Multifamily apartment REITs have seen strong price appreciation and growth in their earnings during the financial crisis. The crisis forced hundreds and thousands of single-family homes to turn into rented homes as families from these homes moved into apartment buildings. Among the U.S. apartment REITs, United Dominion Realty (UDR) is one REIT that has benefited from this crisis. UDR continues to be a major player that is attractively valued and has shown tremendous growth when it reported its second quarter performance. The company has strong fundamentals and offers a dividend yield of 3.4%, which is sufficiently above General Growth Properties' (GGP) 2.2%. We recommend that yield-hungry investors buy the stock.
United Dominion Realty operates as an apartment REIT in the U.S. financial sector with a market capitalization of $6.45 billion. The company seeks to acquire, own, operate, develop, renovate and manage multifamily apartments across the United States, particularly at locations with a high barrier-to-entry. In total, the company has 145 communities in its portfolio with over 41,600 apartment homes. A majority of the apartment communities are within the western region of the U.S.
Recent Quarter Earnings Review
Rental income that the company was able to generate during the second quarter of the current year was $177.5 million against $150.6 million in the same quarter of the previous year. Other income of $3,223k for the most recent quarter was up 13% from the same quarter of the previous year. The surge in rental and other income led to an 18% increase in revenues of $180.7 million in the second quarter.
Total expenses of $204 million for the second quarter of the current year increased by 10%. Most of this surge was blamed on the increase in real estate taxes and insurance, repair and maintenance, and real estate depreciation and amortization.
The bottom line jumped from $15 million in the second quarter of the previous year to 156.3 million in the second quarter of the current year, largely on income accruing from discontinued operations. The company posted a loss of $23 million from continued operations for the second quarter of the current year. However, the loss was less than $34 million in the same quarter of the previous year. A closer look at the historical trend in the bottom line reveals a positive quarterly trend.
Funds from Operations (FFO) are the most appropriate measure of cash generated by an apartment REIT. The company generated FFO of $80.3 million during the second quarter of the current year, while it generated $62.6 million in the same quarter of the previous year.
Average physical occupancy for the company's owned apartment communities remained at 95.6% for the second quarter of the current year. This means an improvement of 60bps from the first quarter's 95%.
The company is also moderately leveraged when compared to its peers. Compared to the 2 times leverage ratio for General Growth Properties, UDR has approximately equal amounts of debt and equity in its capital structure.
The company updated its 2012 guidance on June 11, 2012. It expects to generate FFO between $1.34 and $1.39 per diluted share, and earnings per share of between $0.8 and $0.85. Consensus analyst estimates for fiscal 2012 FFO are $1.36 per share.
The stock offers a handsome dividend yield of 3.41%, sufficiently above the 10-year treasury yield of 1.7%. The dividend distributions are well backed by Fund from Operations (FFO) that the company generates. During the most recent quarter, the company generated FFO of $0.33 per share, while it paid $0.22 per share in dividends. The cash dividend coverage ratio (using FFO as the appropriate measure of cash flow) comes out to be 1.5 times. The cash dividend coverage ratio suggests that the company has sufficient financial muscle to continue this dividend distribution.
UDR trades at a book value multiple of 2.11 times and a tangible book value multiple of 2.07 times. Compared to this, the stock for General Growth Properties trades at a book value multiple of 2.33 times and a tangible book value multiple of 2.34 times. General Properties also operates as an apartment REIT in the U.S. financial sector with a market cap of $18.7 billion.