UDR, Inc. quarterly report, Q3 FY2013

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UDR, Inc. — Q3 2013 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; comparisons are with the same 2012 periods unless stated otherwise. UDR is a multifamily REIT. At quarter-end, it consolidated 141 communities with 41,420 apartment homes and held interests in 37 additional communities with 10,168 homes through unconsolidated ventures.

Financial performance and position

  • Revenue: Third-quarter revenue was $193.6 million, including $190.4 million of rental income, versus $185.1 million. Nine-month revenue was $572.6 million versus $540.5 million.
  • Profit: Third-quarter net income attributable to UDR was $3.2 million; common-stockholder income was $2.3 million ($0.01 per share), compared with a $10.0 million common-stockholder loss ($0.04 per share). Nine-month common-stockholder income was $5.3 million ($0.02 per share), down from $216.6 million ($0.92 per share). The 2012 comparison included $251.4 million of after-tax property-sale gains and a $22.9 million deferred-tax valuation-allowance reversal.
  • Property operations: Same-store NOI increased 6.0% in Q3 and 6.2% for nine months. Same-store rental income grew 4.9% and 5.1%, respectively. Q3 same-store occupancy was 96.1%, monthly income per occupied home was $1,490, and NOI margin was 68.3%, up from 67.6%.
  • FFO and distributions: Diluted FFO per share was $0.37 for Q3 and $1.09 for nine months; FFO as adjusted was $0.36 and $1.05, respectively. Nine-month AFFO per share was $0.93 versus $0.87. These are non-GAAP measures. Common distributions declared were $0.235 per share for Q3 and $0.705 for nine months, up from $0.220 and $0.660.
  • Cash flow: Nine-month operating cash flow was $261.3 million versus $249.7 million. Investing used $128.5 million versus $61.5 million; financing used $133.8 million versus $118.4 million. Ending cash was $11.1 million.
  • Balance sheet and debt: Total assets were $6.76 billion and total liabilities $3.71 billion at September 30. Debt totaled $3.46 billion, comprising $1.38 billion secured and $2.08 billion unsecured; weighted-average rate was 4.34% and weighted-average maturity 4.7 years. Secured debt encumbered 26.9% of gross real estate book value. UDR reported no outstanding balance on its $900 million unsecured revolver and stated it was in compliance with debt covenants.
  • Liquidity and capital spending: Scheduled debt principal was approximately $3.4 million for the remainder of 2013 and $359.6 million in 2014. Nine-month capital expenditures, excluding development and commercial properties, were $133.7 million, up 22.0% year over year.

Material changes and significant transactions

  • Same-store operating improvement reflected higher rents and occupancy; Q3 same-store rental rates rose 4.0%, while operating expenses increased 2.6%. For nine months, same-store rental rates rose 4.1% and expenses increased 2.6%.
  • Nine-month GAAP earnings declined sharply year over year, principally because 2012 included substantial disposition gains and a tax benefit. Lower interest expense and depreciation, improved same-store NOI, and 2013 Hurricane Sandy insurance recoveries partly offset those comparisons.
  • UDR issued $300 million of 3.70% senior unsecured notes due October 2020, using proceeds principally to repay revolver borrowings. It also extended and repriced $350 million of term notes and refinanced $186 million of Fannie Mae debt.
  • UDR sold a 50% interest in five Vitruvian Park partnerships to MetLife for approximately $141.3 million. It deferred a $436,000 gain pending completion of a development project and guaranteed its construction completion.

Outlook, risks, and unusual items

  • Management expected to fund near-term needs with property operating cash flow and credit facilities; longer-term needs may be met through debt or equity issuance, property dispositions, and operating cash flow. No specific earnings or FFO guidance is provided in the supplied filing text.
  • UDR had six wholly owned developments totaling 1,976 homes, with a $782.5 million budget and $489.5 million carrying value; expected completions extended through Q2 2015. Expected costs to complete wholly owned development and redevelopment projects were approximately $310.6 million; reported remaining equity commitment for unconsolidated ventures was $1.8 million.
  • Management estimated a 100-basis-point increase in rates would add about $5.9 million to UDR annual interest expense, based on average variable-rate debt balances. Interest-rate, refinancing, occupancy, rent-growth, operating-cost, development, insurance, joint-venture, regulatory, and REIT-qualification risks are discussed.
  • Hurricane Sandy insurance settlements produced net hurricane-related recoveries and casualty gains; the consolidated statements show a $6.5 million recovery in Q3 and $12.3 million for nine months. Such amounts are unusual and should not be treated as recurring operating results. One affected property remained under redevelopment.
  • UDR reported ordinary-course litigation and claims, but did not expect unprovided liabilities to materially affect financial condition, results, or cash flow. It stated disclosure controls were effective at the reasonable-assurance level.
  • UDR’s earnings-to-fixed-charges ratio was below 1.0 for the reported periods: the nine-month shortfall was $14.9 million for fixed charges and $17.7 million including preferred dividends. This is a supplemental coverage disclosure; the filing separately states covenant compliance.

Important facts for investors to verify

  • Reconcile the 2012 earnings comparison for property-sale gains and the deferred-tax valuation-allowance reversal; distinguish GAAP earnings from FFO, adjusted FFO, and AFFO.
  • Track same-store rent growth, occupancy, expenses, and NOI margin, including whether recent gains persist across UDR’s markets.
  • Review the 2014 debt maturities, revolver availability, refinancing assumptions, and sensitivity to higher interest rates.
  • Monitor development budgets, completion and lease-up progress, remaining costs, and the Vitruvian Park completion guarantee.
  • Confirm final insurance proceeds and remaining repair or redevelopment exposure related to Hurricane Sandy, and assess joint-venture obligations and potential capital calls.