do you expect similar results?

Sure, Alex. Thanks for the question. This is Chris again. I'm going to give you just a rundown of what's happening there. So across '21, I can tell you right now, the coalition and really our plan going forward, we think we're in pretty good shape. I say that for really a couple of reasons. First, I think the coalition is much deeper, and I would say, more widespread participant base than last go-around. So back in 2018, obviously, there's going to still be multifamily owners operators, who are the big guys there, but also affordable housing groups, business organizations, big labor, veterans, boots, et cetera. So it's much more extensive from that perspective. Second, the last update we received from CFRH, California for Responsible Housing, indicated that fundraising has remained strong versus where it was in 2018. And at the same time, we're definitely feeling good on that point as well. And then third, reasonable results, they're about a coin toss as far as yes, no right now, but they do definitely tilt more in our favor once before and against arguments are discussed with the polling respondents. On the one hand, potentially going against us is that it is a presidential election year. We all know that Democrats comprise, I would say, the majority of California's voter base and turnout tends to be significantly higher in California and a lot of states in presidential versus off years. So we'll see how that goes. But again, in general, we feel pretty good about where we are right now on that.

First, let me express my thanks for all of you for your interest in UDR and certainly, the extra time today. I want to wish you to be safe and healthy. To our associates on the call, I just want to reiterate in a heartfelt way, I’m proud of the job you're doing, the adoption, the skill, and always want you to know we're here to help in any way, shape, or form. Turning to the business side, we've said it many times. It's a challenging environment. If you will, a storm on a lot of different fronts. But our strategy remains the same. It's the right one. What has adjusted is our tactics. We will continue to adjust as the environment evolves, proud of the team's ability to adapt to a daily changing environment and execute at a high level. Let us remain constant at UDR, and we'll remain constant in the long-term focus on our cash flow growth, maintaining our diversification, our transparency, and certainly managing risk in this environment. With that, we always welcome your questions, dialogue, and we will see you soon. Take care.