UDR, Inc. — Q2 2012 Form 10-Q
Business context and period: UDR is a REIT that owns, develops, renovates and manages apartment communities. This unaudited filing covers the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. At quarter-end, UDR reported 145 consolidated communities with 41,681 apartment homes, plus interests in 43 unconsolidated communities with 10,717 homes.
Financial performance and position
- Revenue: Q2 total revenue was $180.7 million, up 17.7% from $153.5 million; six-month revenue was $356.6 million, up 20.5% from $295.8 million. Rental income was $177.5 million and $349.7 million, respectively.
- Profit: Q2 net income attributable to common stockholders was $145.7 million, or $0.62 per share, versus $12.1 million, or $0.06, a year earlier. For six months, it was $226.6 million, or $0.99 per share, versus a loss of $18.1 million, or $0.10. Continuing operations remained loss-making: $23.1 million in Q2 and $21.4 million for six months. Results included significant property-sale gains and, for the six-month period, a tax benefit.
- Cash flow: Six-month operating cash flow was $148.1 million, up from $115.1 million. Investing activities provided $77.7 million, compared with $266.1 million used in 2011; financing activities used $54.2 million, versus $163.1 million provided. Cash ended the period at $184.1 million.
- Property operations and margins: Total portfolio property NOI, including discontinued operations, rose 7.8% in Q2 to $125.8 million and 10.8% for six months to $250.5 million. Same-community NOI increased 6.7% in Q2 and 7.4% for six months. Q2 same-community occupancy was 95.8%; the same-community operating margin was 67.6%, compared with 66.8% a year earlier.
- FFO: Diluted FFO per share was $0.33 in Q2 versus $0.31 a year earlier, and $0.68 for six months versus $0.61. FFO is a supplemental measure, not a substitute for GAAP earnings or operating cash flow.
- Debt and liquidity: Consolidated secured debt was $1.44 billion and unsecured debt $1.90 billion at June 30, for total debt of approximately $3.35 billion, down from approximately $3.92 billion at year-end 2011. The $900 million unsecured revolver had no borrowings outstanding, leaving $900 million of capacity before letters of credit. UDR said it was in compliance with debt covenants. Approximately 29.8% of gross real estate book value was encumbered.
- Distributions and capital: Common distributions declared were $0.22 per share in Q2, up from $0.20. UDR issued 19 million common shares in a June offering, receiving approximately $538.8 million net, and redeemed all Series G preferred shares for a total cost of $82.1 million.
Material changes versus the prior period
- Q2 common-stockholder income was substantially higher chiefly because UDR sold 15 communities and recorded $180.9 million of pretax sale gains. In the first six months, 21 communities were sold and pretax gains were $261.4 million; sale proceeds were $594.7 million.
- The six-month tax benefit included a $22.9 million reversal of a deferred-tax valuation allowance after management concluded the taxable REIT subsidiary’s deferred tax assets were more likely than not to be realized.
- Operating trends improved: same-community rent growth drove higher NOI, while physical occupancy remained high. For Q2, same-community rental rates increased 4.7% and occupancy was unchanged at 95.8%.
- Debt fell following repayments funded in part by equity issuance. UDR also issued $400 million of 4.625% notes due 2022 and fully redeemed Series G preferred stock.
- Capital spending increased materially: six-month capital expenditures were $68.7 million, up 99% year over year, including $40.7 million of major renovations. Revenue-enhancing improvements rose 183.6%.
Outlook, commentary and risks
- Management expected 2012 recurring capital expenditures of approximately $1,150 per home. Its wholly owned development pipeline comprised 1,748 homes, with a $601.1 million budget and expected completions through Q4 2013; $319.1 million of costs remained to complete.
- Management described a strategy of concentrating investment in selected high-barrier markets, including Boston, California, Washington, New York and Washington state, and funding liquidity needs through operations, credit facilities, debt or equity issuance, and property sales. No specific earnings or FFO guidance is provided in the supplied filing text.
- Key risks include weaker local economies or apartment demand, rent and occupancy pressure, expense inflation, development delays or cost overruns, difficulty selling properties, refinancing and interest-rate risk, reliance on Fannie Mae financing, joint-venture disagreements, uninsured losses, environmental liabilities and maintaining REIT qualification.
- UDR reported $368.1 million of expected costs to complete development commitments across wholly owned and joint-venture projects. It may make additional joint-venture contributions if needed. Ordinary-course litigation was disclosed; management did not expect it to have a material adverse effect. The filing reported no material off-balance-sheet arrangements and no subsequent events.
- The reported GAAP earnings improvement is not solely recurring operating growth: property-sale gains and the tax valuation-allowance reversal were material. Management also noted that interest expense in Q2 was affected by prepayment penalties and write-offs tied to early debt extinguishment.
Important facts for investors to verify
- How much of reported earnings and FFO performance is attributable to recurring apartment operations versus property dispositions and tax items.
- Same-community rent, occupancy, expense and NOI trends by market, particularly whether property-tax and repair costs continue to rise.
- Execution, remaining funding needs and leasing progress for the development and renovation pipeline.
- Debt maturities, variable-rate exposure, covenant headroom and continued access to the revolver and Fannie Mae facilities; management estimated a 100-basis-point rate increase would add about $2.0 million to annual interest expense on the Operating Partnership’s unhedged variable-rate debt.
- The effects of common-stock issuance and preferred-stock redemption on per-share results, distributions and capital structure, and the extent of future equity issuance.
- Realization of deferred tax assets, joint-venture commitments and risks, and any material developments in litigation, insurance or environmental matters.