XPO Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2023

There are 21 speakers on the call.

Operator

And welcome to the UDR, Inc. 4th Quarter 2022 Earnings Conference 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 is being recorded.

Operator

It is now my pleasure to introduce your host, Trent Trujillo, Director of Investor Relations. Thank you, Trent. 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 A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward looking statements. When we get to the question and answer portion, we ask that you be respectful of everyone's time and limit your questions to 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. 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 4th quarter 2022 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 Kanter and Chris Van Enns We'll also be available during the Q and A portion of the call. To begin, 2022 was an exceptional year for UDR. First, our same store revenue growth was near the top of the sector and we achieved record high full year same store NOI growth 14% and FFO a per share growth of 16%.

Speaker 2

2nd, we further advanced our already industry leading operating platform by investing in our people, which included establishing a 16 person task force to generate and execute innovation initiatives. Additionally, we engaged in various PropTech and ClimateTech Investments. Together, these resources Should further expand our peer leading operating margin into the future. 3rd, we adhere to the capital market signals, Growing opportunistically when our equity was attractively priced early in the year and actively pivoting To a capital light strategy when our cost of capital increased. Being a good steward of your capital is paramount.

Speaker 2

4th, while we had next to 0 debt maturities in 2022, we continue to reduce leverage, strengthen our balance sheet and enhance our liquidity. And last, we were honored to be recognized by a variety of organizations For ongoing commitment to our associates, stakeholders and the environment. These include UDR earned a 5 star ESG designation from GRESB, the highest rating possible. The company was named by Newsweek as one of America's Most Responsible Companies for the 2nd year in a row And institutional investors recognize our ESG program, our Board, IRR team and numerous executives being top 3 in their respective categories among all U. S.

Speaker 2

REITs. In short, we have the right strategy and leadership in place Looking ahead to 2023, we are very aware of the wide Range of economic scenarios that are forecasted to play out, but we build our strategy around diversification and the ability to perform in any environment. This is well demonstrated by our history of cash flow growth and TSR outperformance, Specifically, an 11% TSR compounded annual growth rate over 22 my 22 years at UDR. The constant over this time is our focus on what we can control and how that sets up for relative long term outperformance. This includes, 1st, the strong relative setup of U.

Speaker 2

S. Multifamily industry. Housing is a needs based business, supply is stable, demand and traffic remain healthy, job growth has remained positive, Rent to income levels are steady and relative affordability versus single family ownership and rentership remain near all time highs, while the cost of capital across the industry continues to improve. 2nd, the favorable setup for UDR within the industry. We entered 2023 with approximately 5% earning, the 2nd highest amongst our peers and the highest in UDR's history.

Speaker 2

Innovation initiatives and prudent capital allocation should enhance this growth through margin yield expansion. Furthermore, our balance sheet remains highly liquid with $1,000,000,000 of capacity and we have no debt maturing until 2024. And finally, we increased our dividend by a robust 10.5% this year, enhancing our already strong Return profile. Taken together, we feel confident that we will effectively manage whatever macro environment we face and continue to produce strong absolute and relative results. In closing, I'm very optimistic On the relative strength of the multi family industry and UDR's relative advantages within the industry, we have a strong, talented, experienced and innovative team With a track record of strong relative performance, the key that unlocks our potential is our drive to continue To listen to our associates, our customers and stakeholders, which enables us to determine where we excel, where we can improve and how we can better innovate for the future.

Speaker 2

To my fellow associates, thank you for all you did during 2022 again to make UDR A successful year and I look forward to what will come in 2023. With that, I will turn the call over to Mike.

Speaker 3

Thanks, Tom. The topics I will cover today include our 4th quarter same store results, early 2023 trends, Our full year 2023 same store growth outlook, including factors that could drive results to either end of our guidance range and an update on our continued innovation and operating efficiencies. To begin, strong sequential same store revenue growth of 2% Drove year over year same store revenue and NOI growth of 12.1% and 14.5% in the 4th quarter. Results were driven by 1st, robust blended lease rate growth of 5.4% was well above historical norms for what is usually our slowest leasing period of the year. This growth locked in our approximate 5% 2023 earned, the highest level in our history by more than 200 basis points.

Speaker 3

2nd, sustained strong occupancy of 96.8% Exhibited our ability to efficiently convert traffic into signed leases. 3rd, we remain focused on enhancing our rent roll, which resulted in higher turnover than expected from twice the usual volume of resident skips and evictions. And 4th, collection rates held steady. The number of long term delinquent residents across our portfolio Continues to trend closer to our historical average with approximately 400 residents today or less than 1% of total units. This is down from over 700 delinquent residents earlier in 2022, helping to reduce our bad debt reserve.

Speaker 3

Next, early 2023 results and trends. In my experience, there are 4 primary indicators that help inform us of the strength of the operating environment. These include leasing traffic, concessions, absolute affordability and relative affordability. Thus far in 2023, we continue to see favorable trends. 1st, demand remains relatively healthy.

Speaker 3

Traffic is roughly in line with the elevated levels we saw a year ago and well above the long term average, but prospective residents are taking longer to make their rental decisions. 2nd, concessions remain minimal and have been primarily concentrated in certain submarkets of San Francisco and Washington DC, Averaging around 2 to 3 weeks. Recently concessions of 1 week on average have appeared in Austin, Dallas and Denver. 3rd, our residents' balance sheet appear to be holding up. Portfolio wide wage growth has largely kept pace with rent growth since COVID began, resulting in steady rent to income levels in the low 20% range.

Speaker 3

Today, we have seen scant evidence of residents doubling up. In fact, 42% of our households are single occupants, up slightly compared to pre COVID levels. And last, relative affordability remains in our favor. Renting an apartment is approximately 50% less expensive than owning a home 1st 35% less expensive pre COVID. Only 8% of move outs in the 4th quarter were due to home purchase, roughly 30% less than typical.

Speaker 3

With this backdrop, blended rate growth for the Q1 is expected to average between 3% 4%, similar to historical norms and driven by renewal rate growth of 7% to 7.5%. New lease growth of negative 70 basis points in January was slightly below the pre COVID average, but it is positive in February and we expect further improvement as we enter peak leasing season. Turning to full year 2023, our same store revenue and NOI growth guidance is 6.75% and 7.5% respectively at the midpoint. We are also forecasting expense growth of 4.75% at the midpoint with real estate taxes and insurance Underlying the midpoint of our guidance range is a 2023 blended rate growth forecast of approximately 2% to 3%. We triangulated into this estimate using 3rd party forecasts, Input from our field teams and the output from a multifactor rent growth forecasting model we developed internally.

Speaker 3

Through our predictive analytics work, we have found that total income growth is the primary driver of market rent growth. Within this model, consensus expectations that job growth will be slightly negative in 2023 are fully offset by the expectation of approximately 3% wage growth. In addition, a declining homeownership rate And slowing, but still positive, consensus real GDP growth should continue to benefit market rent growth this year, offset somewhat by increased new supply. In short, even if job growth goes slightly negative, we still see a path to positive rent growth in 2020 With this in mind, our 6.75% same store revenue growth guidance midpoint Can be achieved through our approximate 5% earn in, 125 basis point contribution using a mid year convention from blended rate growth, comprised of new and renewal rate growth of 1.5% and 3.5%, respectively, An approximate 50 basis point contribution from our unique innovation initiatives. The high end of 7.75% Would be achieved through improved year over year occupancy, additional accretion from innovation and blended rate growth similar to the pre COVID Average of 4%, comprised of new and renewal rate growth of 3% 5%, respectively.

Speaker 3

Conversely, the low end of 5.75 percent reflects a 75 basis point contribution From full year blended rate growth of 1.5%, comprised of flat new lease growth and 3% renewals, which is approximately 250 basis points below the pre COVID average renewal rate. Because of the relative Strength of our January February blended rate growth, we need only nominal blended rate growth of 1% on average through the rest of the year to achieve the low end. For reference, even during past downturns, our lowest trailing 4 quarter average renewal rate growth was approximately 2%. Ongoing regulatory challenges could impact our views as 2023 unfolds, but we should have visibility into 65 70% of our full year same store revenue by the end of April. We plan to reassess our guidance assumptions at that time.

Speaker 3

Finally, we continue to drive forward on innovation with the intent of further expanding our 300 basis point Control the operating margin advantage versus peers. Initiatives underway are expected to generate at least $40,000,000 in incremental NOI by year end $5,000,000 to $10,000,000 of this is included in our 2023 same store guidance ranges and will largely be focused on revenue upside such as our building wide Wi Fi project that enables seamless whole building connectivity, Our customer experience project to enhance satisfaction and drive property level ROI initiatives and the expanded use of big data to improve our pricing engine. Innovation has and will continue to drive more dollars to our bottom line as we roll out initiatives across our legacy portfolio and on external growth over time. As an example, On the $2,600,000,000 of third party acquisitions we completed between 2019 2021, Innovation has accounted for an additional 50 basis points in yield expansion above what the market alone would have provided or around $13,000,000 of incremental NOI. This translates to approximately $275,000,000 of value creation.

Speaker 3

In closing, a special thanks goes out to all of our teams for their relentless efforts to drive the best results possible across our markets. Your performance in 2022 was exceptional. And with your help, we will continue to leverage new and innovative tools to drive results in 2023 and beyond. I will now turn over the call to Joe.

Speaker 4

Thank you, Mike. The topics I will cover today include our Q4 and full year 2022 results and our initial outlook for full year 2023, A summary of recent transactions and capital markets activity and the balance sheet and liquidity update. Our 4th quarter FFO as adjusted per share of $0.61 achieved the midpoint of our previously provided guidance range. Full year 2022 FFOA as adjusted of $2.33 was 16% higher year over year, reflecting the company's 2nd strongest year of earnings growth in its 50 year history. Similarly, our Board authorized a robust 10.5% increase to our dividend this year, enhancing our total return profile.

Speaker 4

Based on our AFFO per share guidance, Our 2023 dividend of $1.68 reflects a payout ratio of 74%, in line with our historical average. Looking ahead, our full year 2023 FFOA per share guidance range is $2.45 to 2 $0.53 The $2.49 midpoint represents a 7% annual increase supported by mid to high single digit forecasted same store NOI growth. The $0.16 increase versus our full year 2022 result of $2.33 is driven by the following: A $0.20 benefit from same store and joint venture NOI, a $0.04 benefit from non same store communities Through the continued successful lease up of recently developed and redeveloped communities, offset by 0.06 pennies From higher interest expense and a higher average share count and $0.02 from increased G and A expense and other corporate items. For the Q1, our FFOA per share guidance range is $0.59 to $0.61 or a 9% year over year increase at the midpoint. A slight sequential decline is driven by higher average share count from the settlement of forward equity agreements at the end of the 4th quarter and the higher interest expense.

Speaker 4

Next, a transactions and capital markets update. First, in alignment with our shift towards a capital light strategy in mid-twenty 22, we made no acquisitions or DCP investments during the Q4. And second, we generated approximately $220,000,000 of capital from dispositions and forward equity settlements. Specifically, During the quarter, we sold 1 community in Orange County, California for approximately $42,000,000 and settled all remaining forward equity sales agreements At roughly $57 per share or a 20% premium to current consensus NAV and a 35% premium to our recent share price. We use the proceeds to further improve our balance sheet and execute approximately $21,000,000 of share repurchases at a 20% discount Next, our investment grade balance sheet Remains liquid and fully capable of funding our capital needs.

Speaker 4

Some highlights include: 1st, We have only $115,000,000 of consolidated debt or approximately 0.5% of enterprise value scheduled to mature through 2024 After excluding amounts on our credit facilities and our commercial paper program, our proactive approach to managing our balance sheet Has resulted in the best 3 year liquidity outlook in the sector and the lowest weighted average interest rate amongst the multifamily peer group at 3.2%. 2nd, we have $1,000,000,000 of liquidity as of December 31, providing us ample dry powder and strength. And third, our leverage metrics continue to improve. Debt to enterprise value was just 29% atquarterend, While net debt to EBITDAre was 5.6 times, down nearly a full turn from 6.4 times a year ago and they have turned better versus pre COVID levels. We expect these metrics to improve further throughout 2023.

Speaker 4

Taken together, our balance sheet remains in excellent shape. Our liquidity position is strong. We remain selective in our capital deployment With balanced forward sources and uses and we continue to utilize a variety of capital allocation competitive advantages to create value and drive 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 Thank you. Our first question is from Anthony Paolone with JPMorgan. Please proceed with your question.

Speaker 3

Thank you. First question is for Mike. You went through some of the markets where you're giving out some concessions. Can you maybe just Step back and give us a sense as to which markets you see as being strongest and weakest in the portfolio in 2023? Yes.

Speaker 3

Hey, Tony. How are you doing? That's a good question. I think probably starting at a high level, you've heard us talk a lot about Just the convergence of trends over the last few months as it relates to both the Sunbelt and the Coast. So let me start there.

Speaker 3

I think with the Sunbelt, you've heard us talk a little bit about that earn in, right around 6% going into 2023. The coast for us, Just over 4%. And when you think about it, East Coast was around 4.5%, the West Coast around 3.75%. The difference in what we're seeing today though is we are seeing higher market rents as well as a higher loss to lease in the coast. So we're seeing a little bit more forward strength and leading indicator there, if you will.

Speaker 3

And what we're experiencing and expect to see is The Sunbelt will probably have higher blends to start the year and a lot of that's driven due to renewal growth and what's been sent out in the foreseeable future. That being said, we do think the Coast given market rents in Los Feliz could catch up and potentially surpass that Sometime mid year. But what it's coming down to is what we're doing differently. And a lot of this has to do with what we've done with the pricing system, The fact that we're able to see current demand trends coming through the door, we're able to price a little bit more efficiently there. But we're also utilizing a lot of feedback just In terms of what the customers are saying, what our teams are saying, and we think that this is going to continue to drive outperformance as it relates to our Customer experience project.

Speaker 3

So a lot of exciting things to come on the innovation front that will continue to differentiate us. Okay. Thank you. And then just my follow-up is you didn't put much in the guidance with regards to, I guess, Nothing on the acquisition side and just very little on the sales. But to the extent capital markets or investment sales markets perk up here in the next few quarters, What would you look to either sell or buy?

Speaker 4

Hey, Tony, it's Joe. We did not. We took a relatively conservative approach on guidance as we typically do when it comes to sources and uses. So we really look strictly at what do we have identified in terms of Development, DCP, redevelopment, NOI enhancing spend and then have that funded primarily with free cash flow plus potentially some And the DCP repayment, so pretty conservative on that front. I'd say as we kind of go through this period of price discovery in the broader market, Yes.

Speaker 4

A number of our team were down at NMHC last week and you still do have a bid ask spread out there, call it 10% or 15% with sellers kind of looking for that mid 4s type cap rate, buyers kind of looking for more in the high 4s. So they're still going through this period of price discovery, but I think as we potentially stabilize with That cost really kind of starting to come to an end on the Fed funds side and then spreads compressing and getting more towards a high fours, low fives borrowing cost. We could see more of that price discovery moving forward. If that occurs, I'd say in terms of uses of capital where we've been leaning into more so, I think the developer capital program continues to be a great place to put capital to work in this environment, both on new projects within development, But also within potential recap opportunities, those present a good return, several 100 basis points higher than what we had been doing previously, But also a lower attachment point in terms of loan to values and loan to costs. So expect us to try to remain active there if we have capital.

Speaker 4

On the redevelopment side, we've got a pretty big redevelopment pipeline that we continue to build up that has a good opportunity to achieve pretty good returns as well as refresh assets And take advantage of the markets as they start to come back. So those are probably the 2 bigger pieces. To get there, We are exploring disposition activity in this market. So as always, we're exposing assets to market, including looking for potential JV partners, Both on the operating development and developer capital program side. So if and when we have something there to discuss, we'll bring it back to the market and talk about it.

Speaker 4

But We are looking at alternative sources to help us grow in this environment.

Speaker 3

Great. Thank you.

Speaker 4

Thanks, Dony.

Operator

Thank you. Our next question is from Nick Joseph with Citi. Please proceed with your question.

Speaker 3

Thanks. You touched on the blended rent growth and kind of on the market side, but just from the data you're collecting and I recognize it's a lower traffic Time period, so maybe we can go back for the past few months. Is there anything you're seeing change from a migration trend perspective? Obviously, we've seen some better growth in the Sunbelt from that side, but wondering if there's anything changing in the data? Not really, Nick.

Speaker 3

I'd tell you overall, we are seeing less people moving on in MSAs, but also Less people moving in from outside of the MSA. And just to give you a few stats to put in perspective, move outs right now, 25% move outs From the MSA versus 27% last year. And then for move ins, what we're seeing 29% move ins from outside of the MSA and that's 1st 31% last year. So not a big difference and basically they're back to kind of pre COVID levels.

Speaker 4

Yes. I'd say 2 other things, just kind of demographically, and you mentioned traffic as well there, Nick. Demographically, one of the big macro tailwinds that I think we have going into this year and Help support kind of our outlook is homeownership rate overall. We do expect that to come down. So given the relative affordability dynamic between Single family housing and multifamily housing, we think we do have a tailwind there.

Speaker 4

So that's going to help on the demographic or household formation side for multifamily. The other thing, just you mentioned the low traffic period. 4Q was a lower traffic period. I think our traffic got down to about flat year over year, so perhaps a little bit less demand in Q4. That said, as you look at year to date, I think we're up 7% or 8% in terms of year over year traffic coming here through January February.

Speaker 4

So we have seen us kind of come through that typical lull that we see seasonally and seeing traffic come back quite strong at this point.

Speaker 3

Thank you. And then just Joe, on your comments on DCP and the attractiveness there, how much of the return hurdles changed relative About 12 or 24 months ago, they recognize there's different levels of risk and different structures. So if you can try to just normalize that, kind of how has it changed Just with higher rates.

Speaker 4

Yes. It's a overall, if you looked back to what we are doing in terms The fixed coupon transactions on a typical developer capital program deal over the last several years that was typically in that 11% to 12% type of targeted return. Today, that's going to be several 100 basis points higher, so call it 13% to 14% returns on that paper. One of the big differences though is where we're attaching in terms Risk profile. So if we were in the 80% to 85% loan to cost previously, we think there's good opportunities in this market to actually be down in the 75% up to 80% loan to cost.

Speaker 4

So you're getting more return while taking less risk. You're also seeing some of the pre Developers come back and look for this type of capital. And so you may get better sponsorship within those investments as well as potentially better assets within those investments. So Across the board, I think having capital for that bucket in this environment, you're going to be a little bit more selective and pick and choose pretty good opportunities.

Speaker 5

Thank

Operator

you. Thank you. Our next question is from Nick Yulico with Scotiabank, please proceed with your question.

Speaker 6

Hey, it's Daniel Chikerico with Nick. Tom, you mentioned a wide range of economic scenarios for the year. Looking to get a feel for what type of economic scenario is baked into guidance, whether this is a softer landing with modest job losses. We know you have a more broadly diversified portfolio, which in theory should reduce volatility in your results, but any commentary on your view of the economic outlook would be helpful.

Speaker 2

Yes. I mean, first, a call out to Chris Van Inns and the data analytics team in creating a wide range of I think the baseline midpoint of our assumptions assumes about 1,000,000 job loss for the year on a national basis and then they try to really drill down to 4 or 5 more factors, which is really income growth And employment picture that drive our business and pricing power. And through that back testing it, I think they've come up with about an 83% It's weighted model that points to the midpoint of our scenario that we've outlined for guidance. Joe, Chris, anything you'd add to it, pat on the back?

Speaker 4

Yes. Definitely a pat on the back for Chris on the predictive analytics side. Tom nailed it. It's a multi factor model. We're of course looking at broader consensus expectations plus Some industry specific expectations around rent growth, but while a lot of the focus comes into the potential job losses and layoff announcements, Yes.

Speaker 4

The recent job support was quite strong. We still expect to see wage growth throughout 2023, which is the biggest driver of rents within our industry. You also have homeownership rate expectations to come down. And while we focus a lot on the supply outlook within multifamily, which Does look to be up slightly, call it 10% to 20% year over year. A broader total housing picture actually should have a supply decrease next year given what's going on in the single family market.

Speaker 4

So you kind of roll all those up and you kind of get to a little bit lower expectation than typical. I think Mike talked about needing 2.5% blends. At this point, given we already know January, February, we only need 2% blends the rest of the year, which is called 150 basis points, 200 basis points below historical averages for those 10 months. So we've clearly assumed a little bit more of a lower than typical dynamic from a macroeconomic standpoint to get to those guidance numbers.

Speaker 6

Great. Thanks for that. A quick follow-up. So you look at new versus renewal pricing in the Q4, it's a noticeably wide gap for most markets. And Mike, you gave helpful sensitivity in your opening remarks for 2023, but at what point do you see renewals converge to new lease pricing?

Speaker 6

Or is there an expectation maybe to meet in the middle as new lease pricing accelerates? Any thoughts on that dynamic and how you see it playing out for the year?

Speaker 3

That's a good question. What we're seeing today is that it's starting to converge a little bit as we look out into February March. My expectations is probably by 3Q, you start to see it come down to 100 basis points, 200 basis points because what we are experiencing and what we expect Market rents to continue to increase as we go into leasing season and we are eating away at that loss to lease. So our renewal growth should come down a little bit and I think we'll probably meet in the middle somewhere.

Speaker 7

Great. Thanks.

Operator

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

Speaker 8

Yes. Thanks, guys. Just want to touch a little bit on the model. And I was curious if there were any specific periods that you'd Point us to where you back tested, the model where you saw some significant or notable job losses, But during a period of still attractive wage growth that resulted in market rent growth holding positive.

Speaker 4

Yes. We'd have to go back and take a little bit more of a deep dive on that. We've got the scenarios, but not in front of us. Yes. What comes to mind is if you go back to 2005, 2006 and look at the shift to a rentership nation, Yes.

Speaker 4

Despite the magnitude of job losses, you did see overall rent growth and revenue growth buoyed to some extent, because even during that dramatic period I think our NOI was down roughly 10% both as a company and as an industry. So that's with fairly draconian jobs outlook Because you did have another tailwind there from a demographic and household formation perspective. So, we'd have to take a little bit deeper dive and look at that, but I do think just being in a needs based industry and one in which individuals are going to need shelter and this is the cheapest cost of shelter in this environment relative to single family, You're going to have any incremental housing that's formed really bias over into our part of the world. So I think it's going to be a pretty big tailwind combined with wages going forward.

Speaker 8

That's helpful. Appreciate the comments. And then Joe, going to your comments on kind of evaluating joint venture opportunities, Would you characterize these as more one off opportunities? Or are you guys looking to or would you consider something more Significant like you did historically with MetLife or maybe other partners in the past?

Speaker 4

Yes. Right now, we're thinking about it in terms of probably a little bit more like the MetLife joint venture. They've been a phenomenal partner to us for the last 12 plus years. And so finding a partner that thinks like us, views real estate and operations similar to us and that has capital to grow with us along a number of different avenues. So As we look at exposing a portfolio of assets to the market to potentially find a joint venture partner with, of course, we want to find a partner that will meet the market in terms of pricing and terms, But also then has the capital and the wherewithal to grow with us, both on operations, on potential developments over time as well as DCP investments over time.

Speaker 4

And so We'd like to find that partner. If it takes several partnerships to accomplish that, that would be okay. But it's a way for us to continue to expand the enterprise, utilize our operational and transaction skill sets to grow accretively and continue to gain scale overall.

Speaker 9

Appreciate it. Thank you.

Operator

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

Speaker 10

Good morning, good afternoon. Thanks a lot for taking my question. The breakdown of the range of same store revenue guidance was helpful. Can you break down the Expense growth guidance of 4% to 5.5%, where are you seeing pressure? And then how much more savings can you see from your centralization and

Speaker 3

Hey, Michael. I'll start with that one. Joe can help clean it up if he needs to. But Basically, we're talking about $475,000,000 at the midpoint. And I think it's important to break it down into those components of controllables and non controllables.

Speaker 3

So first and foremost, controllable expenses, they make up just over 50% of the stack at around $250,000,000 We do expect between 4.5% to 5.5% growth and we are seeing pressure points on utilities. We are seeing anywhere from about 6% to 6.5% growth in 'twenty three and that's coming off of nearly 8% growth in 'twenty two. R and M should continue to see a little bit of pressure around 6% to 7% growth for us this year and that compares to 11% in 2022. Personnel continue to see some efficiencies there. So we're seeing around 2% to 3% growth and we're flat in 2022.

Speaker 3

As it relates to non controllables, this is just under 50% of the stack. We expect around 4% to 5% growth, Taxes being in that plus or minus 5% range as well as insurance in that 4% to 5% range. So a little bit of pressure there, but It's what we are doing and you asked a very good question, how much more is left. We think there's quite a bit. On the personnel side, We've been running with about 30 properties that are unmanned.

Speaker 3

We expect that to go around 35 to 40 this year. So we are finding efficiencies there. We're putting in place some technology as it relates to maintenance and we think we can compress our days vacant on the term side. So we think R and M will be benefiting from that. And then on utilities, we are working on different ROIs that should make us a little bit more efficient with our vacant electric as well as just common area lighting.

Speaker 3

So we are doing plenty of things. We're trying to address these numbers and we feel pretty good at our 4.75% range.

Speaker 4

And I do think too, if you take kind of the what's next piece and look at revenue, Mike talked about the 50 basis points that's Additive to our guidance expectations this year. I think that's a big differentiator when you look at what we've seen from others put out there in terms of other income expectations. I think just given a little bit more concrete facts behind it as we do have identified projects with that. So that's a lot of our bulk Internet, our package lockers, 3rd party parking, tenant deposit insurance, things of that nature, that's very well identified. So it's not a hope that we get that 50 bps.

Speaker 4

I think it's a known. I think that's a key differentiator for us as we go into 2023, but also as you look back into 2022, just to give Mike a pat on the back, We think when all is said and done here in Q4, we're shaping up for the number 2 overall same store revenue growth this year, which is a phenomenal outcome given the diversified portfolio that we have. We don't have as much Sunbelt as some of the others. So coming in at number 2, I think a prideful fact that's driven by market selection, submarket selection, Everything that's taking place on the innovation front, so more to come on that for sure.

Speaker 10

That's really helpful detail. And you talked about the affordability Renting and those that are moving out due to buying a new home is down, I believe you said 30%. I guess given The slowdown in single family home price appreciation and signs of stabilization in mortgage rates, do you expect Move outs to purchase a home to rise in 2023 until maybe that becomes a little bit more of a pressure as the year progresses?

Speaker 4

I think usually what you see from a psychology perspective is that home prices come down even as affordability improves. You do see a delayed response in terms of that affordability. So when we had the kind of 2,007, 2,008 crisis and that shift to rentership, That was a shift that developed and took place for the next 7 years or so. And so you do have a different psychological impact that sticks with you a lot longer. So I'd expect that trend to stay with us throughout all of 2023.

Speaker 10

Got it. Thank you very much. Good luck this year.

Speaker 4

Thank you.

Speaker 9

Thank you.

Operator

Thank you. Our next question is from Josh Dennerlein with Bank of America. Please proceed with your question.

Speaker 11

Hey, guys. Thanks for the time. I noticed in Seattle, the effective new lease growth in 4Q is down 7.4%. Just kind of what are you seeing in that market? And I guess what's your expectation built into 2023 for Seattle?

Speaker 3

Great. Josh, this is Mike. Just starting with kind of our exposure, if you will, we're around 6.5% of our NOI in Seattle. A lot of that is in the Bellevue area and the remainder is out in the suburbs. So what we experienced during the quarter was strong growth in the suburbs.

Speaker 3

And what we saw was 10% to 12% growth on a revenue basis. Down in Bellevue, we are still in that 5% to 6% range. What we're experiencing today is rents are coming back a little bit. Over the last few weeks, we've seen market rents increase. We're really not utilizing any concessions In either Bellevue or out in the suburbs and we expect new lease growth to start to show positive here in February March and our blend should be in that 2% to 3% range as we move forward here.

Speaker 3

And ideally, this is a very seasonal market. What we've seen in the past It's typically about a 600 basis point drop off from Q3. It was a little bit more pronounced this quarter. We do expect that that market will bounce back Just given that it's so seasonal in nature.

Speaker 11

Okay. Appreciate that color. And then I just appreciate all the And so you provided on the same store revenue guide, just wanted to kind of clarify, I don't know if I heard it, the occupancy assumption at the midpoint, The high and low end of the range?

Speaker 3

Yes. We're expecting roughly flat occupancy. So we've been running right around 96.7 As we go into January, February here, I expect more of the same for the foreseeable future. We're really focused on continuing to drive that rent roll. And so we're going to be pushing rents for the next few months and see how it all shakes out.

Speaker 11

Okay. That's across the range. You assume the flat or is there

Speaker 3

That's correct. Across the range, some markets being a little bit higher, some being a little bit lower, but right around that 96.7%, 96.8% is about where we'll land.

Speaker 11

Okay. Appreciate that. Thanks, guys.

Operator

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

Speaker 12

Yes, thanks. Good morning. I realize you're not providing sort of quarterly cadences, but Mike, could you maybe just talk about how you think revenue growth progresses throughout the year? And I guess I'm just trying to get a sense for maybe where the exit velocity Maybe as we get toward the end of the year and into 2024?

Speaker 3

Yes. We haven't talked much about the cadence, Steve, what I would tell you is the first half of the year should still be relatively strong, just given what we've done with the year end. I mean, obviously, we put a lot of focus on that over the last 6 to 9 months. So I would expect anywhere from 7.5%, 8.5% in the first half. That being said, that would imply about a 5.5%, 6.5% in the back half, but we'll see what happens with market rents if they continue to go up Closer to that high end of the range that we provided, you could see that migrate up.

Speaker 3

That's kind of how we're seeing it shake out based on everything we're seeing and experiencing today.

Speaker 2

And Mike, how much of your revenue is built in by April?

Speaker 3

Quite a bit, Tom. So we expect between 65%, 70% of it will be known by the end of April.

Speaker 2

Got it. We'll talk to you in NMHC.

Speaker 12

Okay. Thank you. And then second Question, I guess, Joe, coming back from NMHC, I mean, how are you guys thinking about new development starts? And I know you own a bunch of land parcels. I guess, Where would you today be penciling out new development?

Speaker 12

And if those yields don't really work for you, how much higher do the yields need to be? And Is that a function of cost coming down, rents going up? Obviously, it could be a combination of both, but just how do you see development starts maybe unfolding over the next year or so?

Speaker 4

Yes. Good question. I'd say number 1, just related to the current pipeline, I want to point out, from a cost We are primarily locked in. So of the 3 projects still under construction, we're 95% bought out and with that 5% remaining risk, We've got contingencies in place. So from a cost and return standpoint, feel very good about all the projects on Attachment 9, Still kind of turning to the high fives, low sixes for majority of those deals as they go through the lease up.

Speaker 4

So that's on the current pipeline. As we kind of go forward, The one project that we've talked about in the past is a Phase 2, Newport Village in Northern Virginia. In the next 30 days, we should get kind of final cost estimates on that and final refinement of return expectations. Yes. We fully expect that to be in the kind of mid-5s current type range.

Speaker 4

And when I say current, that's current rents on inflated or projected cost. And so that should stabilize over time as we go through that somewhere into the low to mid-6s. We think that's an acceptable level for that project, Especially given that it's a Phase 2 and has ancillary benefits to Phase 1 from an efficiency and potting perspective. So that's the near term Decision for us. The next decision is probably going to be for another 6 plus months as we get into the back half of the year, at which time I think we'll have more price discovery and views in terms of cost Capital and best alternatives for that capital.

Speaker 4

So nothing else near term in terms of growing the pipeline.

Speaker 12

Great. Thank you.

Operator

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

Speaker 13

Hey, guys. I really appreciate all the kind of the color earlier just framing the high end and low end and midpoints. I'm just wondering kind of given the strong renewal growth even with kind of the new lease decel, where does that kind of loss to lease stand today? And Maybe just kind of framing out, could that shift to a gain to lease if renewals kind of do stay in this elevated range with new kind of modest growth?

Speaker 3

That's a really good question. I'll tell you what's been promising to see is today we're sitting around 2.2 loss to lease. Last month, we were around 1.5%. So we've actually seen our loss to lease increase and a lot of that has to do with what we've seen with market rents On a sequential basis, go up almost nearly 1%. So even though we're sending out high renewals and capturing it, we're pushing our market rents, which gives us the ability to continue to have a relatively high loss to lease.

Speaker 3

And just to put in perspective, this time of year, we're usually around 1.5. So we're actually a little bit above that. So we feel pretty good about where we're tracking.

Speaker 13

That's great. Thanks. And then just I think it was a question earlier on Going into the weaker markets in Seattle, maybe just the flip side of that question, looking at New York, I mean, 16.3% effective new lease rate growth in

Speaker 3

the 4th

Speaker 13

quarter. I guess, what's kind of driving the continued strength there? I guess, maybe the question is, can that continue? And Is there a world where maybe that's kind of continues to be a really strong market even with new kind of de selling in other markets?

Speaker 3

Yes. No, I'm glad you asked that. New York feels very strong today. And just to put it in perspective, again, this is about a 7.5% Market for us in terms of NOI weight, we are heavily focused in the financial as well as Manhattan, just around 75%, 80% of our exposure. So What we're experiencing there is strong demand.

Speaker 3

So we've got traffic up on a year over year basis, still running around 98% occupancy, no concessions in the marketplace And really no supply to speak to in the city itself. So New York feels very strong for us. I expect that you'll continue to see high blends As we move forward into the Q1 and Q2 here and quite frankly, we think New York could be one of our best markets this year with anywhere from 10% to 12% revenue growth.

Speaker 13

Thanks again, guys. Really appreciate it.

Operator

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

Speaker 3

Hi, thanks for the time. Just curious on what you're expecting for turnover and bad debt as the year rolls on, Some noise in out of LA County, just curious on how that impacts your business plan or expectations? Yes, Juan, right now, this is Mike. What we expect is turnover to stay pretty relatively flat on a year over year basis. It's up a little bit because we have seen a little bit more on the turnouts due to skips and evictions.

Speaker 3

I'll let Joe get into a little bit more on bad debt. But right now, we're continuing to focus on driving renewal rate growth. We expect we'll have a little bit more move outs due to that. But again, we're not seeing people move out to buy homes, so that's helping us offset that. And I do expect turnover to be relatively flat year over year.

Speaker 4

Hey, Juan, it's Joe. So we actually had a number of these questions last night and this morning on bad debt. So we're still Talking through this topic, hopefully, 2023 is a little bit different picture for us. But maybe just a recap on our approach and then I can kind of take you through current trends and outlook. So our approach going back to 2020 when we started COVID was to consistently estimate what we thought the collectability for each individual resident was.

Speaker 4

So we didn't take a draconian view and simply write off all delinquencies. We didn't get overly bullish and say we're going to collect all of it. But we try to think through, be it from cash Or be it through government assistance, what the ultimate collectibility was for each of those different groups. So what that resulted in was when we had government assistance come in, Which I got to give a plug to that team. We ended up getting $60,000,000 of government assistance on behalf of our residents and our investors throughout this period of time, which I think if you look at that as a percentage of revenue, probably number 1 in the space when we took a look at it.

Speaker 4

So a big plug to those individuals that worked hard on that. But When we had that come in, it wasn't a positive surprise to our numbers, which means it wasn't a big benefit this year, also not a headwind as we go into 2023. And so if you look at recent trends, despite the fact that government assistance has been coming off, it was sub $2,000,000 benefit in 4Q. It's Down under 200,000 here in the Q1. So a de minimis amount, but yes, we saw the best in the month Collections and end of quarter collections in 4Q and end of January that we've seen throughout COVID.

Speaker 4

So we're seeing the ability to get higher paying residents in, Find new residents that have the wherewithal and ability to pay as we go through this eviction and kind of process and ultimately help benefit 23 numbers. In terms of the assumption though, $423,000,000 we think it's relatively flat in terms of total bad debt expense. So Maybe a little bit of upside as we work through some of these abilities to get back some of our units, some of the eviction moratoriums burn off. But net net, we're thinking it's probably about a flat benefit in our guidance.

Speaker 3

Thanks. Super helpful. And then just on Same store expenses, the guidance for 23, what would you say the differential is in expectations between the coast and the Sunbelt And the main drivers of that. Biggest difference what we're seeing today is really around taxes. So we do expect High single digits in the Sunbelt, where we are capped around 2%, obviously, with our California exposure.

Speaker 3

So that's probably the biggest difference. Aside from that, we do see a little bit more pressure as it relates to some of our vendors working down in the Sunbelt, just given the supply pressure down there. You do see More expenses there, but for the most part, it's pretty tight across the board. Thank you very much.

Speaker 4

Thanks, Juan.

Operator

Thank you. Our next question is from Brad Heffern with RBC Capital Markets. Please proceed with your question.

Speaker 14

Yes. Thanks, everybody. Can you walk through what you're seeing in terms of demand in some of the tech markets? Obviously, you mentioned Seattle already, but San Francisco and Austin as well. And is there any noticeable impact that you're seeing from the layoffs?

Speaker 3

San Francisco today feels pretty good. I'll tell you over the last few weeks, I've seen a little bit more traffic return to that market. But again, I think it's always good to put this in perspective. That is about 8% of our NOI, 50% of our exposure is in that SoMa downtown area, The rest is down the peninsula. I've seen pretty good traffic across the board.

Speaker 3

I'm not really seeing downtown outperform Santa Clara, San Mateo necessarily, it's pretty good. And I will tell you, it goes back to some of the exposure that we have in these markets. Seattle, it's just under 15% tech exposure as it relates to our resident base. In San Francisco, it's actually between 10% 12%. It's a much more diversified resident base.

Speaker 3

And so during the months of November, December, when you heard all the layoffs, we did see People kind of sit back, demand was a little bit slower as people were just assessing what's going on. But lately, it does feel and what we're hearing from the ground is People are going back to the office. They want to make sure that their faces are being seen and we're seeing traffic return a

Speaker 4

little bit. Yes. I think one other thing we saw, obviously, early in COVID, we saw a lot of the dispersion of the tech jobs around the country. Similarly, what we've been taking a look at, and I know there's been a couple of reports out there on the warrant notices related to some of those layoffs. Our business intelligence team has done a lot of spatial analytics work Looking at where those warrant notices are and you'd be shocked to see the distribution of them.

Speaker 4

So it's not just a San Francisco or in Austin and Seattle. When you look at the percentage of those layoffs that are taking place or percentage of the workforce in those markets, it's not nearly as impactful as I think most of us typically think when we see the headline Just based off where certain companies are headquartered. So there's more of a dispersed impact around our portfolio and as well as markets we're not in.

Speaker 14

Okay. Appreciate that color. And then in the prepared comments, you mentioned that renters are taking longer to make Decisions even though the traffic levels are basically the same. I was just curious if you could delve into sort of what you meant by that comment and what the implication is?

Speaker 3

Yes, Brad. I would tell you just to quantify that a little bit, the way we think about it is in terms of vacant days. And so it's taking about 2 days longer Just to move somebody in after they started trying to figure out where they want to live and when they want to move in. So about 2 days on average. Other than that, we haven't seen much of a difference.

Speaker 5

Okay. Thank you.

Operator

Thank you. Our next question is from Chaunee Luthra with Goldman Sachs. Please proceed with your question. Hi.

Speaker 15

Thank you for taking my question. So you guys talked about intermarket differences between Coastal and Sunbelt, but perhaps Could you talk about intra market differences A versus B, urban versus suburban?

Speaker 3

Yes. I'm happy to go into that a little bit, just to give you an idea of what we're experiencing today and what we did experience. So as it relates to A versus B, First of all, in 2022, we did see our As outperform on a revenue basis. And what we expect in 'twenty three and what we're seeing today, Our Bs are likely to outperform As as it relates to urban versus suburban. Urban outperformed the Suburban in 2022, we do expect that to flip as we move through 2023.

Speaker 3

And I think just to point to something here, you can see on Attachment 11A, our net life portfolio, high quality, urban in nature, we had 16% growth during the quarter. So you can see What's happening there just as it relates to different parts of what we're seeing in our mature portfolio. So overall, it's in good shape.

Speaker 15

Great. And for my follow-up, in the event that you don't see viable position our DCP opportunities or we stay in that price discovery mode for longer. How would you think about the appetite for buybacks this year.

Speaker 4

Yes. We've definitely had the appetite and willingness and ability to pivot over time. So I I think our most recent $50,000,000 buyback that we did in 3Q, 4Q was actually our 3rd buyback in the last 5 years. So We've got a demonstrated history of pivoting when we can. As we get through price discovery, continue to see where the fundamental picture develops.

Speaker 4

Then importantly, what is that source of capital and the price of that capital? As those all come together, I think we'll have a better Whether or not we have the capacity for buybacks and if it makes a good risk return trade off, it was somewhat of a fairly easy decision when we were thinking about it 3Q and 4Q because we had done the forward equity back in March of 2022. So we had proceeds available. We had a set price. We also sold that asset in Southern California.

Speaker 4

So I think as we expose some of these assets to market, see where they come in on pricing, we'll be able to potentially take proceeds from that To determine do we want to do more operational acquisitions and put that into our platform and get the lift we typically see, do some of the DCP transactions we talked about earlier, Help funds, potential development starts and then of course buybacks will be on that menu as well.

Speaker 15

Great. Thank you.

Operator

Thank you. Our next question is from Rich Anderson with SMBC. Please proceed with your question.

Speaker 4

Hey, Rich. Check and see if you're on mute.

Speaker 16

Sorry about that. Can you hear me?

Speaker 13

Yes. You're good.

Speaker 16

Okay. Sorry about that. I think the question earlier, Sakwa, asked about the cadence of performance over the course of the year and you gave a good answer there. And then when I think about the year ahead, It's somewhat of a pedestrian year except for the fact that you have this 5% earn in. So you're kind of whittling away this great growth profile you had last year.

Speaker 16

So when you think about the end of the year, is it the best probability that you will be looking at like a return to CPI Plus type of growth in 2024 or what has to happen for to have another year of Above average growth and for this story to continue or just curious what the building blocks might be when you're looking at December of this year?

Speaker 4

Yes, good question. And obviously, we are not macroeconomists, but we can kind of focus on what we can control and see coming down the pipe. So I'd say 2 things that are beneficial as you start to go into 2024. 1 on the supply side, I mentioned the total housing stock already starting to come down. I think that's going to only continue when you look at permanent and start activity on single family and what we're starting to see rollover in terms of permits and starts on the multifamily side.

Speaker 4

So you start to bring down total housing stock. The other thing is the relative affordability piece that we've talked about quite a bit. That should be beneficial. So those all help market rent growth. Beyond that, then you still have innovation, which we talked about that adding 50 basis points Here in the 2023 numbers, I think you have at least another year of 50 basis points coming in 2024 when we think about What we have coming especially on building wide Wi Fi and some of the other initiatives that will roll into the pipeline.

Speaker 4

So I think there's a couple of dynamics that hopefully help get us Above inflationary type of numbers as we go into 2024. And then beyond that, you have still a very strong balance sheet in terms of Lack of maturities coming due really in 2024 with only $100,000,000 So you don't have the debt resets. And then we also have capital allocation. We'll see where our cost of capital goes and where we can But hopefully some opportunities there.

Speaker 16

Okay, great. And just a follow-up, just a quick one. Earn in typically 1% or 2% in a normal year?

Speaker 3

Yes. Our historical average is right around 1.5%.

Speaker 16

Okay. And then Joe, on the DCP, What would you say the exit strategy is for the $480,000,000 of commitments that you have currently in terms of getting paid off or Is there any change to what you're thinking in terms of strategy as it relates to those investments as it stands today?

Speaker 4

No, I wouldn't say any change overall. When we go into those, obviously, we're looking to make sure we have a partner, it's an asset that we want to be there with. It's an asset that we ultimately want to own and we've done that. I think those have come through maturity over the last We started that program in 2013, so the last 9 years. I think we've had about a fifty-fifty hit rate on buying those out.

Speaker 4

I'd say the only change in dynamic today has to do with as we go through this period of price discovery and figuring out where cost of borrowing is, Yes. We've got some upcoming maturities and equity partners that while they may have been thinking about exiting the asset and either us buying it or selling it to the market, Yes. They may be looking for a little bit more time to wait to get through that price discovery mode and optimize pricing and economics for themselves and of course us. So We're going to work with some partners on potentially extending and making sure we get to a better window to transact. But in terms of our desire to buy out, It's going to be case by case as we move through those.

Speaker 2

Hey, Rich, this is Toomey. I'd just add, think about it as an option. Okay. It's an option that we get paid for while we sit there and collect it. So not a bad position to be in.

Speaker 2

And if our cost of capital responds, we could be aggressive on that opportunity set because we know it, assets we'd want to own. And if it isn't, we're glad to just cash our check and go away to the next opportunity.

Speaker 4

Yes, fair enough. Okay. Thanks, everyone. Thanks, Rich.

Operator

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

Speaker 17

Hey, good morning, everyone. A lot of good things on this quarter in the year and the outlook, but I just had one, I guess, minor negative following up on the DCP. It looks like Junction was extended. Can you give us a little bit of an update there? Was it just driven by the financing markets?

Speaker 17

Is the project still under construction? Just a little more details there.

Speaker 4

Yes. It really goes back to kind of that prior comment and response. It's just trying to find the optimal window for them to potentially transact. So they do have certain rights from a senior extension perspective. And so in some cases, you're going to have borrowers that look to extend For their rights, in other cases, we'll work with them and the senior lender to figure out what the right extension is.

Speaker 4

So, they did extend and we're still in discussions with them to actually And even further to ensure that we have perhaps a year or 2 window by which to evaluate the market and figure out what the exit is.

Speaker 2

Yes. Wes, Toomey again. A couple of points to make. We still accrue our pref during that period of time. So second, this particular asset's 20% market rents below pre COVID.

Speaker 2

So it's still trying to bring itself back. And the truth is Santa Monica is a great market, so we'll see how it plays out. I think it's again one of those we like our options At this juncture, we'll see how they play through.

Speaker 17

Got it. And then I think it was a few quarters ago, you had mentioned When a tenant moves out due to the higher rent increase, you typically have a large move out move up in rent. Are you still seeing that?

Speaker 3

We are still seeing it not to the same level that we saw probably 1 or 2 quarters ago, but we are still experiencing that. And I expect to see more on the same conference at least the next 1 or 2 quarters.

Speaker 17

Got it. Thanks, everyone.

Operator

Thank you. Our next question is from Haendel St. Juste with Mizuho. Please proceed with your question.

Speaker 14

Hey, guys. Thanks for taking

Speaker 18

the questions. Just two quick ones for me here. I want to follow-up on your comments on the transaction markets. We were at NMHC II and heard lots of chatter about the stalled market, lots of capital willing to buy, but fewer sellers and a pretty sizable bid ask spread. So I guess I'm curious about how you're thinking about the market clearing cap rates in the current environment and what you're willing to pay and when do you think we'll get back to a more normalized level of transaction activity?

Speaker 18

Thanks.

Speaker 4

Yes. I think you're right. We got to mention that 10% to 15% delta in terms of buysell Price discovery window and it's we're unsure at this point which group is going to move which direction, but I would say you do have a pretty good buyer set out there in terms of Unlevered buyer pools are individuals that already have capital raised. They can find pretty compelling IRRs when you're buying in the high 4s, you get to a 8% unlevered IRR. So be it high net worth, pension, closed end funds, a lot of private capital It's definitely efficient around the space.

Speaker 4

And I think once again, plenty of capital looking to come over to multifamily. So for us, in terms of our ability or willingness We're fairly focused from the cash flow accretion standpoint. So whatever allows us to get cash flow lift, if we could sell at X And then redeploy into assets that are under managed and get a day one left with our operating platform, we're more than happy to transact at different Cap rate levels as long as that opportunity redeploys out there. And so that's why the biggest thing we're thinking about in terms of meeting the market and where that pricing comes in.

Speaker 18

That's helpful. Curious on maybe one set of maybe potential sellers here. I heard a lot of talk about merchant builders who Clearly, you started project during maybe different economic times, a different cost of capital and capital expectation. So curious If you're getting more inbound calls from that set of potential sellers, how you maybe would assess or rank that opportunity And if that's an area we expect to be more active in the coming quarters.

Speaker 12

Haendel, this is Andrew. How are you doing? Good question. And we did quite there's the opportunity for DCP recaps, I think, in that space. It's still a little early as it Relates to that, we've done a few of them late last year.

Speaker 12

And we've begun to have some of those conversations, but I still think There's some discovery that needs to take place before we know for sure if those opportunities exist, but it's definitely a place where we're going to like Joe mentioned Earlier that we have a reduced risk in that scenario where the property will be have been completed. We'll have cash flow. We'll have the ability to get a loan that's not a construction loan, so you can work with the agencies and so on. So you're in a much safer position on those DCP type transactions, but it's still been too early, but some additional conversations have been had.

Speaker 18

Got it. Got it. Okay. Thank you and great to hear you, Andrew, long time.

Operator

Thank you. Our next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.

Speaker 19

Good afternoon. How are you guys thinking about the regulatory environment and where the industry is lobbying time and money needs to be targeted over the next few years? You've got rent control, DOJ going after RealPage, taxes increasing everywhere and the potential for reimposing eviction moratoriums. How are you guys thinking about this and what's most important? Where are you targeting most of your efforts and prodding the industry to target theirs?

Speaker 20

Hey, Rob, it's Chris. It's a really good question. I would say we're fighting on a lot of fronts. You mentioned rent control initiatives, right? We see those in 6 or 7 states thus far in the 2023 legislative sessions.

Speaker 20

We're still coming off COVID restrictions, whether that's eviction moratoriums, a couple of holdouts out there, eviction diversion programs, etcetera. And we're working with our trade groups, right? So the California Apartment Association, Places in Maryland, Florida Apartment Association, all that kind of stuff. And we are giving money. I would say rent control is obviously a top priority.

Speaker 20

The Proposition to get rid of Costa Hawkins in 2024 in California is going to be a top priority. And then everything else as you think about just cause eviction rules, fee limitations, longer rent increase notice periods, all that kind of stuff that we're seeing, Which are going against landlords right now, we're working through, but those are probably lower priorities. So most of our dollars are once again going to go to those Kind of top 1, 2, 3 things and we're going to be working with the major trade groups to not only fight the measures, but educate Legislators on what a better solution is, right? It should be a supply based solution. So that's kind of where we're working right now.

Speaker 19

Why don't you guys Sorry.

Speaker 2

No, that's all right. That is the correct answer Chris gave, but I want to emphasize the education piece Because California, I mean, the capital right now of a regulatory landscape that's all over the place, we actually go to the cities next Store that aren't proposing these and they embrace the idea that new development, new housing stock It's a great way to enhance their city. And you take those cities as examples. I mean Huntington Beach, which we've been at for 10 plus years now, Yes, it turned out to be a great city with a refreshed stock and competes very nicely against Newport, which is just the opposite. And so we think the best long term path is these cities that are embracing new supply, new product, Particularly ESG focused are going to realize the only way to solve their long term housing and ESG directives It's by opening up the development windows.

Speaker 2

And we're going to have good conversations along that corridor with a lot of people And we're seeing responsiveness. And so where will our capital flow, where those opportunities are embraced.

Speaker 19

And I guess the one sort of numerical question, how much when you take a look at it, did you guys lose from the eviction moratoriums dollar wise or percentage of rent? And if those get reimposed as if job losses mount, how big of an issue is that going forward in a tougher rental rate environment?

Speaker 2

My response would be a lot, but I don't know the number.

Speaker 4

Hey, Rob, it's Joe. I do have to know the numbers. So The write offs that we had throughout that period of time, we're probably right around $60,000,000 in terms of total write offs as it came through 2020, 2021, 2022 and even in here into 2023. So we have seen fairly elevated numbers on that front. That said, I mean, it sounds like a big dollar amount, To put it in perspective on $1,600,000,000 of annual revenue, yes, we're collecting 98.5% of the rents that we're billing.

Speaker 4

So we're maybe off 100 basis points So therein lies the opportunity to the extent that eviction moratoriums or diversion programs come off over time. We don't expect it to. We don't think we're going to recapture that 100 basis points near term, but we don't see material downside either.

Speaker 19

Okay. Thanks, guys.

Operator

Thank you. Our next question is from Connor Mitchell with Piper Sandler. Please proceed with your question.

Speaker 9

Hey, thanks for taking my questions. Regarding the DC market, the government workers are still working from home. So could you guys comment on how That's affecting the apartment demand?

Speaker 3

Yes. DC is obviously, it's a big market for us. It's right around 15% of our NOI. I'll tell you what we're expecting to see as people start to return to office hopefully here in May timeframe over the next few weeks given it's a 60 day market, We do expect demand to start to pick up a little bit. What we're seeing today just on the floor is concessions a little bit in the 14th Street corridor out in the suburbs, Very minimal concession activity.

Speaker 3

So again, once people start coming back to the office a little bit more, we think DC has some legs to grow and It could be a pretty strong market for us in 2023.

Speaker 9

Appreciate that. And then my second question, With the increased attention on EV fires, could you guys just put some color on how you're going about upgrading your fire suppression Systems in the garage, just since EB Fire shoes a lot more water than the average fire.

Speaker 4

Yes. That may be one to take offline. So we do have a pretty robust EV rollout program working within our redevelopment team. And so between electrical load, fire suppression, etcetera, you're right, it is a pretty decent cost relative to the ROI that you receive on those. But Maybe one to take offline if you want to follow-up and we can get to our experts in that space to talk you through it.

Speaker 9

Yes, appreciate it. Thank you.

Operator

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

Speaker 5

Hi, good afternoon. Question about how you see your Sunbelt markets progressing this year. Are you seeing good track trends there, good demand trends? And Would you expect Tampa, Orlando, Nashville and Dallas to see positive new lease spreads in 2023?

Speaker 3

Hey, Anthony. What we're seeing with the Sunbelt today is market rents as well as our loss leases are a little bit lower to start the year. That being said, we do expect with seasonality and as we return to just a more normal period of time, market rents will increase as we move forward. But as we started the year off, it's a little bit lower than what we're seeing on the coastal side of the house.

Speaker 5

Got it. Thanks. And maybe one just general question. I think you said your loss to lease was increasing in February, traffic trends improved January, February. Does that suggest that demand may be stronger than people are expecting across the board this year?

Speaker 5

It seems like things are boosting up across the nation. And How does that impact your overall macro review for the year?

Speaker 3

Yes, Anthony, I'd tell you we're cautiously optimistic and a lot of that over the last few weeks has really Showing more strength. I'll tell you to start the year, the 1st 2 weeks of January, it was pretty slow. Demand was slow. It typically is given the holidays. But we are hopeful that what we are experiencing over the last few weeks is a trend and something we'll continue to see as we move forward.

Speaker 3

And obviously, with leasing season just around the corner, we'll have a lot more to talk about here at the Citi Conference as well as we get into 2Q, if you will.

Speaker 16

Great. Thank you.

Operator

Thank you. Our next question is from Tayo Okusanya with Credit Suisse. Please proceed with your question.

Speaker 7

Yes. Good afternoon. Congrats on the quarter and the solid outlook. Just on the OpEx side, just given that your Same store OpEx growth forecast is pretty much, much lower than most of your peers. I get some of the operational efficiencies you guys are working on.

Speaker 7

But curious On the real estate side as well, you only had 2.7% year over year growth in 2021 In 2022, sorry, and even 2023, you're kind of forecasting that growth just Below 5%, which again seems much lower than your peers. So I'm just trying to understand what's driving that? Is it you guys just challenging a

Speaker 3

whole bunch of appraisals or how do we kind of think

Speaker 7

through that on the real estate side? How do we kind of think through that on the real estate side?

Speaker 4

Hey, Tayo, it's Joe. So I'd say, starting off, when you look at what we know today, we actually already know about 40% of our taxes for the year. And so You start to get a pretty good read at this point. We have an in house team, but they're also working with consultants in the field. And we do challenge or appeal Probably about 50% of those on a yearly basis that are available for appeal.

Speaker 4

When you look at the markets, Mike mentioned earlier, Sunbelt is kind of in that 5% to 10% range is the range that we've factored into expectations at this point. So we saw more pressure in 2022. As you look through our Texas and Florida markets, we expect that to continue just given the phenomenal growth that they saw over the last couple of years and the fact that typically you're on a little bit of a lag basis. So even though NOI growth has been a little less proficient this year and valuations with cap rates moving up may have come down a little bit, That's more of a lagged impact that maybe you see in 2024. Now when you get to the coast with Prop 13, you're capped at 2% there for about 30% of our portfolio.

Speaker 4

So then that just leaves Seattle plus New York, Boston, D. C, which are actually generally on fiscal years, as we already know 6 months of the growth rate there. So Net net, it gets us to about a 5% impact for real estate tax for the year.

Speaker 7

Got you. Thank you.

Speaker 4

Thanks, Dio.

Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Chairman and CEO, Tom Toomey for any closing comments.

Speaker 2

Thank you, operator, and thanks to all of you for your time, interest and support Clearly, we remain very enthusiastic about the apartment business and believe the industry has a variety of tailwinds That should lead to another very strong year in 2023. And UDR's operating capital allocation and innovation Advantages should deliver relative outperformance. With that, we look forward to seeing many of you in future Non deal roadshows as well as the Citi conference. And with that, take care.

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Earnings Conference Call
XPO Q4 2022
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