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UDR Inc.: Strong Investment Opportunity, Short-Term Concerns

About: UDR, Inc. (UDR)
by: Avisol Capital Partners
Avisol Capital Partners
Long/short equity, newsletter provider, healthcare, biotech

UDR Inc. invests in Class A apartment real estate in 20 markets.

The REIT focuses on providing premium services to create value.

UDR delivers capital growth with strong dividend payment record.

UDR Inc. (NYSE:UDR) is a residential REIT focusing on multifamily real estate in top tier markets. With over $20 billion in enterprise value, it is amongst the biggest REITs. UDR currently has 52,070 properties in 20 markets across the United States. It has distinct bias towards premium A category properties which comprise nearly 55 percent of its portfolio while the remaining is invested in B class properties. The REIT also diversifies its holdings by combining urban properties with suburban ones. Currently, UDR has 45 percent urban properties while 55 percent of its holdings are situated in the suburbs.

UDR’s holdings are also geographically diversified. Its west coast properties account for 44 percent of its NOI, while Northeast is the second biggest contributor with 20 percent share of NOI. Major markets included in West Coast segment are Los Angeles, Orange County, San Francisco Bay Area and Seattle. Northeast segment comprises Boston, New York, and Philadelphia.

While UDR has strong internal fundamentals, its macro environment is thriving as well. Apartment REITs market has generally outpaced the REIT segment as well as the broader market. Residential REIT has several growth drivers working in its favor. The ongoing shortage of housing in the United States is likely to continue for the foreseeable future whereas Residential REIT also offers better long-term NOI growth than other REITs. Further, this segment also tends to do well even during economic downturn since housing is largely a non-discretionary expenditure and is expected to be incurred even when there is reduction in income. The sector is also expected to benefit from the higher propensity to rent among younger adults, thanks to the emergence of gig economy and shared economy.


Source: Company Website

On the micro front, UDR focuses on generating higher than average returns by using innovative technological solutions and carrying out portfolio diversification. Its Next Generation Operating Platform helps in smoother interaction between the REIT and its residents while also making its business operations more efficient. One of the main innovations implemented by the REIT is the increased investment in its SmartHome Technology. This strategy not only allows it to command premium rent by offering hi-tech solutions but also reduce expenses.

Further, it also endeavors to boost its margins by efficiently pricing the apartments while controlling the expenditures. The REIT also undertakes various methods of efficient and accretive capital allocation such as acquisitions, dispositions, development, Developer Capital Program, and redevelopment programs etc.

Operational Efficiency and Balance Sheet

The REIT recently reported its third quarter results where its net income per share was $0.09, Funds from Operations or FFO per share was $0.53, FFO as Adjusted or FFOA per share was $0.52, and Adjusted FFO (“AFFO”) per share was $0.48. The corresponding figures for the third quarter of the previous year stood at $0.07, $0.49, and $0.49 per share respectively, showing strong improvement. The REIT also reported 11 percent increase in its revenue to $295.4 million.

While UDR announced strong numbers for the third quarter, its revision of full year guidance was a mixed bag. The REIT raised its full forecast with regard to FFOA per share by $0.005 at the midpoint to $2.07 and $2.09. It tightened its SS revenue guidance range to 3.50 to 3.90 percent while reduced SS expense guidance by 15 basis points at the midpoint to 2.40 to 2.80 percent. UDR reduced net income per share guidance by $0.065 at the midpoint to $0.68 to $0.70.


Source: Company Website

During the quarter, the REIT completed 5,700 SmartHome installations, which will allow it to charge premium pricing. Further, the company also completed three acquisitions worth $540.6 million during the quarter. By the end of the third quarter, UDR’s development pipeline totaled to $540 million at fair market value.

Looking at the REIT’s balance sheet, the one point which may raise some concern is the debt maturity schedule. UDR has significant amount of debt becoming due for payment in the coming year and two years after that. These payments may put strain on the firm’s liquidity position. However, as the REIT has strong operational performance, it is expected that UDR will be able to tide the potential loss. It also has robust debt position as it has BBB+ rating from Standard & Poor’s for its long-term issues while its senior unsecured debts are rated BBB+ and Baa1, respectively, by S&P and Moody’s.

UDR reported its Recurring EBITDA to interest expense ratio at 5.41, which is slightly better than average shown by the REIT industry. Its Total Debt/Gross Properties ratio is at 34.82 percent which is also on the more desirable side.

Investment Thesis

Various factors need to be considered while evaluating a REIT for its suitability for a long-term income generating portfolio. The REIT stock has gained over 25 percent so far this year. While UDR has a track record of delivering solid operational performance, it also pays robust dividend to its investors along with attractive growth rate. Its latest quarterly dividend stood at $0.3425, giving the annualized payout of $1.35 per share, up from $1.2775 per share it had paid in the previous year. The current dividend yield for UDR stands at 2.85 percent, which, combined with stock price increase, provides an attractive option for the investors. Further, with a conservative LTM dividend payout ratio of 65.22 percent, the stability of the dividend payment and growth is highly probable.

The REIT is also suitable for a long-term portfolio as it operates in the multifamily residential real estate segment. As UDR focuses on the premium end of this segment, it is less exposed to the negative effects of economic downturn, providing hedge to the overall portfolio. While there are some issues such as significant debt repayment becoming due and temporary setback with regard to full year guidance, the REIT still remains a strong contender for any value-based portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.