UDR, Inc. — Third Quarter 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed October 27, 2022. Unless otherwise noted, amounts are in millions. UDR is a multifamily REIT. At quarter-end, its consolidated portfolio comprised 164 communities and 54,728 apartment homes; it also had interests in 9,099 completed or planned homes through unconsolidated ventures and partnerships.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $391.3 | $329.8 | $1,117.7 | $942.6 |
| Net income attributable to UDR common stockholders | $22.5 | $16.7 | $39.1 | $29.4 |
| Diluted EPS | $0.07 | $0.06 | $0.12 | $0.10 |
| Total property NOI | $265.0 | $219.5 | $763.5 | $629.2 |
| Same-store NOI | $245.7 | $214.5 | $688.7 | $602.4 |
| FFOA per diluted share and unit | $0.60 | $0.51 | $1.72 | $1.47 |
| AFFO per diluted share and unit | $0.54 | $0.46 | $1.58 | $1.34 |
FFOA and AFFO are non-GAAP measures; the filing cautions they are not substitutes for GAAP net income or operating cash flow. Same-store NOI rose 14.6% in Q3 and 14.3% year to date. Same-store rental income increased 12.2% in Q3 and 11.4% year to date. Q3 weighted-average physical occupancy was 96.8%, down 0.7 percentage points year over year, while monthly income per occupied home rose 13.0% to $2,446. Same-store operating margin was 68.7% in Q3 versus 67.3%; for nine months it was 69.6% versus 67.8%.
For the first nine months, operating cash flow was $602.6 versus $483.2; investing cash flow was negative $838.7 versus negative $921.3; and financing cash flow was $237.5 versus $443.2. Period-end cash and cash equivalents were $1.5; restricted cash was $28.4. Capital expenditures excluding development were $154.7, up 41.0% year over year. Common distributions paid were $359.9.
Net debt on the balance sheet was $5,626.4, compared with $5,412.8 at December 31, 2021. The weighted-average debt interest rate was 3.06% and weighted-average years to maturity were 6.7. UDR reported $668.2 of variable-rate debt not covered by interest-rate swaps. At quarter-end, commercial paper outstanding was $425.0, with a 3.44% rate and October 2022 maturity; the $1.3 billion revolving facility had no borrowings, and the $75 million working-capital facility had $41.2 outstanding. UDR reported compliance with debt covenants.
Material changes and unusual items
- Q3 common-stockholder income increased to $22.5 from $16.7, driven primarily by a $45.5 increase in property NOI; partly offset by higher depreciation and interest expense and weaker technology-investment results.
- Year-to-date common-stockholder income increased to $39.1 from $29.4. The comparison includes $50.8 of real estate sale gain and $42.3 of debt-extinguishment costs in 2021, neither repeated in 2022. Higher property NOI also supported 2022 results.
- Unrealized SmartRent valuation losses weighed on results: UDR cited an $8.5 Q3 loss and a $15.2 nine-month loss in interest income and other income/expense, net. RETV I also recorded a $28.0 nine-month investment loss, primarily related to SmartRent.
- In September, a joint venture associated with UDR’s preferred-equity investment in 1532 Harrison defaulted on its senior construction loan. UDR purchased the loan for its $47.2 unpaid balance, determined it was the VIE’s primary beneficiary, and began consolidating the venture. Assets and liabilities recorded at fair value were approximately $86.9 and $0.3, respectively.
- UDR issued shares through forward sales, receiving approximately $449.9 net proceeds for 8.3 million shares settled during the nine months. A further 3.2 million shares under forward sales agreements remained unsettled at quarter-end, with settlement required by March 30, 2023.
Outlook, commentary and risks
The filing provides no specific earnings or operating guidance. Management expected to meet short-term liquidity needs through property operating cash flow, credit facilities and commercial paper, and longer-term needs through operating cash flow, debt or equity issuance, borrowings and property dispositions. Management stated these sources were expected to support operations and REIT-required distributions. The remaining 2022 debt maturity was approximately $425.3, consisting primarily of commercial paper; UDR expected to repay or refinance it through the stated liquidity sources.
Management said inflation had raised vendor, repair, utility and insurance costs and increased interest expense on variable-rate debt. Short apartment lease terms generally allow rent adjustments, but sustained cost escalation could pressure residents’ ability to absorb increases. The filing identifies exposure to interest-rate increases, refinancing and capital-market access, rent regulation, market-specific concentration, development and construction costs, natural disasters and insurance limitations, counterparty/JV performance, COVID-19 uncertainty, and SmartRent investment volatility. Approximately 60.6% of nine-month NOI came from six major markets, led by Metropolitan D.C. (15.6%).
UDR recorded approximately $1.0 of Hurricane Ian-related casualty charges and expected total costs, including subsequent cleanup, to be immaterial. It reported no long-lived-asset impairments in the periods presented. Ordinary-course litigation was not expected by management to have a material adverse effect. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether rent growth, occupancy and same-store NOI remain resilient as market conditions and resident affordability change.
- How rising interest rates affect variable-rate debt, debt refinancing and the cost of commercial paper; verify the treatment of the $425.0 commercial-paper maturity and remaining forward-share settlements.
- Whether SmartRent-related valuation losses continue and how much reported income depends on unrealized investment gains or losses.
- Developments in the 1532 Harrison default and UDR’s loan recovery, collateral value and consolidation accounting.
- Actual costs and returns from the development pipeline, capital spending and joint-venture/preferred-equity commitments.
- Whether Hurricane Ian and other casualty losses remain immaterial, including in light of insurance coverage and deductibles.