UDR, Inc. annual report, FY2018

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UDR, Inc. 2018 Form 10-K Summary

Business context and reporting period

UDR is a U.S. multifamily REIT. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below identify the three months ended December 31, 2018. UDR’s consolidated portfolio comprised 127 communities and 39,931 completed apartment homes in 19 markets, plus interests in 32 unconsolidated communities with 8,112 homes. No communities were under development or redevelopment at year-end.

Financial and operating results

  • Revenue: Total revenue was $1.047 billion, up 5.1% from 2017; rental income was $1.035 billion, up 5.2%.
  • Profit: Net income attributable to common stockholders was $199.2 million, or $0.74 per diluted share, versus $117.9 million, or $0.44, in 2017. Reported net income was materially affected by real estate sale gains.
  • Cash flow: Operating cash flow was $560.7 million, compared with $518.9 million in 2017. Investing activities used $113.5 million and financing activities used $260.1 million. Year-end cash and cash equivalents were $185.2 million; restricted cash was $23.7 million.
  • Same-store performance: Same-store rental income rose 3.5% to $939.7 million and NOI rose 3.4% to $672.4 million. Physical occupancy was 96.9%, and the same-store operating margin was 71.6%, unchanged from 2017. Portfolio-wide NOI was $732.1 million, up 4.8%.
  • REIT operating measures: Diluted FFO was $1.93 per share and unit, versus $1.83 in 2017; FFO as adjusted was $1.96 versus $1.87; AFFO was $1.80 versus $1.72. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
  • Debt and liquidity: Debt, net of financing costs and other adjustments, totaled $3.548 billion at year-end, down from $3.672 billion. Secured debt was $601.2 million and unsecured debt was $2.947 billion. UDR had $230.8 million of variable-rate debt; a 100-basis-point rate increase was estimated to add $5.4 million to annual interest expense based on the average balance. The $1.1 billion revolving facility was undrawn, apart from $3.3 million of letters of credit; commercial paper outstanding was $101.1 million of a $500 million program. Management said operating cash flow and available borrowing capacity were expected to meet liquidity needs.
  • Quarterly context: Fourth-quarter rental income was $264.7 million, net income attributable to common stockholders was $81.2 million, and diluted earnings were $0.30 per share. In fourth-quarter 2017, the comparable figures were $250.1 million, $68.4 million, and $0.25 per share.

Material changes versus the prior comparable period

  • Common-stockholder net income increased 69.1%; the increase included $136.2 million of gains on real estate sales, compared with $43.4 million in 2017. Same-store NOI growth was 3.4%, versus 3.8% in 2017.
  • Operating cash flow increased by $41.8 million. Investing cash outflow narrowed from $407.4 million to $113.5 million, principally reflecting higher property-sale proceeds and lower investment and development spending.
  • UDR sold two communities totaling 868 homes, generating the $136.2 million gain, and completed two wholly owned developments totaling 1,101 homes. It made no real estate acquisitions during 2018.
  • UDR issued $300 million of 4.40% senior notes due 2029 and sold 7.15 million common shares for approximately $299.8 million net. It also repurchased 593,373 shares for approximately $20.0 million. Secured debt declined while unsecured debt increased.

Outlook, commentary, risks and unusual items

  • Management provided no specific numerical 2019 earnings or same-store growth guidance in the provided filing text. It cautioned that revenue growth could be affected by economic conditions, occupancy, concessions, new supply, bad debt and other factors.
  • Management plans to allocate capital selectively, exit markets with weaker long-term prospects, and fund future development, acquisitions and renovations through operating cash flow, borrowing, equity or debt issuance, joint ventures and property sales. Approximately $172.6 million of debt obligations were scheduled for 2019 in the company’s contractual-obligations table; management noted that $195.8 million of secured debt previously due in 2019 had been prepaid.
  • Geographic concentration is a key exposure: 52.3% of 2018 NOI came from Washington, D.C. (17.0%), Orange County, California (12.8%), San Francisco Bay Area (12.2%) and New York (10.3%). Other risks include new apartment supply and competition, real estate taxes and operating costs, interest rates and refinancing, development execution, natural disasters and insurance gaps, cybersecurity, environmental matters, and maintaining REIT qualification.
  • Unconsolidated-entity income for UDR declined to a $5.1 million loss from $31.3 million of income in 2017, primarily because prior-year gains on sales or consolidations did not recur. The 2018 earnings increase therefore includes substantial property-sale gains and should be distinguished from recurring operations.
  • UDR expected adoption of the new lease accounting standard in 2019 to recognize $85 million to $150 million of right-of-use assets and related lease liabilities, principally for ground leases. The filing states that ordinary-course legal proceedings are not expected to have a material adverse effect, although ultimate liability could not be determined. The auditor issued an unqualified opinion, and management and the auditor reported effective internal controls over financial reporting.

Most important facts for investors to verify

  • Reconcile reported earnings growth with the $136.2 million of property-sale gains; assess recurring performance using same-store NOI and FFO/AFFO reconciliations.
  • Review market-level rent, occupancy, concessions, supply and real estate tax trends, especially in the four markets generating 52.3% of NOI.
  • Confirm debt maturities, commercial-paper refinancing needs, covenant compliance, available revolver capacity and sensitivity to higher interest rates.
  • Assess the return, funding commitments and counterparty risks of $780.9 million invested in unconsolidated ventures and partnerships, including Developer Capital Program investments.
  • Verify 2019 acquisition and investment plans, the impact of share issuance on per-share results, and the effect of lease-standard adoption on reported assets and liabilities.