UDR Inc (UDR) — Q4 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. A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one, plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn over the call to UDR's Chairman and CEO, Tom Toomey.

Thank you, Trent. And welcome to UDR's fourth quarter 2020 conference call. On the call with me today are Jerry Davis, President; Mike Lacy, Senior Vice President of Operations; and Joe Fisher, Chief Financial Officer, who will discuss our results. Senior officers, Harry Alcock, Matt Cozad, and Chris Van Ens will also be available during the Q&A portion of the call. Throughout 2020, UDR was able to actively and successfully combat many of the challenges brought on by the pandemic. This was a direct result of our company's strategies. In particular, our diversified portfolio, the versatility of our Next Generation Operating Platform, outside cash flow accretion from our 2019 acquisitions, and 2020 capital recycling activities, and the ongoing dedication of our UDR teams. In 2021, maximizing cash flow remains our primary goal. To achieve this goal, we segment growth drivers into what we can and cannot control. Things we can control include the ongoing rollout and successful implementation of our Next Generation Operating Platform, employing dynamic pricing across our portfolio to maximize revenue growth and utilizing our value creation mechanism, including selling low cap assets and recycling proceeds into accretive uses, such as acquisitions with operational upside and DCP investments. So far this year, these factors have contributed to continued stability in our billed revenue, and improvement in occupancy and lease rate growth. Mike will provide more color on our operating trends later in the call. The early year results when combined with the strength of our platform, our diversified portfolio across markets and product types, and our accretive approach to capital allocation, allow us to provide 2021 earnings guidance, which Joe will discuss further. As we move forward, we will continue to closely monitor factors that are out of our control. These include the speed at which vaccinations proceed, what this means to cities reopening and emergency regulations and how these will drive forward rent growth trends. In short, what worked for 2020 should continue to work in 2021. I remain highly confident that we as an industry and a company will be better positioned 12 months from now. The path to get there will continue to be slow, but the inevitability of a recovery is just a matter of when, not if, in our minds. Moving on, ESG remains a cornerstone of how we operate our business and investor capital. Over the past three years, we have dramatically improved how we report our ESG accomplishments to our stakeholders. I'm proud that this was recognized in late 2020 by GRESB who named UDR a top performer in ESG among global real estate firms. Moving forward, our intent is to continue to refine and improve our ESG goals, while also providing comprehensive metrics to our stakeholders as we share our continued success in the years ahead. Last, I've had the honor to lead UDR's team for 20 years, been active in the apartment industry for 30 years and have lived through multiple cycles. UDR's team has always risen to the challenge, just as we did in 2020 and we'll continue to do so in 2021. I'm confident in the direction of our company, what we are actively doing to improve how we conduct business through the Next Generation Operating Platform and our ability to handle any obstacle that comes our way moving forward. With that, the executive team would like to thank all our associates for their dedication, service, and unwavering focus on executing our strategy in 2020. And in closing, I'm reminded that every year presents its own set of unique challenges. And I'm confident in UDR's ability to adapt to whatever 2021 may bring. With that, I will turn the call over to Mike.

Thanks, Tom. Overall I'm encouraged by early 2021 results. Portfolio-wide traffic, occupancy, and blended lease rate growth are trending in the right direction. However, the timing around widespread vaccination and the resulting reopening of urban areas and relaxation of emergency regulations remains uncertain. Nevertheless, we will continue to leverage our platform to maximize revenue and limit controllable operating expense growth moving forward. The start and stop effect the virus continues to have on business activity in our coastal markets was reflected in cash same-store results during the quarter. Diversions from our previously provided guidance was a result of: first, some markets enforcing stricter COVID restrictions around the holidays and the lower traffic and higher-than-anticipated concession levels that came with those; and second, a modest decline in collections compared to prior quarters, which aligns with the seasonal pattern we've experienced in the past. As such, with concessions accounted for on a cash basis, year-over-year combined same-store NOI declined by 10.1% year-over-year, driven by a revenue decline of 5.9%, and an expense increase of 4.8%. When accounting for concessions on a straight-line basis, combined same-store revenues declined to a more modest 4.5% with NOI down 8.1%. These results were in line with our guidance. Please see Page 4 of our press release for drivers of year-over-year, and sequential combined same-store revenue growth during the quarter. Encouragingly, our 2019 acquisitions illustrate for the operational side we can realize from integrating our platform. These communities produced sequential revenue growth of 2% from the third quarter to the fourth quarter, compared to a 50 basis point sequential revenue decline for our combined same-store communities. Looking ahead, 2021 has started off on a better footing. As a reminder, the key to turning the corner on revenue growth will be sustained traffic, improving occupancy, and reduced concession activity. Positively, our occupancy has grown. Concession usage has started to decline, and we're operating with minimal or no concessions across approximately 65% of our portfolio. Where we are using them, the average concession level has come down to approximately 3.5 weeks from 4 weeks on average during the fourth quarter. Additionally, billed revenue remains relatively stable, a trend that has been evidenced since August, despite more widespread regulatory measures that impact our business. Billed revenue is one of the major factors that influence our bottom-line results, and I'm encouraged by this stability. Combining these year-to-date 2021 factors with favorable occupancy terms, especially in our harder hit coastal markets, we're now expecting sequential revenue growth to be positive in the first quarter as suggested by our guidance. Strategically, we continue to focus on maximizing revenue growth by pushing rate growth where we can and driving occupancy where necessary. This property newness specific approach to pricing our homes benefited us greatly during the pandemic, and we anticipate this will continue to do so throughout 2021. It's important to recall that higher than typical levels of concessions were granted during the third and fourth quarters of 2020 negatively affected our earnings for 2021. Even though we have been able to offer a lower level of concessions thus far in '21 as compared to recent months, the straight-line effect of amortizing what has already been granted serves as a headwind to FFOA growth. As such, we expect the first quarter will bear the brunt of this impact. Joe will provide additional color in his comments. Moving on, Page 3 of our release and Attachment 15 of our supplement provide combined same-store growth guidance for the first quarter and full year 2021. Additional high-level context to how we arrived at these factors is as follows. First, 25% to 30% of our NOIs in markets that have fewer business and regulatory restrictions and are therefore effectively open. This bucket includes Tampa, Orlando, Nashville, Dallas, Austin, Richmond, Baltimore and Monterey Peninsula in California. Able to improving fundamentals and positive 2021 revenue growth is anticipated in these markets, due to a combination of occupancy gains and positive effects of blended lease rate growth. Concessions across these markets have generally remained in the zero to four-week range since March, and demand remained strong, which has translated into average physical occupancy of over 97%. Because demand and occupancy are high in these markets, we are opportunistically pushing market rent growth where appropriate. This may result in a modest decline in occupancy during the first half of 2021, but it will benefit our future rent growth. Thus far in 2021, we have generated blended lease rate growth of approximately 3% in these markets, with occupancy averaging 97.3% as of January 31st. Second, roughly 55% of our NOIs in markets that are partially open where fundamentals have likely bottomed and are showing signs of improvement. This bucket includes some of UDR's larger markets, such as Orange County, Seattle, Metropolitan Washington, D.C., and Los Angeles. Comparisons across these markets generally range between two to six weeks, with occupancy holding steady. Thus far in 2021, we have generated blended lease rate growth of negative 1% to negative 2% in these markets with occupancy averaging 96.5% as of January 31st. Last, roughly 15% to 20% of our NOIs in urban areas of coastal markets where emergency regulations and additional restrictions on business activities continue to present challenges. These include Manhattan, San Francisco, and Downtown Boston. Concessions across these markets continue to average four to eight weeks. But we are still seeing competitors offering up to 12 weeks on new leases. Average occupancy across these markets improved from a mid-80% range during the third quarter to nearly 90% during the fourth quarter, but came at a price. Thus far in 2021, we have generated blended lease rate growth of negative 1.5% to negative 2% in these markets, with occupancy averaging 94% as of January 31st. At a high level, we believe widespread vaccination will be the tide that lifts all our ships in 2021. For the timing of when this occurs, and therefore when regulatory and business restrictions are a thing of the past, remains difficult to pinpoint. Next, 2020 was a disruptive year in many ways. And with the recent focus on net migration trends within and between markets, it's important to highlight that UDR's 2020 annualized turnover was up only 30 basis points versus 2019. Most of our markets are stable to improving retention, with the exception of New York, San Francisco, and Boston. Our latest analysis of move-out data in these three markets shows most of our former residents are staying within relatively close proximity to the urban areas, they vacated last year. Approximately 70% of our fourth quarter 2020 move-outs are in Manhattan, Downtown Boston, and San Francisco proper moves within the MSA, comparable to one year ago and significantly better than the third quarter 2020. This suggests coastal markets should rebound once health and safety issues are addressed. Finally, I want to thank my colleagues in the field and here in Denver for their dedication in executing our strategy and adapting to a new environment. The past year has brought a lot of change, and the lessons we learned will help shape how we do business and interact with our residents in the future. And now, I'd like to turn the call over to Jerry.

Thanks, Mike. And good afternoon, everyone. Many of our operating successes in 2020 were driven by the ongoing implementation of our Next Generation Operating Platform. The platform's self-service components allowed us to stay engaged with our residents, deliver a high level of service satisfaction throughout the pandemic, and limit controllable operating expense growth to just 20 basis points for the year. Our five-year controllable expenses have averaged growth of 70 basis points, and our improvement in 2020 from already strong expense growth containment reflects a continuation of our constant and consistent focus on driving efficiency in our business. Because this five-year period overlaps with our platform initiatives, the efficiencies we have generated today are best illustrated after comparing our nominally positive controllable expense growth over this timeframe to more normalized 2.5 to 3% annual wage inflation growth across our markets. We expect to realize additional cost control benefits over the next two years, with the full rollout of the first phase of our Next Gen Operating Platform. As you will recall, we began the full rollout Phase 1 of the platform in Nashville and Seattle during the fourth quarter. This encompassed automated self-touring, new customer service technology, and an updated resident app and headcount reductions, among other things. So far, the results in these two markets are in line to slightly better than our initial expectations. We have realized strong efficiencies by refocusing those markets’ workforces on customer service as the new technology deployed has been widely adopted by residents and prospects, which has proven beneficial to our leasing process and resident satisfaction. Of note, during the fourth quarter, 93% of our company-wide prospect tours were conducted in a self-service or touchless manner. And since the second quarter of 2018, our Net Promoter Score has improved by more than 20%. To date, we have rolled out the full Platform 1.0 to 6 of our 21 markets, with the remainder scheduled throughout 2021. But portfolio-wide, approximately 83% or 400 headcount reductions have already occurred since mid-year 2018 in anticipation of these rollouts. We have seen no discernible evidence of disruptions to operations. To date, we have realized 50% of the benefits of Phase 1 of the Next Gen Operating Platform, which is expected to total $15 million to $20 million. As we look ahead, we expect to realize an additional 25% of run rate NOI from the platform by year-end 2021 and the remainder in 2022. Moving on, we are working hard on planning Phases 1.5 and 2.0 of the platform. Primary areas of focus include utilizing more data science to increase rental retention, better directing marketing dollars to optimal sales channels, and making the leasing process quicker and easier to complete, to name a few. Post-2022, we anticipate that these objectives should continue to drive margin expansion. Last, many businesses have moved or are in the process of moving toward increased self-service, as preferred by their customer base. UDR, and eventually, the multi-family business are no different. 2020 was a key year for implementing and proving out many of the technological components of Platform 1.0. But 2021 is the year that we will fully unleash it. A sincere thank you to all of my fellow UDR associates who have embraced this new way of doing business, and I look forward to providing additional updates on our successes in the quarters ahead. With that, I'll turn it over to Joe.

Thank you, Jerry. The topics I will cover today include our fourth quarter results and guidance for the first quarter and full year 2021, a balance sheet and liquidity update and a summary of recent transactions and capital markets activity. Our fourth quarter FFO as adjusted per share of $0.49 achieved the midpoint of our guidance range and combined same-store revenue and NOI growth with concessions reported on a straight-line basis met our guidance expectations. In regards to collections and residential bad debt, in the fourth quarter, we wrote off $3.5 million and reserved $4 million of revenue for a combined $7.5 million or 2.4% of residential billed revenue. This is based on our assumption of ultimately collecting 97.6% of Q4 revenues or slightly below the third quarter level of 97.7%. Looking ahead, despite the inherent uncertainty around how the pandemic will impact the economy, the regulatory environment, and our business moving forward, we have provided first quarter and full year 2021 guidance. We anticipate full year FFOA per share to range between $1.88 and $2, with $1.94 midpoint representing a 5% year-over-year decrease driven by a year-over-year decrease in straight-line NOI, partially offset by accretive financing and transaction activity. We expect full year 2021 year-over-year combined same-store revenue growth of negative 2.5% to positive 0.5%, with concessions on a cash basis and negative 4.5% to negative 1.5% with concessions on a straight-line basis. This difference is due to the residual impact of concessions amortizing during 2021 that were granted in 2020, which, as indicated earlier, will also serve as a relative headwind to FFOA growth until concession amortization tapers. In regards to our first quarter 2021 FFOA midpoint of $0.47 and the $0.02 per share sequential decline, this is being driven primarily by the straight-line effect of amortizing concessions that have previously been granted. Full year guidance assumes a headwind of $0.03 to $0.04 from concession amortization, with approximately two-thirds of the impact expected to be realized during the first quarter. Additional guidance details including sources and uses expectations are available on Attachment 15 and 16E of our supplement. Moving on, our balance sheet is liquid and fully capable of funding our capital needs due to ongoing efforts to reduce debt costs, extend duration, enhance liquidity and preserve cash flow. As such, we remain in a position of strength to continue weathering the effects of the pandemic. Some highlights include: first, as of December 31, our liquidity, as measured by cash and credit facility capacity, net of our commercial paper balance, was $958 million. Second, after using a portion of the proceeds from our $350 million, 1.94% Green Bond issuance in the fourth quarter to prepay additional higher cost debt originally scheduled to mature in 2023 and 2024, we have only $350 million of consolidated debt or less than 2% of enterprise value scheduled to mature through 2024 after excluding principal amortization and amounts on our credit facilities. Please see Attachment 4B of our supplement for further details on our debt maturity profile. Third, we remain thoughtful in our capital allocation decisions, largely funding our recent acquisition and DCP activity through property sales and the proceeds from our previously issued forward equity sales agreements. Our identified net uses of capital remain minimal and predominantly consist of funding our $491 million development pipeline, which is less than 3% of enterprise value and is over 50% funded with approximately $244 million of remaining capital to spend over the next several years. Fourth, our dividend remains secure and is well covered by cash flow from operations. Based on the 2021 AFFO per share midpoint of $1.76, our dividend payout ratio is forecasted to be 82%, resulting in approximately $100 million of annualized free cash flow after accounting for dividend payments. Last, as is evident on Attachment 4C of our supplement, we continue to have substantial capacity under our line of credit and unsecured bond covenants. As of quarter end, our consolidated financial leverage was 35% on undepreciated book value and 31% on enterprise value, inclusive of joint ventures. Net debt-to-EBITDAre was 6.8 times on both a consolidated basis and inclusive of joint ventures. 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. From a thematic perspective and irrespective of the macro environment, we continue to believe that our platform and other operating initiatives help us to generate outsized returns while paying market prices for acquisitions. Funding these acquisitions by selling assets that are attractive to private market buyers, but potentially less platform-centric, in some cases, only serves to enhance this accretion. Our fourth quarter 2020 and first quarter 2021 acquisitions in Tampa, Suburban Washington, D.C., and suburban Boston are perfect examples of this trading approach, and we continue to evaluate additional opportunities to create value. Some highlights include: First, during the fourth quarter and first quarter-to-date, we sold or are under contract to sell 3 communities, 1 each in Washington, D.C., Orange County, and Los Angeles. Proceeds total approximately $360 million at share, reflecting a low 4% weighted average cap rate, and with the sale of all of DTLA in Los Angeles, we have wound down our West Coast development joint venture. Second, during the fourth quarter and first quarter-to-date, we acquired 3 communities, 1 each in Washington, D.C., Tampa, and Boston, for a combined $328 million. All 3 communities are expected to generate outsized returns once fully integrated onto our platform, with the weighted average yield projected to increase from 4.6% in year one to 5.3% in year three. Third, subsequent to quarter-end, we committed to fund a $30 million DCP investment for a development community in suburban Washington, D.C. at a 9% yield and with profit participation upon a liquidity event, which we expect to occur in approximately 5 years. The development is fully capitalized and is approximate to 2 other UDR communities. Please refer to yesterday's release for additional details on the recent transactions. With that, I will open it up for Q&A.

Appreciate the comments on the operating platform and dynamic pricing. I'm just wondering, as you think about markets like Manhattan or San Francisco, Downtown Boston, which I think you said was a challenge, 15% to 20%. Do you see the benefits from those given the disruption currently from concession activity? Or do you get more of that benefit when the markets are more stabilized and acting more normally? Just trying to see how this benefits roll through when the markets are really being disrupted?

Nick, it's Mike here. Last year, at the Citi Conference, we were able to present what we saw with some of the dynamic pricing using some of the heat maps. And over the last 3 or 4 months we've seen strong performance particularly with our mid to high-rise assets. So it had benefited quite a bit over the last few months just in terms of optimizing our rent occupancy within those markets.

Yes. I would add, Nick, this is Jerry. It's probably got more benefit today on the stabilized suburban markets, especially in the Sunbelt. When you have that much price pressure and concessionary impact from competitors, there's less differentiation based on view and location of the unit. People are just tending to look for the least expensive unit most frequently. So I think you'll see more of that when San Francisco, New York, and some of the other urban areas stabilize, there'll be more benefit, but I think the biggest benefit to-date has been on the suburban.

That makes sense. And then just on those migration trends that you're talking about with a lot of those residents maybe staying within the MSA, where are they moving? Are they doubling up? Are they moving back home? And would you expect it to be those residents who actually move back in or that type of resident at least? Or do you think it's going to be a different resident base that ultimately moves back into some of these more urban areas?

I think it's different by market from what we're seeing today. I'll give you an example, in New York City, we're still seeing people moving out closer around, call it, Boston, New Jersey, even Connecticut, and we're staying in touch with those residents and just trying to get an idea of when the city starts to open up more, what their intentions are. So a place like that, we do expect that they'll come back. And today, we are seeing people come in from outside of the MSA as well. And then when you look at some of our suburban assets down in the Sunbelt, it's a little bit of a different story there.

I wanted to circle back to Mike's initial comments on Manhattan, San Fran, Boston, improved occupancy, but it came at a price. And then again, the discussion on 70% stayed within the MSA. Specifically on Manhattan, what are you seeing there? I think you just commented that you're staying in touch with these people to see what their intentions are. I guess, in the last month or two, have you started to see some of those younger millennials, Gen Z start to come back to Manhattan specifically or not yet?

To some degree, we're starting to see it more on our traffic patterns. So our traffic has increased, I would say, over the last 30 to 60 days. A big piece of that was the fact that we started using our brokers a little bit more within Manhattan versus, call it, San Francisco. It's just we found a little bit more success there. And so we were able to capture a little bit more incremental demand from, I think, people from within that market, looking for a deal or maybe trying to move into a place that they couldn't necessarily afford before, and they can now.

Okay. My follow-up is about acquisitions. It seems you're expecting a small number. While everyone is focused on the Sunbelt, there's a lot of supply in that area. Considering a different perspective, such as back to Manhattan or San Francisco, are you identifying any distressed opportunities for UDR to take advantage of in 2021?

Yes, hi, Jeff, good morning. It's Joe. I'd say at this point, really not seeing the distressed opportunities. Generally speaking, the only area that we saw a distress kind of coming through this has been up on the DCP side, where you did see us do an investment there in the quarter, another $30 million in Suburban Virginia. That really just due to the pullback that you saw in construction financing, mezz financing, equity financing for developments. At the end of the day, I think stabilized assets, the GSEs as well as other financing sources remain available. Proceeds may come down a little bit. Coverage issues in some of those urban high-rise markets might get a little bit more stressed from a coverage perspective. But overall, not really seeing any signs of distress. I think generally speaking, the urban high-rise product, pricing might be off 5% to 10% relative to pre-COVID. But overall, not seeing the distress come through.

And Jeff, this is Jerry. I'll just add on. I think I'd say generally in the core of the deals, while there hasn't been a tremendous number of trades to form a definitive opinion, pricing has likely hit bottom and possibly even started to rebound. Buyers are no longer trading on cap rates, and really are trading relative to replacement cost. And replacement cost continues to increase.

This is Sumit here for Nick. Guys, 2 questions. One, your San Francisco new lease rate fell by about 3% year-over-year, which is pretty good compared to some of your peers as well as some of the market reports, and physical occupancy was up 410 basis points Q-o-Q. So overall, I'm trying to sort of reconcile this against the revenue per occupied unit, which declined 9% Q-o-Q. I guess, was there a lower impact to economic occupancy in San Francisco, in particular? Or were there other elements that drove the sequential decline versus the improved rate performance. Is it a mix issue of some sort?

Sure. This is Mike. To provide some context, San Francisco accounts for approximately 9% of our NOI. Our portfolio consists of 40% urban and 60% suburban properties. We are experiencing a decline in market rents, particularly in urban areas, which have decreased by 10% to 18%. In our suburban properties, rents are relatively stable, down around 5%. The significant difference in new lease signings is linked to higher vacancy rates. For instance, in the fourth quarter, our occupancy in the city and SoMa area was around 83%, compared to nearly 95% in other financing. This illustrates that there is greater vacancy where rents are more depressed, as opposed to areas where we have more pricing power. This reflects our asset-by-asset strategy focused on optimizing total revenue, with San Francisco being a prime example. Regarding your second question about our growth, the main factor has been economic occupancy, which saw a decline of about 1,000 basis points year-over-year in the second quarter. This particular market has also been our strongest historically in terms of additional income growth from initiatives like our short-term furnished program and amenity rentals. Fee income has decreased by about 11% because we were unable to pursue many activities we typically engage in. Lastly, I'd emphasize the urban-suburban dynamics when considering the situation in San Francisco.

Got it. Got it. Thank you for the color on that. We'll probably take that offline as to what's in the fee income. And I always want to know whether the sort of app that you guys used to control the AC, but that's a different question. Moving ahead to like, I guess, asset sales. On the West Coast development JV, you guys had a fixed price option on OLiVE, at least based on something you said in 2018. And you chose to sell it. And I apologize for the background noise, that's my 4-year-old, sorry about that. But with DCP, you stated that you're always looking for these assets that you'd like to own in submarkets that you'd like to be in. So what made OLiVE less platform-centric? Just curious to understand whether the pricing, what the pricing terms were pre-COVID or whether there's a push to reduce exposure to Urban L.A. in such markets or there’s it something about the asset?

This is Jerry. The decision was primarily based on asset pricing. From our perspective, we decided to sell based on the market price of the asset. With the sale of DTLA and Parallel, we've completed the Wolff joint venture that we undertook in two phases in 2015 and 2017. Out of the seven total properties, we ended up owning three and selling four. Our thinking about what to buy and what to sell was entirely rational. We achieved an unlevered internal rate of return of 11% on our total $260 million capital invested, which meets or exceeds our expectations. For the Parallel property in Anaheim that we're about to close, we sold it for approximately 20% more than the price at which we bought out Wolff in 2019. That also turned out to be a good trade.

So I appreciated all the detail you had on the preferences for pushing rate in some of your markets that are a little more stabilized and as well as the challenges that others are still facing, predominantly those coastal markets. You did mention it's more if and when the recovery occurs in some of those challenged markets. So I guess, what did you incorporate in terms of your guidance as far as the recovery in the coastal markets from a timing perspective, given all the uncertainty? And do you think or did you assume that leasing spreads across the portfolio could turn positive at some point in the back half of the year?

Hey, Austin, it's Joe. Maybe I'll kick it off with a high-level comment just in terms of how we formed the same-store NOI guidance and FFOA guidance overall, then Mike can take you through some of the specifics. When you look at that same-store NOI cash guidance range of flat to minus 4%, if you just utilize 4Q of '20 as the starting point, to go to that low end of minus 4% NOI, all you need to see is NOI stays static relative to 4Q of '20. So basically, no improvement from 4Q all the way through 4Q of '21, gets you to the low end of our range, that minus 4% year-over-year. To get to that midpoint of minus 2%, basically a 2% lift, meaning we have to average about 2% better than where we were at in 4Q. The sequence of that, we've run through a number of different scenarios. Obviously, you have a piece of the portfolio stable and improving, a piece that's in that 20%. But we've run through a number of different scenarios as to when that starts to lift based off vaccinations and reopenings and feel pretty comfortable that that's a pretty good midpoint to put out there at this point.

Yes. Austin, this is Mike. I would add, obviously, the cadence of market reopening dictates those results. But what we're seeing right now is promising, and we expect that traffic will start to return kind of in that 2Q timeframe in places like New York and Boston and probably traffic starts returning in 3Q, maybe into 4Q for San Francisco and results will follow those trends.

Joe, I appreciate that you provide metrics on both a cash and GAAP basis. I think you're in a unique position to help us consider how these metrics might evolve into late 2021, early 2022, and beyond. On a cash basis, can we say that the concessions from 2020 will turn into significant challenges or advantages in late 2021 and early 2022? Furthermore, is it likely that in late 2022, any growth will mainly come from base minimum rent increases rather than the effects of those concessions?

Yes. I got you, Rich. Yes, I think that's generally a fair statement. So as you look at the concessions granted in 2020, as of year-end, we had about a $20 million straight-line asset that needs to be amortized over time. We think net-net, the headwind relative to 4Q is about a, call it, $0.03 to $0.04 headwind as we work our way throughout 2021. So you have kind of cash underperforming GAAP here in 4Q and throughout 2020. We start to cross over in the first quarter of '21. Those will effectively level out and you get a crossover point between new concessions granted and those that have been amortized. And then, you start to revert as you go through into the back half of the year where cash starts to outperform GAAP. And that's really the strategy that Mike and team have been employing throughout and talking about a lot about in terms of if you believe there's a recovery that's going to take place. While you take the upfront concessions, you keep the face rate higher and that helps just the revenue growth on the back end helps you renew off a higher number on the back end. So you should see that start to drive relative performance here as we go into the back half.

Got it. That leads into my next question. We noted that your effective lease growth in January, if I’m correct, turned positive, which is an interesting indicator compared to your peers. Considering your diversified portfolio across different geographies and quality, how do you think that positions you to increase rents—true rents, not effective rents? I’m hopeful that in the near future we can focus on true rents again. How do you believe this positions you to outperform, for lack of a better term, your peers?

Rich, it's Mike. I think it puts us in a good position. And as Joe alluded to, that's something we've been focused on for quite some time. And I'll tell you over the last three months, we've seen sequential market rent growth in our portfolio. And a lot of that has to do with trying to find those pockets where we do have high occupancy and we can start to push our market rents a little bit because, obviously, that helps on the renewal side, too. And so, we're starting to see some promising signs with what we're sending out for renewals going forward and again, kind of where our market rents are today. And it does vary market by market, but it goes back to that asset-by-asset approach, and I think it's starting to pay dividends.

Thank you for the insights shared so far. I'd like to revisit the questions regarding the urban core for a moment. Considering the increased demand and traffic observed in the fourth quarter and year-to-date '21, is there anything notable about the unit mix that could indicate who is moving into the cities, their origins, and their motives beyond just low rents? Are there any trends concerning studios versus one bedrooms that could help clarify this situation?

Rich, it's Mike here. We're seeing very similar trends to what we've talked about in the last couple of quarters, quarterly earnings calls. Our studios are a little bit less occupied than what we're typically seeing in regular cycles, so nothing really different from that end. I will tell you, though, one thing that helped us out probably more than anything over the fourth quarter is, when you look at our tours, and you look at how many were guided for self-guide and all the things that Jerry and the team are doing for the platform, less than 7% of our tours were guided. So, the fact that we were able to just give more traffic through the door and really accommodate them, we're able to push where we otherwise couldn't. So that's about it on that side.

I wanted to go back to that same point I brought up a couple of times. The 70% that moved out stayed within the MFA and those urban areas. And the interesting part for me is that it was pretty stable on a year-over-year basis. But you are hearing from others that have more suburban portfolios, whether it'd be multifamily or single-family rentals that they're seeing much higher application volume from out-of-state coming into their markets. It just seems like you have a unique perspective to be able to look at both sides of that. So can you maybe round that out to help us understand how much of the rhetoric around state to state moves is real as you see in your data? And how much of it is maybe exaggerated a bit?

Yes. I'll give you a little bit more color because we did talk a lot about move out. We haven't really talked about prospects and move in. So just to give you a little bit more color on that, we saw about 23% coming from outside of MSA. And in places like Nashville, Texas, Florida, Denver, it was closer to 30%, where we experienced people coming from outside of the MSA, and that compares to about 20% the year prior. And I'd tell you for us, the one that jumps out to me is DC, we saw the highest number of people coming from outside of the MSA and was pushing close to 40%.

Yes, there's less transient yo-yo effect in more suburban markets whereas urban has been noisier just in terms of who actually wants to move. And the movement back and forth, you're seeing strong pockets of growth in suburban, and those are seeing greater influxes and higher returns right now. But definitely probably a more stable aspect to it, as noted the 70% changing permanence.

Let me begin by thanking you for your time and interest in UDR. We strongly believe that COVID will end just as other crisis and challenges have as well. The pace of the recovery, though, is out of our control. But promising signs is a vaccination rate going from 1.4 million per day two weeks ago to 2.4 million today. Vaccination production in March looks to be over 100 million doses. These are certainly encouraging signs. But at the same time, we're reminded that regulation and opening of cities and lifestyles remain challenging and will throughout the year. Our focus, though, remains on our strategic plan, in particular, our cash flow growth, platform execution, and capital allocation. And with our team's help, we will be successful. With that, thank you, and take care.