UDR, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. UDR is a multifamily REIT. At quarter-end, it consolidated 132 communities with 40,728 apartment homes and held interests in 28 unconsolidated communities with 6,891 homes.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $243.3m | $221.4m | $716.9m | $657.0m |
| Net income attributable to UDR common stockholders | $26.0m | $12.4m | $52.5m | $171.2m |
| Diluted EPS | $0.10 | $0.05 | $0.20 | $0.66 |
| Property NOI | $170.4m | $153.6m | $501.8m | $447.6m |
| Operating cash flow | Not presented by quarter in the supplied text | $383.1m | $305.8m |
Q3 revenue rose about 9.9%; property NOI rose 10.9%. Same-store NOI increased 6.4% in Q3 and 6.9% year to date. Same-store Q3 rental income rose 5.3%, with 96.8% occupancy, 5.2% growth in monthly income per occupied home, and a 71.2% NOI margin versus 70.4%. For nine months, same-store occupancy was 96.6%, the NOI margin was 71.3% versus 70.6%, and monthly income per occupied home grew 5.9%.
Q3 net income improved year over year, supported by higher property NOI and a larger contribution from unconsolidated ventures. Nine-month net income fell sharply, primarily because 2015 included $79.0m of gains on property sales and substantially higher joint-venture income. UDR’s share of unconsolidated-entity income was $16.3m for nine months versus $61.3m in 2015. Depreciation and amortization increased to $317.1m from $269.7m, and interest expense rose to $93.7m from $88.7m.
Supplemental REIT measures: Diluted FFO per share and unit was $0.46 in Q3 versus $0.42; FFO as Adjusted was $0.45 versus $0.42; AFFO was $0.41 versus $0.37. For nine months, diluted FFO was $1.33 versus $1.25, FFO as Adjusted $1.33 versus $1.24, and AFFO $1.22 versus $1.13. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
Balance sheet, debt and liquidity
At September 30, 2016, total assets were $7.65bn and total debt, net, was $3.54bn, down from $3.57bn at December 31, 2015. Secured debt was $1.05bn and unsecured debt $2.50bn; weighted-average debt interest was 3.66% and weighted-average maturity 5.3 years. Cash and cash equivalents were $3.3m. UDR reported $180m drawn on its $1.1bn revolver, leaving $920m available before letters of credit, and $66.9m drawn on a $75m working-capital facility, leaving $8.1m. The company stated it was in compliance with debt covenants.
Nine-month investing cash use was $271.6m and financing cash use was $115.0m. UDR paid $230.1m in common-stock distributions; declared distributions were $0.295 per share for Q3 and $0.885 year to date. A 5.0m-share offering generated about $173.3m net proceeds. A 100-basis-point increase in rates on variable-rate debt was estimated to add $5.2m to nine-month interest expense, based on average balances.
Material changes, outlook and unusual items
- Management attributed same-store growth mainly to higher rents; Q3 same-store rental rates increased 5.2%. Real estate tax expense remained a pressure, rising 10.3% in the quarter and 9.2% year to date for the same-store portfolio.
- UDR issued $300m of 2.95% senior notes due 2026, using proceeds in part to prepay secured debt due in 2017 and reduce revolver borrowings. It also repaid $347.3m of secured debt and $11.6m of unsecured debt during the nine-month period.
- Two wholly owned development communities, totaling 1,101 planned homes, had $294.8m carrying value against a $708.5m total budget; estimated completion is in Q1 2018 and Q1 2019. Estimated remaining costs to complete were $413.7m. Management projected 2016 recurring capital expenditures of about $1,150 per home and said it would selectively pursue revenue-enhancing improvements.
- In September, UDR agreed to sell seven operating communities totaling 1,402 homes for about $236m, expected to close in Q4. It also agreed in October to sell another 380-home community for about $48.6m. After quarter-end, it acquired the remaining interest in two Bellevue communities (331 homes); the filing cites an expected consolidation gain of about $34m.
- A joint venture sale generated $11.5m of UDR gain in Q3, and insurance proceeds generated a $4.6m casualty gain. The nine-month real-estate sale gain recognized by UDR was $10.4m, compared with $79.0m in 2015. The filing also reports $1.7m of Q3 debt-extinguishment and other costs in its FFO reconciliation.
- Management said operating cash flow and credit facilities are expected to meet near-term needs; longer-term needs may be funded through borrowings, securities issuance, and property dispositions. No quantified earnings or FFO guidance is provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Risks and contingencies
Key risks include apartment-market weakness, new supply and rent competition, operating-cost and property-tax increases, construction delays or overruns, difficulty disposing of properties, joint-venture funding or governance issues, and variable-rate debt and refinancing exposure. UDR also cites possible uninsured or underinsured casualty losses, environmental and regulatory liabilities, and the need to maintain REIT qualification. Routine legal claims were disclosed; management did not expect them to have a material adverse effect, though ultimate liability could not be determined. UDR reported no material off-balance-sheet arrangements. Disclosure controls were assessed as effective at a reasonable-assurance level.
Investor verification priorities
- Confirm that same-store rent and NOI growth persist, and monitor occupancy and expense growth, especially property taxes.
- Track delivery, lease-up, budget and returns for the 1,101-home development pipeline and ongoing redevelopments.
- Verify the timing and proceeds from announced community dispositions and the post-quarter Bellevue consolidation and projected gain.
- Reconcile liquidity and debt maturities, including revolver and working-capital-facility usage, variable-rate exposure, and covenant headroom.
- Separate recurring operating performance from joint-venture gains, insurance recoveries, property-sale gains and other FFO adjustments.
- Assess distribution coverage using cash flow and capital needs; GAAP cash flow and non-GAAP FFO/AFFO are distinct measures.