United Dominion Realty Trust: REIT for Our Times

Investopedia Advisor submits: Real Estate Investment Trusts ("REITs") are a great way to potentially realize capital appreciation as well as a steady income. And among my favorite REITs right now is a company called United Dominion Realty Trust (UDR). Here is what I like about the company:

It’s In The Right Business: United Dominion is an apartment REIT. It collects rent from individuals occupying its roughly 75,000 apartments and then passes along the profits to its shareholders in the form of a dividend. Why is an apartment REIT so great right now?

In a slowing economy, where land values of all types are on the wane, people tend to hunker down financially. They are more reluctant to spend big money on a house or on speculative land deals. Rather, they rent as they weather the economic storm. This, I would argue plays to the company’s advantage.

As evidence of this, I would point to the company’s second quarter earnings. During the period ended June 30, UDR reported same-store occupancy of 94.9%, which is about 50-basis points better than the comparable period a year ago. Also, total income per occupied home was $878. That is the highest it has been in the company’s 35-year history.

Demographics: UDR's 75,000 apartments are in over 270 communities, located throughout 17 U.S. states. This gives them some hedge in that they aren’t totally dependent upon any one region. They rent affordable blue collar/young professional type apartments, as well as senior apartments. This allows them to cater to the majority of the population, particularly in the markets they serve.

With all that said, the company draws about 50% of its net operating income from its facilities in California, Florida, and the Washington DC area. But, I think this concentration is a good thing, because these areas still have decent job growth. They are also considered big destinations in terms of where people are moving, as well as future population estimates.

Lastly, these areas, particularly California, have a comparatively high cost of living. And real estate, although declining in value, is still relatively high. These factors, I believe, are providing renters with a strong motivation to continue to rent.

Growing Leaner And Meaner: In 2005 the company raised $500 million in bonds paying a weighted average coupon rate of about 5%. They in turn used this cash to pay down $168 million in 6.9% debt. This will provide the company with a substantial interest savings going forward. It also used $390 million to buy just over 2,500 apartments in 8 communities in high job-growth areas. And this is expected to provide a nice boost to the company’s top- and bottom-line results going forward. Again, these are the types of catalysts that I suspect will help drive the share price.

Financial Results/Trends: In the second quarter, the company reported Funds From Operations (FFO), which is basically what REITs refer to as net income, of 43 cents a share. That represent roughly a 7.5% improvement over the same period last year. Management has also said that it expects to report full-year FFO of between $1.65 and $1.73 per share. That is in-line with Wall Street estimates.

Next year, analysts think the company will earn $1.81 a share in FFO. This represents an anticipated growth in the high single digits. Again, given that this is a REIT, that is pretty impressive, especially when combined with the anticipated dividend payments.

Dividend: UDR pays an annual dividend of $1.25 per share. That equates to a yield of about 4.4%, which in this market isn’t too shabby. For the record, UDR has increased its dividend in each of the past 30 years, and appears to have more then adequate cash to cover the dividend, as well as to fund operations going forward.

Bottom Line: United isn’t a high growth company. It is a REIT that I think has the potential, based upon 2007 expected FFO to see a 10% jump in its share price (implying a $33 per share price target). It also pays a healthy dividend that I consider to be the icing on the cake.

UDR 1-year chart:

By Glenn Curtis, Contributor - Investopedia Advisor

At the time of release Glenn Curtis did not own any shares in any of the companies mentioned in this article.