UDR Inc (UDR) — Q3 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 ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met. Discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn over the call to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent. And welcome to UDR's third 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 executives, Harry Alcock, Matt Cozad, and Chris Van Ens are available during the Q&A portion of the call. Simply stated, our business is predicated on revenues we bill and our ability to collect those revenues. For the former, the third quarter remained challenging, due to the combination of ongoing regulatory restrictions, slow coastal openings, work-from-home trends, and elevated concession levels in our high rent coastal markets, combined with the highest number of lease expirations for any quarter during the year. Despite this, billed revenue appears to have stabilized across August, September, and now October. For the latter, our ability to collect revenue remained strong and is consistent with prior months. While these observations have yet to show up in our company-wide same-store revenue and NOI results, I draw some degree of comfort from the approximately 80% of our portfolio, which is experiencing stabilizing or slightly improving fundamentals. This is in our suburban and same-store communities. Combined, these factors provided the basis for our issuance of same-store and earnings guidance for the fourth quarter. But we have not lost sight, of the fact that many uncertainties and challenges remain. Every recession has a couple of quarters, where the headwinds converge. The third quarter had that type of feel for us. And based on our guidance, the fourth quarter, which has fewer leases coming due, could as well for same-store statistics. The stabilization of fundamentals, occupancy, billed revenue, and collections is the first step toward a recovery. But to inflect higher, we need meaningful improvement in our hardest hit high rent markets of San Francisco, Manhattan, and Downtown Boston. These markets make up 20% of our portfolio, and while improvement in our October occupancy has been encouraging, they have come at a cost of higher concession levels. We have not lost faith in the long-term viability of these urban areas, but we need a vaccine for widespread reactivation and recovery. Mike will provide more commentary in his remarks. With all that said, we remain focused on maximizing cash flow and bottom-line results. On that front, the midpoint of our fourth quarter earnings guidance, implies a full-year 2020 FFOA of $2.04 per share, which is down only 2% year-over-year. This is a result I am very proud of, given the challenges this year has presented. Shifting gears, I am pleased at the ESG achievement UDR has made over the past year. As detailed in our recently published 2020 Corporate Responsibility Report, which covers our 2019 actions. We remain committed to driving our ESG platform forward and have laid out a variety of sustainability targets through 2025, and have improved our reporting disclosure to provide the most relevant and comprehensive metrics to the investor community. We look forward to sharing our continued success in the years ahead. Next, all of UDR would like to welcome Diane Morefield as the newest member of the Board. Diane has an accomplished history as a senior executive in the REIT industry and as an Independent Director, who will bring valuable perspective, as we continue to execute our strategy. Finally, as we wrap up 2020 and turn our attention fully to 2021, we continue to focus on controlling what we can, which is how efficiently we price our homes, how well we execute the implementation of our next-gen operating platform, the quality of our customer service we provide to our residents, the support we give our associates in the field, and maintaining a strong liquid balance sheet. The executive team would like to thank all of UDR's associates for their efforts to move our business forward; keep up the good work. With that, I will turn the call over to Mike.

Thanks Tom and good afternoon. Starting with third quarter results. On a cash basis, our combined same-store NOI declined by 10% year-over-year, driven by a revenue decline of 5.9% and an expense increase of 4.2%. When accounting for concessions on a straight-line basis, our year-over-year combined same-store revenue declined a more modest 3.3% with NOI down 6.4%. On Page 4 of our press release, we have included blocks between cash and straight-line combined same-store revenue growth during the third quarter. As was evidenced by our quarterly results, some of these concessions made economic occupancy negatively impacted our growth. But the extent to which they did was market-specific, particularly in suburban locations. Despite these challenges, I am encouraged that our billed revenue stabilized in August and September, with the trend continuing into October as well. Currently, we are operating with minimal and no concession across approximately 65% of our portfolio and continue to maximize revenue growth, by balancing blended lease rate growth against occupancy changes at the market and unit levels. We believe this surgical approach to pricing our homes, has contributed to the stabilization of our billed revenue, and maintained our rent roll for 2021. These factors drove our decision to provide fourth quarter 2020 guidance, which you can find on page 2 of our release. Splitting our portfolio into three performance buckets helps to better explain our fourth quarter guidance. First, roughly 20% of our NOI is in markets that have stable to improving fundamentals and positive relative growth, both of which we expect will continue. This is due to a combination of occupancy gains and positive effective funded lease rate growth, primarily due to a less restrictive regulatory environment and quicker economic reopenings. This bucket includes Tampa, Orlando, Nashville, Dallas, Austin, Richmond, Baltimore, and Monterey Peninsula in California. Concessions across these markets have generally remained in the zero to four week range since March, and demand remains strong, which has helped us maintain the average occupancy of approximately 97.5%. Second, roughly 60% of our NOI is in markets that we believe have bottomed, and are showing early signs that an improving second derivative could ensue. This bucket includes some of UDR's larger exposures, such as Orange County, Los Angeles, Seattle, and Metropolitan Washington D.C. Also in this grouping are our suburban communities in New York, Boston, and the Bay Area. Concessions across these markets have generally ranged around two to six weeks, with occupancy averaging 96% to 96.5%. Third, roughly 20% of our NOI is in suburban areas of coastal markets, where demand and growth are more dependent on office reopenings, mobility trends, work-from-home flexibility, and a vaccine. These include Manhattan, San Francisco, and Downtown Boston. Concessions across these markets have averaged four to eight weeks, but some competitors have offered up to 12 weeks on new leases. Average occupancy across these markets was in the mid to high 80% range during the third quarter but has since improved to 91.6% in October, with Manhattan leading the way. While these results, which are highlighted on page 3 of our release, are encouraging, occupancy gains in these urban cores have come at a cost in the form of more concessions over lower base rates. Overall, market fundamentals across our portfolio feel somewhat better than during the summer months. Billed revenue appears to have stabilized. Cash collections remain strong and continue to trend above 98%. And traffic and application levels remain favorable versus 2019. On the other side of the equation, new lease roll downs are likely to remain the norm into 2021, and ongoing emergency regulatory measures in primary coastal markets will continue to hinder our operations. But we believe our revenue maximization strategy toward pricing our homes throughout the pandemic will yield dividends as we move into next year. Finally, I want to thank my colleagues in the field and here in Denver for their dedicated execution of varied operating strategies, in the face of still evolving regulatory restrictions. Our dedicated governmental affairs and legal teams have diligently tracked these changes, and your efforts have been crucial in laying the foundation for future success. And now, I'd like to turn the call over to Jerry.

Thanks, Mike. And good afternoon, everyone. A big part of our future operating success is expected to be driven by our next-generation operating platform, which provides residents an online self-service model and improves operational efficiencies while increasing resident engagement. The initiatives we have rolled out thus far have expanded our controllable operating margins, and driven a year-to-date decline in controllable expenses of 40 basis points. Combined personnel and repairs and maintenance expenses are flat year-over-year, while administrative and marketing expenses are down nearly 8% year-to-date through September 30th. While declining revenues because of the pandemic may have altered the timeline for achieving some of our margin expansion targets, the ultimate operating benefits of our next-generation platform have remained clear. First, site-level headcount has declined 29% since our base quarter of 2Q 2018, through natural attrition. Over that same period, the number of total homes we own and manage has increased by 4%, as permanent reductions in our cost structure through headcount efficiency have driven a 31% improvement in controllable NOI per associate. Second, despite reducing headcount, we have delivered a self-service model that our residents prefer, while also ingraining UDR further into their day-to-day lives. This is apparent in our resident satisfaction, as measured by net promoter scores, which have increased 24% since 2Q 2018, as well as the 80% adoption rate of our resident app in the two months since we rolled it out. Self-service has become the preeminent way that businesses interact with our customers. We believe we remain ahead of the curve in the multi-family industry. Last, while all public apartment REITs operate very efficiently, at comparable rent levels, we have higher than peer average margins across the majority of our markets. Versus private operators, we believe the margin advantage is even greater, typically ranging between 500 and 1,000 basis points, affording us the opportunity to enhance shareholder value through acquisitions. Looking ahead, we plan to capture additional staffing level optimization, which will further improve our operating efficiency without sacrificing the high-quality service our residents have come to expect. In addition, with the rollout of the next phase of our self-service smart device app, and the integration of more data science into our process, we see further opportunities to enhance resident loyalty and deploy revenue growth and expense reduction initiatives. Finally, it is important to understand that our next-gen operating platform does not have a finite life. Centralization, smart-home installations, self-touring, and a shift to self-service have formed a strong foundation upon which we will continue to evolve and improve. Future platform enhancements should benefit not only our existing portfolio but also allow us to generate outsized returns when buying assets at market prices. With that, I'll turn it over to Joe.

Thank you, Jerry. The topics I will cover today include third quarter results and fourth quarter guidance, an overview of collections and our bad debt reserves, and the balance sheet and liquidity update, inclusive of recent transactions and capital markets activity. Despite the challenges we faced during the third quarter, our FFO as adjusted per share of $0.50 declined by only $0.02 or 4% year-over-year. The $0.01 sequential decrease in FFOA per share was primarily driven by lower property revenue, due to a decline in occupancy and elevated concession levels, partially offset by lower interest expense from executing accretive debt prepays and higher DCP income from recent investments. Regarding guidance, despite the continued uncertainty around how the pandemic will impact the economy, the regulatory environment, and our business, we have provided fourth quarter 2020 combined same-store growth and earnings guidance as outlined on page 2 of our release. We anticipate fourth quarter FFOA per share to range between $0.48 and $0.50, with the $0.49 midpoint representing a 2% sequential decrease. We expect fourth quarter year-over-year revenue growth of negative 5% to negative 6% on a cash basis, and we expect the difference between cash and straight-line revenue growth rates to compress relative to the third quarter, due to a lower amount of concession dollars during the fourth quarter because of fewer lease expirations and the amortization of concessions previously granted. Additional guidance details, including sources and uses expectations are available on Attachment 15 and 16A of our supplement. On to collections and how we are reserving for potential bad debt. To begin, we continue to make progress on second quarter collections, which stand at 98.1% of billed residential revenue. This is 200 basis points higher versus second quarter end and leaves a modest 20 basis points or approximately $600,000 of earnings risk toward the revenue we recognized during the second quarter, given the $5.5 million or 7% reserve we took. For the third quarter, as we outlined in our operating update on page 2 of yesterday's release, as of quarter end, we had collected 96.1% of billed residential revenue, which is the same level of collections compared to the end of the second quarter. We expect cash collections to ramp further, and subsequent to quarter-end, third quarter collections stood at 97%. This compares to our bad debt reserve of $4 million, or 1.3% for third quarter billed residential revenue. Collectively, we had a rental revenue accounts receivable balance of approximately $15.5 million at quarter end, against which we have reserved $9.5 million between the second and third quarters. This leaves $6 million or less than $0.02 per share of recognized revenue that we expect to collect in the future. Moving on; our balance sheet remains strong, due to ongoing efforts to reduce debt costs, extend duration, maintain liquidity and preserve cash flow. As such, we remain in a position of strength to weather the continued effects of the pandemic. Some highlights include; first, as of September 30th, our liquidity, as measured by cash and credit facility capacity net of our commercial paper balance was $924 million, when accounting for the roughly $102 million previously announced forward equity sales agreements, which we intend to settle in the fourth quarter of 2020, we have over $1 billion in available capital. Second, after completing the refinancing of our final 2020 debt maturity during the third quarter, we have no consolidated debt scheduled to mature through 2022, after excluding principal amortization and amounts on our credit facilities. Looking further ahead, less than 15% of our consolidated debt is scheduled to mature through 2024. This is due in part to issuing $400 million of 2.1%, 12-year unsecured debt during the quarter and prepaying over $360 million of higher-cost debt originally scheduled to mature in 2023 and 2024. Please see Attachment 4B of our supplement for further details on our debt maturity profile. Third, identified uses of capital remain minimal and predominantly consist of funding our current development and redevelopment pipelines, to which we added 440 Penn Street 100, a 300 unit $145 million community in Washington D.C. The aggregate cost for our active development and redevelopment projects totals only $453 million or less than 3% of enterprise value, and they are nearly 50% funded with approximately $234 million of remaining capital to spend over the next 24 to 30 months. Fourth, our dividend remains secure and is well covered by cash flow from operations. Based on third quarter 2020 AFFO per share of $0.45, our dividend payout ratio was 80%, resulting in over $100 million of free cash flow on an annualized basis. Taken together, our balance sheet is in good shape. Our liquidity position is strong, and our forward sources and uses remain very manageable. As is detailed on Attachment 15 of our supplement. Next, a transactions update. First, as previously announced, we funded a $40 million DCP commitment for our community in Queens, New York, at a 13% yield and with profit participation upon a liquidity event, which we expect to occur in approximately five years. As a reminder, the project is fully capitalized and the investment provides superior economics compared to pre-COVID deals due to more assertive bank lending standards and generally lower available construction financing. Second, during the quarter, we acquired a fully entitled development site in the King of Prussia submarket of Philadelphia for $16.2 million. Third, subsequent to quarter-end, we sold Del Ray Tower, a 322 home community in the Metropolitan Washington D.C. area for $145 million or approximately $450,000 per home. The proceeds from which we expect to accretively redeploy in the coming quarters. Moving forward, we will continue to leverage our industry relationships and evaluate investment opportunities based on a rigorous set of qualitative and quantitative criteria, in determining how and where we choose to invest your capital to generate value. With DCP being our top rated use currently. Last, as is evident on Attachment 4C of our supplement, we continue to have substantial capacity before we would breach our line of credit or unsecured bond covenants. As of quarter-end, our consolidated financial leverage was 35% on undepreciated book value, and 34.2% on enterprise value, inclusive of joint ventures. Consolidated net debt to EBITDAre was 6.5 times and inclusive of joint ventures was 6.6 times, which looks slightly elevated due to the still outstanding settlement of forward ATM proceeds. With that, I will open it up for Q&A. Operator?

Thanks. Appreciate all the disclosure, particularly around the different parts of the portfolio. When you think about UDR portfolio, obviously it's diversified across markets and price points. But Tom, given the regulatory restrictions that you talked about, and I recognize some are national, but a lot of those are more local or state-driven. How do you think about the market exposure past COVID? So once the transaction market returns more to normal, are there any lessons learned thus far that maybe makes you want to change where the portfolio is situated?

Hey Nick, it's Joe. Maybe I will address that first, and then pass it over to Tom to close it out. But I think similar to our comments from last quarter and throughout conference season, I think it's a little bit too early at this point to jump to conclusions in terms of market exposures. We're fairly certain the diversified portfolio has worked for us throughout this crisis, as well as during the upmarkets. That means the strategy will remain. But I think we want to go through some of these binary outcomes to try to figure out what it means ultimately for our markets. So, getting through the election here in a couple of days, getting through COVID and getting the vaccine, understanding to what degree the regulatory environment changes, and then maybe we will evaluate the fiscal health of these markets, and ultimately what happens with migration of jobs and therefore migration of the incomes over time that helps capital on the supply side respond to that. So today, I think it's still too early. What we're really focused on is, can we do what we've done in the past from a capital allocation standpoint, which is just continue to do accretive type of spread investing. So, stay disciplined on that point, and try to source low-cost capital through dispositions of free cash flow, and drive more accretion, which I do think is important within this release, just to highlight the fact that while our year-over-year earnings growth was down 4%, when you look at the underlying pieces within that, we had almost 4% accretion coming off of last year's acquisition, DCP, and capital markets activity. So, the amount of work we've done on that front continues to show through, so while operations are clearly important to us in this environment, driving cash flow is all the more important. So, what we've done there. And I will actually turn it to Mike, he can probably talk a little bit about how those transactions have performed.

Yes, hey Nick. I would say, if you looked at $2 billion in acquisitions, we're actually within a 100 to 150 basis points on our original underwriting. I think a lot of that you can point toward our 90% of those properties being suburban in nature. So, we're pretty happy with where we've got those deals.

Thanks. And then just maybe on the DCP program. The $20 million here to note that saw the default. Can you talk about what the plan is there and the underwriting for that, as you plan to take the title off the land?

Hey Nick, it's Joe. Okay. It has become a high-level concern for us, just to get a little context and then Harry is going to jump in to give you some details on that transaction and outlook for it. So yes, ultimately, the goal of DCP is we have talked about in the past, ideally, is to get IRRs, returns in between acquisitions and development, while taking that risk commensurate with that. With this plan and with this deal, we summarize all deals we report back to the board, as we do with development acquisitions to show them what the returns were, what the acquisition returns were, what the development returns were. And overall, the program has pretty much performed as expected. When you look all the way up to date, there are some things we've realized, including Alameda. We're running right around a low double-digit IRR, which is what we've communicated previously. It has got a couple of home runs in CityLine 1 and 2, Arbory in parallel, I guess some singles like Alameda in there. But the process is always pretty much the same. Are we comfortable owning an asset at that basis? Are we comfortable stepping in? Have we given ourselves the ability to look at the structure and the document? So, I think one thing that's quite different here a little bit versus all the other DCP transactions we've done, this is a land loan. It did not have limited partner equity lined up. It did not construction financing lined up. We got involved with the intent to be a private equity deal somewhat in the future, once they did that, whereas all other transactions we've closed simultaneously, equity, construction loan and limited partners. So, we took on a little bit more risk, but that's part of the reason we have the opportunity today going forward within the city, which is less LP, less construction financing, more opportunities for new deals that we're out there doing. But hopefully, I think this deal, we got some time here to evaluate, but will be at the 150, 200 basis point range over market cap rates, once we get in the ground and get that deal started.

Nick, this is Harry. I will just jump in for a minute. Just a reminder, this is a parcel of land that's fully entitled for 220 market rate homes. We have a cost basis of roughly $314,000 per unit, but that includes nearly $15 million that was invested by the borrower for land equity, architectural plans and other entitlement costs, but the valuation is quite good. The borrower holds the Master Development, which created a significant amount of required investment from them. They own the parcel next door. They own Phase II and III of the master plan, and as Joe mentioned, they had been unable to secure an LP to help fund the several million dollars of costs prior to construction commencement, including interest in our loan, which they were currently paying. The borrower asked for some assistance, given their other financial commitments on the project site. And we just made the decision to take the property, rather than grant assistance. It's all being done in a very friendly manner. Just a little bit about the site, it's up in Alameda, which is a quasi-island between San Francisco and Oakland. The environmental cleanup and entitlement process took probably 20 years to complete. The site is part of the larger master plan with multiple parks. Two downhill projects selling for more than $1 million per home. Another market rate community and a senior community will be completed next year, plus there is office and retail in the future. It's a high-income suburban location. Excellent schools, a 20 minute ferry ride to San Francisco, and I would remind you, there is virtually no new supply in Alameda for the last 20 years or so, just a single 200-unit property built perhaps 10 years ago.

Thank you.

Operator? Operator, can we go to the next question?

Alright, great. Thank you. I was getting worried there. Good morning out there, guys. I got a couple of quick ones. I guess in light of the seasonal slowdown in leasing that we're going to see in all markets, but really centering on Manhattan, Boston, and San Francisco. How long do you think this four to eight week plus production environment can last? Will it last per forecast sort of through the end of the 4Q, early part of 1Q? I mean, how should we think about that? And does it really factor into anything for the next few months, let's say, and likewise, with office occupancy and that sort of thing?

Hey Rich, this is Mike. I'll take a stab at that. At first, I'd start by saying, we continue to believe in the long-term viability of both New York and San Francisco, as well as Boston, and operational centers in cities that will attract talent and individuals who have demonstrated a propensity to rent. In all cases, we are encouraged that our approach has led to increased occupancy. So with that, you tend to have to solve through one of the levers first, and I can tell you having a diversified portfolio, we've seen opportunities where we can increase rents today and concession levels have come across in places like the Sunbelt, and we're able to hold occupancy relatively high. But going back to New York, San Francisco, and Boston, we have taken an approach to try to increase our occupancy there. That being said, it has come at a cost, and we've seen concession levels anywhere from eight to 12 weeks in some of the hardest hit parts of those markets. But in other parts, where we have more suburban assets, is closer to zero to two weeks on average. So we are starting to see in pockets, concession levels coming off, and again, our occupancy levels are rising.

Okay, I appreciate that. And then maybe a little bit more broadly, and this sits on the sort of market diversification and portfolio allocation question as well. But as you think about a lot of these beaten-up states and municipalities coming out of COVID and the implications for property tax increases, how do you think that's going to play out across the rents in the markets in the localities that you are exposed to? What should we think about the next one, two, three, four years in that context?

Yes. Hey Rich, this Joe. Phenomenal question. We have been spending a lot of time thinking about broader fiscal health, but also of course real estate taxes both near and long term. Yes. So at this point, for 2021, we've got approximately a third of the portfolio is in California. So clearly, we have that effectively locked in at 2%. In addition to that, about 20% of the portfolio, we are expecting expense next year. It is effectively locked in as we've already got the valuation. So, we're starting to reduce that risk, it's probably kind of mid-single-digit type of growth next year for real estate taxes. But if you think about those municipalities and states, it's not quite as simple as just thinking, Coastal, Sunbelt, red versus blue. It depends a lot in terms of the sources of revenue that those states have. So, obviously, there are states like Florida, Texas, Tennessee and the state of Washington that have no real estate or no income tax, which puts them much more dependent on the real estate tax side of the sales, and used tax side. So I'd say, as we go forward, we're a little bit more concerned about what's going to take place in Seattle, Tennessee and Texas next year in terms of valuations, as they try to fill up that revenue bucket. And then it comes down to our markets that are hard to it like New York and New Jersey, California. But I think California is probably one of the best-positioned in the country from a reserve or rainy day fund perspective. So you do need to factor that in. And then we have got the election next week, which if there is a Democratic sweep, clearly there has been talk of stimulus for states, and so with the struggle they have had, and you could potentially bailout some of those fiscal issues, which is why we keep saying, we do want to wait and figure out some of the binary risks that are out there.

Yes, that's a great answer Joe. Thank you.

Hey, good afternoon everybody. This is Sumit in for Nick. Thank you for taking the question. I was just sort of piggybacking on Richard's question on accretive spread investing. Just curious, there is a lot of capital getting into the Sunbelt. When you speak to people who are predominantly California biased, they seem to want to get a little more Sunbelt exposure. And so, either through acquisitions or development lending, curious if there are any markets, besides the coastal markets, that you may not be interested in at this stage, because the spreads are not suitable?

There's really nothing that we've redlined today. Obviously, we're cognizant of near-term performance in certain markets, so New York and Boston, San Fran. So we're cognizant of the performance there. And as you go through the underwriting, there's probably a wider degree of variables or outcomes as you think about forward NOI streams. But there are no markets that we have redlined. Typically when you see kind of herd mentality, I'll shift to a place like the Sunbelt, you see some cap rate compression and see more competition. That's not always a great way to make money, to run with the herd. So there may be more value opportunities in other markets, but nothing we've redlined today. At the same time, I wouldn't say there's any new markets outside of these six or seven in the Sunbelt that we are already in, that we're looking at.

Sumit, this is Tom. Just to add some additional color. I think there's a lot of people sitting on the sidelines, waiting the outcome of the election and the potential changes in tax, particularly around rates as well as 10/31s. And so I think you're going to be thinking about this topic, but I suspect, post-election, first part of '21, you will see an elevated differential in where capital is flowing, and the triggering of those 10/31 transactions will start to be more visible. So, kind of saving ourselves to watch how that unfolds, but there could be some opportunities inside of that to be selling.

Thank you for the information. Regarding the urban markets you mentioned, such as New York, San Francisco, and Boston, I'm curious about which types of units are experiencing the most significant decline, whether it's one-bedroom, two-bedroom, three-bedroom, or studios.

So generally speaking, we've seen less occupancy on our studio unit, and those are particularly located in places like New York, San Francisco, and Boston. That being said, we have seen things like our transfer relet fees increasing over the last few months, and we have been able to move people from studio units in those areas, into the larger ones and twos, where we're capturing a higher fee income, as well as keeping that occupancy in place.

Got it. Thank you so much.

Hey, Jeff. Are you online?

Can you hear me?

Yes. I do now.

Great, thank you. Sorry about that.

Jeff, are you still there?

Can you hear me now?

We can.

Okay. I'm sorry, I don't know what's going on, I am on a handset. I'm not sure. Hopefully you can hear me?

Well, glad that you asked. Get back to the office.

Yes. I hope you can hear me now. I wanted to follow up on the market discussion again. I know you've talked about it several times, but I want to confirm. If the election results in no stimulus or limited stimulus in early 2021, does that mean that San Francisco, New York, and Boston will face significant challenges? I'm particularly concerned about San Francisco, and I think you mentioned something similar recently regarding your company or apartment owners in general in those cities. Should we not assume that without stimulus, these cities will be in serious trouble for years to come?

I wouldn't say that's the case. I think there are a number of other factors aside from the stimulus. Really, if there is, that helps relinquish a little bit of the fiscal pressure that some of the states are under, that is helpful. But there are still going to be a lot of other facts. I think, when we come back to the number of these coastal cities and look at the knowledge-based economy and while individuals are spread out today, COVID has probably the biggest impact and an important indicator of are those cities going to come back. So, as you see the ability to get back on mass transit, come into high rises, as you reactivate a lot of the amenities in those cities, I think that's going to be a big driver. And throughout this crisis, while office leases have obviously fallen off fairly materially, you still have seen a lot of tech companies taking down space in some of these major markets. If you go out to New York and wonder what's been taking place there, with Salesforce, Facebook, Google. Facebook just bought the REI headquarters up in Seattle. Boston, San Fran, of course, they have life science contentions, and that continues up. I don't think ultimately, you're going to see a mass exodus from these cities. It's going to be more of the hub-and-spoke model, where maybe you need to be in a couple of days a week. And if you do have the ability to work at home remotely and full-time, you still have some of these tech companies, who are going to start reducing your income, as you do. So the cost of living argument, starts to care a little bit less late in their scenario. So, I don't think we are dependent on one factor at the end of the day, i.e., stimulus; there's going to be a lot that rolls into the qualitative and quantitative side.

Okay. Thanks Joe. That is fair. And then my follow-up, I'm sorry if you discussed this already, if I missed it. But again, just given your diversified geographic portfolio, can you talk about did you discuss any of the trends you're seeing like within the portfolio or moves within the portfolio? And again, any comments on that and do you think some of this is temporary or when you've interviewed the people moving, it seems more permanent?

Yes. Mike has some pretty good stats on that, as it relates to market dynamics, he can take you through.

Yes, hi Jeff. I'll start with the move-outs. We have been looking at this, and we look at it both over the last, call it six to nine months and we compare it to prior periods. I would tell you in both New York and San Francisco, we experienced around 40% of our move-outs relocating out of the MSA, and this compares to about 20% to 25% moving out normally, and the difference between the two markets is, in New York we had more local forwarding addresses. Places like Boston, New Jersey even upstate New York, where we're getting the sense that people are moving out and potentially looking to come back if and when, the markets really open back up. The difference with San Francisco over the last 30 to 45 days is, we've seen more of those forwarding address in states that are further away from California. But that being said, I will tell you, given traffic in application patterns, increasing for us over the last, call it two to three months, we're starting to see people come back to the cities, outside of that MSA. So it has been promising to see some of our traffic patterns. Specifically for New York and San Francisco. Just to give you a little bit more color on the markets. I'd tell you, our hardest hit submarkets in New York, the financial district and Chelsea for us, and you can see it that we did a cash and straight-line basis for New York. Build markets were down in the negative 20% range, and they were obviously hit harder with concessions in the eight to 12 week range. I'll tell you today though, in Chelsea our asset there, we're running back at the 95% range and we're not actually offering concessions, so that's some promising submarket for us over the last few weeks. As far as San Francisco goes, during the quarter, we had a very different experience among our submarkets, as well as urban and suburban exposure. I can tell you that, 68% of our properties are already in that urban area, and they were down about 23% compared to our suburban exposure, which is closer to 30%. They were down around 11%. So, much different story, and again, you can point back to the concession levels, the occupancy levels. Obviously in that Soma area, and we're seeing concessions in that six to eight week range today, and down along the waterfront, we're seeing they were two weeks. So, a much different story and start going down south.

Very helpful.

Yes, this is Tom Toomey, I'd just add some color. I mean, the key that we spend a lot of time every week on is looking at that occupancy concession trade-off trend. And you can see in New York, it hit its low occupancy in the Manhattan portfolio, pure urban down in the low 80s, and then Mike is running back close to 93%. And with that type of occupancy level, concessions can go from 12 weeks down to eight pretty rapidly, and as he gets up closer to 95%, he will pull it down even further. So, I think that while everyone's quoting rent billed, rent collected, the real turning and inflection point comes when we achieve an occupancy concession trade-off that works on a net cash basis for us and helps us build a '21 rent roll. And so, that's what we're really focused in on last month, and on the balance of the year is that particular markets that are starting to have that inflection piece. And it's hard to find, but it's going to show up in those two stats perfectly.

Great. Thank you.

Hello, everybody. You mentioned DCP as one of the most attractive opportunities for you today. Just curious, though, what your conviction level is maybe versus last quarter and buying back some stock here, given the incremental proceeds you've got from the D.C. sale?

Hey, Austin. Good morning. It's Joe. Over time, I think we've shown a pretty good track record in terms of our ability to pivot to different sources and uses. Actually we pivoted last year to a good cost of equity and grew the enterprise pretty accretively. More recently it went the other way, and as we mentioned, we did buy back a little bit of stock. In the third quarter, we bought some back in early 2018, when we got to pretty compelling levels, and bought back in the last downturn. So, there definitely isn't any aversion to buy back stock. We do realize that capital is presence at this point in time. There is a lot of unknowns out there. We got a quick conviction on the economic trajectory and the capital markets, our NOI, which will we have enough conviction in the next two months to give you fourth quarter guidance. I can't say that we have high degree of conviction in the next two years. So, there's a lot of unknowns out there still, as well as course implications to our taxes, our rating agency, our liquidity leverage, etc. So, we're going to try to balance them all. As you mentioned, we sold that DC deal, but that is part of the operating partnerships and there are certain tax implications. So, that is going to be a 10/31 transaction. The idea there, the proceeds there were simply to take a very compelling price and you can back into what the yield was, that we sold that look at Attachment five down the held for sale NOI. And we deployed that at a very accretive basis into hopefully another transaction that has pretty good operational upside positions.

Got it. No, that's helpful. I understand there is a lot of uncertainty in the outlook and the economy, but you mentioned that cash and GAAP same-store revenue are compressing in the fourth quarter. Do you believe cash same-store revenue has reached its lowest point at this time?

Yes, I mean in the interim. We're not trying to call the inflection or we are not trying to speak to '21 yet today. Hopefully, we have the conviction when we are talking with you late January when we get out there and we potentially put out '21 guidance. We'll see where we're at that point. But today, when you look at our press release, that billed revenue line item that we focus on a lot, as it kind of weeds through all the concession and occupancy rate of trade-offs. You can see October, we're looking at around $103 million, so that's three, four months in a row here that we've hung around that level. So, next quarter we think cash same-store revenue on a sequential basis should be plus or minus flat, expenses should come down a little bit, generally just due to seasonality and turnover, and you should get a positive sequential cash NOI number out of us. That one of course, that comes to the straight line side, which you mentioned on the guide, as we start to see that compression, then you do have to run up a little bit against these straight-line amortizations. So, that's why you see $0.50 this quarter coming down to $0.49 next quarter.

Makes sense. Thanks for the thoughts.

Hi, guys. Just a couple of questions for me. I guess, first off, is there anything in short-term rentals or parking, etc., that kind of has contributed to the widening gap between that blended lease rate growth, and the cash same-store numbers?

No. Hi Juan, this is Mike. Let me tell you, just to give you a little color on our other income, we were pretty excited to see that that was actually a positive contributor to our total revenue in the quarter. So, to give you a little more color on our short-term program, we were down around $1.3 million year-over-year or about 70%. We had probably roughly 130 occupied, compared to typically 400 per month. So, that was mainly due to the regulatory environment, as well as just people not being able to travel as much. And then on late fees, we weren't able to charge in a lot of cases. So, that was down around $500,000 or 40%, and then our common area amenity program that we started last year. We weren't able to do a lot of that this year. That was only down about $200,000. So in total, that was down $2 million. On the flipside, to your point on the parking, that's one of the more sticky initiatives we've put in place over the years. That was up 3% or $200,000, and our biggest pickup on other income this quarter was transfer lease rates going back to that point. We've reached out to a lot of our residents to try to figure out how we can try to keep them. In a lot of ways, it was just moving into the property to different units. And so, we were able to increase that by about $1.5 million in the quarter, up 75%. So overall, other income was a positive contributor for us during the quarter.

Hey guys, good afternoon. I think I might be the only analysts on Wall Street that's actually back in the office, and I think you guys might be as well. So misery loves company, I guess. Hey, I wanted to ask a little bit about what the fourth quarter might look like? I really appreciate you guys giving the guide. I think that's really helpful, at least for sentiments. But could you maybe talk about what build that's embedded in your guide, and what leasing spreads might look like as well?

Yes. As we mentioned, if you go to page 2 within the press release, it really gives you a pretty good sense for where 4Q is going to play out. So, as Mike talked about, occupancy trends started to pick up a little bit, as we showed to you on page 3, that New York San Fran Boston picked up a little bit. So, you do see the October range start to pick up relative to Q3 '20. The blend is up a little bit, which a little bit of that is just math, in terms of which units are leasing. Obviously, a weaker blended lease rate in the New York, San Fran, etc. and so to the extent that we gain occupancy in those, which is good for cash flow. It did show up optically negative on the blends, but ultimately it's about cash flow and how much revenue we can build. So, I think those are going to be relatively static, as you think about the trajectory of those numbers.

Okay, that's helpful. That was the beginning of my question, I promise you I did get to page 2 of your press release, believe it or not. So one more question guys. As you think about this demand increase that you and some of your peers are starting to see. Can you maybe walk us through why that demand is building? Is it seasonal? Is it because rents have dropped enough? Are you actually seeing people come back? What's driving that? And I guess ultimately it's a question about, why aren't you confident about giving a guide, because clearly you're seeing something?

Hey Rich, it's Mike. I think the biggest thing for us, going back to the diversified portfolio, on every market is acting a little bit differently, and then you can go within the submarkets, within each market and we're seeing different stories. I think my example of Chelsea is a good one, as well as the Financial District when they started bringing back some of the jobs to the city. We do see an uptick in demand and recently, we've seen just generally speaking, our traffic patterns increasing in places like the sunbelt, as well as some of these harder hit markets. Some of it is a function of us finding the right spot in terms of pricing, and some of this, quite frankly, we're seeing people coming to the market, that we historically haven't seen coming to the market. So again, very different market by market. We are very excited to see our occupancy levels obviously increase in that 20% of NOI that we've referenced in the past that has been more of a struggle. So, that obviously helps to Joe's point, put us in a more stabilized environment when it comes to billed revenue.

Got it. And just one moment, I apologize.

I think the other thing. I mean, we of course track all the mobility stats, about markets on the restaurant bookings cancelled on the security card side. It gives you some indication by market. So, slowly but surely those are coming back. Clearly, not nearly close to where we hoped it to be. But for other jobs, clearly, those individuals get more comfort that the economy is moving in the right direction and they're going to retain their job, whether they're actually getting their job back. That's helpful. So whether or not they left the city, whether or not they are working in an office, just setting the comfort level that they are going to have a job and ability to pay rents, is helpful from a demand standpoint.

Got it. And just maybe one follow-up question, can you share any renewal data on the non-CBD markets? I recognize you did a really nice breakdown for the three markets that you discussed on Page 2, but the non-CBD markets, any updates on the renewal trends there?

Yes, Rich. The renewal trends that we're seeing today are pretty consistent. I would tell you in general, we've been in that 2% to 2.5% range, and I would remind you and everybody else that, 20% of our NOIs capped at 0%. So that's kind of where we stand there. But as far as the markets that are in the other buckets, they are still in that 2% to 3% range, and that's what we're sending out today.

Great, thank you guys. And appreciate the transparency, and what looks like a good inflection in the quarter. Thank you.

Thanks, Rich.

Thanks. Rich number three here. So, I feel like maybe there should be some rule against dialing in an hour early before a conference call. But that's another conversation apparently. So on the topic of the CBD, New York City, Boston, and San Francisco, am I reading this right, are you guys kind of frustrated with the local and state leadership there and don't agree with how it was handled? And maybe that's a strike against them when it comes to investing again in those marketplaces? Or is it the reverse, where you may be more likely zig rather than zag and invest more there, with a longer-term view? I'm curious how the leadership, through this COVID thing has impacted your view of those three specific marketplaces?

Yes Rich, this is Toomey. And for the right price, we could let you reserve that first spot. And I understand we ran through the TRS, and we're pretty good on the income. Tough to help out there, or a box of cigars, either one would probably get you there. So yes, I think it's a fair question with respect to our observations of how government had responded differently in different municipalities, and does it taint our view toward the market in the future? I wouldn't say it taints it. What it does, as Joe has highlighted on the portfolio of strategy, it's another part of the Q that we're looking at and saying, what do we think the tax base looks like? How vibrant of an economic environment? And is it conducive to us and our operating business? And there's a lot of city councils that swung very far in a very aggressive manner, and we think they're going to pay a price on long-term viability of their city. And that's not for us to judge; it's just we have to take the facts in and look at it and say, boy does that change our example? Seattle, downtown view of that marketplace? When they have declared war on business through a variety of taxation and legislative action. Well, businesses are going to move. And if those businesses move, our business is going to move. So yes, we do weigh it, but we want to see more facts develop and see how cities open back up, and if they realize that if they open their doors to business, the vibrance of their city can take off and all the other projects they had can be funded and they can solve some of their problems. But the anti-business sentiment that is being exposed in a number of these cities, I hope passes. I think we're in an election year. Everybody's amped up. We'll see how that plays out at post-election, and if they start pulling back off of some of this. We've seen you can say in California, 3088 was a nice measure, at least it forced people to have a dialog. Florida lifting evictions. You're starting to see cities respond, and it'd be a question about the aggressive nature of that response and the timing of it, but we are just like everyone else. We're a citizen. We've got to run our business. We've got to look at how that business is impacted by its overall legislative agenda.

Good answer, thanks Tom. Thanks everyone. That's all I got.

Thanks, Rich.