UDR Inc
NYSE:UDR
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
33.28
47.13
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
UDR Inc
Earnings Call Analysis
Q4-2023 Analysis
UDR Inc
The company offers a full year Funds From Operation Adjusted (FFOA) per share guidance range of $2.36 to $2.48. This projection encapsulates expectations at the operational level, anticipating same-store Net Operating Income (NOI) growth to vary from a decrease of 1.75% to an increase of 1.75%.
Compared to the previous year, the FFOA per share is expected to decrease by approximately 2%. This is due to a confluence of factors, such as increases in same-store revenue and lease-up income, which are balanced against a rise in same-store expenses. Additionally, there is a decrease in Development Capital Program (DCP) activities attributed to a lower average investment balance forecast for 2024.
For the first quarter, the FFOA per share guidance is set between $0.60 to $0.62, suggesting around a 3% sequential decrease from the prior period. The driving forces behind this decrease include a marginal drop in same-store NOI, primarily due to seasonally linked expense increases, alongside a notable uptick in interest expense and general and administrative costs.
The company's debt profile is robust, with only 13% of total consolidated debt set to mature by 2026, which mitigates future refinancing risk. The firm's liquidity is further supported by approximately $1 billion in line capacity, minimal committed capital, anticipated dispositions, and strong free cash flow. The balance sheet and liquidity position are thus characterized as being in excellent shape, providing leeway for opportunistic capital deployment and long-term accretive strategies.
The projections for same-store revenue growth in 2024 are built upon three key elements: the embedded earn-in from prior year lease rate growth, expectations for lease rate growth during the year, and contributions from operational innovations and other initiatives. A more detailed look forecasts a 70 basis point earn-in, with assumptions of renewal rate growth around 3% and a roughly negative 1.5% new lease rate growth. Cumulative effects from these factors, alongside innovations such as rollout of property-wide WiFi, are anticipated to bring a 45 basis point increase to same-store revenue growth, leading to a guidance range from 0% to 3%, with a midpoint of 1.5%.
The expectation for same-store expenses in 2024 points to a 5.25% growth at the midpoint. This upsurge is attributed mainly to increased real estate taxes, personnel costs, and insurance expenses. Notably, insurance expenses alone, which compose a mere 6% of total expenses, are projected to surge by 16% to 20%. Without the influence of certain one-time factors, such as a previous employee retention credit and costs linked to the Wi-Fi initiative, the normalized same-store expense growth is more likely to align in the low 4% range throughout the year.
You don't have any saved screeners yet
Greetings, and welcome to UDR's Fourth Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Vice President of Investor Relations, Trent Trujillo. Thank you, Mr. Trujillo. You may begin.
Welcome to UDR's quarterly financial results conference call. Our press release, supplemental disclosure package, and related investor presentation were distributed yesterday afternoon and posted to the Investor Relations section of our website at ir.udr.com. In the supplement, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. Statements made during this call, which are not historical, may constitute forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that our expectations will be met.
A discussion of risks and risk factors are detailed in our press release and included in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. When we get to the question-and-answer portion, we ask that you be respectful of everyone's time and limit your questions to one plus a follow-up. Management will be available after the call for your questions that did not get answered during the Q&A session today. I will now turn over the call to UDR's Chairman and CEO, Tom Toomey.
Thank you, Trent, and welcome to UDR's Fourth Quarter 2023 Conference Call. Presenting on the call with me today are President and Chief Financial Officer, Joe Fisher; and Senior Vice President of Operations, Mike Lacy; Senior Officers, Andrew Cantor and Chris Van Ens will also be available during the Q&A portion of the call.
To begin, for this quarter's call, we enhanced how we communicate our outlook for the year ahead. The volatility we have experienced over the last 5 years, combined with the supply-induced challenges our industry is expected to face in 2024 translate into a wider range of potential outcomes for this year versus our typical year. As such, in conjunction with our earnings release, we published an outlook presentation that highlights these potential outcomes and their drivers. Our prepared remarks aligned with the presentation, and those on our webcast should see the slides on your screen. We will resume our usual format of prepared remarks only on future earnings calls.
Moving on, key takeaways from our press release and our 2024 outlook are summarized on Slide 4 of the deck. These are first, Fourth Quarter and Full Year 2023 FFOA per share and same-store results met the guidance expectations set forth on our Third Quarter call. Full year 2023 same-store NOI growth of 6.8% was particularly strong and one of the highest amongst our peer group.
Second, based upon consensus estimates, we expect that economic growth and apartment demand will remain resilient in 2024, but historically high new supply will continue to lay on our core growth. Third, ongoing investments in innovation will continue to drive incremental NOI growth above the broader market in 2024, Mike Lacy will give you greater detail on this subject. Fourth, we are maintaining a capital-light strategy given our still elevated cost of capital, but we will take advantage of opportunities when appropriate.
For example, in 2023, we executed roughly $1 billion of accretive deals through joint venture and operating partnership unit opportunities. We will continue to keep our eyes open for external growth and feed our cost of capital signals. And fifth, our balance sheet remains well positioned to fully fund our capital needs in 2024 and beyond. With that, I'll turn the call over to Joe.
Thank you, Tom. The topics I will cover today include our Fourth Quarter and Full Year 2023 results, including recent trends and transactions, the 2024 macro outlook that drives our full year guidance, and the building blocks of our 2024 guidance. First, beginning with Slide 5. Our Fourth Quarter and Full Year FFO as Adjusted per share of $0.63 and $2.47 achieved the midpoint of our previously provided guidance ranges. On the bottom half of the slide, you can see that during the quarter, we shifted to a more defensive operating strategy and build occupancy going into 2024. Occupancy trended sequentially higher for each month during the Fourth Quarter, resulting in a 20 basis point sequential improvement versus that of the Third Quarter.
As anticipated, this occupancy pivot resulted in lower blended base rate growth versus original 4Q expectations, but it was the right decision to place our portfolio in a position of strength given elevated new multifamily supply in 2024. For January, operating trends have improved. Market rent growth turned sequentially positive and is following normal seasonal patterns thus far. Blended lease rate growth improved to positive 0.2% with new lease rate growth of minus 3.6% and renewal lease rate growth of plus 4%. Concessionary activity continued to trend lower, and occupancy increased further to 97.2%. One month does not make a trend, but we are encouraged by these results.
Moving on, as detailed on Slide 6, during the quarter, we executed a variety of transactions that both enhance our liquidity and set us up well for future accretive growth. These include: number one, our joint venture with LaSalle acquired a 262 home community in Suburban Boston, were approximately $114 million at an initial mid- to high 5% yield. Through platform initiatives and various fees, we expect the stabilized yield to be in the mid- to high 6% range to UDR. We continue to explore investment opportunities with LaSalle, which will provide scale-oriented efficiencies to our operations, expand our fee income, and drive future earnings accretion and enhanced ROE for our shareholders.
Number two, we sold our [indiscernible] on $180 million of dispositions. These are expected to be executed at a weighted average buyer cap rate in the mid-5% range and further enhance our already strong liquidity. And three, we assumed a DCP developer's ownership interest in a distressed Oakland asset. 1.5 years old community was appraised at $67 million or $387,000 per unit, which resulted in a noncash investment loss of approximately $24 million to UDR.
The community is still in lease-up and a submarket of Oakland were 2- to 3-month concessions or the norm. The initial yield on the assumed asset is in the mid-3% range. However, once stabilized, we expect the yield to be in the low 5% range.
Turning to Slide 7 and our macro outlook. As in years past, utilize top-down and bottom-up approaches to set our 2024 macro and fundamental forecast. Our 2024 market rent growth forecast of roughly 1% was informed by third-party forecast and consensus expectations for a variety of economic factors that drive market run growth and our internal forecasting models, we combined this top-down forecast with a bottom-up growth estimate built by our regional teams as they best understand local supply and the demand dynamics in their markets.
Our 1% market rent growth forecast for 2024 is slightly conservative when compared to prominent third-party forecaster estimates at 1.7% and is driven by stable to positive demand set against historically high multifamily deliveries and the expectation for continued elevated concessions.
As Mike will discuss, the approximately 1% rent growth ties to our assumption for 2024 blended lease rate growth. Primary variables to our forecast include GDP growth, employment and wage growth, changes to the homeownership rate, supply and its impact on pricing, economic uncertainty.
Turning to Slide 8. If we step back and consider the near to intermediate-term outlook for the industry, we remain encouraged by a variety of key supply and demand metrics. First, at the top left, our consumer remains resilient with rent-to-income ratios at the long-term average. Second, at the top right, relative affordability versus alternative housing options remains decidedly in our favor at roughly 50% less expensive to rent than own, a 20% improvement from pre-COVID.
This supports a stable to declining homeownership rate and absent a major correction in home prices or a significantly more accommodated long-term interest rate environment, we do not expect this dynamic to change near term. Third, at the bottom left, the latest census data indicates that the largest U.S. a cohorts remain in their prime renter years. This should provide continued support for future long-term rental demand. And fourth, at the bottom right, while multifamily deliveries are expected to remain elevated through at least 2024, starts activity is significantly retreated and is down 70% from recent highs, and is now well below historical averages. This should benefit outer-year growth absent a near-term change in financing costs.
Moving on to Slide 9. Third-party data providers are forecasting record multifamily deliveries for the U.S. and in our markets over the next 4 to 6 quarters. Based on completion forecast, peak deliveries are currently expected to occur in the middle of 2024 before trending downwards, closer to long-term historical averages in the second half of 2025. We are cognizant that there will be supply slippage as they move to 2024, and that lease-up concessions could remain elevated after new deliveries update. Positively, peak deliveries in the coming quarters are not materially above the levels we have seen in the second half of 2023, and into the start of 2024. When market level concessions move throughout 2024 will be a primary driver of our ability to capitalize on our market rent growth forecast.
On Slide 10, we provide more context on which regions and markets are expected to feel the greatest impact of 2024 supply. The Sunbelt is forecast to face significantly higher absolute deliveries than the coastal markets, although all regions will face higher relative supply in 2024 as compared to their long-term averages. As is evident on the bottom of the page, this dynamic is reflected at the market level, with Sunbelt market supply growth rates expected to be more pressured than coastal markets this year. Mixing this all together, we arrived at our 2024 guidance, which is summarized on Slide 11. Primary expectations include full year FFOA per share guidance of $2.36 to $2.48, same-store revenue, expense expectations that translate to NOI growth ranging from negative 1.75% to positive 1.75%.
Slide 12 shows the building blocks for our full year 2024 FFOA per share guidance at the $2.42 midpoint, representing a 2% year-over-year decrease. Drivers include a $0.07 increase of same-store revenue and lease-up income from recently developed communities, offset by a $0.07 decrease from same-store expenses. A $0.025 decrease on DCP activities due to a lower average investment balance in 2024, including a potential $0.02 impact from assuming ownership of a DCP development, dependent on the refinancing of its senior construction loan. While the developer continues to advance refinancing discussions, we have chosen to take a conservative approach by including the downside scenario in our guidance.
We expect to have clarity on the refinancing by the second quarter and do not see additional 2024 earnings risk from our DCP investments at this time. Continuing with the building blocks, and approximately $0.02 decrease from interest expense due to higher average interest rates and the expiration of certain hedges and an approximately $0.01 decrease in G&A, reflective of inflationary wage growth. Moving on to Slide 13, and specific to the first quarter, our FFOA per share guidance range is $0.60 to $0.62 or an approximately 3% sequential decrease at the midpoint. This is driven by a [ $0.015 ] decrease of same-store NOI, primarily due to higher expenses attributable to seasonal trends and approximately a $0.05 decrease of higher interest expense and G&A.
Last, on Slide 14, we present our debt maturity schedule and liquidity. Only 13% of our total consolidated debt matures through 2026. The thereby reducing future refinancing risk, combined with roughly $1 billion of line capacity, minimal committed capital, our projected first quarter disposition and strong free cash flow, our balance sheet sits in an excellent position. In all, despite near-term macro and potential DC-related headwinds in 2024. Our balance sheet and liquidity remain in excellent shape. We remain opportunistic in our capital deployment, and we continue to utilize a variety of capital allocation better advantages to drive long-term accretion. With that, I will turn the call over to Mike.
Thanks, Joe. Today, I'll cover the following topics. How our 2023 results and other drivers factor into the building blocks of our full year 2024 same-store revenue growth guidance, an update on our various innovation initiatives, expectations for operating trends across our regions and our outlook for same-store expense growth.
Turning to Slide 15. The primary building blocks of our 2024 same-store revenue growth guidance include our embedded earn-in from 2023 lease rate growth, our blended lease rate growth expectations for full year 2024, and contributions from our innovation and other operating initiatives. Starting with our 2024 earn-in of 70 basis points or about half of our normalized historical average, the 20 basis point increase in average occupancy we achieved during the fourth quarter of 2023 came at the expense of some rate growth, which reduced our earnings by approximately 30 basis points versus what I spoke to on the third quarter call.
We believe this is prudent, defensive trade given the elevated new supply outlook in many of our markets. Next, portfolio blended lease rate growth is forecast to be approximately 70 basis points in 2024. Given a midyear convention, rate growth should add about 35 basis points to our same-store revenue growth this year. Our expectation is that blends will be lighter through the first half of 2024 before marginally improving during the second half of the year. This dynamic, if accurate, means that blended growth should have less of a positive impact on 2024, but more impactful to our 2025 growth. Underlying our blended rate growth forecast, our assumptions of approximately 3% renewal rate growth in 2024 and approximately negative 1.5% new lease rate growth.
As a reminder, even during recessionary periods, we have seen approximately 2% renewal rate growth on average, which, combined with recent trends, provides support for those assumptions. Lastly, we expect the combination of occupancy and bad debt to be roughly flat in 2024. Moving on, innovation and other operating initiatives are expected to add approximately 45 basis points to our 2024 same-store revenue growth, which equates to $5 million to $10 million.
The bulk of this growth should come from the continued rollout of our property-wide WiFi, other property enhancements such as the addition of package lockers as well as improved retention and less fraud. For retention, our guidance assumes that our 2024 resident turnover will be 200 basis points below that of 2023.
Half of this comes from the easier first half comp. As you may remember, long-term delinquent skips and evictions were elevated through the first half of 2023. We do not anticipate this repeating in 2024 as we have seen long-term delinquent activity stabilize. The other 100 basis point improvement should come from our proprietary customer experience project, which helps us improve our resident experience throughout their time with UDR, thereby improving their probability of renewal. We have seen the early benefits of this initiative with resident retention higher on a year-over-year basis for 9 consecutive months. For every 100 basis points of improved retention or reduced turnover, approximately $3 million drops to our bottom line.
We believe our customer experience project will continue to improve our turnover and expand our operating margin advantage relative to peers. Regarding fraud, we are implementing a variety of AI-based screening measures process improvements and credit threshold reviews to enhance our upfront resident screening. Given the resident-friendly legislation, we continue to see throughout our portfolio, minimizing the potential for bad debt before it gets in the front door is critical. Rolling all this up, our 2024 same-store revenue guidance range from 0% to 3%, with a midpoint of 1.5%. The 3% high end of our same-store revenue growth range is achievable to improve year-over-year occupancy, additional accretion from innovation, and blended lease rate growth that occurs more ratably throughout the year or at a higher level than our initial forecast.
Conversely, the low end of 0% reflects full year blended lease rate growth of approximately negative 2%. And some level of occupancy loss and delayed income recognition from our innovation initiatives.
Turning to Slide 16 and our regional revenue growth expectations, we expect the coast will continue to perform better than the Sunbelt in 2024, led by the East Coast. The East Coast, which comprises approximately 40% of our NOI is forecast to grow same-store revenue by 1% to 4%. We expect Boston, Washington, D.C., Baltimore, and Philadelphia to each deliver full year same-store revenue growth of at least 2%. Signs of recent softening in demand in New York, leave us slightly more cautious on that market.
The West Coast, which comprised of approximately 35% of our NOI is forecast to grow same-store revenue by 0% to 3%. Orange County, Los Angeles, and the Monterey Peninsula are expected to produce upper tier growth, while San Francisco, San Diego, and Seattle are forecast to be softer. Last, our Sunbelt markets, which comprise roughly 25% of our NOI, our forecast to grow same-store revenue by negative 2% to positive 1%. Austin, Nashville, Denver, and Orlando are scheduled to see some of the highest levels of new supply in which should continue to pressure pricing power. On a relative basis, we expect Dallas and Tampa to be leaders among our Sunbelt markets.
Moving on, as shown on Slide 17, a we expect 2024 same-store expense growth of 5.25% at the midpoint. This is primarily driven by growth in real estate taxes, personnel, and insurance. While only 6% of total expenses, insurance expense growth of 16% to 20% reflects the premium increase we realized when our policy was renewed in December. In terms of year-over-year expense growth guidance, the first quarter should be elevated due to a onetime $3.7 million employee retention credit we realized at the beginning of 2023. This has the effect of increasing total first quarter 2024 same-store expense growth by more than 300 basis points. Additionally, for full year 2024, the costs associated with our property-wide Wi-Fi initiative amount to an incremental $2 million.
Absent these 2 factors, we would expect normalized same-store expense growth to be in the low 4% range throughout the year or approximately 120 basis points lower than our full year midpoint.
In closing, while the near-term operating environment presents some challenges, we continue to innovate with the intention of increasing revenue growth, improving resident retention, and further expanding our operating margin over time. I thank our teams for their collaboration and eagerness to leverage new and innovative tools to drive superior results. I will now turn over the call to Tom.
Thank you, Mike, and as summarized on Slide 18. When we consider our potential 2024 growth trajectory, I come back to the key components of running a successful business. First is to understand your customer. Our residents have healthy rent-to-income ratios and relative affordability continues to favor apartments over other forms of housing. So we view the effect of elevated supply as transitory and expect that the demand versus supply dynamics will revert to our favor sometime after 2024.
In terms of resident satisfaction, we can measure success through our customer experience initiatives and how they translate into greater retention, which has improved for 9 consecutive months. We expect this trend to continue. The second component is the understanding of your associates. Through frequent discussions, surveys, and town halls, we have created an open dialogue and a culture that fosters engagement and innovation.
UDR is proud and recognized leader in corporate responsibility as well. And third characteristic is to listen to investors. We are highly engaged, conducting roughly 500 investor calls, meetings each year. We are confident that we have a good read on what investors think we are doing well. and where we can improve. From these interactions, we have created a company we believe is a full cycle investment and maximize value creation for our stakeholders regardless of the economic outlook.
In 2024, we plan to focus on what we can control, namely, this means leaning into our operating platform and innovation, developing talent, nimbly adjusting our operating strategy in the face of supply and taking a capital-wide approach to maintain liquidity and balance sheet flexibility. Taken together, we believe we can successfully navigate whatever macro environment we face moving forward. With that, I'll open it up to Q&A. Operator?
[Operator Instructions] Our first question comes from the line of Eric Wolfe with Citibank.
Can you walk us through the math on how you get to the $0.025 of dilution from taking ownership of the 2 DCP assets? And I think in the past, you've talked about a third asset that might see a similar outcome. So just help us understand if there's likely any incremental impact beyond what's in the 2024 guide.
Eric, it's Joe. Maybe some quick math on the $0.025, and then I'll kind of take you through some of that remaining DCP risk and how we approach that. So as I think we kind of mentioned upfront, there is a Philly asset that I'll get into that has a binary outcome coming up in 2Q related to its refinancing, which right now is in process and discussing with lenders. But if that were to not be refinanced and we were to take ownership of that asset, we'd effectively be moving from a high-yield DCP investment to a lower-yield acquisition, which naturally results in some dilution. So that's about $0.02 of that number that shifts the whole range down, including at the midpoint.
So if that refinancing did occur in theory, the entire range would shift right back up by $0.02. The rest of that has to do with we took ownership of [indiscernible], as we mentioned there in the release, it has a little bit of dilution to it. In addition, we've got an assumption in there that we have roughly $75 million of payoffs in the back half as we have some of these deals that are opening into their prepayment window and it may make sense for them economically to go out and refinance with a cheaper cost of capital. And so you get a little bit of drag from that as well, offset by continued accruals on the rest of the portfolio.
So it's kind of the puts and takes on the $0.025. As it relates to getting into the rest of the portfolio, we walked through [indiscernible], I think everybody understands kind of what took place there. When we go into these deals, you really have 3 primary areas of risk that we're trying to underwrite One is the upfront kind of cost and delay and timing aspect of any development. Two is going to be the cash flow perspective, what's going to take place on rents and the supply in any given market, and three, just the capital markets component, what happens with interest rates, cap rates and capital availability. And so that's kind of the 3 main areas we're trying to underwrite when we go into these.
Clearly, any one of those factors is not going to be enough to drive distress on any of these deals. But when you kind of get a couple of them that stack up, you do run into a little bit more distress, which is really what happened with [indiscernible]. I think everybody is pretty familiar with what happened in NorCal since pre-Covid, rents still being down and then downtown Oakland, perhaps one of the worst submarkets in that respect, with rents still down 30-plus percent. And so we did take the keys back on that asset as the developer didn't want to continue to support the cash flow shortfalls. That said, as we continue through lease up and hopefully burn off the concessions in the next couple of years, you see it in the presentation, getting to a more palatable yield here in the next couple of years.
As it relates to the Philly asset that I mentioned, a couple of those same risks not to the same degree, but a challenged market in downtown or City Center Philadelphia from a supply and concession perspective. And so that NOI has been a little bit weaker. We did have some delays coming through COVID on that development. But as I mentioned, that development partner is in process with a couple of different lenders, just trying to make sure that they can get it to the finish line on proceeds and terms, but we felt it prudent to take perhaps a more conservative approach and put the risk out there to the street. Beyond that, you mentioned what else is out there. So you kind of got 12 other assets, roughly $475 million of outstanding balance of those 12 when we go through the stress testing and scenarios, just 3 of those are what we would consider watch list and the balances on those 3 are plus or minus $50 million.
So only about 10% of the rest of the book. They don't have the same degree of risk that the first to do, but they are on our watch list for varying reasons, they don't have maturities come up until '25 and '26. So we do have a little bit of time there, unless, of course, the developer partner decides not to continue making payments. So if we did have to take those back, that's really plus or minus $0.01 of risk over time. We don't see all 3 obviously have in near term and/or potentially even longer term. Beyond that, you get into the rest of the book of the business, the other $400-plus million that's out there. Most of these are in their lease-up and/or stabilization process. So we've got pretty good visibility on rents and NOI, which, at this time, the rest of those are in line to above pro forma expectations. And so we feel pretty good about the rest of that book of business.
That's very helpful. And then maybe just quickly, the Oakland property, Lake Merritt, I guess, why not just try to sell it, take the small loss. You mentioned some of the struggles in Northern California. So I guess the question is why sort of increase your exposure there versus just selling it today, putting into more accretive uses in the near term?
Yes. So I think the valuation, obviously, a third-party appraisal there that dictated that noncash impairment. But when you look at where we're at today on that asset, we are taking it over, and we do think there's quite a bit of upside be it through real estate tax resets, other income, obviously, burning off concessions and getting it stabilized. So it's probably better value in our hands than bringing it to the market right now where, clearly, in Northern California as a whole and Oakland specifically from a transaction market perspective pretty challenged, given some of the risks out there. So I'm not sure you optimize price and value by simply trying to liquidate. I think it's better to keep it in our operations team's hands for a couple of years and then evaluate down the road when the market is a little bit better.
Our next question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets.
Mike, you guys averaged 60 basis points of blended lease rate growth in the second half of last year. And you mentioned the 70 basis point lease rate growth assumption in guidance assumes lower growth in the first half of this year and then kind of picks up a little bit in the back half. Is it fair to say that you think that lease rate growth bottoms in the first half of '24, and we see continued improvement in the back half and then into 2025?
Austin, thanks for the question. Yes, I think what you can expect to see is the first half is going to look very similar to the back half of last year. So that 60 basis points first half is where we expect things to track today. As of right now, the second half is closer to 1% on blends. And I'll tell you what we've been -- we promised to see the -- where we're at today just in terms of blends. If you look at December to January, you can see it in our deck. We went a 150 basis point increase, and a lot of that has to do with our strategy. .
And you've heard us talk about this before, but we tend to operate closer to 5% to 7%, we're able to drive our occupancy closer to 97.2% in January. Again, that put us in a better position today to start driving our rents. We're seeing some promising trends. We don't want to call that things are significantly better -- as we have to get through some more of the leasing season. But to start the year, things are starting off a little better than we expected.
Great. So it sounds like the lease rate growth should inflect, I guess, comparing spreads year-over-year in the back half of this year. The Sunbelt markets have been kind of the most challenging for your portfolio. And I'm just wondering sort of how that stacks up versus the portfolio overall this year and how you're thinking about inflection or further deterioration across the markets that you're in? Just any detail you can provide on how you're thinking about the cadence for that 25%, 30% of the portfolio.
Yes, Austin. That's another really good question. We put a good slide in here, Page 16, that walks just where we expect East Coast to perform against the West Coast as well as the Sunbelt. And I'd tell you that even though the Sunbelt we're definitely facing higher supply and that's playing out in some of our expectations for the year. We're coming off a very strong year. And we compare ourselves on a relative basis within the markets against our different peers. And I can tell you, the teams are proud of what they were able to accomplish. And we're off to a good start for this year as well. .
I think a lot of this has to do with what we expect with supply that we're facing here over the next 4 quarters or so. But on top of that, it's still relatively strong job growth. We're still seeing wage growth in that area. So we're seeing pretty positive absorption. And for us, what's interesting when you think about what we put on Page 15, and we break down our earn-in versus our expectation from blends and other income. Other income is expected to make up about 45 basis points of our total revenue at the portfolio level for the Sunbelt. That's double. So a lot of things that we've been working on as it relates to rolling out our WiFi, for example, that's starting to pay dividends, and that's what's translating to positive relative performance against our peers.
Our next question comes from the line of Brad Heffern with RBC Capital Markets.
Occupancy in January was about 50 basis points above the '23 level, but guidance assumes flat occupancy. So I'm just curious is the expectation that you plan to trade that occupancy for rent growth in the spring? Or is that just a conservative assumption?
It's a good catch, Brad. We're starting to see that today. So again, we wanted to build our occupancy in a period of time where our lease expirations are the lowest. It allows you to just push your occupancy up. And then as you move into the leasing season, you can start to get more aggressive as leases start to turn. And so the 97.2% is probably a high mark for us. I think as we move through the quarter, we expect that to come down closer to 97%, maybe even the high 96% range and continue to test our blends. And from all you can see is that rate of change from December to January. Again, very positive momentum, a lot of that is on the new lease side. So we had negative 5.6% new lease growth in December. January was negative 3.6%. February, it's only 7 days in. So it's probably too early to call, but things are promising, and it looks like it's trending upwards.
Okay. And then how are you treating the DCP book going forward as you take back assets and redemptions come in? Do you plan to shrink the book just based on recent experience? Or do you plan to reinvest in DCP and kind of keep it at the same size that it always was?
I think naturally, you're going to see a little bit of potential shrinkage. Embedded in guidance, we mentioned that binary outcome there with that Philadelphia asset, which if we were to take that back, that's plus or minus $100 million balance. So that would bring it down to $475 million. And then we mentioned that we have about $75 million of assumed redemptions in the back half of the year. So you could see that balance flow down, which near term is a little bit dilutive. That said, I don't think there's any desire to continue to shrink beyond that. I think the hope is that as we get some of those paybacks we find opportunities to continue to redeploy into either on the traditional DCP side or the recap side.
That said, it's kind of a double-edged sword in terms of -- we're not seeing a lot of opportunities out there in that space right now, but that speaks to the fact that starts have dropped off to kind of annualized 200,000 unit level. So not a lot of developers out there starts today. But I do think over time, you'll see us continue to pivot between that, between acquisitions, redevelopment, development as it makes sense. But I wouldn't expect it to continue to shrink much beyond that.
Our next question comes from the line of Joshua Dennerlein with Bank of America.
Mike, I just want to explore your guidance assumption for 3% renewal rate growth in 2024. Are there specific markets driving that lower? Or is there just some kind of split the difference between conservatism I think you said recessions are 2% versus maybe more normal years, it's closer to 4%, just trying to engage in where you guys are coming from?
Yes. Good question. I'll tell you, just as we think about renewals and new leases in general, just as we started the year, you can see our renewals started to come down closer to that 4% range. And it feels to be a pretty comfortable we're still spending on that 3.5% to 4% as we move forward over the next 2 months or so. Our expectations are with seasonality picking up even though we're facing supply, typically, your market rents start to pick up as well. So if we can continue to see our new lease growth continue to improve. You're going to see that, that spread between new and renewal is in a more healthy range. And then we can start testing our renewals again as we move forward. But as it relates to just regional performance, there's not a big difference typically between the Sunbelt versus the East Coast, West Coast, usually in that range of, call it, 2, 2.5 to all the way up to around 5% on renewals, but it's pretty tight overall.
Okay. And then maybe just one follow-up on that. Does that imply the second half renewals like 2.5% or the spreads 2.5?
They're pretty consistent right now. Our playbook is around 3% for the year. And again, when we send out 3.5% to 4% we typically negotiate on 25% to 30% of our renewals, and it's usually in that 50 basis point range. So I feel comfortable at least in the foreseeable future in the first couple of quarters with that range. And we'll see what happens with market rent. And again, if we can test the waters and push rent renewals back up, we will.
Our next question comes from the line of Jamie Feldman with Wells Fargo.
So I guess just thinking about Slide 10, more than 250 basis points above historic average markets. I mean, how do you even guide in those markets right now? I mean, what do you -- like what gives you -- can you just talk about how you think about visibility in terms of like where rents could really go? What gives you comfort giving any kind of numbers on those, whether it's historic cycles or maybe the numbers you're seeing from third parties or however else you're thinking about it. Really, just a question on kind of visibility in the highest supply markets.
Jamie, it's Joe. Maybe I'll start off and Michael will come in behind me here. But I do think, to your point, on the visibility. When you look at the deliveries that we were facing kind of in the back half of '23 and here to start this year, there really isn't a material difference between deliveries that we are facing at that point in time versus what we expect to face as we get in the middle of the year. It goes a little bit higher as we kind of get into 2Q, 3Q, but it's really not a big change. So the fact that we are already facing kind of a run rate delivery schedule during a typically seasonally weak period of time, and we're putting up the results that we did in terms of blends and renewals and the traffic that we saw and we were able to drive occupancy.
That gives you some conviction as we go into a seasonally stronger period of time, and we have seen concessions come back a little bit. We're seeing good traffic the pricing power to start the year is off to a good start in terms of pushing rents up on a month-over-month basis. It gives you some conviction that maybe not the worst is behind us, but at least we're finding a little bit of a floor here as we move into the year. So it helps a little bit in that approach to those high supply markets.
If I could just add. I think for us, we spend a lot of time doing both a top-down and a bottom-up approach and whether it's coming from the field and they're telling us how the supply is impacting them directly versus all of our third-party data that we're able to look at here in Denver, we triangulate around a range of outcomes, and that's why we've provided that by region here and again, we feel pretty good to start the year and we'll see how it plays out, especially as it relates to moving into the leasing season.
Okay. That's very helpful. And then a big week for headlines in terms of distressed and commercial real estate, [ KRF ] guides, all kinds of stories out there. What are you guys seeing now in terms of merchant stress you think it will present even more opportunities than you originally thinking for the year? And any change in merchant developer behavior on concessions as you're starting to see more things seem to have issues?
Jamie, it's Joe. I guess maybe just stepping back first as you think about the sector versus broader commercial real estate. I do think it's important to think about multifamily, maybe a little bit differently than some of the headlines that are out there. A lot of that bank stress revolves around other sectors because the reality is that when we have Fannie Mae and Freddie Mac in the multifamily space, they do take the majority of the financing for our space. And so the banks end up having to go heavy some of those sometimes more risk factors. So you got to delineate between those 2 to start and the fact that in a needs-based business, but plenty of capital still flowing through it or wanting to flow into it, you typically don't see that same level of distress within multi.
So I think I'd keep with a little bit of what we've talked about in the past, which you'll see some distressed developers for sure. So to the extent that you have pro forma NOIs that are below expectations, obviously, higher interest rates and cap rates or delays, as we talked about earlier, you are going to see some of these developers that feel distress just like on this Modera Lake Merritt deal that we are talking about.
That said, do you see distressed pricing on the other side is another discussion, and with well-priced capital from the GSEs and availability of that capital, yes, you're still seeing quite a big demand for multifamily. Andrew Cantor and team just spent a ton of time out at NMHC, meeting with a lot of different partners, brokers, capital providers. And I'd say the general consensus was cap rates plus or minus 5% at this point in time. There's still going to be a little bit of a meeting of the minds with some of the risks that are out there between buyers and sellers. But it still seems like we're in that plus or minus 5% cap world. So that really doesn't feel like distress, I'd say, as a buyer.
Okay. If I could just ask a follow-up on that. I mean when you think about your debt lending business and your preferred lending business, and you look at the impairments you've taken or some of the projects you're talking about, I mean, is part of the story, like you just don't get great deals even in distressed moments. I mean, does it make you rethink at all some of the other ways you're investing beyond just development and clearly very strong core operating skill set just because there's so much capital that does want to be in this space?
I don't think it makes us rethink the suite of options that we have. I think that's one of the powers of the platform, obviously, in terms of diversification of markets but also diversification of ways we've been deploying capital. We're really not a one-trick pony. And so I don't think it changes at all our thoughts on what we continue to deploy into DCP like investments. Those over time have provided solid returns for us. It's a good way to pivot at certain points of time when other capital decisions may not make sense. So I really don't see that being a pivot for us. We'll continue to go into all forms of capital.
Jamie, this is Toomey. I might just add, what's interesting, everybody can find 1 or 2 deals that have distress. And we highlighted the path that creates a lot of that distress. And you've gotten slightly a [indiscernible] in the last 90 days with rates coming down 100 bps. That certainly helped. But when you say the scale of distress, what my experience is, is there's a lot of people with a lot bigger capital capabilities than ours and even in the public arenas to write large checks for significant signature bank, for example. Lot of distress inside of that entity with real estate. And it was never offered up, no one ever got a hard look at it. So the range of distress 1, 2 deals in a market, yes, and they will get picked off, but in mass, no, because of Fannie and Freddie capability as a backstop.
And then that leads to significant capital beyond ours that probably can reach and grab should it become entity level-type distress. So we'll be smart and nimble about it program with respect to DCP, not going to be a lot of development activity coming online anytime soon. And the recap market is pretty competitive and a lot of capital. We'll be cautious about any aspect of going back into that. But we're going to keep, as Joe said, all our options open, and see what makes sense on a risk-adjusted against matched against our cost of capital.
Our next question comes from Michael Goldsmith with UBS.
Can you talk a little bit about the pace of recovery trending from Northern California and Seattle? And when you look at your Slide 16, you have a top and bottom growth markets on the West Coast as a whole. So how wide is the gap between these cohorts? And then can you just talk a little bit about the trajectory of some of these markets and when we can start to see them improving?
Sure, Michael, this is Mike. I'll take a crack at it first. Specific to Seattle, San Francisco area, I'd say first starting with San Francisco. It's good to be diversified. We are 50-50 urban suburban. We've got 50% of our exposure in the SoMa downtown area and then the rest down along the Peninsula, and it covers about 8% of our NOI, team did a really good job last year. I can tell you we expect to be #1 in terms of total revenue growth in that market. So we've been able to do a lot with what we have to work with there. Today, we're sitting around 97%, 97.5% occupancy. We've seen concessions come down as of late, really over the last 30 days or so, and we're starting to drive our rents. And I think specific to your question around trajectory and trends San Francisco is the one market out of all of ours that had the highest momentum. And when I say that, I look at December, for example, our blends were around negative 7%.
In January, we're actually flat, so about a 700, 750 basis point increase month-over-month. Again, it's a low lease expiration period of time. So try not to get too excited about it, but we have seen demand pick up there. A lot of that has to do with the city being cleaned up more. You don't have as much supply. So today, San Francisco feels relatively well. Seattle is not too far behind for us, again, a very diversified market. We are all along the suburbs and a lot of exposure to the Bellevue area, where most recently, we've heard that there's about 200-plus thousand square feet of office space being taken out by a TikTok. So more recently, we've seen traffic pick up in that area. I can tell you our blends, just going from December to January increased about 250 basis points, from about 0 to, call it, 2.5%. So that part of the country feels a little bit better today than what we would have expected moving into the year.
And then my follow-up is you're including 45 basis points of benefit from innovation and other income in your same-store revenue guidance for the midpoint of -- what are the current opportunities for further revenue generation and cost savings from the platform?
Yes, a few things. Let me step back and give you a little bit of color on some of the initiatives we're working on, both on the revenue side and expense side. I mean, for us, you've heard us talk a lot about the customer experience project. And we put in my prepared remarks that we do expect about a 100 basis point improvement in turnover this year from that. That's just the start of it. We just recently armed our teams with a lot of information. They're putting it to use today, and they're starting to question the power of knowing exactly what retention can be and what it will do for them.
And I'll give you an example, we went through, call it, 300,000 data points and recognize that you can have a 20% higher retention rate, if you can move people with a negative sentiment, we're more on a bad trajectory to a good trajectory.
And again, we use a lot of our proprietary information to score this, whether it's their sentiment scores, their survey scores, service scores or [indiscernible] all those together to get an understanding of how we can change those trajectories. Over the last 9 months, we've seen an improvement in turnover. Just by putting a flashlight on this, and specific to the fourth quarter, our turnover was actually 400 basis points better than the historical average.
So again, we're just now scratching the surface. We expect a benefit this year, but even more to come in '25 and '26 as it relates to that program. In addition, we talked a little bit about our WiFi rollout. We've got about 20,000 units installed today. We've got another 12,000 coming throughout the year. And so this is going to continue to pay dividends not only this year, but into the future.
As of right now, we think that's about a $6 million benefit in incremental revenue in 2024 and more to come in 2025. Aside from that, really excited about our fraud and bad debt detection, starting to utilize more AI around that, just to be able to understand who's coming in, try to block people from getting in the front door. So we're utilizing it in terms of our proof of income as well as our ID verification. And we're starting to see that, that's making a difference for us as well.
And as it relates to expenses, we're highly focused on driving that number down. You saw the midpoint of our guidance is around 5.25%. I'd remind the audience that aside from our anniversary-ing off of the CARES Act as well as the WiFi. Our organic growth is probably closer to around 4%.
Still after what we can control, trying to drive that number down, some of the things that I can think of off top of my mind are vendor and product consolidation, working with the teams to try to drive that into a more efficient state, more personnel efficiencies and more ROIs around expense savings, where an example is a re-pipe. We can limit some of the insurance costs that are hitting us, and we can also eliminate some of the service requests that we're having to face. So those are just a few examples of things that we can control that we do expect will help us throughout the year.
Our next question comes from the line of Adam Kramer with Morgan Stanley.
Just wanted to ask a little bit about the sequential move in January versus December and blended rate growth and I guess, kind of the occupancy build as well. And looking at Slide 9, it looks like there was kind of decent drop-off in 4Q in terms of deliveries in your market. Wondering, did that kind of play a factor in maybe in kind of the January results with the December and January results? And then maybe how you're thinking about kind of, I think, some of the further sequential improvements that you guys kind of talked about here in new lease in February versus January. And kind of in the months going forward relative to the fact that there is kind of that the pre-material step-up in deliveries, it looks like in 2Q, I guess, in 3Q, 24 in your markets?
Adam, it's Mike. I'll start and if Joe wants to jump in, he can. Again, for us, we took the stance of trying to drive that occupancy up in the Fourth Quarter. And a lot of that has to do with you just have lower lease expiration. So it's a period of time where you can really get in there and make a difference. And I'll tell you, probably more specific to how we did it. It's not necessarily with the deliveries. I'd say it's more around our focus on retention. And so again, when you look at our turnover, and it's 400 basis points better than what we would have historically experienced during that period of time, we were trying to driver retention up, which obviously helps you with occupancy.
Once we're able to build that up in that 97% range, we're able to continue that into January. 97% too again is probably a high mark for us. We're actively bringing that down today. I think February is probably closer to 97% and we're comfortable in the high 96% or 97% range, while testing our rents. And so probably the thing I'd point to the most and probably most excited about is that trajectory. So looking at that rate of change from December of down, call it, negative 1.2, negative 1.3 to 0.2 in January, it's a positive trend. And the fact that a lot of that is coming from new lease growth. It gives us a lot of confidence as we move forward, but very low lease expirations in January, February. So give us a little bit more time to see how this plays out over time.
Adam, just to kind of close out there on the kind of midyear spike, if you will. What we're showing here on Page 9 is based off third-party forecast. And I think we all kind of know and accept that there's always going to be some degree of slippage, and so even with that spike, you're only running maybe 7,500 units a quarter above where we have been kind of in the back half of last year in terms of this year. So it's not a big number. There will probably be some slippage, but you're having that slippage and that higher delivery schedule into a typically seasonally a better period of time, which we would expect. And when you've got roughly 8 million units in our collective markets and you're only talking about maybe another 7,500 units a quarter. Yes, it really isn't a big number. We're cognizant of the risk it creates, obviously. So -- and given that risk and some others, I think it's appropriate for us to be balanced in our approach and try to be cognizant of that and not get too far ahead of ourselves in terms of what we think could to come on pricing power and guidance.
That's very helpful. Just maybe a quick follow-up. Wondering what the bad debt reserve that you have embedded in guidance. I know you've accounted for this a little bit differently maybe than some of the peers. So maybe just what the bad debt reserve and guidance and then kind of the assumptions around, I guess, where bad debt is today? And then kind of what the assumption is for where it is, I guess, at year-end?
Yes. So after kind of a challenging first part of '23 when we had the excessive level of long-term delinquents, the last 6 months of last year really leveled out. So we are pretty consistently getting to, call it, 98.5% collected during that period of time. And that's really our base case assumption as we go into 2024. And so those higher turns that we saw in the first quarter last year those help out in terms of thinking about stress on occupancy, on expenses, on potentially rates. But because we had reserved those individuals at an appropriate level, there's really no year-over-year implications for bad debt. And so we've taken an assumption that we basically stay at the same level. That said, I think Mike started to go into some of those actions that we're taking. And so we haven't really assumed those actions benefit us in terms of who comes in the front door and the possibility of fraud and delinquency.
Subsequent to that, be it through kind of those AI-based income and ID verification efforts, we're reevaluating a lot of our deposit and credit thresholds, taking a look at some of our processes related to move-in monies and other aspects to ensure that we continue to try to limit the front door because it really has become a cottage industry in terms of creating fraud and try to get in and take advantage of landlords at this point in time. But for now, flat year-over-year assumption, we hope there's some upside over time.
Our next question comes from the line of John Pawlowski with Green Street.
Joe or Mike, on the -- with respect to the low 5% expense growth guidance, if you double clicked on it, roughly, what would the average Sunbelt market look like in terms of 2024 expense growth expectations?
John, they're all pretty close, probably within 100 basis points of each other. We are experiencing a little bit more pressure just on personnel in a place like that, just given the supply. Aside from that, we do have more of our rollout on the WiFi today. So we're incurring that expense. But we're seeing the offset again in other income because that's double of what we're seeing in the portfolio as a whole. So slightly elevated in the Sunbelt, but not materially different.
Okay. And then just a follow-up to that point, Mike, did I interpret your comments to the Sunbelt has doubled the lift of ancillary income, so call it, 90 bps. And so the range of 1% to negative 2% revenue growth in terms of -- we're just looking for organic market level revenues really closer to 0% to negative 3% in your Sunbelt market. Am I interpreting that math correctly?
Yes. I'll give you a little bit more color on our expectations at the midpoint for the Sunbelt. We're coming into the year with, call it, negative 20 bps on our earn-in and that would imply about negative 2% expectations on full year blends, but the contribution from that will be closer to about 100 basis points negative.
Our next question comes from Rich Anderson with Wedbush Securities.
So I find it interesting that the blended number -- excuse me, the renewal number is still 3% or 4% or whatever it is and people are sort of confident that they -- even though they know they can get 2 or 3 months free across the street, they're sticking around, to avoid the inconvenience of moving. And that tells me something about what the swing factor is for your guidance going forward. It really is you got this blob of supply cholesterol on the system that perhaps will go away over the time. But if we get an economy in the future that avoids any kind of material drop-off. Isn't this guidance really sort of realistic in today's present tense view, but also designed to be beaten if we get an economic picture into the middle part of this year that is resilient -- continues to be resilient and so on. So is that the swing factor here to the upside, pure economic activity and the demand side of the equation?
Rich, this is Toomey. I think you nailed ahead -- nailed it perfectly. It's jobs, okay? We've seen a robust set of numbers and the revisions have been up. we're surprised at the strength of the job market, the people reentering the wage growth side of the equation. And if that were to continue, the absorption of what the supply picture is goes pretty darn smoothly. So I mean, our business starts with jobs. Supply is a [indiscernible], if you will, a bump in the road, and we'll get past it. But that's the upside scenario. And I'm not sure anybody has hit the jobs number right in a long time. So we'll see how that plays out. But we're encouraged by where it started off in January and February, as Mike pointed to. -- and hope that, that trend continues, and that would be material revisions to our results. But right now, we're playing it on a consensus as Joe outlined right down the middle.
I think to -- Rich, the only thing to add -- Rich, just on your comment there on renewals and why are individuals jump in for those concessions. Keep in mind that those concessions are not a market-wide concession. Those are concessions that you're seeing some developers offer in very distressed submarkets. So maybe 2 to 3 months in certain locations. But when you only have, call it, 2.5% of stock to deliver across our market, that implies a lot of units that aren't offering those distressed levels of concessions. So it's not as if every resident has the opportunity to jump ship, avoid that 3% renewal and go get 3 months. So it creates a little bit of a stickiness, not just the fact that they don't want to move and it's costly to move, but also there's just not that abundance to jump to. And we are starting to see that a little bit.
Nobody has asked it yet. But last quarter, we talked a lot about the A versus B continue in terms of in the Sunbelt, some of our B renters jump into As for the concessions. We are starting to see a shift in that dynamic after the last couple of months of seeing concessions start to ratchet down a little bit. We're seeing that continuum start to shift back to a more normalized approach [indiscernible] the B renter and staying in the B location.
Okay, cool. And then real quick. What do you make of Camden's market share comment about new households increasingly going the rental route. Obviously, it's much more expensive to own a home in this market. Are you seeing that play out at all in your neck of the woods?
Yes. I think Camden and team are spot on that in terms of seeing more of a capture for the rentership side of the equation, be it multi or the single-family rental side. When you have affordability pretty much as distressed as it has been at any point in the last 30, 40 years for single-family. Typically, when you see that, you see the pendulum swing the other way. And so you've started to see signs of that with home ownership rate kind of peaking out to plus or minus 66% over the last year or 2, you start to see that tick down a little bit.
So I think on the macro side, definitely agree on that. We expect that to be the case in terms of the macro backdrop for our guidance. And then when you look at what we're actually seeing on the ground, you look at our move-outs to buy activity, it's still significantly below what it used to be. And so we're keeping more and more people in the renter pool, which obviously helps on the retention side and helps on the pricing side. So we're in 100% agreement with Camden on that.
Yes. I mean I get the theory, just wondering if you're seeing it in your numbers and you're saying you are already, which is interesting.
Our next question comes from the line of Haendel St. Juste with Mizuho Securities.
Two quick ones for me. Mike, I wanted to follow up on your comments on San Fran and Seattle. I don't think you mentioned it. So perhaps can you share specifically what concessions you're seeing in those 2 markets today and what you're offering in your own portfolio and then maybe also outline where concessions are being used more broadly and more prevalently in the portfolio?
Yes. And thanks for the question. Specific to San Francisco, we were offering around 3 weeks during the quarter, during the fourth quarter. That's actually come down to about half of that range over the last 30 days, and that's where you see it translate into those blends that I mentioned, that 700, 750 basis point pickup from December. A lot of that is just concessions coming down in that market as well as market rents coming up.
And it's pretty consistent across the board. I mentioned earlier, we're 50% exposed downtown SoMa area 50% down along the Peninsula, it's pretty consistent across the board. As it relates to Seattle, we haven't really offered concessions there over the last year or so. That's a market where we tend to adjust our market rents more than anything else. And today, we're not offering any concessions.
Okay. And back to I think comments you guys have made on capital deployment here. It certainly sounds like there's a conservatism as you wait for perhaps to see better return versus not necessarily not having an interest. So curious if you could talk a bit more about how hurdle rates or hurdles rates have changed here and what you'd need to see to get more active with on [indiscernible] and perhaps more DCP deployment.
So I guess overarching, our capital deployment strategy is that we still sit in a capital-light mode. Obviously, the cost of debt has dramatically improved in the last 60 to 90 days. Cost of equity has improved a little bit. Asset pricing has probably improved a little bit. So the backdrop clearly getting better, and you continue to take off a little bit of risk at a time in terms of the supply and macro environment as we move throughout the year. So maybe some increased degrees of conviction. But today, I'd say the area that we are most focused on deploying is continue to deploy [indiscernible] with our joint venture partner, LaSalle, big props to Andrew and the LaSalle team on that One Upland deal that we got done in the mid- to high 5s initially.
With the capital flows we've seen and compression in rates, that deal would clearly trade for a cap rate inside of where we just bought it a few months ago. So we'd like to continue to deploy with them, go out there and get more opportunities. We've put about $150 million at the high end at share within our guidance. So that's the priority today. To the extent that DCP opportunities come along and maybe get some paybacks and we can redeploy. We'll take a look at that, obviously.
Development, we've seen a little bit of reprieve in terms of hard cost. They are starting to come down a little bit. And so I'd say on the shovel-ready deals that we have prepared, we're probably in the 5.5% to 6% type range on current NOI and inflated cost I think we'll continue to take a hard look at that as we move throughout the year in terms of when is the appropriate time to start those given the fundamental picture, which, as you go into 25 should be a little bit better than 26 clearly, when you're delivering well below historical levels of supply should be a good year to potentially deliver into. So that's the other piece that we'll be taking a look at as we move through the year.
Our next question comes from the line of John Kim with BMO Capital Markets.
This is Robin Haneland on for John. I just wanted to touch on the DCP. How many of these are currently on a cash basis versus simply accruing the rate of return to the balance and it looks like a couple of the preferreds were extended, Junction Phase 1 at infield. Was there any particular reason for this?
Yes. So in terms of cash pay versus accrual, majority of these, by definition, because they are developments are going to be accrual-based. So just the same way that the senior loan is going to have an interest rate reserve to help fund their portion. We're going to have an accrual on ours and so over time, as those assets migrate to cash flowing and operational, at that point, they'll start to generally pay the senior with cash flow, but will typically accrue. So we'll probably follow up off-line and get you a little bit more specifics on which ones have some degree of cash flow, but for now, I assume majority are accruing as you think about it. In terms of the years to maturity, do you want to delineate between our maturity and senior loan maturity.
Sometimes those are not coterminous. And so what we disclosed there in the supplemental on 10-B that is our maturity for our pref position and/or mezz position. And so typically, they're going to have extension rights built into those. So that's really all you're seeing there is exercise some of their extension rights that they have. That said, in terms of senior maturities, we talked a little bit about the asset in Philadelphia coming up with a maturity here in 2Q. Beyond that, our next maturity starting '25 and '26. So we really don't have much in terms of senior maturities upcoming, which typically trigger some type of capital event.
Got it. And on SoCal, given the current set of emergency, are your renewal rates impacted in any way? And can you maybe just touch on your flood risk insurance policy?
Yes. So right now, they are in a state of emergency. So there are price gouging efforts in place. So there's a maximum of around 10% that we can charge at any given time. Right now, just in terms of how it's impacted us, we've -- happy to say it hasn't been a huge impact. We do have probably 10 or 12 units that are currently facing some leaks, but overall, it hasn't been a big impact for us.
And just from the insurance perspective, every single year when we go through our renewal, we obviously renew -- take a look at adequacy of limits across quick, name storm, water, whatever it may be. And so I feel we're appropriately covered at this point in time with the insurance program.
Our next question comes from the line of Linda Tsai with Jefferies.
Just one question. Back to innovation and other income. You highlighted the $5 million to $10 million contribution in '24. I think back at NAREIT and L.A., there was a slide showing $40 million from innovation over the next 24 to 36 months. So $13 million a year conservatively. The $5 million to $10 million you're guiding to this year is less. Did anything change in your outlook versus back at NAREIT?
No, nothing's changed in our outlook. I think for us, we're just looking at the initiatives that are out in front of us. We still have a list of about 60 others that we're assessing today. And so we're constantly trying to figure out which ones to move the dial on and where we should put our efforts. And again, we think that, that's a pretty good place to start the year, and it's consistent with probably the last 5 or 6 years of around 50 basis points of incremental NOI that we've been able to produce.
Yes. And I think as it relates to that $40 million, a big component of that, call it, $15 million to $20 million was related to WiFi and still is. But as Mike talked about, that's kind of $5 million to $6 million incremental. So a lot of that lift comes in the coming years as we continue those rollouts and then you mature through the leasing cycle at each asset once we get that installed. I would say, too, just a little bit of context to that 45 or so basis points that we talk about innovation. That number is explicit to what I would say is very concrete ideas where things like WiFi or parking or storage where you can charge an explicit fee. We know what the rollout schedule is. That's really componentized within that 45 bps.
When you look at some of our biggest opportunities that Mike mentioned, when it goes to customer experience, when it goes to fraud efforts. Those were not captured within that $40 million that we talked about, but those are also outside of other income. Those are pretty big implications as it relates to occupancy, pricing power, expenses, capital, et cetera. And so those are opportunities above and beyond that, but are very soft in nature because they're harder to quantify in terms of explicit timing by resident. And so those will come over time but aren't embedded in our guidance.
But is an opportunity in '24?
We do think there's an opportunity in '24. Mike mentioned we captured the kind of 1% of reduced turnover from customer experience. That adds a little bit to our 24 number, plus or minus $3 million on a year-over-year basis. But we do think there's a lot more opportunity above and beyond that to continue to push that customer experience and move detractors into supporters and start to continue to renew with us. Similarly, on the fraud side, we assumed no improvement year-over-year on bad debt. But in totality at that 1.5% number, that's $25 million of revenue right there, and the real cost is usually about 2x that when you factor in upstream, downstream costs, expenses return, capital return. So that's a $50 million opportunity of which we're going to be going after a portion of, obviously, as we move to the future years and roll out some of this fraud prevention.
Our next question comes from the line of Anthony Powell with Barclays.
Just one for me. I think you mentioned earlier in the call that you saw some softness in New York. Maybe talk about what's going on there in your kind of meeting term outlook for that market.
Sure, Anthony, this is Mike. Just to give a little background, New York, 8% NOI market for us, mainly down in the financial district. And I'll tell you, prior to the team this year. We're going to end up with the top revenue amongst our peers in that market. So they've done a really good job. But I'll tell you from what we've experienced, we were coming off some pretty big highs. [indiscernible] We are obviously running 97.5%, 98% of [ occupancy ]. And then we started going to the more seasonal slow period of time. I'm happy to see that in January, our blends did actually increase from December. They're up about 150 basis points, and they're roughly flat today. So some of it's probably seasonal, some of it's coming off of a high, but we're anxiously are hopeful that things are going to continue to improve there.
There are no further questions in the queue. I'd like to hand the call back over to Chairman and CEO, Mr. Toomey for closing comments.
Thanks to all of you for your time, interest and support of UDR. We look forward to seeing many of you in the upcoming events. With that, take care.
This concludes today's teleconference. You may disconnect your lines at this time.