United Dominion Realty Trust Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

Key Takeaways

  • 8% same store NOI growth in Q2 and 7% FFOA per share increase, top of peer group.
  • Early Q3 metrics including accelerated traffic, other income, and collections support sequential same store revenue growth above historical norms and FFOA per share acceleration in H2 2023.
  • Formed a $507M joint venture with LaSalle and agreed to acquire six communities to attract global capital, drive future cash flow accretion, and enhance ROE.
  • Maintains an investment-grade balance sheet with over $1B liquidity, enabling execution of accretive transactions as cost of capital improves.
  • Sunbelt markets face near-term headwinds from elevated supply and higher rent skips, constraining pricing power, though long-term growth prospects remain intact.
AI Generated. May Contain Errors.
Earnings Conference Call
United Dominion Realty Trust Q2 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Greetings, and welcome to UDR's Second Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Vice President of Investor Relations, Trent Trujillo.

Operator

Thank you, Mr. Trujillo. You may begin.

Speaker 1

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.

Speaker 1

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 the 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 1 plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q and A session today.

Speaker 1

I will now turn the call Over to UDR's Chairman and CEO, Tom Toomey.

Speaker 2

Thank you, Trent, and welcome to UDR's Q2 2023 conference call. Presenting on the call with me today are President and Chief Financial Officer, Joe Fisher and Senior Vice President of Operations, Mike Lacey, who will discuss our results. Senior Officers, Andrew Cantor and Chris Van Enns will also be available during the Q and A portion of the call. To begin, the multifamily business continues to exhibit strength. In the Q2, the industry experienced Positive net absorption demonstrating the health of the consumer and the attractiveness of the apartments 1st alternative housing options, despite pockets of elevated supply deliveries.

Speaker 2

Our results reflect this strength. A few highlights. 1, our 2nd quarter year over year same store NOI growth Of almost 8% led to year over year FFOA per share growth of 7%, both of which we expect to be near the top of our peer group. 2, early third quarter trends including traffic, other income and collections have accelerated versus our June results. This supports our expectations of sequential same store revenue growth Above historic norms and FFOA per share acceleration in the second half of twenty twenty three, as indicated in our guidance.

Speaker 2

3, the joint venture partnership and portfolio acquisition of 6 communities we announced Align with our strategic goals and demonstrates the strength of our operating platform by attracting capital from a sophisticated global institutional partner, while finding a unique opportunity to deploy capital and grow the company. These transactions provide future cash flow accretion, enhanced ROE for investors and offer additional scale and efficiency benefits for our operating teams. And 4, our investment grade balance remains strong with over $1,000,000,000 of liquidity. This provides both safety and the ability to execute accretive transactions should our cost of capital improve. Looking ahead, we are encouraged by the continued job and wage growth combined with the prospects of additional clarity on the direction of interest rates.

Speaker 2

Regardless of the economic path forward, UDR is well equipped to succeed based upon our diversified portfolio, prudent capital allocation And our leading operating and innovative platform, all of which should help us outperform versus peers. Collectively, the actions we are taking are poised to benefit our stakeholders, our associates and the communities in which we operate. With a highly engaged group of associates and future utilization of innovative technologies, I'm confident in UDR's ability to capitalize on the strength of the multifamily industry and expand our advantages amongst public and private peers. With that, I will turn the call over to Mike.

Speaker 3

Thanks, Tom. The topics I will cover today include our 2nd quarter same store results, Early Q3 2023 results and how they factor into our full year 2023 same store growth outlook and an update on operating trends across our regions. To begin, year over year same store revenue and NOI grew at strong rates 7.6% and 7.7% respectively in the 2nd quarter. Similar to the Q1, We continue to recapture apartment homes that were previously occupied by long term delinquent residents. This temporarily high level of vacant units Pricing and increased repair and maintenance expense relative to what was in our initial guidance.

Speaker 3

There's still some work to do on this front, We believe these disruptions are now largely behind us as long term delinquents have reverted to near our pre COVID levels and in the month collections continue to improve. Next, we continue to see favorable fundamental trends to start the 3rd quarter. First, demand remains relatively healthy. Year to date job growth has been stronger than most anticipated, which is supporting solid levels of traffic. 2nd, the financial health of our residents appear robust as wage inflation has largely kept pace with rent growth in most markets, resulting in steady rent income levels in the low to mid-twenty percent range.

Speaker 3

2nd quarter move outs due to rent increases totaled only 8%, down from roughly 10% last quarter and 18% at its peak a year ago. 3rd, Relative affordability remains in our favor. With mortgage rates hovering around 7% and low single family home inventories bolstering prices, Renting an apartment is approximately 55% less expensive than owning a home versus 35% less expensive pre COVID. Only 6% of move outs in the 2nd quarter were due to home purchase, which is 50% less than our historical average. And last, concessions remain minimal and average approximately half a week on new leases across our same store portfolio.

Speaker 3

The concessions we've been offering remain primarily concentrated in certain submarkets where elevated levels of new supply are being delivered. With this backdrop, we have confidence in our ability to drive further sequential same store revenue growth improvement in the second half of twenty twenty three. First, after a slow start to the year, sequential market rent growth of 3% over the last 4 months is above the pre COVID average of approximately 2% over the same timeframe. July blended lease rate growth of mid-two percent and occupancy in the mid-ninety 6% range are similar to our June results and are anchored by the most difficult year over year comparisons we face given June, July August 2022 blended lease rate growth of 15.5 percent on average. As the year progresses, our comparisons to 2022 results ease.

Speaker 3

This, when combined with our strong loss to lease and rent growth momentum, should result in acceleration in both new lease rate growth and blended lease rate growth throughout the year. This would benefit not only 2023, but also positively contribute to our 2024 earn in. 2nd, our loss to lease at the portfolio level stands at 3% to 4%. Much of this is related to leases signed in the Q4 of 2022 And Q1 of 2023, due to greater than typical seasonality during those periods, New York, Boston, Washington, D. C, Seattle and San Francisco, which are collectively half of our same store NOI, Have the largest upside with a weighted average loss to lease of approximately 5%.

Speaker 3

And third, resident turnover is improving, which has both revenue and expense benefits. During the first half of twenty twenty three, we had approximately 600 more unit turns From resident skiffs and evictions compared to the first half of twenty twenty two. This impacted our occupancy, turn costs, repair and maintenance expense And administrative expenses, which collectively reduced our earnings by approximately 0.01 and improved pricing in the second half of twenty twenty three and into twenty twenty four. In all, we have positive operating momentum as we begin the back half of the year and expect to produce sequential same store revenue growth of 2% to 2.5% in the 3rd quarter, which compares favorably to pre COVID averages Approximately 1% and above level seen a year ago. Relating this to full year 2023 guidance, Recall that the building blocks we've provided to achieve the midpoint of our same store revenue growth guidance included: 1, our 5% earn in 2, full year blended rate growth of 2.5 percent with the contribution to 2023 being half of this or 1.25 percent.

Speaker 3

3, 50 basis points from other income initiatives and 4, flat year over year occupancy. Thus far, better realized year to date blended lease rate growth versus what was in our original guidance has been offset by 50 basis points of occupancy headwind to maximize revenue and NOI. Turning to regional trends, the positive momentum we have seen on the coast has continued. On the East Coast, our Northeast markets of New York and Boston are portfolio standouts. Weighted average second quarter occupancy was 97.2 percent and we achieved 9.4% year over year same store revenue growth.

Speaker 3

Robust levels of traffic and minimal competitive new supply continue to support pricing power with blended lease rate growth of nearly 5% during On the West Coast, occupancy has remained consistent in the mid-ninety 6 percent range with stable concession usage. Seattle was a standout in the 2nd quarter with a 70 basis point sequential acceleration in blended lease rate growth compared to a 30 basis point deceleration for the entire portfolio. Return to office mandates for various large employers in the region, Coupled with new jobs created by artificial intelligence companies has enhanced both traffic levels and pricing power. Lastly, the Sunbelt continues to face a pair of headwinds that has led to negative new lease rate growth in order to maintain occupancy levels. First is the relatively high level of new supply deliveries, which we would expect to continue through 2024.

Speaker 3

2nd is an increase in skips to nearly twice the prior year level, attributable to compound and rent growth over the past few years, outpacing income growth and affecting affordability for certain residents. Because of these factors, we expect pricing power across our various Sunbelt markets To remain constrained in the near term, though we continue to believe in the long term growth prospects. Finally, I'm excited to operate the 6 communities in Texas that we are under contract to acquire. Our acquisitions team identified properties within place, controlled operating margins that are approximately 800 basis points on average below UDR Communities in the same markets. By bringing these acquisitions on Our best in class operating platform, we can drive compelling upside and create value through our existing and ongoing innovation initiatives.

Speaker 3

In closing, thanks to our teams for your ability to execute our strategies as we continuously innovate and adopt new technologies to drive strong results. I will now turn over the call to Joe.

Speaker 4

Thank you, Mike. The topics I will cover today include our 2nd quarter results And 3rd quarter and full year 2023 guidance, a summary of recent transactions and capital markets activity And a balance sheet and liquidity update. Our 2nd quarter FFO as adjusted per share of $0.61 Achieve the midpoint of our previously provided guidance range and was supported by strong year over year same store NOI growth. The approximately 2% sequential increase was driven by incremental NOI from same store, Joint venture and recently completed development communities. Year to date results are largely in line with our initial expectations.

Speaker 4

Operations are trending to the midpoint of guidance and potential accretion from the LaSalle joint venture is offset by near term dilution From the announced Dallas and Austin acquisitions. As such, we have narrowed our full year 2023 same store growth and FFOA per share guidance Looking ahead, for the Q3, our FFOA per share guidance range is $0.62 to $0.64 Or an approximately 5% year over year increase at the midpoint. The $0.02 or 3% sequential increase It's driven by a combination of higher NOI from same store and recently developed communities. The implied 4th quarter FFOA per share guidance of $0.65 reflects another $0.02 or 3 percent sequential increase. This is driven by an increase in revenue from blended lease rates, occupancy and other income initiatives, Additional lease up NOI from developed communities, higher income from DCP Investments, sequentially lower expenses And improve bad debt trends.

Speaker 4

Next, a transactions and capital markets update. First, during the quarter, we completed the formation of a $507,000,000 joint venture with LaSalle on behalf of an institutional client. UDR contributed a seed portfolio of 4 communities totaling more than 1300 apartment homes at a low 5% yield. With the $245,000,000 in proceeds, we reduced our commercial paper balance, which carries a mid-five percent interest rate. We plan to grow the joint venture alongside our partner by targeting acquisitions with operating upside that are located proximate to other UDR communities To increase operating scale, densification and earnings accretion.

Speaker 4

This transaction is expected to be accretive to cash flow and FFOA per share Once dry powder is deployed and will enhance our future growth profile. 2nd, subsequent to quarter end, We entered into an agreement to acquire 6 communities totaling 17 53 Apartment Homes for approximately $402,000,000 In addition to the operating upside Mike discussed, we were able to finance the transaction through roughly $173,000,000 of UDR Operating Partnership Units issued at Chip units issued at $47.50 reflecting a 2% premium to consensus NAV. Furthermore, we assume nearly $210,000,000 of debt at an attractive weighted average coupon rate of 3.8%. Due to negative non cash debt mark to market adjustments related to the below market debt rate assumed, the transaction is expected to be cash flow neutral and slightly dilutive to FFOA per share in the near term. However, we expect to drive accretion once operations captures the significant margin upside.

Speaker 4

3rd, during the quarter, we addressed 3 of our upcoming DCP maturities by funding a total of $39,000,000 projected initial contractual weighted average return rate of 9.4% while having our first dollar exposure Starting in the low 50% LTV range. And 4th, during the quarter, we achieved stabilization on 1 development community Totaling 292 Apartment Homes for a cost of $102,000,000 at a stabilized yield in the high 5% range. We continued the successful lease up at our 2 other recently completed development communities, which also have an expected weighted average Finally, our investment grade balance sheet remains liquid and fully capable of funding our capital needs. Some highlights include: 1st, we have only $113,000,000 of consolidated debt 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 3.2%. 2nd, we have $1,100,000,000 of liquidity as of June 30.

Speaker 4

And third, our leverage metrics remain strong. Debt to enterprise value was just 27% at quarter end, while net debt to EBITDAre was 5.5 times, Down 0.7 times from 6.2 times a year ago and more than a half a turn better versus pre COVID levels. We expect these metrics to remain stable throughout 2023. In all, our balance sheet remains in excellent shape, Our liquidity position is strong. We remain opportunistic in our capital deployment with balanced forward sources and uses.

Speaker 4

And we continue to utilize a variety of capital allocation competitive advantages to drive cash flow and earnings accretion. With that, I will open it up for Q and A. Operator?

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question And our first question comes from the line of Eric Wolf with Citi. Please proceed with your question.

Speaker 5

Hey, guys. Maybe I missed this in your remarks, but where do you expect permanent growth to go in the

Speaker 3

back half of the year? Hey, Eric, it's Mike. We're seeing some pretty positive trends. So just to kind of put in perspective, over the last few months, we've seen Market rents rise about 2% in the back half of the year. We expect to see something similar.

Speaker 3

So right now, market rents, we've got Some tailwinds, if you will.

Speaker 5

Yes. So market rents, you said 2% blended rent would be a bit higher than that given like a lost lease?

Speaker 3

Yes, it's different by region obviously. What we're seeing today is lost to lease in that 3% range. We're probably closer to 5% to 6% on the East Coast, around 3% to 3.5% on the West Coast and then our Sunbelt's roughly flat today. So we do expect to capture a lot of that in the back half. And just as a reminder, when we were going into the back half of last year into the first part of this year, We had a lot of headline news, if you will, just around tech layoffs, the banking issues, put a little pressure on our market rents, but we expect to gain a lot of that back this year.

Speaker 3

So That's part of our confidence and where we're headed with both new lease growth and renewal growth as we

Speaker 2

move into the rest of the year.

Speaker 5

Understand. And then just a quick follow-up on that. I mean, in your remarks, you said that you needed to adjust pricing to induce demand from some of the delinquent tenants that left over than Which obviously is a good thing. But when I look at where blended spreads went down the most, it was in the Northeast and the Sunbelt, which is where I would think you You would see the least amount of delinquent tenants, I would think, would be on the West Coast. So just maybe help us understand sort of how much you I think those sort of delinquent tenants and the price adjustments impacted your spreads during the second quarter.

Speaker 3

Sure. I'll give you a little color, but I think we've gotten a few questions on this. So let me just back up a little bit and provide a few other points. I think it's important just to remind everybody, there's varying definitions on blends out there right now. And as a reminder, We include everything, 1st and foremost.

Speaker 3

And when we think about blends right now over the last 3 to 4 months and really thinking about last year, We were about 200 basis points higher than the peer average. So we were really driving our loss to lease. We were pushing our renewal growth And we've got a tough conference right now. As we think about it going forward, just getting rid of some of these long standing delinquents, the fact that They're more or less behind us. We're starting to see that momentum in market rents that goes to what I said with what we expect going forward, especially in those coastal markets.

Speaker 3

And that's truly what's going to drive that rent growth trajectory as we move forward.

Speaker 5

Got it. Thank you.

Operator

Thank you. And our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

Speaker 5

Great. Thank you. Good afternoon. My question is focused on the Sunbelt. Is it fair to say that the Sunbelt is a bit worse than expected so far this year?

Speaker 5

I know you've been flagging it, supply issues, but I guess, how would you characterize the Sunbelt? And if you could be more specific on, is it certain cities? Is it urban, suburban? We're getting a lot of questions on the Sunbelt today. Thank you.

Speaker 3

Yes, Jeff, again, this is Mike. I would tell you, we do Experience a little bit more weakness in the Sunbelt than we would have expected. And as I said in my prepared remarks, I think it's Twofold. It's partially due to some of the supply that we have in some of our submarkets, specifically what we're seeing in the Cedar Park area of Austin, As well as Addison in Dallas where we have more exposure. So I think that's part of it.

Speaker 3

The other piece of it was really the skips that we experienced down there. So As you all know, we've been pushing renewal growth pretty aggressively over the last couple of years. We experienced about 250 to 300 Skips in that part of the country and that put a little bit of pressure on our occupancy, which obviously in turn has pressure on your market rents. That being said, skips are starting to slow back down at this point. And going forward, it feels like the Sunbelt's relatively stable.

Speaker 3

Today, we're in that 96.5 percent occupancy range. Not really seeing the concession levels pop up as much and market rents are holding steady. So As we move forward, we expect that we'll see probably blend similar to what we just experienced in 2Q in the Sunbelt. That being said, We did see more growth in the coast, specifically the East Coast. We didn't expect New York, Boston, even DC to do as well as they have.

Speaker 3

And again, those are other markets where we're running close to 97% occupancy today. Concessions are basically non existent in New York and Boston, Still a little bit to some degree in the 14th Street quarter of DC, but pretty strong growth on just top line rent. In addition to that, other income is doing really well. We feel pretty confident about where total occupancy is today. We think we can get a little bit more aggressive as we move forward on our rents and we're seeing a lot of success returning some of our other initiatives That relate to other income as we move forward too.

Speaker 3

So overall positive outlay as we go forward.

Speaker 5

Thank you. And just to clarify, I know you had some comments on supply in the Sunbelt in 2024. I guess, some of the data showing that might remain elevated beyond 24. Any information or any color you could provide there on kind of that Sunbelt supply you were talking about through 2024 potentially into 2025?

Speaker 4

Hey, Jeff, it's Joe. I'd say overall for our portfolio as well as Sunbelt, I think we remain pretty stable when you go into 2024. So you see a pretty big ramp here in 2023 relative to 2022. In terms of deliveries taking place, we're kind of up 30%, Really that kind of 2.5% of stock number overall within our portfolio, it's a little bit less than that within our submarkets here this year. But you do have Sunbelt running up in the 4% range as a percentage of stock and even higher in certain markets like Nashville and some others.

Speaker 4

So They're facing a little bit more pressure. When you go into 24, it looks like it's going to remain pretty stable. There's not a lot of volatility either this year or next year as it relates to 1st half, second half stats. So I think you're kind of stuck with Sunbelt staying a little bit higher here through this period of time. I would say though from a total housing stock perspective, You've seen single family completions coming off fairly dramatically as starts have really fallen off a cliff in the last 6 to 12 months.

Speaker 4

And so total housing stock picture looks Quite a bit better, and generally is stable on a year over year basis in 2023 and likely into 20 24, plus you got the relative affordability piece, which is clearly in multi's favor. So I think generally Mike's comments on stability feel pretty fair in terms of as long as we continue to see that demand in household formation in the Sunbelt, I think we'll be in a pretty good place there. As it goes into a little bit longer, you're kind of alluding to is that tail going to get stretched out. Yes, you're starting to see the early signs on the census data in terms of permits and starts coming off maybe 10% from peak. I would say anecdotally, We believe it's off quite a bit more than that.

Speaker 4

Just talking to developers in the space, talking to lending partners that we work with, Obviously, looking at DCP projects that, honestly, we're really not seeing much come through our pipeline. You look at the Architectural Billings index, which is off pretty dramatically. So a lot of good forward indicators that tell us it's about to fall off. Similarly, if you look at some of the 3rd party data and go away from Census based data, which is a little bit spotty from a survey perspective at times and somewhat lagged, if you look at third parties like Axio and their stat data, which has Traditionally have been very well correlated with overall starts. They're off as much as 50% from peak already in the last 12 to 18 months.

Speaker 4

So I think somewhere in between the down 10 and down 50 is probably closer to reality, but we are seeing that supply come down, which bodes well for 25.

Speaker 5

Very helpful. Thanks, Joe.

Speaker 3

Thanks, Joe.

Operator

Thank you. Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Speaker 6

Thanks. I guess still good morning out there. I guess, Joe, to kind of follow-up on that question, I'm just curious, are you seeing any, maybe early signs of any distress or investment opportunities maybe on the land My understanding is a number of merchant builders are starting to scale back the size of their development teams and Maybe looking to sell some land parcels. I'm just curious, is there anything that's come up or you think gets shaken loose over the next 6 to 9 months that Might be a 2024 or 2025 start for you guys?

Speaker 4

Yes. I'd say, number 1, just kind of thinking about the starts activity. Within our internal business plan, we had plus or minus 6 projects that we had to kind of penciled in to start either this year or next year. And just given our capital light strategy, the cost of equity, the cost of debt, where cost and rents are and in place Yes. We are kind of sitting on those and just building on the optionality so that either when rates come down, cap rates down, stock price up, and going yields up, We'll be ready to really jump into our existing development pipeline.

Speaker 4

And so we have delayed that, which obviously helps sources and uses and is prudent, I think, to kind of sit back and wait. On the distressed side, be it land, be it acquisitions, we really aren't seeing distress within the multifamily space. I think there are sectors that have become much more capital starved and or have different fundamental profiles. But in multifamily with the GSE back There's always liquidity available and it is a preferred asset class as we've seen good performance going through COVID and coming back out the other side. So Yes.

Speaker 4

I'd say if you go to some of the tertiary land parcels, yes, maybe they're trading off as much as 20%, 30%. But if you look at kind of main and main Core parcels, you're really not seeing anyone willing to transact as the developers are generally pretty decently capitalized and not in a rush to transact at potentially discounted prices.

Speaker 7

So nothing on that

Speaker 4

front and honestly, really So nothing on that front and honestly, really nothing on the acquisition front. Our commentary really hasn't changed much from last quarter and that When you look at current NOI, we're still seeing plus or minus 5% cap rates on the deals that we've been taking a look at. We've shown a lot of deals to our new joint venture partner and have been working through kind of those assets and see in the market and what the returns are there. We're still seeing a lot of unlevered buyers out there, be it sovereign, high net worth, closed end vehicles, PE That are looking for kind of that 7 plus percent unlevered IRR. So we kind of think we're in that plus or minus 5% cap world right now.

Speaker 4

So not seeing much distress out there.

Speaker 6

Great. Thanks. That's it for me.

Operator

Thank you. Our next question is from Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your question.

Speaker 6

Great. Thank you. Just stepping back for the total portfolio, can you just give us a sense how far along you are in that eviction Process and how you expect you'll be able to backfill some of the vacancy you highlighted due to SKIPs and Avics. I mean is that a 23 event? Could you get back to the high 96 range later this year.

Speaker 6

Just trying to get a sense of how that trends and then also what you're assuming to get to that 2% to 2.5% sequential revenue growth for the 3rd quarter?

Speaker 4

Yes. Hey, Austin, it's Joe. So I'd say overall feeling really positive as it relates to that long term delinquent picture. We're down to plus or minus 250 kind of longer term delinquents at this point in time, which really isn't materially different than our long term average. So they are sitting there with a little bit higher balances because they've been able to stick around quite a bit longer than history would have allowed them to do.

Speaker 4

So We're feeling pretty good there. We've gone from kind of $750,000,000 9, 12 months ago down to that number. I think as Mike said, between the evictions and the skips as worked through that process. We saw about 600 incremental in the first half of the year, which definitely came at us quicker than we expected. We thought it may take a little bit longer either due to eviction moratoriums that used to be in place and or eviction diversion programs that have elongated the process.

Speaker 4

So we did get them back quicker. As Mike mentioned, it cost us maybe a $0.01 or 2 in the first half between taking a little bit of occupancy and pricing hit, Losing some fee income and of course you have higher turnover, higher legal and then marketing costs to go acquire the new resident. So We did have that headwind, but overall feel like we're in a pretty good place now. You've seen our gross AR and net AR continue to trend down. And when you look at our collections, our end of month collections and end of quarter collections continue to trend higher.

Speaker 4

So overall, feel good on that trajectory. So When you kind of think about that 2%, 2.5% sequential number, there is some occupancy pickup that we expect as we go forward. So you got that. You have blended lease rate growth that is positive. Mike already talked through some of the other income and reimbursement initiatives that we have out there that are going to help drive some of sequential and then you get into bad debt after taking more of the hit in the first half, it starts to improve from sequential and year over year perspective here in the second half of the year in 3Q and going into 4Q.

Speaker 4

At the same time, On the expense side, we think we're relatively static in expenses in the back half relative to 2Q.

Speaker 5

So it will pop up a

Speaker 4

little bit in 3Q and back down 4Q. And then beyond that, the other big driver that we have out there, which is non same store, but helps drive that increase in FFO from 61 to 63 65, we've got development lease up NOI. So we've got 3 assets that are in lease up right now, About $375,000,000 basis in 2Q produced annualized yield of just over 1%. Those are eventually going to stabilize in the high fives. So there's about a $3,000,000 or $0.01 pick up from 2Q to 4Q from that Probably another $0.03 of accretion year over year by the time you get into 2024 from those lease ups.

Speaker 4

So it's kind of the roll up of kind of that walk forward from 2Q to 4Q.

Speaker 6

A lot of helpful detail in there. It sounds like some occupancy pickup, but maybe not back to the high 96% range you were at. So as we think about then this improvement in lease rate, can you just give some detail around how new and renewal lease rate growth trended month to month in 2Q, so we can get that picture of how things are trending into the back half now that the skips and The VIX are further behind you.

Speaker 3

Yes. Hey Austin, it's Mike. Throughout 2Q, we were hovering right around 3% to 3.5% in the 1st part of the quarter and then June, we were closer to 2.5%. I would July August to look very similar to June at this point just because we're anniversarying off of those very high numbers from last year. And again, that being said, We do expect September to start to take off even with normal seasonality right now with market rents.

Speaker 3

We will see year over year market rent growth going forward And that will obviously lead to higher new lease growth and higher renewal growth.

Speaker 6

Just to clarify, when you say start to take off, is that sort of back to the 3% to 3.5% level or do you think it could get better than that?

Speaker 3

Right now, we're thinking that 3% to 3.5% range as we move forward, once you get past It's July August timeframe.

Speaker 5

Very helpful.

Speaker 4

And also just to quantify that a little bit, when Mike talked about that seasonality we saw last year starting in September when We saw those a lot of those headlines pop up on the banking and the tech side. We saw seasonality dip pretty aggressively September through December. It actually dropped by 300 basis points versus typical seasonality. So a lot of that loss still leased that Mike is talking about of plus or minus 3%, That's embedded in basically September all the way through 1Q of next year. So the loss release that we're looking to capture isn't so much occurring here in the next couple of months.

Speaker 4

As we go through kind of those blends, you're going to really start to see a pop potentially in 4Q and 1Q next year. So that's really the momentum piece. Part of it's better market rent growth year to date and part of it's just Lot easier comp, both on an absolute and relative to peer basis.

Speaker 6

That's good detail and appreciate the insights.

Operator

Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.

Speaker 8

Hi. This is Derek Metzler on for Adam Kramer. I appreciate the comments on accretion for the JV and the subsequent property acquisition in the opening remarks, if you could talk any more about expectations for timing Deploy the dry powder that you mentioned in the JV and any other puts and takes you can talk about For the subsequent fixed property acquisitions, so net net, how should we think about accretions for these transactions? Thanks.

Speaker 4

Yes, great question. So I'd say as it relates to guidance this year, because we've got a couple of questions on Got it. The implications of the 2? Yes, the JV is expected to be year 1 accretive, but contingent on deployment of that dry powder. Once that dry powder gets deployed, that's when you start to earn the asset management, prop management fees.

Speaker 4

It's also when we're able to redeploy and do assets that we can go capture Operations upside and kind of enhance yield on. So, yes, day 1, it's kind of a push as we sold the life low-5s and then paid off, got a low to mid-5s commercial paper balance. So there should be some accretion coming there. We are pretty convicted in terms of our ability over the next 12 months to begin to get that capital deployed. As I mentioned, Gary and Andrew of the team have been working pretty tightly with LaSalle and looking at a lot of different assets in the market, Trying to make sure what fits for them, what fits for us.

Speaker 4

And as we've talked about, aside from kind of that just accretion from the fee side, Definitely think it's beneficial to be able to have a partner that over the long term we can continue to grow with, redeploy proceeds with an efficient basis And get some of that operating upside from our platform, be it through the traditional initiatives or getting more deal next door and more densification plays. So I think over the JV, you'll see that accretion come in over the next 12 months. The counterbalance to that is obviously the OP Unit transaction, which Is day 1 dilutive for us? So the net of these 2 ends up being slightly dilutive here to 2023. But over time, both FFO and cash flow accretive in 24 and 25, we believe.

Speaker 4

So maybe just a couple of comments on that OP Unit Portfolio transaction. We're obviously very excited. I think this is going to be a very fun test for the operational team to take what has been under managed assets And really lean into the operational upside there. So I'll make a couple of points, but Mike will probably come over the top and give you some more specifics. To the positive, the controllable operating margin here, it's about 800 basis points below the margin And our Dallas and Austin assets, that's the widest differential that we've seen of the $3,500,000,000 that we bought over the last 4 or 5 years.

Speaker 4

So probably the most meat on the bone of any transaction we've seen. From a funding perspective, we really like this because it's basically self funded the sense that we had low cost of sumable debt combined with a very attractive request equity issuance through OP units. And so we like the self funding nature of it. On the debt side, debt assumable debt carries a rate of about 3.8%. When you look at that relative to market today in the low fives, We've got 6 plus years of, call it, 150 basis point advantage on that debt, which if you think about a debt for market value, it It translates into about a 25 basis point benefit in terms of asset pricing.

Speaker 4

And then lastly, these are newer institutional assets that have been very well maintained. You think about the CapEx profile on these relative to our legacy portfolio, the percentage of NOI is probably about half of our legacy portfolio Over the next 5 plus years, so that equates to about a 25 basis point improvement to the cash cap rate relative to the equity that we issued. Day 1, we buy this at about a 4.5 percent NOI yield. Year 1, it's probably about a 4.75 And that assumes that we capture about 200 basis points of that margin upside. But then when you adjust for that cash differential, You're basically issuing and buying in year 1 at the same cash cap rate.

Speaker 4

And from that point forward, you have all the revenue initiatives plus all the Margin upside to go after, which we think ultimately drives much better growth from this portfolio relative to our legacy portfolio And gets to probably a 10 year or so accretion over the next couple of years. Yes. I'll turn it to Mike. He can take you through some more details.

Speaker 3

Yes. Let me just add a little bit more color around that Controllable operating margin. Joe mentioned, the team is very excited to get our hands on these assets. He mentioned 75%, 76% control of operating margin. We run our properties in the same markets closer to around 84%.

Speaker 3

So we do believe in the next 6 to 12 months, we'll be able to capture a good chunk of that. And obviously, after 2 years, we'll be able to capture the majority of it. Couple of things just To give you more specifics around it, 4 of these assets are basically in our backyard right next door to one of our wholly owned assets. So we intend to get a lot of efficiencies just as it relates to just the personnel side of the business. And we expect to capture that again in the next six 12 months.

Speaker 3

Aside from that, we do have some positive in unit amenities that we're able to get in there day 1 and add, Such things as smart homes, washer dryers on a couple of 2 or 3 of these deals, we're able to get in there and do that. That's a really good return for us. And in addition to in unit amenities, there's also everything that's on the outside. So things that we've done in the past with parking initiatives, The fact that they do not have package lockers, we're able to order those and get those installed in the next few months, a lot of low hanging fruit. And we believe between the in unit and the amenity areas, there's probably 150 basis points alone in the next 12 months.

Speaker 3

Aside from that, more innovation on WiFi over the next 6 months, we'll assess that and try to Go hard on installations and then just our revenue management alone. The fact that we can get in there and do more of our surgical pricing on in units, We think there's a lot of upside. So I think it's safe to say that, call it 700 basis points, 800 basis points will be captured in the next 12 to 18 months.

Speaker 8

Great. Really helpful. Thank you.

Operator

Thank you. Our next question is from Jamie Feldman with Wells Fargo. Please proceed with your question.

Speaker 5

Great. Thank you. A lot of moving Here on the guidance, puts and takes. Just as you think about the back half of the year, where do you think there's the most variability? Where may you actually surprise to the upside and where are you most concerned about the downside?

Speaker 4

Yes. I I think when you go to the non ops lines, we generally feel pretty dialed in. As it relates to interest expense variability, Yes. We're running at maybe 6% floating rate debt plus or minus in the back half of the year. So minimal variability there.

Speaker 4

G and A feels pretty well dialed in. DCP, we did the $40,000,000 of additional investment there. We'll have some additional fundings on a couple of other deals As we fulfill commitments on a couple that are just working through construction, but minimal variability that we see on the DCP side. I think a couple of variability aspects of on the OP Unit transaction, just as we integrate, maybe you see a little bit of either positive or negative. Same with the joint venture, if we redeploy quicker those cash proceeds, we could start to earn those fees a little bit sooner and start to capture some of that upside.

Speaker 4

But I think most of it's going to come through on Mike's side on the same store piece. And so we do expect to see some upside in occupancy. We've talked about that pickup in blend starting in September of the year, although that ends up being a little bit more of an earn in and 2024 story at that point given how many So I think that's your big variability. Real estate tax is pretty well dialed in at this point. We know 80 plus percent of those.

Speaker 4

I think personnel, R and M, especially given that we've gone through a lot of the high turnover, pretty well dialed in on the expense side. So We feel we're pretty tight. That's the reason we ended up going right back to the midpoint as overall we're tracking to where we expected to this year.

Speaker 3

If I can just add a couple of things. I think to Joe's point, we feel pretty good about the blocking and tackling around the operating environment. Fact, we're sending out between 4.5%, 5% renewals through October. We intend to capture that. And again, market rents Should start to see that year over year bounce back.

Speaker 3

So overall, the blocking, tackling feels good. On the opportunity front, I think it's around innovation. And you've heard us talk a lot about what we've put in place this year in terms of rolling out Internet. We've got about 9,000 units installed for bulk. At this point, we've got another 9,000 that are coming over the course of the next 5 months or so.

Speaker 3

And we'll continue to push that forward as we move into next year. So I think there's some opportunity there. As far as unmanned sites, we're a little bit over 20% of the portfolio rolled out. We're going to be assessing that and looking at 2024 to see if we can add more. But overall, I'd say the things that we've rolled out Have been successful, but where we're probably most excited about and you've heard us talk a little bit about it is the customer experience dashboard.

Speaker 3

And the fact that we have full transparency on the lifecycle of the resident with all of our data in one place in chronological order, which includes things like text, Surveys, phone calls, service requests, we can see exactly what's happening. We're testing different hypotheses right now. We think there's a ton of opportunity as it relates to this. I think what's on the horizon, it's probably more of a 24, 25, But obviously, we expect this will increase our retention. We think it'll be allow us to do a little bit more as it relates to capital decisions And how we spend money and ultimately it's going to lead to pricing power.

Speaker 3

So I think there's more opportunity with this in front of us and we're just now Scratching the surface.

Speaker 5

Okay. Thank you. And it sounds like you'll see some acceleration in the back half of the year on same store And earnings, rolling into 24 on the expense side,

Speaker 3

what do

Speaker 5

you think your growth rates look like there if you think about the major line items, At least from the visibility you have today?

Speaker 4

Yes. Jamie, I'd say it's pretty early to get into that. But Honestly, I think with a 4.75% midpoint this year, you probably don't look materially different next year. I think it's A little bit above that long term kind of 3% number, so again, let's say 4% to 5%. Like real estate taxes, you do have some lagged impact Valuations having come down and NOIs moderating, insurance clearly is going to continue to be an area of pressure, Although, overall, premiums are only about 2% or 3% of expenses.

Speaker 4

There's still some degree of wage pressure given the strength of the job market out there. So you still have wage increases and as well as within R and M, but it probably doesn't look much different than it has here in 2023.

Speaker 5

Do you see a scenario where it's materially higher?

Speaker 4

Never say never, but some of the big pressure items that we saw here come Through this period of time, if you look at the level of turnover that we had, driven by those long term delinquents, Those are exceptionally costly to us. And given how much they cost us in the first half of the year, it's hard to see how that would be the case. We do have some tough comps. I think everybody remembers in Q1, we have the benefit of the CARES benefit in terms of the personnel reimbursement We're looking at COVID, so that was maybe a 75 basis point impact. At the same time, we've got a lot of initiatives, Mike mentioned, going to fewer headcount over time.

Speaker 4

We rolled out our maintenance technology suite here recently, which is vastly improved efficiency as well as resident communication. So there's probably more benefits there. We've got a number of ROIs that we'll be focused on both from a revenue and expense perspective. So vastly higher would be challenging, I think, but It remains to be seen. I think 6 months from now, we'll get into it on that guidance call in January.

Speaker 5

Okay. All right. Thank you.

Speaker 2

Thank you. Hey, Jamie, this is Toomey. I might just add, I mean, if you think about it long term, the advantages the publics have is sophisticated operating models That continue to put distance between us and the private owners. And so when we get a cost capital advantage, You're going to have a distinct advantage both on the revenue and the expense because of the investments these companies have been making. So I think When I look out on the horizon 24, 25, when we get across capital, there's going to be opportunities for these enterprises to continue to grow By making investments in their operating and innovation platforms.

Speaker 2

So while we might not be able to fight back all the expense pressure, It is by far a fraction of what private operators are having to deal with.

Speaker 5

Yes. No, that makes sense. I guess, Tom, just while you have the mic, I mean, the whole Sunbelt debate, I mean, it seems like this quarter, Some portfolios have acted a little weaker than people thought, some have acted better. I mean, what's the big picture on Sunbelt Supply in your mind?

Speaker 2

Well, I mean, I think it's always been we run a book of national. So we can't talk a region or Up or down 1, I think in the long term, the Sun Belt will have an equilibrium. It should have attracted a lot of Supply did attract it. It attracted a lot of jobs at higher paying ratios. And so we'll see how those higher paying jobs, other businesses relocating.

Speaker 2

If those grow and grow into that supply, it should perform very well. And so I think in long term housing as a whole It is a great place to be invested in and these markets go through these ups and down cycles, but in long term And grow that income that we want a piece of. So long term, I think it will equal out. Markets will cycle up and down. That is our philosophy about how we structure the company, be diversified.

Speaker 2

These markets are going to go up and down. But if we can pick the right markets at the right time, we're going to do really well.

Speaker 5

Okay. All right. Thank you.

Operator

Thank you. Our next question is from Juan Sanabria with BMO Capital Markets, please proceed with your question.

Speaker 7

Hi, thanks for the time. In the opening remarks, you made some comments about maybe some stretched affordability in the Sunbelt. So I was hoping maybe you could provide a little bit more color On where those levels have gone from and to and how that compares to kind of the other markets or coastal part of your portfolio, please?

Speaker 3

Hey, Juan, it's Mike. Yes, I think that's more specific to what we experienced with the skips In the Sunbelt versus the evictions in the coast, so we did see around 250, 300 skips and a lot of that has to do with some of the supply in our backyard. So when we're tracking and we're finding out where people are going, they're pretty much sticking within that marketplace, but they're able to capture either a concession or a lower rent At some place next door. So again, that put a little bit of pressure on us in the Sunbelt and it's the opposite with what we experienced in the coast. That's where we're able to get in there, Move through the eviction process.

Speaker 3

We did see more evictions than what we saw last year. And again, this put the same type of pressure on both our occupancy and our rents, but We feel like a lot of this is behind us now and we're able to move forward.

Speaker 7

Maybe a dumb question here, but how do you determine if something is Quote skip versus just a normal course move out?

Speaker 3

A skip, typically somebody comes in and they drop off the keys. So they're not waiting to go through the eviction process. They're more or less giving up.

Speaker 7

Got it. Okay. And then just second question. How are you guys thinking about The potential overhang from the end of the student debt relief and the strikes in LA

Speaker 4

Yes. I guess as it relates to the student debt piece, I'll take that one and then Mike can talk to anything about the Recent strikes in LA. On the student debt side, I wouldn't say we have great insights here. We're kind of beholden to wait and see When August 29 occurs and payments go potentially back into place, I'd say overall, you typically see about 20% of households in the United States that Have some form of student debt, with a medium payment only being about $200 So as you think about our renter and their typical household Income, yes, it is less than 2% typically of overall household income, so not a meaningful component. That said, I think we're I have to wait until we get into the fall and see if there are any indications in terms of pricing power and renewals or any demand impacts in terms of traffic coming through the door.

Speaker 4

But Today, we don't have any great insights there.

Speaker 3

Yes. Specific to LA, I think it's always important to know this is really just a About 3%, 3.5% of our NOI market, a lot of our exposure is in Marina del Rey. And I'll tell you the market has done well, where we continue to see Positive new lease growth, renewal growth still in that 5% range and occupancies hovering around 96.5% today. More concessions are downtown where we have Our JV assets, but overall LA feels good. I have gotten a couple of questions around just our sequential growth.

Speaker 3

And I think it's important to note that Without some of the evictions that we saw there as well as some of the skips, we would have been closer to about 1% to 1.2% sequential revenue growth without bad debt. So again, this market feels pretty good to us today, not really seeing a big difference in traffic. And I think we're in a good position as we move forward.

Speaker 7

Thank you very much.

Operator

Thank you. Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Speaker 7

Good afternoon. Thanks a lot for taking my question. Mike, the quantification of the new lease rent growth by region was helpful. Do you expect the gap in the new lease rent growth for the East and West Coast and the Sunbelt? Did you expect that to widen through the back half of the year and by how much?

Speaker 3

Not much. So what we would I would tell you is again, in the back half of the year, we think there's more opportunity in the coast Just because that's where we have the greatest loss to lease. And again, that's where we had some of the depressed market rents last year. So I think you'll see that continue You show well in the back half, but what we're seeing with the Sunbelt today is we've got through a lot of these skips. It did put pressure on us.

Speaker 3

We do expect that it to be somewhat stabilized going forward. It's not going to widen. So maybe the coast gets a little bit better, but I don't expect the Sunbelt to get materially worse.

Speaker 7

That's helpful. And then have you seen any changes in the lease up strategies for merchant builders Who see their product delivering into a high supply environment or has pricing remained overall pretty rational around lease up?

Speaker 3

It's been very rational. We see in some cases where concessions are in

Speaker 7

the 4%

Speaker 3

to 6% range, But we're not seeing people go as far as 8 to anything past that. So overall, it feels rational. Sunbelt today, minimal concessions. And then I think there's just pockets where you have developers offering a little bit more. But overall, we feel pretty good.

Speaker 3

I mean, we have a couple Lease ups of our own and we offer right around 4 to 6 weeks and we're ahead of schedule in terms of leasing. They've been leasing at about double the rate of what we see in our mature

Operator

Our next question is from Nick Yulico with Scotiabank. Please proceed with your question.

Speaker 5

Hi, everyone. I just wanted to see in terms of the acquisitions that were announced, you gave some Perspective on the yield, are these also under occupied assets? Any sense on what the

Speaker 9

you can give us on

Speaker 5

the occupancy of the assets?

Speaker 3

They're a little bit lower than what we would run. So we see around 95.5 to 96. And again, in the Sunbelt area, we're closer to 96.5 today. So just slightly under where we typically run them.

Speaker 5

Okay, got it. I just wasn't sure what the initial yield you talked about, whether we should think that In reality, the yield would be a little bit higher before what you've already mentioned was some of the margin improvement you expect to achieve.

Speaker 3

Yes, that's right.

Speaker 9

Okay. Thanks.

Operator

Thank you. Our next question is from Wes Golladay with Baird. Please proceed with your question.

Speaker 10

Hey, everyone. It looks like you have a lot of opportunity on the acquisition you discussed earlier. But can you remind us that what is the typical value creation you're going to achieve just through the UDR platform within a few years?

Speaker 4

Yes. Typically, when you go back, Wes, and look at from 2019 to early 2022, we did $3 plus 1,000,000,000 of transactions. Usually, the controllable margin differential that we saw in those was around 400 basis points. So back then, we'd buy and we could typically get 10% lift Including any market rent growth. And so that would be capturing that 400 basis point plus you're going to put on some occupancy upside, rev management, Other top line initiatives like parking and package and smart rent and Wi Fi and all that that will drive top line as well as the expense piece helps the margin.

Speaker 4

So It's usually 10% lift. We can kind of take to the bank when it's managed by typical third party. In this case, this is not managed by 3rd party property manager. It's really more of a mom and pop shop. So there's a little bit more meat

Speaker 5

on the

Speaker 4

phone there with that 800 Points of margin than we typically see.

Speaker 10

Got it. And you mentioned not seeing any distress, but we did see you come in and help one of your DCP a few of your DCP Investors and I know you're a well capitalized company. I'm just kind of worried not worried, I just maybe want to get your view of the state of The average private developer, they're probably getting a lot of accrued interest, cap rates have moved up a little. Conversely, NOI has increased. Has that been sufficient to have them with equity just for the broader industry based on the people you talk to?

Speaker 10

Or do you think we lose some developers in the cycle?

Speaker 4

I think you're definitely going to see some developers lose assets a cycle and lose capital. In this case, with these three assets, Definitely not going to tell you that they're going to get the returns that they originally expected when they went into these transactions. But from a capital stack perspective, Yes. The cap stack on these was basically they were built for $360,000,000 After these pay downs, the senior loans at about $175,000,000 Our position is about 160. So we're kind of going to 50% to low 90% loan to cost on these assets.

Speaker 4

Obviously, originally, they expected these to be worth substantially more than cost. But even if you use cost as a baseline, there's still some equity in there. In terms of the distress for those developers, yes, we talked a lot internally about how to approach these over the last kind of 3 to 6 months. Ultimately, we didn't want to push either our lending partner or equity partner to the brink on this to find out, was there going to be capital available from the equity Or force them into the position where there are plenty of opportunistic lenders out there. The challenge with them is they charge much higher rates.

Speaker 4

You'll have points on the way in and on the way out potentially interest rates and reserves and just general terms that we as a pref equity partner Don't really want to have sitting ahead of us in the cap stack. So we like the idea of doing the refis with the relationship lenders, keeping them in place and just doing the pay down, which For us, doing it at 50% to 60% loan to cost is effectively where we're investing that new capital at a mid-9s. That felt like a pretty good return for assets we know, the assets that are still going through their stabilized NOI phase, but they're 90% leased, Less occupied, but NOI trajectory looks good on those. So overall, felt good about them, but yes, there probably will be some distress out there at some point in time for certain developers.

Speaker 5

Great. Thanks for the time.

Operator

Thank you. Our next question is from Allen Petersen with Green Street Advisors. Please proceed with your question.

Speaker 9

Thanks for the time guys. Joe, maybe just a follow-up there on the DCP projects that you guys extended incremental capital to. In terms of the conversation with those partners, What's really holding them back from starting to market these assets for potential disposition opportunity for them? Yes.

Speaker 4

Just think timing wise, when you look at the environment that we're in today, they're coming through lease up. These markets, specifically relative to a lot of the rest of our owned or DCP portfolio, have been more challenged. When you look The Oakland market has faced a lot of supply. Santa Monica has been a little bit more challenged. And even Philly, it isn't a pocket where there has been a lot So from an NOI trajectory, there's a belief that as you work through that, that you're going to see rents continue to lift, Those NOIs will stabilize and you'll have a better number here in a couple of years to either refi off of and look at a different refi environment to potentially sell into Or recap into.

Speaker 4

At the same time, you've got a lot of unknowns around where Fed has been, where rates going to stabilize And where buyers can actually underwrite these assets too. So today, while they have equity, they don't have the equity and returns they wanted. And so holding on for a potentially better environment makes a lot of sense to them and we're happy to be along for the ride as we like where we're at in the capital stack.

Speaker 9

Appreciate those comments. Maybe just shifting over to operations. Mike, in terms of some of the heavier supplied markets, I appreciate your comments on just the lease up concessions that are being offered right now. You're starting to notice a lot of Stabilized concessions as well within some of these heavier supply markets within the Sunbelt, whether you're using them or some of your private peers are and to what degree?

Speaker 3

Hey, Alan, that's a very good question. I'd tell you again, just to remind everybody, we have been giving out Less than half a week on new leases. So we're not really utilizing a lot of concessions on stabilized leases. That being said, in the Sunbelt, We have seen a few more people offer maybe 2 weeks here and there just to try to drive a little bit of demand, but nothing that's thrown us off. I'm not really seeing a lot on stabilized assets in some of the coastal, especially East Coast markets.

Speaker 2

Hey, Alan, this is Toomey. I'd also add, I mean, Part of this market is how owners operate and how they adjust their strategies. The other part is really the resident. And Mike had it in his opening remarks, but we're not seeing any stress with respect to our residents. Not seeing the doubling up impact and we're kind of grateful that we've gotten through the long term squatter issue And gotten that behind us.

Speaker 2

And so that really feeds a lot of our optimism from where we are. The fact that we are looking out 90 days and what we're seeing for renewals, Petra, so that really does feed the second half story of what we believe is unfolding in the marketplace. And you continue and like you have written, strong employment picture, good wage, no stress on the consumer That's evident. That's our optimism and it's turning into being a reality when we look out 90 days and what we're setting up for renewals and

Speaker 9

I appreciate those comments and thanks for taking the question guys.

Operator

Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question.

Speaker 7

Hi,

Speaker 9

For lease spreads and market rent growth, which is the inverse of a typical seasonality. So is that the case? And do you think that's unique to your portfolio? Or is that Industry wide phenomenon we'll see adjusting for markets and geographies?

Speaker 3

I think it's a little bit of both. So when you think about Just the comps, we pushed very aggressively in the middle of last year and that goes back to one of the comments I made. Our blends were about 200 basis points higher from, call it, April through July. As we went into the back half of last year, We started bringing down our renewals. Our blends were a little bit lower than some of the peers.

Speaker 3

So I think we have more in terms of year over year as it relates to comps, but a lot of this is the seasonality we've talked about. If nothing else Changes and we have normal seasonality going forward. September really starts to move. So you do see that inverse relationship As it relates to a year over year basis, and that drives your new lease and your renewal growth.

Speaker 9

Got it. So you're pretty confident you'll see that higher rent growth even in a lower foot traffic environment kind of in September, October, November, given the comps and given what you're seeing on renewals and Given the strong consumer?

Speaker 3

Based on everything we're seeing today, yes, and it goes back to Tom's point with the consumer being as healthy as they are. And again, where we're tracking today, we feel pretty confident.

Speaker 9

Great. Thank you.

Operator

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Speaker 11

Hey, good afternoon out there. So two questions. And first, your comments around the Sunbelt and The rent pressure certainly poke a lot of holes in the folks who would want to say that these pricing systems control the market, clearly not. My question is, when you guys were pushing rents aggressively, and I think you said you ended up with a bunch of skips in the Sunbelt, What went into the process on pushing the rent so aggressively? Presumably, your leasing team knew about the competitive So I'm just trying to understand better the strategy of pushing rents If you in fact knew that you were facing the supply pressure down there?

Speaker 3

Yes, Alex, I think that's a really good question. I'll tell you, it's more about what we did, not what we did in the last couple of months. So the last couple of years, we were probably more aggressive on some of our renewal increases in the Sunbelt. And I think that started to stretch people to some degree as we moved into this year. But over the last few months, you can see it in our renewal growth rates as well as our turnover.

Speaker 3

Our renewals were going out at a pretty normalized 4.5%, 5% range. So it wasn't necessarily what we're doing Recently, it's more of what we did over the last couple of years.

Speaker 11

Okay. And then the second question is supply in the Sunbelt definitely seems to be more of a submarket issue Because it's not uniform. And you guys obviously just bought committed to buy more product down there. What are you guys doing as far as diversifying away, either older buying older product or buying more in the suburbs For diversifying your holdings such that and this by the way, I guess, applies to the coastal infill markets as well, So you diversify your product away from where people can build new supply.

Speaker 4

Yes, I think it's a good question. When you look at our existing Sunbelt portfolio, we are much more suburban and B quality. The new development rents that are coming online are typically 20 plus percent above most of our Sunbelt portfolio. So I think we're mildly insulated, but Clearly not immune from that activity, but we have talked about over time, do we want to become more diverse within those markets, being more suburban and B quality. This trade obviously helps us go up in quality from a quality perspective.

Speaker 4

So newer product, obviously the potting aspect, We are potting for these 6 assets, so they're close or adjacent to existing assets. So it's helpful from an ops perspective, maybe not diversification, Submarket perspective, but it does help the ops team quite a bit. So we do think about that and we did think long and hard about the Exposure to Dallas and Austin, it is adding to the Sunbelt in a period of temporary weakness, we believe. Tom laid out kind of the thesis longer term or We do think Sunbelt longer term is a great place to be. And I would say Dallas has been kind of middle of the pack for us.

Speaker 4

It's not in the same level with the Austins, Nashvilles, Charlotte, Phoenix, etcetera that have been getting hit as hard with supply and We'll have the degradation in fundamentals. So Dallas reported the assets are has been performing better for us.

Speaker 11

Okay. Thank you, Joe.

Speaker 4

Exact.

Operator

Thank you. And our next question is from Haendel St. Juste with Mizuho.

Speaker 5

My first question is a follow-up on the JV with LaSalle. I guess, 3 part, but quickly, firstly, how do the IRRs on the assets you're buying And underwriting compare with what you're selling into the JV. 2nd, can you discuss the market selection process involved? I understand that the assets that were contributing to the JV, there were no Sunbelt. Boston DC Seattle OC, was that a deal breaker for the partner?

Speaker 5

Do you not want any Sunbelt? And then lastly, you mentioned There's capacity or desire to contribute further assets, so curious how much larger this JV could become?

Speaker 4

Thanks. Hey, Haendel. Good question. So a number of these actually kind of evolved as we went through the process, talking about this partner and others in terms of Desired portfolio exposures, unlevered returns, future growth profile, etcetera. So I'd say on the unlevered side, generally, Not necessarily specific to this conversation, but a lot of the conversations that we had as we went through the partner selection process, The unlevered kind of low to mid-7s IRR is where a lot of sovereign wealth funds were looking to transact at.

Speaker 4

So That with a typical kind of 2.5%, 3% growth number, really supported the kind of 5% cap environment that we're in. So I would expect these were underwritten about the same way. On a go forward basis, as we show assets, I do think we have the ability to Capture outsized IRRs on an unlevered basis. You have your buying at market pricing, but then can put better than market operations onto that asset. You should have a potential to drive a little bit of incremental IRR relative to that 7 plus number.

Speaker 4

In addition, I think they're going to continue to look at our partner Going to continue to want to look at kind of that 10 to 20, 25 year old asset that maybe has more of that operational upside As well as potentially a CapEx plan, which could help juice returns further. So I think we're pretty well aligned because that's been our strike zone for a number of years of On the acquisition front, so we should be good there. Market selection wise, we really didn't try to cherry pick certain markets. We tried to make sure it was diverse for all the potential partners we talked to, make sure it kind of looked like the UDR portfolio as a whole. I would not say that Sunbelt is redline for this partner.

Speaker 4

Andrew and team have shown them a number of Sunbelt transactions already. So it's not a red line market. It's going to come down to market, submarket and assets. So perhaps over time, we do see more Sunbelt assets come into that JV. And then just lastly, in terms of future growth, each of us have plus or minus $250,000,000 of dry powder earmarked for future growth together on an unlevered basis.

Speaker 4

So that would take this JV from roughly $500,000,000 to $1,000,000,000 At some point in time, we may put leverage onto the joint venture if it becomes accretive and make And then the one of the pieces we're probably most excited about with this partner was, they're pretty light on real estate allocation today and expect to continue to grow over time. And we'd love to be one of their preferred partners to grow with And continue to enhance this JV when returns and cash sources and uses make sense for us. So hopefully we see more growth going forward there.

Speaker 2

Haendel, this is Timmy. What I'd add that probably hasn't been said enough is in the interview process Finding a partner, it was finding someone that thinks about the business the way we do. And what we found was a very unique A partner that looks at it and says diversification, operating acumen Inability to continue to grow these assets over time. So in targeting assets, you can see what We contributed, but what we're also looking at is buying assets over a 15 year cycle that have a couple of opportunities to redevelop, Continue to expand margin through our operations and innovation. And so they're looking at it from that standpoint and not Just target a market and hope it rebounds, but who can actually drive cash flow growth over time And expand the investment because of their footprint.

Speaker 2

So it comes in as a very Good partner who looks at the world a lot like we do.

Speaker 5

That's great color, guys. Appreciate that. The other question I had was on the insurance Mark, get the headwinds you referenced. I know it's not a huge component of OpEx, but I was hoping you could talk a bit more specifically about the level of inflation you're Seeing there what you're expecting near term. And then I guess, how much are you self insuring today versus historically?

Speaker 5

And if there's any Cost savings for perhaps doing that, how do you balance that against potential catastrophic risks? Thanks.

Speaker 4

Thanks, Haendel. So yes, on the insurance program, so I'd say number 1, we are locked in through mid December with the existing program. So Feel good about the kind of go forward rest of year insurance money or forecast. Yes, The big driver of the number being down year to date, we did see about 20 plus percent premium increase last year. What we've seen though is that year to date claims have come off dramatically.

Speaker 4

Part of that's because we came through 2021 2022 off a very inflated number of claims activity as individuals simply happen to stay home more. We also put in place a lot of preventative maintenance and ROIs to help drive those claims down. So feel pretty good about the number this year. I think Going into next year's renewal, no doubt we're going to see continued pressure on the premium side. I wouldn't doubt to see a plus or minus 20% number again, but I think by next call, we'll have a lot better sense for what that number is.

Speaker 4

We just got to do our best to either constrain that or continue to focus on claims through more ROI and preventive maintenance. On the self insurance side that you mentioned, we've traditionally had a $4,500,000 retention above and beyond our deductible that we have to eat through first. And then over time, we play with the different layers and evaluate what's our historical loss ratio relative to the premiums being charged. Last year, we took another $5,000,000 of self insurance risk and the primary $10,000,000 from where we were at previously. And the thought process there was really, I think the premium we're going to be charged for that $5,000,000 was something like $4,000,000 for the year versus a loss ratio of maybe $2,000,000 over the prior 10 years.

Speaker 4

So over the long term, it should be a net positive for us. So each year, we'll look at which layers are Potentially priced inefficiently and see what decision we want to make.

Speaker 5

Thank you.

Operator

Thank you. There are no further questions in the queue. I'd like to hand the call back over to Chairman and CEO, Mr. Toomey for closing comments.

Speaker 2

Great. Thank you. Thank you for all your time, interest and support of UDR. Clearly, we've established ourselves as a full cycle investment that delivers above average Growth and total shareholder return across a variety of macro environments. We remain enthusiastic about the apartment business and believe our operating, Our capital allocation, our innovation advantages should deliver relative outperformance versus peers in 2023 and beyond.

Speaker 2

As a long time veteran of this industry, what I'm struck by is actual results, where I find that our number We're number 2 in operating statistics from my viewpoint and look to be finishing that at the end of the year And number 2 or 3 in cash flow growth. And so actual results is what matters in life the most, I've always found. And I think the team is very focused, enthused about those results and we look forward to continuing to grow beyond those numbers. So with that, we look forward to seeing many of you in the upcoming events and we'll Hope you the best for the remaining balance of the summer. Take care.

Operator

Thank you. This concludes today's teleconference.

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