UDR, Inc. — Q3 2015 Form 10-Q
Business and period: UDR is a multifamily apartment REIT. This filing covers the quarter and nine months ended September 30, 2015, with comparisons to 2014. At quarter-end, UDR consolidated 136 communities with 39,405 homes and held interests in 28 unconsolidated communities with 6,696 homes.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $221.4 million | $206.8 million | $657.0 million | $608.5 million |
| Operating income | $40.2 million | $33.1 million | $124.8 million | $92.5 million |
| Net income attributable to common stockholders | $12.4 million | $39.6 million | $171.2 million | $86.1 million |
| Diluted EPS | $0.05 | $0.16 | $0.66 | $0.34 |
| Diluted FFO per share and unit | $0.42 | $0.41 | $1.25 | $1.16 |
| Diluted FFO as Adjusted per share and unit | $0.42 | $0.38 | $1.24 | $1.13 |
For the nine months, GAAP net income included $79.0 million of gains on sales of real estate; income from unconsolidated entities was $61.3 million, including a $59.1 million gain from the Texas joint venture property sale. These items materially boosted reported earnings.
Property operations: Q3 total property NOI was $153.6 million, up 9.8%; same-store NOI rose 7.3% to $127.8 million. Same-store rental income increased 5.9%, while operating expenses rose 2.7%; same-store operating margin improved to 70.7% from 69.8%. Average physical occupancy was 96.6% for Q3, down 0.3 percentage point year over year. For nine months, same-store NOI grew 6.8% and occupancy averaged 96.8%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $305.8 million, compared with $282.0 million in 2014. Investing cash outflow was $228.2 million; financing cash outflow was $91.5 million.
- At September 30, cash and cash equivalents were $1.3 million and restricted cash was $23.7 million. Total debt was $3.513 billion: $1.347 billion secured and $2.166 billion unsecured. Weighted-average interest rate was 3.91%, with 4.5 years weighted-average maturity.
- The $900 million unsecured revolver had $110 million drawn and approximately $790 million of unused capacity, excluding letters of credit. UDR reported compliance with debt covenants.
- UDR issued $300 million of 4.00% senior notes due 2025 and raised equity through public and at-the-market offerings during the nine months. Common distributions declared were $0.8325 per share, versus $0.78 in the prior-year period.
- Management said operating cash flow and credit facilities should be adequate for operating needs and distributions. A new credit agreement entered into October 20, 2015 replaced the prior revolver and term loans with a $1.1 billion revolver and a $350 million term loan, with maturities in 2020 and 2021, respectively.
Material changes, outlook and risks
- Q3 common-stockholder earnings fell from 2014 largely because the prior-year quarter included $31.3 million of real estate sale gains, while Q3 2015 had none. Higher property NOI and lower interest expense partly offset the comparison.
- Nine-month results improved with same-store growth, completed development and redevelopment activity, and the Texas joint venture sale. Interest expense fell 9.2% for UDR on a consolidated basis, primarily following repayment of $325.2 million of notes and replacement financing at lower rates. General and administrative expense increased 15.6% year over year.
- Management provided no specific earnings or rent-growth guidance in the supplied filing text. It described one wholly owned development of 516 homes, with a $342 million budget and expected completion in Q1 2018; a San Francisco redevelopment was expected to finish in Q1 2016.
- After quarter-end, UDR completed a $901 million acquisition of six Washington, D.C.-area properties, funded with DownREIT units, assumed debt, Section 1031 exchanges and cash; it also issued approximately 13.7 million Series F preferred shares to eligible former Home OP partners.
- Key stated risks include apartment-market weakness, rent and occupancy pressure, operating-cost inflation, construction and lease-up delays or overruns, joint-venture partner risks, interest-rate and refinancing exposure, insurance and casualty losses, and maintaining REIT qualification. A 100-basis-point increase in rates was estimated to increase UDR’s nine-month interest expense by $6.3 million based on average unhedged variable-rate debt.
- Ordinary-course litigation was disclosed; management did not expect it to materially adversely affect financial condition, results or cash flow. Management reported disclosure controls effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring property and same-store performance from property-sale and joint-venture gains when assessing earnings and FFO.
- Review the financing, preferred-share issuance, and DownREIT accounting and economics for the $901 million post-quarter acquisition.
- Assess liquidity beyond the reported $1.3 million cash balance, including revolver availability, the replacement credit facilities, maturities and covenant headroom.
- Track rent growth, occupancy, expense growth, development costs and completion timing, as well as the effect of rising rates and additional equity issuance.
- Confirm the status and expected disposition timing of the eight UDR communities classified as held for disposition, totaling 1,755 homes.