UDR, Inc. — Q2 2016 Form 10-Q
Business context and period: UDR is a residential REIT that owns, operates, develops, renovates, and manages apartment communities. This filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. UDR reported 132 consolidated communities with 40,728 homes, plus interests in 29 unconsolidated communities with 7,143 homes.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $238.8 million | $215.9 million | $473.6 million | $435.6 million |
| Net income attributable to UDR common stockholders | $17.0 million; $0.06 diluted/share | $85.9 million; $0.33 diluted/share | $26.5 million; $0.10 diluted/share | $158.8 million; $0.61 diluted/share |
| Operating cash flow | Not separately presented for the quarter | $226.5 million | $217.0 million | |
| Investing cash flow | Not separately presented for the quarter | $(122.5) million | $(163.8) million | |
| Financing cash flow | Not separately presented for the quarter | $(105.6) million | $(65.5) million |
- Operating performance: Q2 same-store rental income rose 5.7% and same-store NOI rose 5.7%; six-month growth was 6.0% and 6.8%, respectively. Same-store occupancy was 96.6% in Q2. Same-store operating margin was 71.2% for Q2 and 71.2% for the first half, versus 70.7% for the first half of 2015.
- Supplemental REIT measures: Diluted FFO per common share and unit was $0.44 in Q2 versus $0.41; FFO as adjusted was $0.45 versus $0.42. For the first half, FFO per share/unit was $0.87 versus $0.84 and FFO as adjusted was $0.88 versus $0.82. These are non-GAAP measures, not substitutes for GAAP earnings or cash flow.
- Balance sheet and debt: Total assets were $7.61 billion and total liabilities $3.73 billion at June 30. Secured and unsecured debt, net, totaled $3.47 billion, with a weighted-average rate of 3.76% and 4.9 years’ weighted-average maturity. Cash and equivalents were $5.2 million. UDR had $255 million drawn on its $1.1 billion revolver, leaving about $0.8 billion of unused capacity, excluding letters of credit; $4.2 million was drawn on its $30 million working-capital facility.
- Distributions and equity: Common distributions declared were $0.295 per share for Q2 and $0.59 for the first half. UDR issued 5.0 million shares in March for net proceeds of about $173.3 million.
Material changes versus prior periods
- GAAP net income fell sharply, mainly because 2015 included $79.0 million of net gains from property sales in UDR’s consolidated results, compared with $7.3 million in Q2 2016 and $10.4 million in the first half of 2016. First-half 2015 also included $58.6 million of income from unconsolidated entities, largely related to a Texas joint venture sale; first-half 2016 income from unconsolidated entities was $1.0 million.
- Revenue and property NOI improved. Total property NOI grew 11.2% in Q2 and 12.7% in the first half, supported by same-store growth and contributions from acquired, developed, and redeveloped communities.
- Real estate depreciation and amortization increased 17.3% in Q2 and 18.0% in the first half, primarily reflecting homes delivered from development and redevelopment projects and 2015 acquisitions. Interest expense increased 5.7% for the first half, principally due to a higher weighted-average rate on total debt.
- During the first half, UDR sold a Bellevue retail center and its 95% interests in two Santa Monica land parcels, for $66.1 million net proceeds and $10.4 million net gain. Of the proceeds, $34.7 million was held in escrow for Section 1031 exchanges. UDR also acquired the remaining interest in Los Angeles land for approximately $20.1 million and then ground-leased the parcel to a third-party developer.
Outlook, commentary, and risks
- The filing provides no formal earnings or revenue guidance. Management said operating cash flows and credit facilities were expected to meet operating needs and support distributions, with longer-term needs addressed through borrowing, securities issuance, or property dispositions.
- Two wholly owned developments comprising 1,101 homes had a total budget of $708.5 million; $238.9 million was carried at June 30, with completion expected in Q1 2018 and Q1 2019. Four communities were being redeveloped, with completion expected in Q1 2017. Recurring 2016 capital expenditures were projected at approximately $1,150 per home.
- Management cited rent growth as the primary driver of same-store improvement; property expense growth—especially real estate taxes and insurance—partly offset revenue gains. Management intends to continue selective revenue-enhancing upgrades where expected returns exceed the cost of capital.
- Key exposures include apartment-market weakness, competition and supply, development cost and completion risks, property-sale and joint-venture risks, variable interest rates and debt refinancing, and potential uninsured property or environmental losses. A 100-basis-point increase in rates on UDR’s $719.6 million of variable-rate debt not subject to swaps would have increased first-half interest expense by an estimated $3.4 million, based on average balances.
- UDR reported compliance with debt covenants and effective disclosure controls. Routine legal claims were not expected by management to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether the reported same-store rent, NOI, occupancy, and expense trends continued after June 30, particularly across UDR’s different markets.
- Development and redevelopment budgets, remaining funding needs, construction timing, lease-up assumptions, and expected returns.
- Debt maturities, floating-rate exposure, revolver availability, covenant headroom, and the effect of refinancing or higher rates.
- The sustainability of distributions relative to operating cash flow and recurring capital spending; do not treat FFO or FFO as adjusted as cash available for distributions.
- The effects of property dispositions, Section 1031 escrow restrictions, and joint-venture performance on reported earnings and liquidity.