Greetings, and welcome to UDR Second Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Vice President, Chris Van Ens. Thank you, Mr. Van Ens, you may now begin.

Welcome to UDR's quarterly financial results conference call. Our press release and supplemental disclosure package were distributed yesterday afternoon, and posted to the Investor Relations section of our website, ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure, in accordance with Reg G requirements. Statements made during this call which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements, are based on reasonable assumptions, we can give no assurance that our expectations will be met. A discussion of risks and risk factors are detailed in our press release, and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions and follow-ups. Management will be available after the call for your questions that did not get answered on the call. I will now turn the call over to UDR's Chairman and CEO, Tom Toomey.

Thank you, Chris, and welcome to UDR's second quarter 2019 conference call. On the call with me today are Jerry Davis, President and Chief Operating Officer; and Joe Fisher, Chief Financial Officer, who will discuss our results; as well as senior officers Warren Troupe and Harry Alcock, who will be available during the Q&A portion of the call. Our strong second quarter results highlighted by same-store NOI growth of 4.2% and FFO as adjusted per share growth of 6.3% continue to demonstrate UDR’s value creation potential as well as execution of our primary strategic objective. These remain, first, ensuring continued operational excellence through strong blocking and tackling, and innovation, such as the implantation of our next generation operating platform to further boost our operating margin; second, maintaining the diversified portfolio to mitigate risk and provide more degrees of freedom to utilize our best-in-class operating platform and adaptive capital allocation platform; third, driving cash flow growth through accretive and disciplined capital sourcing and deployment; fourth, maintaining a liquid investment-grade balance sheet; and fifth, promoting a culture of empowerment and innovation. Continuous execution of these objectives has made UDR a full-cycle investment. And over the past three years has resulted in the second highest FFO, as adjusted per share growth rate in the group, outpacing our peer average by 100 basis points per year. This is a tremendous result for a highly diversified company. Moving on, we are now seven months into the year with good visibility through the remainder of the peak leasing season. As such, we have raised our same-store revenue and NOI growth guidance ranges by 20 basis points and 37.5 basis points at the midpoints, and our FFO as adjusted per share guidance range by $0.015 at the midpoint. Joe will provide more details in his prepared remarks.…

Thanks, Tom, and good afternoon, everyone. We’re pleased to announce another quarter of strong operating results with same-store revenue, expense and NOI growth of 3.7%, 2.3% and 4.2%, respectively. For revenues, blended lease rates grew by 4.4% during the quarter or 60 basis points above last year’s comparable period, and consistent with the first quarter spread and our expectations. We are forecasting a similar year-over-year spread throughout the back half of the year. Quarterly occupancy was strong at 96.9% and is forecast to remain in the high 96% range for the remainder of 2019. And other income grew 11.5% year-over-year. This rate was above what we had forecast entering the quarter but comps do toughen as we move through the back half of 2019. In short, blended lease rate growth and occupancy have been as expected thus far, whereas other income growth has outperformed. This outperformance in combination with our expectation for stable apartment fundamentals throughout the remainder of 2019 drove the 20 basis-point increase in our full-year same-store revenue growth guidance range, which is now 3.4% to 4.0% and near the top end of the sector. At the market level, San Francisco, Seattle and Austin which represent 24% of our same-store NOI, marginally outperformed our initial expectations with average revenue growth of 5.7% in the second quarter. This was a result of increased demand for our apartments which drove occupancy, which drove occupancy, as well as above average contributions from other income item such as parking, short-term furnished rentals, and rentals of common area spaces. Conversely, Orange County and Florida, which comprised 22% of our same-store NOI, have slightly underperformed our initial expectations with average revenue growth of 3.3% due to weaker demand and/or competitive supply. All other markets are performing more or less in line with our initial…

Thanks, Jerry. The topics I will cover today include our second quarter results and updated full-year guidance, a transactions and capital markets update, and a balance sheet update. Our second quarter earnings results came in at or above the high ends of previously provided guidance ranges. FFO as adjusted per share was $0.52 over 6% higher year-over-year, and driven by strong same-store and lease-up performance and accretive capital deployment. Next, our full-year guidance update. We raised our full-year FFOs adjusted guidance range by a $0.015 at the midpoint to $2.05 to $2.08. NAREIT FFO and AFFO per share expectations were also increased. Of the $0.015 increase at the midpoint, improved operations, year-to-date transactions combined with equity issuances, and lower interest expense due to lower LIBOR and rates on year-to-date debt issuances each contributed a half penny. The full guidance update including sources and uses expectations, the same-store updates Jerry referenced and third quarter guidance ranges, is available on attachment 15 of our supplement. Moving on to transactions and capital markets. We remain disciplined in our capital sourcing and flexible with its deployment, continuing to pivot to the best available risk-adjusted return opportunities that can be creatively funded. During the quarter, we acquired 4 apartment communities located in Towson; Maryland, King of Prussia, Pennsylvania; St. Petersburg, Florida; and Waltham, Massachusetts for $328 million at a weighted average year one NOI yield near 5%, and moving to the midsize in year two. These brought our year-to-date acquisition activity to $731 million including land for future development. These purchases in target markets have significant operational upside and utilized the leverage adjusted buying power of $492 million of equity we issued at an average 2% premium to consensus NAV last December, during the first quarter. Throughout the second quarter, our equity cost of capital…

Thank you. [Operator instructions] Thank you. Our first question today comes from the line of Nick Joseph with Citigroup. Please proceed with your question.

Thanks. Maybe turning on to the next generation operating platform, it looks like spend for 2019 in guidance was up about $10 million. So, I'm wondering if you can walk through that. Is it acceleration of spend, the change in the scope or something else?

Yes. Nick, this is Jerry. The extra $10 million is just -- we're going to go forward with more smart home installations than we had originally planned this year. The first 19,000 have gone well; we're seeing the benefits to the platform and the resident adoption. We’ve made the decision to keep the pipeline going with the vendor, and we've added an additional 10,000 or so units.

Thanks. And then, I appreciate the margin comments in terms of leading the longer term opportunity with the platform. But how scalable is that platform, or how many homes could it support ultimately, without adding incremental expenses, meaningfully?

Really, most of those benefits occur out in the field. So, there's just a few positions that will be added later next year or into early 2021. I mean, inside sales team will really be needed to support some of the functions from here. So, I’d tell you, it's really on a property-by-property basis. So, it's fully scalable.

Our next question comes from the line of Trent Trujillo with Scotiabank. Please proceed with your question.

Good morning. So, Joe, your work and the team's work around predictive analytics indicated that New York was an attractive market and perhaps the preferred market for investment. Has the recent rent regulation altered this view at all?

No, it really hasn't. You saw our subsequent activity that we disclosed there in Englewood, New Jersey, which we consider part of the New York MSA. So, I think that gives you a signal that we are still interested in New York. That predictive work, of course, kind of leads us in the right direction that can go against the herd or against the group a little bit. But, then, it's still up to all the qualitative assessments and analysis that we do with the group here and with the group in the field to determine is it the right market, is it the right sub market? So, rent control overall, I think you've heard others make comments on it, we would comment the same thing that it probably does impede future capital and future supply on the rent stabilized side in terms of competing supply out there. So, there is a possibility we think that the market rate units that are in existing portfolio and in this New Jersey deal, stand a benefit over time. So overall, doesn't necessarily change the view of the overall market. But it makes us a little bit more positive on our market rate exposure.

And Jerry, it seemed like you started to shift focus on rate increases as opposed to focusing explicitly on occupancy. So, given where the portfolio stands, and what you achieved on the increase side so far this year, I think it was 60 basis-point GAAP year-over-year. How much incremental rate growth are you looking to achieve to set up the earnings for 2020? I think you mentioned previously there was about an upside of 70 basis points. Just wondering if that might still hold?

Yes, it could, but it’s probably going to be comparable to what we’ve done in the first half. We pushed the rate heavily in the beginning part of the second quarter and had some resistance as you probably noticed and our turnover ticked up a 100 basis points, part of that was because of short-term furnished rentals which are up a 100% year-over-year. Even after backing out the effect of short-term furnished from both periods, turnover was still up 40 bps. So, we gave it a push in April and May, felt some resistance, lost a little bit of occupancy early June, and we built it back up. So, we’re cognizant that we like to run in that high 96 range. So, you may see us temper down that rate growth to maintain that occupancy. But, I still think, it’s comparable to what we’ve done in the first half and probably won’t grow.

Okay. And maybe just a quick follow-up to that. You mentioned or you touched on turnover ticking up. Are you explicitly managing that or is it basically an output of the revenue management approach that you’re taking, because if turnover does play in your approach, it does effect the cost control in terms of cost on turns? So, just wondering if you have thoughts on that.

Yes. I think it is in the -- you do put in target occupancy levels into the rent optimization system. So, we got to sit where we like to be. But at times, when you push a little heavier on renewal rate growth, which we did early in the second quarter, you’ll end up with higher levels of move-outs. So, that’s when we’ll alter really the amount we send on, on renewals. Because you can always take a recommendation from the system then add a few 10, 20, 30 basis points to it try to get that incremental growth to see where that sweet spot is and that’s what we attempted to do. But, again, we’ve let the system kind of come back to the natural pricing on renewals to keep that turnover more flat.

The next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please proceed with your questions.

Hi. Good morning, everyone. So, is it fair to say, Jerry, that the higher turnover on the short-term rentals you referenced and otherwise is what’s really resulting in the pause in acceleration in same-store revenue growth despite the fact that you’re getting positive blended lease rate spreads, you have a sequential uptake in occupancy? But we’ve seen now two quarters in a row where same-store revenue growth has been virtually flat. Is that the factors that’s driving that?

I think so. We’re getting no contribution, as you said, from occupancy. We have been getting good contribution from other income, which grew to 11% but we expect that to moderate down to high single-digits, as you get into the second half of this year. And the blended rate growth, while it’s been up, you’re still getting rent growth that goes back over the last four quarter, that’s how it gets built up.

So, are you assuming that turnover continues to tick up in the back half of the year?

I think it’s going to be comparable from what we see right now to what it was last year, so kind of flat.

Okay, thanks. And then, just on the acquisitions, could you provide what the average going in cap rate is for the acquisitions you’ve completed and have announced? And then, what you expect in year two or three on those, or what the FFO upside, I guess would be, the other way to look at it in year one versus two to three years out?

So, typically, when we've gone out, we try to make sure that we can acquire assets to improve both, near-term cash flow growth as well as FFO accretion and then produce better IRR relative to WACC. So, we're trying to check a number of boxes. But, when you look at the ingoing cap rate on kind of this current group that we've announced, it’s high 4s. And over the next 12 months by year two, we think we’ll be into 5.25 range. You do have a pretty wide range within that. We talked last quarter a little bit about Rodgers Forge, one of the deals that we’re very excited about that we think we have the opportunity to hit to a 6% yield by year two. So, some of them have a little bit more opportunity than others, but all of them fit well with the target market strategy, the existing operating platform, and then that next generation operating platform. So, we think overall, we're getting pretty outsized growth relative to market assumptions.

And is that upside generated just from implementing the next gen ops or also include market rent growth assumptions as well?

Yes. There's going to be market rent growth assumptions as a baseline expectation. But, on top of that, there's a lot of things that Jerry and his team do exceptionally well on the core blocking and tackling side, whether that be managing LEMs, putting in place the other income, controlling expenses, et cetera, which is part of the core business, if you will. And then, you have the next generation operating platform that we talk about as well, which is additional juice and returns above and beyond that amount. So, you have all those kind of compounds that drive that growth.

Thank you. Our next question is from the line of Rich Hightower with Evercore. Please proceed with your question.

My question on turnover has been adequately answered. So, I'm just going to stick to one here. So, just in terms of acquisitions for the year-to-date period, I know that Thomas Circle is a particular situation, given that it was in a joint venture, and there's a history there. But, is there any sort of theme as to sort of the more suburban tilt from what's been acquired more recently, outside of that? I'm not familiar with the St. Petersburg asset, but I don't know if you call that suburban or not, anything to kind of pick up on that?

No, I don't think so. It’s very asset-specific in terms of the opportunities. Overall, we want to maintain that 50-50 urban suburban AB mix. A lot of our development in recent years has been more urban, high rise class A type of product. So, this does help us balance it out. So, when you do go through those opportunities, as you mentioned, 1301 Thomas, which is more urban, the two New York area acquisitions, I would say are more urban in nature. You mentioned the Preserve, or the Currents or the other Tampa deal, those are more operated as a pod, so probably a little bit more suburban, but they worked very well within your platform. So, it's kind of a mix of probably one-third urban, two-thirds suburban. In general, there have been a little bit newer, a little bit higher rents, but the ultimate idea here is to drive accretion. So, we're not necessarily trophy chasing but we're not dipping down into B minus suburban quality to get yield either. So, trying to produce more cash flow with a little bit better portfolio, a little bit more diversified.

Rich, this is Harry. I’d add that the -- I mean, we're using the term suburban but most of these suburban type assets as we're calling them are really first-ring suburbs, where there like the Waltham deal, like Englewood, even like the St. Pete deals are really only 5 to 10 miles from the urban core.

Our next question is from the line of Wes Golladay with RBC Capital Markets. Please proceed with your question.

Looking at the DC program, do you expect that to grow much this year if have being repaid at the back half of the year and I see your permits are falling in some of your markets?

The intent of course is to still try to continue to find opportunities there. We like the risk adjusted returns that we’ve found to-date. And so we're going to hold to that underwriting and that return requirement. Like you said, permit activity has come off a little bit, I think, on the construction financing side, the fact that we're probably going to see here in the next hour, LIBOR come down and Fed funds rate come down, you seen on the construction financing side, spreads have compressed a little bit and terms have eased a little bit. So, I would say our capital that cost becomes perhaps a little bit less competitive. But, we don't have a ton of capacity there left, another $100 million or so to go to get our kind of self-imposed limits. So, we don't need to stretch, we don't need to go rush out there and find it. So, hopefully, we find some more opportunities. But right now pretty happy with all the acquisition activity, we've been able to do.

And do you expect to formally participate any takeout, I guess, on the Block 11? It mentioned none in the supplement. But you did offer some extensions, so did you get anything in return for that?

Yes. We did have incremental returns, we had an extension fee on that that we earned. That was blended in over five months. In addition, we think it may create an opportunity on the back end here, as they continue to move forward with that opportunity. So, it may roll into an additional DCP opportunity, which could be larger in nature, could have a different return profile, and could have backend participation, as many of our recent deals have had.

The next question comes from the line of Richard Hill of Morgan Stanley. Please proceed with your question.

This is Lauren Weston on for Richard Hill. Thanks for the color on the next gen platform. Could you just provide a bit more color on the use of predictive analytics to select markets and maybe how you're finding value while others aren't? Previously, you talked about New York and Baltimore, in Philly and Tampa, are there any new insights that you can share with us?

It's a tool that we utilize. At the end of the day, it comes down to somewhat of a mean reversion type of analysis. There's a number of factors that go into it. The goal, though, is to lead us to where others potentially aren't, where there are opportunities that the herd may not see, if you will. So, we're trying to find markets that have good economic growth, good underlying demographic drivers, but have not seen rents that have kept pace with those. We think we found them in Baltimore and Philly and New York and Boston. We're trying to go that route. But, at the end of the day, there is still a qualitative assessment. Right? We have to make sure that the job composition, the education base, the demographics go through it all, make sure it all works with what the model tells us. And so, then, you siphon down the market exposure a little bit more in terms of what Harry and his team are able to focus on. And then, ultimately, it just comes down to pick the right sub market, pick the right asset.

The next question comes from the line of John Pawlowski with Green Street Advisors. Please proceed with your question.

On the revenue-enhancing CapEx side, can you give us a sense for how much of the portfolio has seen the kitchen and bath upgrades last few years? Are we reaching a moderation of revenue-enhancing CapEx or is the current levels, should they persist for the next several years?

I would say, John, over the next couple of years, you're probably going to see at somewhat similar levels as these assets continue to age. And we expect the life of the kitchen and bath to be, call it 10 to 12 years, and you’re doing 5,000 or so of those -- sorry, 2,000 to 3,000 of those a year. And there is always inventory coming in. It’s not purely kitchen and bath, we also do some expense reducing CapEx with that such as LED light replacements and things like that, as well as adding amenities, dog parks, rooftops, repurposing old theater rooms, opportunities like that, or in some place we found the opportunity to do single unit additions at properties where we have additional deck space. So, it falls into that. But, I think, when you look at that $35 million to $45 million range that we’ve been spending, I think you’re going to see that sustain for the next couple of years.

Thanks. And then, Jerry, on Orange County and LA, new lease growth continued to deteriorate in 2Q. The supply backdrops seems better than some of your Sunbelt market. So, what is the team seeing on the demand side, how are reasons for move-out trending, I guess why the softness in the Southern California markets?

You’re just seeing muted job growth still in Orange County, it’s roughly 1% and no reason for move-out typically, leaving the area. Orange County, you’re seeing a lack of an influx lately of -- people for employment. I think in LA some of that is supply driven. It’s not as much as on the demand side. But Orange County, we definitely have felt less job creation and wage growth down there.

Our next question is from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.

Hey. Good morning out there. Just a few questions. First, Jerry, when you mentioned your New York market rate exposure now with the rent control, I think you said that right now 40% of the units are market rate. But, before, previously, I thought you guys have said that only -- that 20% of your units were regulated, meaning 80% more market rate. So, was this a shift because of you guys are sort of doing a pro forma the luxury decontrol or is it something else change?

Hey, Alex. It’s Joe. So, there was another factor that changed in June, although the focus was on the Tenant Protection Act of 2019, which we have talked about previously, put us at about 80% market rate with the two deals being Leonard Pointe and Columbus Square that were in the rent stabilized size. What we also got caught with in June was New York State Court of Appeals ruling on 421g, which impacts our 10 Hanover and 95 Wall assets, which are about 3.5% of our total NOI. There had been a court case out there that went all the way up through Court of Appeals that we’d expected would not rule against landlords, the court case specifically focused on could you utilize luxury deregulation in 421g. Historical precedent, going back to the 90s have been that all landlords consider those market rates. When 421g was put in place, Giuliani and the state Senate had agreed that luxury deregulation could be utilized for those. We’ve seen prior court cases that have supported that and the Department of Housing and Community Renewal had also provided us specially and others documentations that said they were market rate. Unfortunately, the Court of Appeals decided to overwrite all of that. So, we’re little bit surprised on the ruling and the timing of it. So, that did slip us to 40%. I’d say the positive or silver lining on all of this, the legal versus market rents today, there is a very substantial gap to where legal rents will be for those two assets, although we’re 25%. So, new leases are not impacted. We still have the ability to push rates on those. And then, from a duration of how long we are within rent stabilization or at least lack of luxury deregulation, and Hanover comes off in the next 11 months, on 6/30 of next year. And 95 Wall is off 6/30 of ‘23. So, that's why we ramp back up from about 40% today and start ramping back towards that 80% of our a couple years. Now, the NOI impact, I think Jerry kind of broke down, relatively immaterial, as I look at these two plus the other two that we've previously spoken to. So, relatively immaterial NOI impact, don't see evaluation impact, given the fact that they're about to come off rent stabilization the next couple of years, but there was a change in that percentage.

Okay. And then, on the outlook front, on the guidance front. Jerry, it sounds like from the comments, obviously good start to the year. But then, right now, your year-to-date revenue growth is basically where your full-year guidance range is. So, was there just sort of, I guess, you could call like slack in the system earlier in the year where there was a lot of potential to capture a lot of lost ground or mark to market on whether it's occupancy or rents or whatever it was that allowed you guys to boost occupancy. But for the back part of this year, it's -- you don't have those same levers, in which case, it's just -- I think, as you were saying, it's maybe a tougher comp. But, the real growth that we saw earlier in the year, basically plateaus for the balance of the year. Just trying to better understand what's going on.

First, there's really been no occupancy gains at all this year. We've run it 96.9 for the past two years. So, while some of our peers are getting occupancy pops that are driving revenue growth, we're not. The second thing is, in the first half of this year, we've had more of a contribution from increasing other income, which as we continue to anniversary out more difficult comps, last year, in the second half, it becomes more muted. So, I think on the rent side, things are playing out as expected, but you're just going to get less of an impact from that. I would add, when you look at our numbers, we do have the highest guidance at a midpoint of 3.7. So, we're proud of the numbers we're putting out. But again, we haven't had the opportunity to drive occupancy, because we got out in front of that several years before the bulk of our peers. And we're continuing to enjoy the benefits of other income, and it is starting to slow from double digits down to high single.

Okay. And then, just finally, Joe, on the on the increase capital for acquisitions this year, over $700 million, how much of that has been driven by just the rise in your stock price, which has made equities more attractive versus you guys seeing something changed in the market that makes apartment investing better this year than you originally thought at the beginning of the year?

Yes. I think, it’s more driven by the former than the latter. We're always looking for opportunities to improve the portfolio, improve near term cash, long term cash flow growth. So, even if we didn't have a cost of equity today, we could be still turning assets over and selling assets. So, we're always looking at opportunities, always looking in the market. But there hasn't been a change in our underwriting that's driven us to be more aggressive. I think, it's more so simply that we’d become more active as our cost of equity is improved. And so, given the opportunity to go out there and issue some equity, be disciplined around it in terms of managing the dilution profile, making sure that we match funds and making sure that we keep putting up more accretion for 2020, given that opportunity, we want to take advantage of it. And so, we're able to do that. But, we'll continue to monitor what's going on in the use side, and then the source side as well and match them up.

Our next question is from the line of Hardik Goel with Zelman & Associates. Please proceed with your question.

A similar question was asked before, but I wanted to stress on a different aspect of it, and maybe put it in context. So, if you look at EQR comments, they believe that suburban assets will not fare well over the course of a long cycle, because once supply hits, there won't be any demand absorb it. You guys are obviously buying assets in the outer rings and suburbs. What is your thought on the long-term kind of performance of these assets if supply were to shift there?

So, we are not purely buying in the outer ring. I think, I it’s Harry made the comment earlier, really first ring suburbs, the suburban town centers, if you will, as well as some urban assets. But we're not trying to make a wholesale shift either to suburban. So, this isn't a strategic shift and a view the suburban will always outperform urban. I think, every market and every submarket will go through its cycles. Our goal is to be diversified around that by being in the 20 markets, the urban suburban mix, the AB mix. And when we've looked back over time and looked at A and B rental rate growth performance, and urban and suburban, there isn't all that much of a discrepancy between the two. And there are different levels of volatility, I would say, meaning that suburban is typically less volatile, B a little bit less volatile. So from a portfolio construction standpoint, it makes sense to have a nice blend of all those. In addition, we're typically getting a little bit more yield by going to that first ring suburb, which allows us to get a little bit better IRR than would be the case, if we went for urban A plus quality at a 4 cap.

Any thought on whether valuations could shift more negatively in the first ring suburban and the core? I know this cycle just kind of compressed to being comparable?

This is Harry. I think, we don't see any evidence of that necessarily. The fundamentals continue to be strong in these first ring suburbs. And again, remember, we're talking about markets that are 5 to 10 miles from the urban core in most cases. And we look at it, at a property like Englewood, New Jersey to property like Currents on the Charles in Waltham, the rents are roughly 50% or even more than 50% below the rest in the urban core. So from our perspective, we're well-positioned and in theory, we're cushioned to some extent against the downturn in the market.

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

Well, thank you. And, again, thank you for your time and interest in UDR. As you've read and as you heard, business is very good. What I will say is we will continue to execute our strategic plan, as it's clearly working and producing growing cash flow and TSR that accompanies it. As we look to the future, we feel really good about the balance of 2019 and probably even a tick up from there as we build for our foundation for 2020. With that, take care. We look forward to seeing you in the September conference event.

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.