UDR's CEO Presents at 2013 Citi Global Property CEO Conference (Transcript)

Mar. 5.13 | About: UDR, Inc. (UDR)

UDR, Inc. (NYSE:UDR)

March 05, 2013 2:15 pm ET

Executives

Thomas W. Toomey - Chief Executive Officer, President, Director and Member of Executive Committee

Jerry A. Davis - Chief Operating Officer and Senior Vice President

Thomas M. Herzog - Chief Financial Officer and Senior Vice President

Analysts

Michael Bilerman - Citigroup Inc, Research Division

Eric Wolfe - Citigroup Inc, Research Division

Michael Bilerman - Citigroup Inc, Research Division

[indiscernible] or other individuals are on the line, please disconnect now. We are very pleased to have with us UDR. Tom Toomey. Tom, I'll turn it over to you to introduce the management team and then have some opening remarks, and then we'll shoot through some Q&A.

Thomas W. Toomey

Thank you, Michael and Nick, and to my immediate left is Jerry Davis, our COO; and to my right is Tom Herzog, our CFO. We've got about 2 minutes of prepared remarks, and I'll read those for you and then open it up to Q&A. Can all of you hear me? That's great. I'll do that.

Michael Bilerman - Citigroup Inc, Research Division

I think your mics are off, sir.

Thomas W. Toomey

Thank you very much. I apologize. I got a little bit of a cold today, so bear with me, if you will. Now let me start with multifamily fundamentals. First I'd say is they remain very solid. First, our view is job growth remains steady. Supply still looks to be under control aside of a couple of markets. The single-family housing is undoubtedly improving, but sourcing of down payment and still tight credit standards are going to make it difficult for people to move out of our apartments and homes. Lastly, household growth continues to improve and continues to favor rental owners and operators. And I'm intrigued to watch what happens in Washington, D.C. on the debate around immigration, but believe that, that may be also helping us in the near-term future. And lastly, record enrollment in college is -- there's a lot of kids getting out. They're most likely going to be renters before they're homeowners, and we think we'll capture a fair share of those.

Our 2013 expected same-store revenue growth is 4% to 5%. Our expense growth of 2.75% to 3.25%, leading to an NOI growth of 4.25% to 6%. We feel like that is a good tone and well above long-term averages, and we expect our strength to come from our coastal markets, although some summed-out markets, particularly Florida, are showing some strength recently.

Moving on, we have provided a 3-year strategic outlook during our fourth quarter call and we spent a great deal of our time here at Citi talking to investors and going through that. And let me highlight a few points there.

First, we view the 3-year strategic outlook and, if you will, as a contract between management and our shareholders, clearly articulating what we are going to do over the next 3 years, why we're going to do it and then what the derived benefits that we expect out of that.

In particular, some points to give to you would be the strategic portfolio repositioning. We consider it complete. There will always be some buying and selling, but the vast majority of repositioning of portfolio is complete. The balance sheet metrics have improved significantly through 2009 and we've established targets that we believe we'll get to by 2015. Operationally, Jerry and his team continue to generate strong results, both on a relative basis by market and through peers and aggregate. We continue to focus on our internal use of capital and its allocation.

We're focused on our development and redevelopment efforts, which currently comprise $1.3 billion of an active pipeline. Over 55% of that will be delivered in 2013 and over 50% of the aggregate pipeline has already been funded.

We expect our AFFO growth per share will grow by 9% on average in 2014 and '15 as a result of the development and redevelopment activities being delivered. We also believe that this will result in a growing dividend. So finally, we think it's a great time to take advantage of what work we've done, let the earnings get to the bottom line and we think we have fundamentals that will support that as well. So with that, Nick, I'll turn it back to you and we'll start the Q&A portion.

Michael Bilerman - Citigroup Inc, Research Division

Great. Tom, we've been starting each of these sessions with the same questions to management, which is, what do you think is the most value creating opportunity that you currently have within the company that the market is not attributing much value for?

Thomas W. Toomey

Well, I think our response would be our redevelopment activities, and they go beyond just a simple kitchen and bath $10,000 per home improvement. Our average spend on a redevelopment activity is $75,000 per home, so we actually take many of these properties down to the studs, rebuild them, and our intent is not just to get a good cash-on-cash return, which we've forecasted better than 88%, but also to reposition the asset and capture a cap rate compression. And so many times, we would start an asset that would be a 5 -- excuse me, a 6 cap and by the time we're done repositioning it, it turned out to be 4.5 cap. So I think people look at redevelopment as a cash-on-cash, but they missed the cap rate compression potential.

Michael Bilerman - Citigroup Inc, Research Division

And so I guess, how much -- I mean, some people also would argue that it's latent CapEx or preferred CapEx rather than revenue-enhancing CapEx. It's just dressed up.

Thomas W. Toomey

I'm certain there could be that, Michael, in the argument. In our attempt to underwrite it, what we do is we mark the asset mark-to-market. And so if the cost basis were $100 depreciated, we believe the market value is $150; we will start running our numbers assuming that's $150 from there. So I think one way to negate this deferred CapEx underlying tone is just to mark asset, mark it and ask yourself, what's the return after you do that.

Michael Bilerman - Citigroup Inc, Research Division

And you think there's that big of a 150-basis point reduction in cap rate, of your improving the asset to that degree in addition to earning the return on the capital?

Thomas W. Toomey

We think that's a potential. And clearly, it's a submarket-driven aspect, but some examples would be Southern California.

Jerry A. Davis

Yes. I think it is Southern California, as well as Northern California, it's probably been more in the 75-basis point, but there are extremes where if you take a CS and up to an A-, it could be as much as what Tom said.

And so get some round numbers in terms of redevelopment spend relative to asset value that you're impacting, so let's just take round numbers. So if you're putting $100 million in to a $1 billion asset base.

Michael Bilerman - Citigroup Inc, Research Division

You're saying that the asset base is trading at the 6, you lower it to 4.5, you're obviously getting a -- that billion is obviously worth a lot more. Just trying to get a magnitude of really how much impact we should be thinking about of that magnitude?

Thomas W. Toomey

I think the original question was mostly misunderstood.

Michael Bilerman - Citigroup Inc, Research Division

And now I'm making it more confusing.

Thomas W. Toomey

Yes. Now we're going further. The relative impact, I think our annual spend, we'd like to do $100 million to $150 million of spend, both cap rate compression. Is that NOI's return? It may add NAV of $0.20 to $0.30 annually.

Michael Bilerman - Citigroup Inc, Research Division

But the $100 million to $150 million is on an asset base of what? That's putting incremental $100 million to $150 million into assets that are worth $2 billion today or assets that are worth $3 billion? Just trying to get a sense of...

Thomas W. Toomey

No, it's much more focused. We're back to $75,000 a door, okay? So it may affect 2,000 doors. And if your cost basis is approximately $250,000, market value of $250,000, your tops 500 doors -- no, excuse me, 2,500 doors out of 55,000. It's a small part of the company, but I think it's poorly understood.

Michael Bilerman - Citigroup Inc, Research Division

And probably big part of that might be our explanation.

Let's go into your 3-year outlook that you released with fourth quarter earnings. Why do you think it was important to share that contractor outlook with the market? Have you received a lot of questions about where you are going because it was, it's unique compared to your peers?

Thomas W. Toomey

Well, I think a couple of things. First, the genesis of it started in 2011 as we are trying to look at finishing the repositioning of the company, and questions that we're asking inside the boardroom and the management team was, how large of a company should we be, and what market should we be in and what should be our balance sheet strategy. And after spending a year working through those 3 strategic questions with board, we came to the conclusion that said, first, we need to be a top 25 REIT for cost capital, G&A spread, market exposure. And today, we're about #20. Second question was how to sustain that if you want to be in that bandwidth? Why? We found and concluded that we need to do somewhere between $500 million and $700 million on an annual basis of asset additions on a net, and that led to the conclusion of what you need for a balance sheet. The conclusion of the balance sheet is meet financial flexibility to not just meet our current obligations, but also probably be able to develop on a delivery schedule of $500 million to $700 million. Why? You can't count on acquisitions to always grow a company and we felt that the enterprise could sustain itself by trying to have a development pipeline of that size and scope. Annual deliveries of 500 to -- 400 to 600, takes 3 years to deliver an asset. That gets us to $1 billion to $1.3 billion type range.

After you've reached those conclusions about your company, size, where you want your asset base, your balance sheet strategy, we thought it was important to communicate to the investor base, here's our expectations, here is our roadmap towards the future. And in essence, that's how, I think, you get to a contract. The response that we've received so far from investors has been very positive, supportive of the story, understanding the transparency and believe that we can execute on that.

Michael Bilerman - Citigroup Inc, Research Division

So the growth going forward would be mostly from developments delivery. What kind of cap rates are you delivering to and how does that compare to acquisition cap rates in those markets?

Thomas W. Toomey

Right now we're -- our current pipeline, again, 1.3, we estimate a blended 6.5% on stabilization. That's after management fees and after CapEx. Current cap rate, we think, would probably be about a blended 4.25%.

Michael Bilerman - Citigroup Inc, Research Division

So is that 225 bps spread larger than historical averages?

Thomas W. Toomey

Yes. I think we've timed it our well. We started our development activities in earnest, probably, mostly in late 2010 as we were coming out of the recession. Our view was to get strategic and think 2, 3 years down the road where would be the pipeline that we would want to deliver. We had enough land inventory, our secured sites of entitlement that we could commence that pretty quickly. And so there's a lot more detail, I think, in this presentation about where that pipeline is and the delivery schedule. Again, 55% of it gets delivered this year and Jerry's got a few of them at lease up already.

Eric Wolfe - Citigroup Inc, Research Division

Okay, Tom. You talked a bit the contract that you entered into with shareholders. I'm just curious how strict do you think that contract is. Obviously, it's very tough to predict what transaction activity is going to be like 2 or 3 years from now. So if you find the portfolio, you'd find a large acquisition that's attractively priced. I'm assuming that you would still go after it. You don't view the guidance that you put out around acquisition activity as being set in stone.

Thomas W. Toomey

No. I agree and understand your position, Eric. I think what we would have to do is justify any deviation, as well as report how we are executing against the plan on a quarterly basis and transactions that arise that are both NAV accretive, earnings accretive can be funded with our capital structure and help on 1 and 2, if you will. Then it'll be something we'd look at. We just think in the current environment and for the foreseeable future that it's tough for us to look at the acquisition frontier and say that it's a smart deal.

Michael Bilerman - Citigroup Inc, Research Division

So the heavy risk and in terms of portfolio repositioning, it's pretty much complete. Are your market allocations where you'd like them to be or over the next 3 years, is there still some tweaking you'd expect?

Thomas W. Toomey

Nick, over the next 3 years, we've put in our planned sales of approximately $750 million, $800 million. We would estimate that, that's enough to help us fund our development activities and/or potential sales, excuse me -- acquisitions. So I think the portfolio is probably at the 80%, 85% level in terms of where we'd like it to be. There's always submarkets that we'll find. Particular markets that we're going to hang on to during this period of cycle and ultimately sell would be Florida, for example. We think Florida is having a good run right now. It's improving. We think it's got 2 to 3 years before the supply equation turns upside down on it. And we think the interest rates are going to stay down for a little bit longer and so there's some value that's still be wrung out of that portfolio and we'd like to get some more development stabilized and funded by selling parts of Florida, for example.

Michael Bilerman - Citigroup Inc, Research Division

And also, to fund your development pipeline, I believe, you have some equity issuance assumed in the 3-year plan. Can you talk about, obviously, the stock is trading below consensus NAV right now so if you could talk about either issuing equity below to fund NAV -- or to fund development or how you expect to fund it if it decide to continue to underperform?

Thomas M. Herzog

This is Tom Herzog. If we look at the equity issuance, we've got on our plan right now somewhere between $50 million and $150 million. And that assumes that we're able to issue that equity at NAV or above. If it comes to pass that we're not trading at NAV or above, then we would choose to fund it by other means. That could include other asset sales from our warehouse portfolio or non-core portfolio. It could include joint venture transactions. It could include debt. But we've got all those different levers that we can pull as we determine how to fund these accretive development and redevelopment type transactions. As far as any acquisitions, of course, within that equation, that's not part of the plan.

Thomas W. Toomey

Okay. And then if I could turn back for a second. I think we've talked about the development quite a bit and I think it would be important for the audience and listeners as well to hear Jerry give you an update on the lease-ups and maybe the D.C. market, which people have a lot of angst about in what's going on there. So...

Jerry A. Davis

Sure. We have a lease up going on in D.C. right now called Capital View. It's up at the 14th Street in U Corridor. We began releasing units there back in early November. Today we're about 57% leased occupancy and about 40% physical. We're getting pro forma rents, which are about $3.65 a foot, offered a month free, which was the expectation when we went into it. And we have benefited quite a bit from other lease-ups and that submarket being delayed. So our expectation is to stabilize by the summer. We look at D.C. as a whole because a lot of people have been asking us about how new supplies affecting that market. It really is pocket by pocket, and there's 4 or 5 submarkets where you've got significant new supply coming online. So one is NoMa, where we're not located. Another one is the Ballston-Rosslyn area. And again, we're not located there, although we do believe that is a great long-term location. And then when you get outside of the Beltway, you got Tysons Corner and then you also have the Woodbridge submarket. We are being affected in Woodbridge. But I can tell you, so far we've seen very little job loss that's affected us in Washington D.C., supply to this in a few submarkets. Right now, I would tell you the B product is probably doing a little bit better than the A, but it's very location specific when you get in a places like D.C.. When you go around the country, I will go through all of our lease-ups. So one we're excited about is our new lease-up that will begin welcoming residents in June. And that's in Huntington Beach. It's called Bella Terra. It's built right at the intersection of 405 Freeway and Beach Boulevard in North Huntington Beach. It's adjacent to a renovated shopping center we just opened up for leasing 7 days ago. And we've already taken applications on 6 units and there's about -- we've taken about 30 to 40 tourists, each of the 2 days over the weekend. So activity is strong. And I think one key point that Tom brought up is the bulk of our developments are coming online on the West Coast, which still is not seeing major supply issues.

Eric Wolfe - Citigroup Inc, Research Division

Just curious, as you look within the market, allocating capital to the different submarkets, so you mentioned that you really like Ballston-Rosslyn Corridor. I mean, what makes that a more attractive submarket than, say, specific parts of D.C. Dupont Circle? What do you look at besides the supply coming on later on to determine whether something's a good submarket for you to invest in?

Jerry A. Davis

I think what I like about Ballston from the guy I have on ground there, it's where people want to go for nightlife. Some people do want to live there. I think there's a lot of good jobs there. There's a good metro stop there. But it's an up-and-coming area where that demographic they were aiming for, 24 to 35, wants to live.

Michael Bilerman - Citigroup Inc, Research Division

I guess most of it is really just anecdotal in nature; you're looking at where the sort of 20- to 35-year olds are hanging out, where transportation centers are and things like that.

Jerry A. Davis

Yes, that's a key driver anytime we make a decision on the development side. Now jobs, entertainment, transportation.

Thomas W. Toomey

Affordability of housing, supply potential, you weigh it on a holistic basis. We rank every one of our assets. In fact, we've rank our peers by submarket, and we tested both against third-party data that you use, we use, and long-term performance. And it's clearly -- you've got to take a city, for example, Seattle. Everybody loves everything in Seattle. The truth is, there's really about 6 submarkets in Seattle that have wildly different experiences based upon the jobs, transportation and supply. Bellevue right now is the best submarket in the city. Downtown was 2 years ago, but the supply is going to bury it. The Kalamazoo has been a very weak market and ever it comes and goes. So we're happy to have our assets primarily located in Bellevue.

Michael Bilerman - Citigroup Inc, Research Division

I'm curious, so Tim Noton [ph]yesterday and [indiscernible] said this as well, with ABV and EQR being north of 50% of the multifamily public size, that they feel as though that drives operating scale and efficiencies, capitals scale and efficiencies in terms of costs and access, investor interest just given size. If there's a big step down relative to them to you and a lot of others, do you feel as though you and others need to get together to sort of gain that scale?

Thomas W. Toomey

You know, Michael, the simple answer is no. I think at some point you can be so large it's hard to turn the battleship; it's hard to do a deal that moves the dial and then I think it's very difficult. At one time, with my tenure with Amco, we were at 400,000 apartment homes. We had scale, but you couldn't get it always to the bottom line because you had inefficiencies because you were so big. So I'd rather be where we are, $10 billion to $12 billion of an enterprise, kind of move the dial there, and have good quality, efficiency, operating scale at that point, and being number 3 in the apartment space doesn't feel so bad to me right now.

Michael Bilerman - Citigroup Inc, Research Division

Like I said, if you contrast Amco relative to what EQR and Amco had become in terms of property value per asset, just given Amco in those days was much more spread out, probably didn't have as much focus in terms of CBD tower, more chunky assets and a lot of other things, I would sort of debate a little bit that being big in the right market, well, you pursued that strategy already, right? You've gone more coastal and more concentrated in being bigger and better in those markets, including there are some peers in the multifamily space that would fit [indiscernible] in terms of ark stone. I don't know if there's any public peers that fit the same way with you, but I'm just curious why, why not?

Thomas W. Toomey

Why not be larger?

Michael Bilerman - Citigroup Inc, Research Division

In the markets that you want, right? I mean, there's clearly...

Thomas W. Toomey

I mean today, we're in 20 markets. We feel good about the market mix, but certainly would I grow our interest? Yes, we think we've had figured out the right 20. But I think it has to be done on a basis that's accretive. We will see. But is it part of our plan? I think we're very comfortable trying to be in a top 25 REIT. We're comfortable executing, growing the asset base $500 million to $700 million on net basis a year. And we're comfortable putting forth a 3-year strategy that we think that gets us a pretty darn good return for our shareholders over that time frame. So I think I'm comfortable with my plan right now. If the world changes, we're evaluated and adjust accordingly. But I don't think that plan entails trying to take us $10 billion to $12 billion and makes us a $20 billion company over the next 3 years. I'm comfortable saying here's the enterprise in the plan.

Michael Bilerman - Citigroup Inc, Research Division

I think questions from the audience.

Unknown Analyst

[indiscernible]

Jerry A. Davis

Okay. The question was, expand on my comment that these are doing better [indiscernible]. That was specific to Washington, D.C. It wasn't on a national basis, although I do think the spread between B's and A's, and we've talked about this quite a bit over the last several years, has tightened. Two years ago, A's, we felt as far as rank growth, were probably 200 to 250 basis points better. Today it's more like 50 basis points. They have closed the gap. But within the district and outside of the Beltway, B's do tend to be doing a little bit better than A's today and I think it's predominantly because there's no new supply competition coming after the B's.

Unknown Analyst

[indiscernible]

Jerry A. Davis

I'll take that. It varies by asset, but typically it's in the $500 to $700 range depending on what you're doing. And like Tom said, a lot of times it's an architectural change to the outside to update a 40-year-old building. Typically, what is, is opening up the interior of the unit, the kitchens, replacing the baths, the flooring, adding amenities, buildings and structures, new landscaping. So it really does appear to be a property that's 20 to 25 years newer with all the conveniences that we can address that a new built home would be. Sometimes one thing you can't change is ceiling height.

Thomas W. Toomey

Sometimes you get density. You go to the city with your plans, eager to add housing. You can get density on some of these place and it's just the last thing I'd say about it that's intriguing to me is development takes generally 3 to 5 years. We can do a redevelopment in 18 months, though it's frankly lower risk because you already have identified the market, you already have the entitlements, you can get it done in 18 months and you probably get a higher return. But it is extremely difficult.

Michael Bilerman - Citigroup Inc, Research Division

Turning to operations quickly. Can you update us on your new and renewal lease rates going out 30 and 60 days and also January and February?

Jerry A. Davis

Sure. New lease rates for the quarter probably going to average in that 2.2 to 2.4 range. So on January, there's 2.5, it came down a hair. In February, there's 2.1. Our expectation in March is it will pop back up to the high 2s. Renewal rates have averaged about 5 to 8 this quarter and we would expect that to persist for probably at least the next 3 months in our expectation and it will probably stay in that range for most of the year.

Michael Bilerman - Citigroup Inc, Research Division

And understanding that, and I do know you gave guidance a month ago, but just so far, you're feeling good on your revenue guidance? Are you feeling like you're tracking a little ahead, just looking at traffic trends.

Jerry A. Davis

I feel good. I think for the most part, we're right on. There's a few markets that are a little bit better and there's a few that are a tad worse, but in general I think the guidance is still good.

Michael Bilerman - Citigroup Inc, Research Division

Okay. And then in terms of expenses, you've done a very good job in the past years to keep it lower than peers. And this year's guidance assumes a similar trend continuing. Can you talk about how you're able to keep expenses low and what you're seeing in terms of property taxes?

Jerry A. Davis

Sure. As far as property taxes for us, we're expecting to go up about 8%. I know you get about 35%, 40% of portfolio over in California with 2% and then the place we're really feeling the pressures in the Sun Belt markets, Florida, Texas, Nashville, but also up the state of Washington. I know it's not Sunbelt, but those are up in the double digits, low to mid-teens. So -- but blended real estate taxes are 8. What we're doing to bring that down to our midpoint of expense growth of 3 is we're really trying to make our service teams more efficient. Over the years, you've talked about us typically being below everybody else and that was when we made our marketing teams more efficient, our administrative functions more efficient and now we're going to the next frontier which is on the service side. And when I called my people and we go really analyze what our maintenance men do during the day, they're really only functioning tasks that save me money about 5 hours of the day. They spend 3 hours of every day walking around, getting keys, getting parts, getting service requests, and we're introducing technology just like we did on the marketing and administrative proportions of the job, help them become more efficient as well as introducing labor standards to better track their productivity. So our expectation is we'll have flat turnover this year, but I'll be able to push my repairs and maintenance costs down by making my service teams much more efficient.

Michael Bilerman - Citigroup Inc, Research Division

Mr. Herzog, I have a question for you. As you step in to the CFO role, obviously you were in Amco and with HCP. I'm just curious, your sort of impression of sort of the capital markets and the accounting function and sort of what you wanted -- what's different, what you want to change in sort of moving forward?

Thomas M. Herzog

Well, I'd tell you, I had spent a fair amount of time visiting with Tom and the senior management team before I joined, so I had a pretty good feel before I stepped in the door. My assessment was, and I remember UDR from years back during my time in multifamily with Amco, it was a far different company: $700 rents, a highly levered balance sheet, old assets and the company had truly been transformed as you all know. The balance sheet put into a place where even since 2009 had gone from about 52%, 53% leverage down to where it is today at 38% to 39% leverage. Our rents up in the $1,400 range. Our development and redevelopment program that has been put in place and with all these different things, over the last few years, there's a certain amount of dilution that had resulted in transforming this company. And that was quantified, Tom and I spoke of it in depth, and also as an outlook as to what brings the company over the next 2 years. And as I stepped in the door, they had already started this 3-year strategy plan that you -- most of you have probably seen. And it resonated with me that it's a company that has set itself up well with a great portfolio, a balance sheet that set up a development and redevelopment program to produce additional CVNI and NAV as we go forward, and I really think set to drive some good returns in the coming years. So I'm quite excited to have the opportunity to join the company.

Michael Bilerman - Citigroup Inc, Research Division

And anything on the finance side or the way structure or anything like that that's different?

Thomas M. Herzog

Different, I've experienced different balance sheets in my time. I like the -- pardon me?

Michael Bilerman - Citigroup Inc, Research Division

And different CEOs?

Thomas M. Herzog

Yes, correct. I like the way this is set up. It's investment grade balance sheet. It's got all the different triggers that a person can pull in the Capital Markets. I think at 38% leverage and as we have communicated to the street that we are targeting 35% to 40% over the next period of time, canned in towards the 35% level overtime. I think that that's a good place to be. As far as net debt-to-EBITDA, we are sit in at 7, I think we've talked about it ticking up a bit during the development period, midway through the year and then coming back down and then working their way down probably to 6x to 6.5x sometime over the next couple of years. And that feels about the right place to be to me.

Michael Bilerman - Citigroup Inc, Research Division

All right, 3 rapid fires for Q&A. What will the same-store NOI growth be for the apartment sector in '14?

Thomas M. Herzog

5.

Michael Bilerman - Citigroup Inc, Research Division

If you had to, what property sector other than your own would you personally invest in right now?

Thomas M. Herzog

Biomedical.

Michael Bilerman - Citigroup Inc, Research Division

Do you expect to see more or less public companies in the apartment space 1 year from today?

Thomas M. Herzog

Less.

Michael Bilerman - Citigroup Inc, Research Division

Are you the acquirer or you're the target?

Thomas M. Herzog

None of the above.

Michael Bilerman - Citigroup Inc, Research Division

Thank you very much.

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