UDR Inc (UDR) — Q3 2022 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 the call over to UDR’s Chairman and CEO, Tom Toomey.

Thank you, Trent, and welcome to UDR’s third quarter 2022 conference call. Presenting on the call with me today are Senior Vice President of Operations, Mike Lacy; and President and Chief Financial Officer, Joe Fisher, who will discuss our results. Senior Officers, Andrew Cantor and Chris Van Ens will also be available during the Q&A portion of the call. To begin, we continue to see exceptional results and are in a healthy multifamily operating environment. Highlights of the third quarter include the following: sequential same-store revenue growth of nearly 5%; year-over-year, same-store revenue grew almost 13% and NOI was nearly 16% higher. And we continue to capture additional accretion from our 2021 acquisitions. These results translated into 18% year-over-year growth in FFOA per share and drove our third guidance raise this year, which Mike and Joe will discuss in further detail. To date, the financial health of our residents has remained strong. Employment growth continues to demonstrate resiliency. Wage growth remains robust. Traffic is healthy. Rent-to-income levels of incoming residents have not deteriorated. Cash collections continue to improve. Concessions are almost nonexistent across the portfolio and the regulatory environment has been stabilizing. These factors, combined with our favorable relative affordability versus alternative housing options and reasonable new supply expectations create a positive near-term outlook for multifamily. In short, Main Street has shown incredible resiliency. Moving on. All in all, we continue to believe UDR is well equipped to manage whatever macro environment we face based upon what we know right now and what we can control. First, our customers remain financially sound. Second, our jump-off point for 2023 has never been better as our same-store revenue earn-in is roughly 5% effectively locked in at this point. Third, our continued focus on innovation and culture should continue to enhance our margin growth. Fourth, prior FFOA per share headwinds like development and lease-ups become tailwinds in 2023. And last, our balance sheet remains highly liquid with over $1 billion of capacity. That said, we are fully aware of growing concerns over where the macro environment is trending and the challenges our business could face moving forward. Two areas to highlight include: first, elevated inflation. Like most every business we are feeling the impact of inflation across our expense structure. Thus far, we have been able to pass these costs on to our residents in relatively short order given our standard 12-month lease structure. Specific to the third quarter, a portion of our elevated expense growth was anticipated as we continue to push rental rate growth, which resulted in higher turnover and elevated repair and maintenance costs. However, building a better 2023 rent roll at the expense of short-term cost pressures is the value of creating trade for a 70% margin business like ours. And second, our cost of capital. Our cost of capital has increased materially since the first quarter. As such, we pivoted to a capital-light strategy and pared back opportunistic external growth. Our balance sheet remains fully capable of supporting all planned capital uses and with less than 2% of consolidated debt maturing over the next three years, our interest rate risk is minimal. Moving on, we continue to build on our position as a recognized global ESG leader with the publication of our fourth annual ESG report and a 5-star designation from GRESB, the highest ESG rating possible. Our GRESB survey score of 87 was the highest in our history and an achievement that all UDR stakeholders should be proud of. In closing, I remain optimistic about UDR’s future prospects. We have a highly talented experienced team with a track record of performance irrespective of the economic environment combined with our culture that fosters collaboration and innovation mindsets. We will continue to advance UDR and our industry. To my fellow associates, I express my deepest gratitude for all that you do. With that, I will turn the call over to Mike.

Thanks, Tom. To begin, strong sequential same-store revenue growth of 4.7% drove year-over-year same-store revenue and NOI growth of 12.7% and 15.5% on a straight-line basis. This was an acceleration of 150 and 110 basis points respectively compared to our second quarter results and were better than expected. Key components of these results and our demand drivers included: first, year-over-year effective blended lease rate growth remained firmly above historical norms at 13.1%. We traded a nominal amount of occupancy to achieve this rental rate growth but also improved our 2023 rent roll and locked in more of our approximately 5% 2023 earning. This will be the highest earned in our history by at least 200 basis points. Second, our in-place residents are increasingly paying rent on time. Collection rates improved sequentially in the third quarter and the number of long-term delinquent residents in our portfolio continued to decline, which reduced our bad debt reserve and accounts receivable balances. Third, portfolio-wide rent-to-income ratios remain consistent with history in the low 20% range. Employment and wage growth remains strong and we have seen no evidence to date of residents choosing to double up. Fourth, traffic and applications remain above typical seasonal levels, allowing us to continue pushing rate growth. Fifth, concessions are de minimis across our portfolio, with exceptions being 1 to 2 weeks on average in specific submarkets of San Francisco, Washington, D.C., and Boston. And lastly, due to rising mortgage rates, renting an apartment is approximately 50% less expensive than owning a home, versus 35% less expensive pre-COVID. During the third quarter, only 7% of residents that moved out did so to purchase a home. This is the lowest level we have seen and is 35% lower compared to a year ago. In total, we believe demand for apartments remains broad-based. We continue to monitor the financial health of our residents for signs of potential distress across our portfolio. But the U.S. consumer and our residents have proven resilient thus far and we have yet to see any meaningful cracks in our forward demand indicators. Moving on to expenses, quarterly same-store expenses rose 7.2% on a year-over-year basis. While this is higher than usual, our margin continues to expand as we operate a 70% plus margin business. Some of this expense growth was in our control, while the remainder was not. First, what was in our control? We continue to push rent growth, which resulted in 450 more unit turns than a year ago. Positively, we re-leased these homes at a 22% higher average effective rate or 900 basis points above our average renewal rate for the quarter. In addition, we regained 200 homes from long-term non-payers. Combined, this negatively impacted repair and maintenance during the quarter by $1.6 million, which should generate approximately $7 million in incremental revenue over the next 12 months. Had we not made these trades, our year-over-year same-store expense growth would have been approximately 5.7%. Utilities also contributed to our above-trend growth as energy costs increased. However, as we are typically reimbursed by residents for approximately 70% of this line item, same-store NOI was not meaningfully impacted. Next, what we cannot control: higher real estate taxes, which comprise 40% of all expenses, grew by over 5%. Pressure points consisted of Texas and Florida where valuations increased and New York City, where the burn-off of our 421 abatement continues. Insurance, which is a relatively small expense for us, also increased dramatically due to higher premiums and claims. Looking ahead to the fourth quarter, we saw the return of typical seasonality in market rents after Labor Day. This factor, combined with our pricing strategy to drive rate growth, drove a quicker capture of our loss to lease. For October, blended lease rate growth is expected to be roughly 7% to 8%, comprised of new lease rate growth of 4.5% to 5% and renewals of approximately 10%. For the fourth quarter, we expect blended lease rate growth to average 6% to 7% with sequential deceleration due to toughening year-over-year comps. Taken together, we increased our full-year 2022 same-store revenue and NOI guidance ranges for the third time this year in conjunction with our release yesterday. We now expect to achieve 2022 same-store revenue and NOI growth of 11.5% and 14.4% at the midpoint on a straight-line basis or an increase of 50 basis points and 38 basis points respectively. Finally, we are continuing to drive forward on innovation with the intent of further expanding our 325 basis point controllable operating margin advantage versus peers. Initiatives underway are expected to generate roughly $40 million in incremental NOI by year-end 2025 and will be increasingly focused on revenue upside versus expense controls. These include: first, launching building-wide WiFi that allows whole-building connectivity, a seamless setup at move-in for new residents and enhanced control over smart hubs to reduce energy consumption and improve Scope 3 emissions. UDR has made a capital investment in equipment, which provides improved economics and more control over the scope of the project versus traditional bulk deals. We believe this initiative could generate more than $20 million in the incremental NOI once fully rolled out by 2025. Second, leveraging advanced resident leads and virtual leasing technology to better generate qualified leads and track prospects, optimize marketing activities, close leases faster, and enhance real-time pricing. Third, simplifying our move-in process to reduce vacant days while simultaneously offering a better tool to sell other income initiatives, such as renters insurance, parking, and storage thereby increasing our share of wallet. Fourth, improving our dynamic work order scheduling through enhanced vendor management tools, which should reduce vacant days through the turn process while improving asset management to better assess the repair-first replace decision. And fifth, expanding the number of communities we are able to operate without dedicated onsite personnel from 25 today to 35 over the next 12 months. This approach, whereby leasing and resident services activities conducted virtually improves our margin and helps mitigate inflationary costs. Today, we have increased the number of apartment homes managed per associate by 60% versus pre-COVID levels. Last, a special thanks goes out to all our teams for their ongoing dedication, but especially our teams in Tampa and Orlando. Natural disasters, especially those of the magnitude of Hurricane Ian, are unpredictable. I applaud your round-the-clock efforts to safeguard our communities, protect our residents, and return our properties to normal operations. And now I will turn the call over to Joe.

Thank you, Mike. The topics I will cover today include our third quarter results and our updated outlook for full year 2022, a summary of recent transactions in the capital markets activity, and a balance sheet and liquidity update. Our third quarter FFO as adjusted per share of $0.60 achieved the high end of our previously provided guidance range and was driven by strong same-store revenue growth and further accretion from our 2021 acquisitions. For the fourth quarter, our FFOA per share guidance range is $0.60 to $0.62 or a 2% sequential and a 13% year-over-year increase at the midpoint. This is supported by continued strength in sequential same-store NOI growth, partially offset by increased interest expense given rising rates. These same drivers led us to increase our full-year 2022 FFOA per share and same-store guidance ranges for the third time this year. We now anticipate full-year FFOA per share of $2.32 to $2.34 with the $2.33 midpoint, representing a $0.02 or 1% increase versus our prior full-year guidance and a 16% increase versus full-year 2021. The guidance increase is driven by and approximately $0.02 benefit from improved NOI and approximately $0.05 benefit from lower G&A offset by approximately $0.05 of higher interest expense. Next, the transactions and capital markets update. First, in alignment with our shift towards our capital-light strategy earlier in 2022, our third quarter external growth consisted solely of the previously announced $102 million DCP investment into a portfolio of stabilized communities at an 8% return. Because recapitalizations of stabilized assets have lower risk profiles, this is a relatively lower return versus our typical DCP investment. We funded this investment with $100 million of proceeds from the settlement of approximately 1.8 million shares under our previously announced forward equity agreements. Next, during and subsequent to the quarter, we repurchased a total of 1.2 million common shares at a weighted average price of $41.14 per share for a total consideration of approximately $49 million. These buybacks were executed at an average discount to consensus NAV of 24% and a high 5% implied cap rate, representing a very accretive use of capital. Finally, during the quarter, we entered into an agreement to sell one community in Orange County, California for approximately $42 million. This transaction is scheduled to close during the fourth quarter. Speaking more broadly to the transaction market, pricing on the majority of multifamily transactions suggests cap rates are priced 75 to 100 basis points higher than at the beginning of the year, depending on market and asset quality. However, volume has been lighter than expected, so additional price discovery is needed. All told, the ongoing volatility in the macro environment and an elevated cost of capital relative to earlier in 2022 keep us selective in our capital deployment. We are fortunate to have a variety of external growth levers we can continue to pull to create value and drive earnings accretion. Finally, our investment-grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: First, we have only $115 million of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 after excluding amounts on our credit facilities and our commercial paper program. Our proactive approach to managing our balance sheet has resulted in the best 3-year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 3.1%. Second, we have $1.1 billion of liquidity as of September 30, which is comprised of approximately $900 million of capacity on our line of credit and nearly $200 million of unsettled forward equity agreements, providing us ample dry powder and strength. Third, our leverage metrics continue to improve. Debt to enterprise value was just 29% at quarter-end, while net debt-to-EBITDAre was 6x, down more than a full turn from 7.1x a year ago. We expect year-end debt-to-EBITDAre and fixed charge coverage will further improve to the mid-5x range given our capital-light external growth strategy and continued NOI growth. By year-end 2022, both metrics should be approximately 0.5 turn better versus pre-COVID levels. Last, our approximately $370 million of developments in lease-up have been a drag on 2022 earnings, but are expected to benefit future earnings by approximately $0.05 per share based on a 6.5% weighted average stabilized yield. Stabilization of these developments should improve our run-rate EBITDA and further enhance our leverage metrics. Taken together, our balance sheet remains in excellent shape. Our liquidity position is strong. Our forward sources and uses remain balanced and we continue to utilize a variety of capital allocation competitive advantages to create value. With that, I will open it up for Q&A.

Thanks. Joe, you talked about the cost of capital changing, leverage trending down and the buybacks in the quarter and I guess in October as well. The stock is a bit below kind of the average cost you have been acquiring at. What’s the appetite and how would you think about funding additional share buybacks from here?

Hey, Nick. Thanks for the question. So yes, we did pivot a little bit as we move throughout the year, obviously. So with the equity issuance back at the end of 1Q up in the high-50s. As the cost of capital has changed and price discovery has been occurring, we have pivoted over and shifted some of our development plans back into next year and then obviously shifted to the buyback. So – at this point in time, I wouldn’t say there is a set dollar target that we are going after. We do really like the economics in terms of discount to NAV and the implied cap up in kind of the high 5s at a pretty compelling IRR on that purchase. But we’re going to continue to monitor what’s going on in the macro environment, what’s taking place with our cost of capital and the price of the stock, and what’s going on with sources and uses. I would say sources and uses in a pretty phenomenal place at this point given we still have almost $200 of equity available that issuance in March, plus a disposition that we mentioned here that should close in the fourth quarter. Then with free cash flow against a relatively small development commitment schedule. So we have the capacity, and we will kind of continue to monitor those factors, but no set target today.

Thanks, that’s helpful. And then just on the DCP program, how do you monitor the credit profile? And obviously, there was the default in the supplemental, but are there any changes or indications of additional stress in that portfolio?

Nick, this is Andrew. We regularly interact with our different partners throughout the process. We’re getting regular reports from them. We have third-party consultants during the construction period. And so we’re regularly interacting with them. As it relates to 1532, we think this is unique to our DCP portfolio. It was the perfect storm. We had an early bankruptcy with one of the key subs followed by delays by other subs as well as COVID, which caused a two-year delay in the delivery of that building. Between the delay and the COVID impacts, it added to the cost of the building and resulted in the senior loan interest in the pref accrual eating through the equity and the economics of the deal for the developer. So when the senior loan finally matured, we were in a situation where the developer was unable to refi due to the lower NOI, which resulted in the default and then we stepped in per the terms of the agreement and bought the loan from the bank. We’ve initiated foreclosure. The building leased up during a high, obviously, concessionary environment. Obviously, rents fell a lot in San Francisco. It’s one of the markets that was probably impacted the most by COVID. But overall, we feel comfortable with the portfolio that’s very diversified across all our DCP investments. It’s laddered. It’s across the country. And we see this as a one-off circumstance driven by delays by the development of the building and the COVID market of San Francisco. To date, we’ve done 27 deals over the last 9 years or almost $900 million. We monetized 12 of those for about $400 million with a weighted average unlevered IRR of 11% to 12%. So we’ve had great success, and we’ve been doing it for a long time.

Thank you.

Thanks. Hi, good morning. I guess maybe I wanted to start with Mike on just operations. It sounds like you’re still pushing pretty hard on rent increases and occupancy has been very strong. Just trying to get your thoughts on kind of some of the looming dark clouds and potential slowdown in job growth? How do you think about a potential pivot? And what are the sort of early warning signs you’d be looking to take your foot off the gas on rent increases and focus more on occupancy?

Hey, Steve, that’s a great question. You’re right. We’ve been focused on this for a while now in 2Q, 3Q really driving our rents. As we move forward, we’re going to see a little bit more of the team increase going on that 9% to 10% range through December at this point. They feel like they are sticking. We’re not seeing a lot of negotiations at this point. The leverage will be on the market rent side, and we will see where that shakes out. So to your point on kind of those warning signs, I said in my prepared remarks, we see a lot of green lights still today. The one thing we’re watching that’s outside of that is just the cancel and denials. We have seen that increase a little bit. And that’s one of those warning signs that we will watch closely. But again, we’re seeing occupancy in that 96.5% to 97% range. So we feel comfortable about pushing right now. And we think that we have more tailwinds as we go into next year with that.

Yes, I think there is still quite a bit of unknowns out there. Obviously, with price discovery taking place, in the prepared remarks, talked about cap rates being up maybe 75 to 100 basis points up into that plus or minus high 4s range. That’s kind of what we’re hearing today, but obviously, transaction volumes are down fairly materially. So I think we’re still going to go through a period of time here to get price discovery. And so we really need that to settle out before you can start to look at development in terms of that typical 150 plus or minus basis points spread that we need. So at this point, I wouldn’t say we’ve pegged a required hurdle for development. We need the price discovery on transactions first. What we have done is, you’ve heard us talk about a $185 million development in Northern Virginia throughout the year. That’s a densification play. That was supposed to start here in the third quarter, but we’ve delayed the start of that pending evaluating cost of capital, price discovery, etcetera. So I don’t – I can’t say that we have a hurdle today other than we want to see where prices settle out.

Great. Thanks, guys. So in the three markets that you’re seeing concessions, I guess, how broad-based are those? Is there anything that concerns you like slowing traffic, rising vacancy, etcetera, that would lead you to expect that concessions could increase further in those locations as we move later into the year or even into early next year?

Not as of right now, in those same markets are the ones we’ve mentioned previously. We’ve seen anywhere from 1 to 2 weeks on average across the board there. So it hasn’t really grown, and it hasn’t shrunk. Again, occupancy is still in a great place; traffic is still coming into those markets. Our blended growth rate, as you see in the supplement, still very high in those markets.

Yes, Austin, I appreciate the question. When I referred to macro, we tend to look at it in two lenses. One, what’s happening on Main Street with our residents. And Mike alluded earlier, we’re not seeing any cracks. In fact, we have a very healthy resident profile, no issues with credit, quality, payment patterns, or doubling up. Main Street seems very strong. When you look at Mike’s blends in October, a 10 and a 5 on new and renewal would be a great number historically. So that side of the equation is really strong, and we will see how it plays out, depending on employment. We feel good about the employment picture looking down the horizon. With respect to the macro environment, coming from the capital markets, obviously, the Feds and banks are trying to push down inflation with every tool they’ve got, and they are going to succeed. They are raising the cost of capital, and you see our stock price and any other lending situation, all being challenged by that. That’s out of our control. We participate in the market, observe it, and it influences us. We don’t know where it’s going. Will rates continue to rise, plateau, or succeed in bringing down inflation? That’s going to be a lot of ‘23 as our dialogue will surround the capital markets environment. It feels like a capital markets recession. Is it going to be shallow or deep? How long will it run? No one really knows. This will influence our capital-light program. I think we’ve positioned ourselves well there, and it will create opportunities. We will pivot to those opportunities as they arise. We focus on what we control and what interactions we have in generating opportunities. Our operating numbers are strong, expect those to continue, and we will wait and see what cracks occur.

This is Dan Tricarico with Nick. Good afternoon. Question on your renter profile, do you have a high-level or regional level breakdown of your tenants by occupation whether that’s tech, finance, professional, and other services? And any differences between your West Coast, East Coast and Sunbelt tenants?

Dan, we don’t have that. I don’t have it in front of me. Obviously, when somebody comes in, we get an idea of where they are coming from, but we don’t have that in an aggregated level at the market in front of me today.

But what you can say is our average resident is 34-35 years old, so well in their career, probably have some financial acumen and capability to manage their expenses and income levels. So that is not 10 years ago when we’re running the 25-year-olds right out of college making $60,000. They seem to be very durable during this. When you look at banks and the information they give about spending, savings, credit, that part of our resident profile looks pretty strong.

Great. Thank you. Good afternoon. I just want to confirm, first, are you seeing any price sensitivity in any of your markets?

Hi, Jeff. I think when you think about the price sensitivity, first and foremost, what we’re seeing is seasonality. Market rents are above last year’s levels. Sure, in some markets, some already have some cracks here and there, and that’s where we see some of these concessions popping up. But for the most part, it’s been pretty strong. I’ll tell you looking at 4Q versus 3Q, I do see a little bit more deceleration if you will in the Sunbelt. It’s just coming off of very high numbers, but it’s still going to be very strong. Also, right now, loss to lease is a little bit higher. Market rents are a little bit higher, maybe got a tailwind heading into next year.

Yes. versus peak pricing, you’re probably 10% to 20%. It’s going to depend on which type of asset and market. There were some more high-flying markets. We got very compressed from a cap rate perspective based on forward growth potential, so more of the Sunbelt markets have probably come off a little bit more. You also have more of the B and C kind of levered asset play that’s come off a little bit more. You have some unique circumstances where maybe you have in-place debt that’s assumable where that asset price hasn’t moved as much. So I think 10% to 20% for now is a fair range to utilize.

Hi, everybody. I appreciate some of the detail you gave on the 1532 default already. I was just curious; it’s a little difficult to exactly determine the outcome with that asset. Is this still sort of a good outcome from the standpoint of you’re able to buy the loan at a discount and you’re sort of getting access to this building lower than replacement cost? Can you walk me through any of the math on how you expect that to turn out?

Yes. Just a little bit on the process first, Brad, in terms of the outcome because the outcome isn’t necessarily certain yet. We’ve purchased the senior loan. We intend to move forward with the foreclosure process, but it’s expected in 1Q ‘23. So the outcome isn’t necessarily certain. What I would say is that from an economics perspective, when you look at replacement cost for this asset, our basis is probably plus or minus $87 million, which equates to about $640 per door. Replacement costs is well in excess of $100, given development costs today, it would be prior the $800 plus or minus range. So relative to replacement cost, it’s a very good outcome. From a yield perspective, the yield on our cash basis is probably in the mid-4s based off that basis on a fully accrued basis, including the good pref somewhere in the mid-3s. But I’d say that the submarket runs here still 10% plus below where they are at pre-COVID. So we still think there is room for growth on that front. You have a market with quite a bit of a decrease in supply coming at you. Less supply pressures going forward, and then you’re just coming through the lease-up phase, so we’ve got to burn off a lot of those concessions. Should be pretty good growth on a go-forward basis.

Okay, thanks for that. And sorry if I missed this, did you guys give a loss to lease figure?

We do not. So right now, as you can tell, obviously, with our strategy, it’s been our intention all along to try to drive this down, right? Right now, we’re sitting in that low to mid-single digits loss to lease. This can fluctuate quite a bit over the next couple of months. But again, our intention is to continue to drive this down. Obviously, it builds our earn-in for next year. You can see it in our blends today, and you’ll see more of that as we move forward.

Brad, this is Tom. I would emphasize a couple of things. Mike has done a fabulous job with respect to capturing the market rent that’s there. You can see it in our numbers on a sequential basis with almost 5% revenue growth; second, we’re seeing nominations in occupancy. It’s just trying to roll the rent roll up as strong as possible for ‘23. When you walk into ‘23 and say 5% already booked, we feel like we’re in a really good position into that ‘23 window with no issues with residents choosing the capital markets.

Hi, guys. Appreciate the question. I just wanted to first ask, one of your peers put out a 2% market rent growth forecast for 2023, recognize that you guys clearly aren’t guiding here, but I’d love to just kind of hear your thoughts about that 2% rent growth forecast for ‘23? Obviously, you guys have had different markets than that peer. Would love to just hear your thoughts about kind of that number and how that kind of seems given your portfolio?

Yes. I think all we can really speak to is what we’re seeing today. So I think to that last question on what are we seeing from blends and loss to lease and our earn-in perspective, I covered part of it. I think what’s important, too, is that decrease in blends is not coming from a decrease in underlying market rents. We’ve seen market rents continue to increase on a year-over-year basis, commensurate with historical averages, typically 3% to 4% throughout the year. Recent trends and the strength of the consumer tell us that could continue. If we enter a recession, we might see a lower number. But we are going to continue to try to capture every dollar we can on that and drive that loss to lease lower and those blends higher. In the interim, we are continuing to focus on the innovation side. There is a lot we can do from a share of wallet or other income perspective as well as what we’re doing on vacant days and pricing engine to hopefully drive some above-peer relative growth. It’s too early to start talking about the 2023 forecast, but that gives you some of the building blocks that we see today.

Sure. I think if you look at the fourth quarter, we have lower lease expirations. Right now, we have a little more ability to push it back up. We went as low as around 96.6% to 96.7%. I think you’ll see us hover between that 96.7% to 97% going forward through the fourth quarter, and we will have pricing power with that. Once you start going below 96.5% for us, it may cause a little bit of a pressure point. So we’re trying to avoid that. That being said, it’s how you get there. The way we think about it is our vacant days. If we’re a little more efficient with how we turn the units and move people in faster, it shouldn’t really come at a cost on the rent side of the equation.

Yes, the benefit over time. We made a comment in the press release about increasing our collection expectation. So we picked that up about 15 basis points relative to prior expectations, continuing to trend in the mid-98% collected relative to billed revenue. Historical averages were 50 basis points of bad debt. So there are 100 basis points total to go after. Realistically, we’re looking at maybe half of that as a possibility given some of the rules and regulations that have been put in place by different municipalities, primarily on the coast.

Hey. Good morning out there. First, I guess is a follow-up on bad debt. We have seen a number of your peers report an uptick in the third quarter. Some of the bad debts taking a bit longer to resolve, but you guys saw an improvement here. So, I guess I am curious what you are maybe seeing or doing differently? Are there any reasonable price point distinctions? Am I right to infer from your comments to an earlier question that you expect that improvement next year?

Yes. Hi Haendel. I will start and reverse on that one. We do expect improvement over time going from the mid-98% plus or minus collected on billed revenue. I can’t say necessarily that’s going to occur next year. I think on the margin, it should because we are having success in whittling down those long-term delinquents. We’ve got a pretty active process on that of that excess long-term delinquent we have today, and about 75% of them are somewhere in the eviction process although eviction processes instead of being perhaps 30 to 60 days, in some cases, are more like four months to six months. We think we’ll continue to whittle that down and collections should improve and become more of a tailwind.

Yes. Good morning out there. Just sticking to the world of technology, any update on PropTech initiatives at the company in order to try to reduce operating expenses going forward, especially given general operating expense headwinds?

Yes. Thanks for the question. I think probably the biggest one and one we are most excited about is just becoming a little more efficient as it relates to maintenance. We have some technology that’s going into place here in the very near future. It does allow us a little bit more visibility into decisions around repair versus replace should allow us to turn the units a little quicker. We will have more visibility into what our vendors are doing. They will have more visibility into what we are doing. We think that we can compress our time that it takes to turn a unit just knowing when they are coming in, how we can schedule a little more efficiently, and again, driving down those vacant days. So, that’s probably the biggest one aside from that. Just given what we have rolled out previously and you have heard us talk about it, we have 25 properties today that are unmanned. We do plan on taking that closer to 35, and again, a lot of that has to do with some of the technology that we have already put in place.

Thanks. First one, Mike, you talked about, I think that’s $40 million by 2025. It looks like half of that is the whole building smart system WiFi. But maybe can you talk about the other portions of that. What is the incremental of that? If you are at zero today or at the beginning of this year, what are you at, at the end of next year or ‘24? Should we assume some sort of ramp up?

That’s a good question, Neil. I think what you are going to see first and foremost, with the gig stream and the fact that we are rolling out the bulk Internet. That is something that’s going to take some time. We are currently rolling out about 10,000 apartment homes by the end of this year. We expect another 15,000 by the end of next year and then the rest of the portfolio in 2024. It does take a little bit of time to start seeing that revenue roll through. We do expect that the run rate will be $20 million when it’s all said and done. That’s the biggest one. Aside from that, I just spoke about some of the technology we are putting in place that will help us with efficiency around turns. We are continuing to find ways to do a better job with our pricing, obviously, going out there and creating more of those buyers or shoppers if you will. A lot of effort is going in there, and then obviously, our customer experience project, we are very excited about that, the data that’s going to come from that. Where that transpires a lot of that will come in 2023 on the revenue side followed up with 2024.

Neil, just to size the numbers quickly for you. Of that $40 million associated with those over 60 projects, we have got about $6 million of that in the 2022 number that we have already been able to realize through the initiatives started over the last 12 months and 18 months. I think as you fast forward into ‘23, anywhere from $5 million to upwards of $10-plus million depending on some issues with the supply chain around our bulk Internet rollout as well as some other constraints, but we are moving as quickly as we can there. So, give you a range there. And then in ‘24 and ‘25, you will capture the rest of that number.

One, there is a lot there to assume and adjust for what will stabilize mortgage rates and proceeds settle out. How much is that supply, replacement cost, and exposure towards the future? It’s going to be a continued monitor to see what comes to market, how it prices out. Days of 3.5% caps in the Sunbelt don’t seem on the horizon anytime soon. They have moved up, and we will look and as Joe has articulated many times and very well; we will monitor our cost of capital and look for accretive opportunities. If they present themselves in the Sunbelt, that’s great. If they present themselves somewhere else, that’s great, too. We will just go where the best risk-adjusted returns are. We will keep playing that growth model.

Hi. Thanks for the time. I am curious about what potential lead indicators looking back historically would be of seeing people begin to double up organic roommates. Just more broadly, thinking about some of the literature out there on how strong the housing market has been and the macro factors that have. Do you think that maybe we pulled forward some creation of households because of the pandemic and some of the unique dynamics there, maybe normalize over the next couple of years?

Yes. I think it’s fair to say that the pandemic did pull forward some of the household formation demand. It also pulled forward a little bit of a shift into single-family over multifamily. Single-family clearly had a tailwind at their back for the last 24 months relative to multifamily. That’s part of the reason you have that pretty large disconnect between the cost to own versus cost to rent. We are seeing now today, and you definitely see it within our move-out stats. Our move-outs to buy are down roughly 35% going from kind of low-double digits into mid to high-single digits. We are shifting back more towards a rentership society. Homeownership rates should stay steady and/or come down, which obviously benefits us in terms of more demand from any incremental household formation. I think we are good on that front, one of the tailwinds we have going into next year.

And just a quick follow-up on property taxes. Some surprises in some of your broader residential peers about what we are seeing in some of the Sunbelt markets. Any sense of what we could expect in ‘23 even as some of the appraisals will lag what’s going on in home prices generally and what we should be thinking about?

Yes. I would say number one, we aren’t necessarily immune to some of those surprises, but the diversification that we have in the portfolio obviously insulates us. When you look at some of the expense growth that we have had in our Sunbelt markets that are being driven primarily in Florida and Texas by the real estate taxes increasing as well as seeing higher turnover in those markets. We are seeing it this year and still expect to see it next year. I think when we look at preliminary outlook for next year on real estate tax, we are looking at plus or minus 5% overall. That’s going to be lower when you go out to California with Prop 13 and then go to the Mid-Atlantic and Northeast where we expect kind of low to mid-single digits. When you get down into our Sunbelt markets, I think you’re going to be looking at high-single digits to low-double digits for markets like Florida and Texas and Nashville for us.

Hey. Good morning out there. Just sticking to the world of technology, any update on PropTech initiatives at the company in order to try to reduce operating expenses going forward, especially given general operating expense headwinds?

Yes. Thanks for the question. I think probably the biggest one and one we are most excited about is just becoming a little more efficient as it relates to maintenance. We have technology going into place here in the very near future. It does allow us a little bit more visibility into decisions around repair versus replace should allow us to turn the units a little quicker. We will have more visibility into what our vendors are doing. They will have more visibility into what we are doing. We think that we can compress our time that it takes to turn a unit just knowing when they are coming in, how we can schedule a little more efficiently, and again, driving down those vacant days. So, that’s probably the biggest one aside from that. Just given what we have rolled out previously and you have heard us talk about it; we have 25 properties today that are unmanned. We do plan on taking that closer to 35 over the next year. Again, a lot of that has to do with some of the technology that we have put in place.

Thanks. First one, Mike, you talked about, I think that’s $40 million by 2025. It looks like half of that is the whole building smart system WiFi. But maybe can you talk about the other portions of that. What is the incremental of that? If you are at zero today or at the beginning of this year, what are you at, at the end of next year or ‘24? Should we assume some sort of ramp up?

That’s a good question, Neil. I think what you are going to see first and foremost, with the gig stream and the fact that we are rolling out the bulk Internet. That is something that’s going to take some time. We are currently rolling out about 10,000 apartment homes by the end of this year. We expect another 15,000 by the end of next year and then the rest of the portfolio in 2024. It does take a little bit of time to start seeing that revenue roll through. We do expect that run rate will be $20 million when it’s all said done. That’s the biggest one. Aside from that, I just spoke a little about some of the technology we are putting in place that will help us with efficiency around turns. We are continuing to find ways to do a better job with pricing, obviously going out there and creating more of those buyers or shoppers if you will. A lot of effort is going in there, and then obviously our customer experience project, we are very excited about that the data that’s going to come from that. Where that transpires a lot of that is going to come in 2023 on the revenue side followed up with 2024.