Real estate investment trust (REIT) UDR (UDR -0.16%) is one of the largest owners of apartment properties in the United States. Although the business of renting an apartment is fairly simple to understand, there are a lot of little things that go into the process. UDR has spent two years examining one of the more difficult aspects of the customer relationship, move outs. Management thinks it can bend the curve.
UDR is technology driven
One of the things that UDR's management team spends a lot of time talking about is technology. For example, it provides online tools for renting an apartment and online tools for scheduling maintenance once a person becomes a renter. The company is very big on digitizing the business in whatever ways it can to both increase efficiency and to improve the customer experience.
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That's a good thing to do, of course. But there's more to the effort because it also allows for better tracking of the business overall. For example, management can specifically see how maintenance efforts are playing out and step in if there are problems. But there's one area where UDR isn't doing so well, its retention rate lags a few percentage points behind those of its closest peers.
That basically means that more people tend to move out of a UDR property then move out of peer operated properties. That's a problem for the REIT because it is far more costly to fill an empty apartment than it is to retain an existing tenant. For example, a vacant apartment needs cleaning and maintenance work -- perhaps a coat of paint -- before it can be released. Then the unit has to be advertised. And convincing a new tenant to move in might require rent concessions, like free months of rent. More importantly, all through the turnover period the apartment isn't generating any revenue. Simply keeping the old tenant around for another year would be a much better financial outcome.
UDR is throwing technology at the move out problem
UDR hasn't stuck its head in the sand hoping that things get better. It has examined a decade's worth of data to see why tenants are moving out and it believes that roughly 50% of the issue is controllable. It all boils down to the customer experience. Specific touch points that can be improved include making the move in process better, improved execution on maintenance requests, and an effort to better handle trash, pet waste, and noise issues. In fact, of the top 15 factors the company found, only one was tightly related to the actual cost of the apartment.
The company is putting in place processes to start addressing the issues it thinks it can control. So far the news has been positive, with management noting that it believes it can not only get back on par with its peers, but that it can improve its turnover to above industry average levels. This is a bigger issue than it sounds like, particularly right now.
UDR ended up trimming its full-year 2023 guidance when it reported third quarter earnings because of an onslaught of new properties coming to market. That's making it tougher to attract new tenants because aggressive pricing at new buildings is allowing renters to get into higher-quality properties (Class A) for what it would have traditionally cost to rent at a lower-quality asset (Class B). If non-rent related issues are leading tenants to leave and UDR can improve those issues, it may be able to retain up to 50% of the move outs it has faced in recent years.
That, in turn, will lead to higher occupancy levels and improved financial results because of less down time and lower turnover related expenses. In other words, fixing this problem will blunt the impact of the new supply that is coming to market right now.
Is it time to buy UDR?
UDR's decision to lower full-year guidance on top of the ongoing headwinds from new supply have resulted in a depressed stock price for the apartment REIT. The 4.8% dividend yield is near its highest levels in a decade, suggesting the stock is attractively priced right now. Although there's no quick fix for all the problems facing UDR, the fact that management has taken its technology skills and put them to work around retention is a sign of the company's strength and long-term focus.
Assuming it can get back on par with its peers with this effort, retention will no longer be the problem it is today and investors will be rewarded with a more stable business. That's worth watching if you own this REIT. It might even be worth taking the risk and buying the REIT if you don't own it, given the historically high yield and the opportunity that solving the turnover problem offers.
