UDR, Inc. quarterly report, Q3 FY2017

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UDR, Inc. — Q3 2017 Form 10-Q

Business context and reporting period

UDR is a REIT that owns, operates, develops, renovates, and manages multifamily apartment communities. This unaudited quarterly filing covers the three and nine months ended September 30, 2017, with comparisons to 2016. At quarter-end, UDR’s consolidated portfolio comprised 128 communities and 39,906 apartment homes; its total portfolio also included 29 unconsolidated communities with 7,286 homes.

Financial performance and position

  • Revenue: Third-quarter total revenue was $251.1 million, up 3.2% year over year; nine-month revenue was $742.9 million, up 3.6%. Rental income rose 3.3% for the quarter and 3.6% year to date.
  • Profit: Third-quarter net income attributable to UDR was $16.2 million, versus $27.0 million; net income attributable to common stockholders was $15.3 million, or $0.06 per diluted share, versus $26.0 million, or $0.10. For nine months, common-stockholder net income was $49.5 million, or $0.18 per diluted share, versus $52.5 million, or $0.20.
  • Property operations: Total property NOI, a non-GAAP measure, increased 2.6% to $174.7 million for the quarter and 3.8% to $520.8 million for nine months. Same-store NOI increased 3.0% and 4.0%, respectively. Same-store occupancy was 96.7% for the quarter and 96.8% for the nine-month period. Same-store operating margin was 70.9% for the quarter, down from 71.1%, and 71.4% for nine months, up from 71.3%.
  • FFO and AFFO: Diluted FFO per share and unit was $0.46 for the quarter (versus $0.46) and $1.37 year to date (versus $1.33). Diluted FFO as Adjusted was $0.47 and $1.39, versus $0.45 and $1.33. Diluted AFFO was $0.43 and $1.29, versus $0.41 and $1.22. These are non-GAAP measures.
  • Cash flow: Nine-month operating cash flow was $388.9 million, compared with $383.1 million. Investing used $383.4 million, compared with $271.6 million; financing used $5.8 million, compared with $115.0 million. Cash and cash equivalents were $1.8 million at September 30.
  • Debt and liquidity: Net debt was $3.68 billion, up from $3.40 billion at December 31, 2016; weighted-average interest rate was 3.65% and weighted-average maturity was 4.8 years. UDR had no borrowings on its $1.1 billion revolving facility, $40.7 million drawn on its $75 million working-capital facility, and $285 million of commercial paper outstanding under a $500 million program. Debt covenants were met.
  • Distributions: Common distributions declared were $0.31 per share for the quarter, versus $0.295, and $0.93 year to date, versus $0.885.

Material changes versus the prior comparable period

  • Quarterly common-stockholder earnings declined despite higher rental revenue and NOI, mainly because income from unconsolidated entities was $13.5 million lower. The 2016 comparison included a joint-venture property-sale gain and casualty insurance recovery.
  • Nine-month common-stockholder earnings declined modestly. Higher NOI was offset by lower property-sale gains than in 2016, higher depreciation, and lower income from unconsolidated entities.
  • Same-store results continued to improve, supported by rent growth and fee/reimbursement income, while real estate tax expense increased, partly due to higher assessed valuations.
  • UDR issued $300 million of 3.50% notes due 2027 and used commercial paper and note proceeds in part to repay secured debt. Secured debt fell while unsecured debt rose; the filing reports $5.8 million of year-to-date prepayment costs.

Outlook, commentary, risks, and unusual items

  • Outlook: The filing provides no specific numeric earnings or same-store guidance. Management said operating cash flow and available borrowing capacity should be adequate for operating needs and distributions, and expects to fund longer-term needs through borrowing, debt or equity issuance, and/or asset dispositions.
  • Investment plans: Two wholly owned developments totaled 1,101 homes, with 208 completed; the reported budget was $716.5 million, carrying value $534.3 million, and estimated completion dates in Q1 2018 and Q1 2019. Remaining estimated development costs were $182.2 million.
  • Post-quarter event: On October 5, 2017, UDR acquired a 218-home Denver community with retail space for approximately $141.5 million. The filing reports a projected gain on consolidation of approximately $14.8 million.
  • Unusual items: Hurricane Irma damage contributed to higher third-quarter casualty charges. UDR also recorded a $12.2 million gain on consolidating a Seattle community previously held through a joint venture; a Richmond land sale generated a $2.1 million gain during the nine-month period.
  • Key risks: Management identifies apartment-market and rent competition, property operating-cost and tax increases, interest-rate and refinancing exposure, development and lease-up execution, joint-venture and investment risks, and potential uninsured weather or other casualty losses. The company had $484.5 million of variable-rate debt not subject to swaps; a 100-basis-point increase would have added an estimated $4.1 million to nine-month interest expense, based on average debt outstanding.
  • Contingencies and controls: UDR is subject to routine legal proceedings and says any liability not covered by insurance is not expected to materially harm its financial condition, results, or cash flow. Management reported effective disclosure controls and no material third-quarter change in internal control over financial reporting.

Important facts for investors to verify

  • Review the drivers of same-store rent and NOI growth, particularly expense and real estate tax growth, and whether occupancy and margins remain durable.
  • Assess the near-term refinancing exposure: the $285 million commercial-paper balance was due in October 2017, and the filing lists substantial debt maturities in 2018 and 2019.
  • Track development costs, completion and lease-up schedules, and the post-quarter Denver acquisition and projected consolidation gain.
  • Separate recurring property performance from prior-year joint-venture gains, casualty recoveries, current casualty charges, and other adjustments when evaluating earnings and non-GAAP measures.
  • Confirm liquidity, access to capital markets, debt covenant compliance, and the capacity to sustain distributions amid development spending and debt maturities.