UDR, Inc. annual report, FY2017

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UDR, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; the filing was signed February 20, 2018. Although the request identifies 2017 Q4, this is an annual filing. Quarterly figures are noted separately below. UDR is a multifamily REIT; its consolidated portfolio comprised 127 communities and 39,998 completed homes, with interests in 29 additional unconsolidated communities containing 7,286 homes.

Financial and operating performance

  • Revenue: Rental income was $984.3 million, up 3.8% from $948.5 million. Total revenue, including joint venture management and other fees, was $995.8 million, versus $959.9 million.
  • Profit: Net income attributable to UDR common stockholders was $117.9 million, or $0.44 per diluted share, compared with $289.0 million, or $1.08 per diluted share, in 2016. Income from continuing operations was $89.3 million, versus $109.5 million.
  • Operating performance: Total property NOI was $698.5 million, up 3.8%. Same-store rental income increased 3.7% and same-store NOI rose 3.8% to $607.5 million; same-store operating margin edged up to 71.5% from 71.4%. Same-store physical occupancy was 96.8%.
  • REIT supplemental measures: Diluted FFO per common share and unit was $1.83, up from $1.80; FFO as Adjusted was $1.87, up from $1.79; and AFFO was $1.72, up from $1.63. These are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.
  • Cash flow: Operating cash flow was $519.2 million, down from $536.9 million. Investing activities used $407.4 million, compared with $112.3 million used in 2016; financing activities used $111.8 million, compared with $429.3 million. Cash and cash equivalents at year-end were $2.0 million, with restricted cash of $19.8 million.
  • Capital spending and development: Capital expenditures, excluding development and commercial properties, were $105.9 million, down from $112.9 million. Development costs were $248.5 million. Two wholly owned projects had a stated total budget of $716.5 million and carrying value of $592.5 million; management expected completion in Q1 2018 and Q1 2019.
  • Debt and liquidity: Year-end debt, net, was $3.672 billion: $803.3 million secured and $2.868 billion unsecured, at a weighted average interest rate of 3.65% and average remaining maturity of 5.3 years. UDR reported $480.5 million of variable-rate debt. It had no year-end borrowings on its $1.1 billion revolving facility, $300 million outstanding under a $500 million commercial paper program, and $21.8 million outstanding under a $75 million working-capital facility. Debt covenants were reported in compliance.
  • Distributions: UDR declared $1.24 per common share for 2017, a 5.1% increase from 2016; $1.225 per share was paid during the year. The board retains discretion over future distributions.

Material changes versus 2016

  • Common-stockholder net income fell substantially, principally because gains on real estate sales declined to $43.4 million from $210.9 million in 2016. The filing attributes the prior-year comparison to larger dispositions in 2016.
  • Same-store results improved, but expense growth—especially real estate taxes, up 7.1% for UDR’s same-store portfolio—partly offset revenue growth. Same-store rental-rate growth was 2.5% and reimbursement and fee income increased 11.2%.
  • Operating cash flow declined by $17.8 million, primarily due to lower cash returns from unconsolidated joint ventures, partly offset by improved property NOI. Investing cash use increased with development spending, joint-venture investment and capital expenditures, as well as lower property-sale proceeds.
  • UDR issued $600 million of 3.50% senior unsecured notes due 2027 and 2028, began a commercial paper program, and prepaid $275.3 million of secured credit facilities. It also redeemed $300 million of 4.25% notes due 2018; debt prepayment costs included in interest expense were $5.8 million.
  • In 2017, UDR acquired or consolidated two previously unconsolidated communities and recorded $27.0 million of consolidation gains. It sold two communities and a land parcel, recognizing $43.4 million of total net gains on real estate sales.

Quarterly context, outlook and risks

  • Q4 2017: Rental income was $250.1 million, versus $240.1 million in Q4 2016. Net income attributable to common stockholders was $68.4 million, or $0.25 diluted EPS, compared with $236.7 million, or $0.88, in the prior-year quarter. The annual filing attributes the much higher 2016 earnings comparison mainly to larger real estate-sale gains.
  • Outlook: The filing gives no specific numerical 2018 earnings or rent-growth guidance. Management said 2018 revenue growth could be affected by economic conditions, lower occupancy, concessions, new supply and bad debt. UDR expected to fund operating needs and dividends from property cash flow and borrowings, and to address maturities and investment needs through borrowings, securities issuance and/or property dispositions.
  • Near-term obligations and subsequent event: UDR listed approximately $333.7 million of 2018 debt maturities, including $300 million of commercial paper and $33.7 million of secured debt. In February 2018, it extended the working-capital facility maturity to January 2021. Also in February, it sold a 264-home Orange County community for $90.5 million gross proceeds and estimated a $70.3 million GAAP gain; proceeds were designated for a Section 1031 exchange.
  • Key risks and contingencies: Apartment supply, rental-rate and occupancy pressure, real estate taxes and operating costs, refinancing and interest-rate exposure, development delays or cost overruns, joint-venture partner and investment risks, natural disasters and uninsured losses, cybersecurity, environmental liabilities, and maintaining REIT qualification. Ordinary-course litigation was disclosed; management did not expect it to have a material adverse effect, but ultimate liability could not be determined.
  • Tax and controls: UDR reported a $1.1 million one-time tax benefit related to refundable REIT AMT credits under the Tax Cuts and Jobs Act. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor gave unqualified opinions on the financial statements and UDR’s internal controls.

Important facts for investors to verify

  • Reconcile the sharp GAAP earnings decline to the smaller real estate-sale gains, and distinguish recurring operating performance from transaction and consolidation gains.
  • Review the FFO, FFO as Adjusted and AFFO reconciliations, definitions and recurring capital expenditure assumptions; these non-GAAP measures are not cash available for distribution.
  • Assess the funding and refinancing plan for 2018 maturities, particularly short-term commercial paper, alongside available revolving capacity and covenant headroom.
  • Track development budgets, remaining commitments, completion dates, lease-up and returns, and the risks and liquidity terms of unconsolidated joint ventures and structured investments.
  • Monitor same-store rent and occupancy trends against new supply, concessions, bad debt and real estate tax growth, particularly in UDR’s larger markets.
  • Confirm subsequent property-sale proceeds, estimated gain and Section 1031 exchange treatment when evaluating realized cash and reported earnings.