UDR, Inc. — Q3 2018 Form 10-Q
Business and period. UDR is a self-administered REIT that owns, develops and operates apartment communities. This filing covers the quarter and nine months ended September 30, 2018, compared with the same 2017 periods. At quarter-end, UDR consolidated 127 communities with 40,420 homes and also held interests in 32 unconsolidated communities with 8,112 homes.
Financial and operating performance
- Revenue: Q3 total revenue was $266.1 million, up 6.0% from $251.1 million; nine-month revenue was $779.2 million, up 4.9% from $742.9 million.
- Property operations: Q3 total property NOI, a non-GAAP measure, increased 5.8% to $184.8 million; nine-month NOI increased 4.6% to $544.7 million. Same-store NOI rose 3.9% in Q3 and 3.4% year to date. Same-store physical occupancy was 96.9%; Q3 same-store monthly income per occupied home was $2,161, up 3.5%. Same-store operating margin was 70.9% in Q3 and 71.5% for the nine months, unchanged year over year in each period.
- Profit and per-share results: Q3 net income attributable to UDR was $18.6 million, versus $16.2 million; common-stockholder income was $17.6 million, or $0.07 per diluted share, versus $15.3 million, or $0.06. Nine-month net income attributable to UDR was $121.0 million and common-stockholder income was $118.1 million, or $0.44 per diluted share, versus $52.3 million and $49.5 million, or $0.18, respectively. The 2018 nine-month result included a $70.3 million gain on a property sale.
- REIT operating measures: Diluted FFO per share and unit was $0.49 in Q3, versus $0.47; FFO as Adjusted was $0.49, versus $0.47. Diluted AFFO per share and unit was $0.44, versus $0.43. For nine months, FFO per share and unit was $1.44, versus $1.37; FFO as Adjusted was $1.46, versus $1.39; AFFO was $1.34, versus $1.29. These are non-GAAP measures and should not be treated as cash flow or substitutes for GAAP income.
- Cash flow: Nine-month operating cash flow was $406.7 million, up from $389.3 million. Investing used $203.1 million, compared with $383.4 million; financing used $197.4 million, compared with $5.8 million. Ending cash, cash equivalents and restricted cash totaled $28.1 million, including $27.0 million of restricted cash.
- Debt and liquidity: Total debt, net, was $3.81 billion at September 30, compared with $3.67 billion at year-end 2017; weighted-average interest rate was 3.63% and weighted-average maturity 4.9 years. Debt comprised $798.2 million secured and $3.01 billion unsecured. UDR had $415 million of commercial paper outstanding, $51.0 million drawn on its $75 million working-capital facility, $350 million outstanding on its term loan, and no borrowings on its $1.1 billion revolving facility. UDR reported compliance with debt covenants.
- Distributions: Common distributions declared were $0.3225 per share in Q3, versus $0.31; nine-month distributions were $0.9675, versus $0.93.
Material changes and notable items
- Same-store rental income growth and contributions from recently developed, redeveloped and acquired communities supported NOI growth. Real estate taxes and other property operating costs also increased; management cited higher assessed valuations as a key tax driver.
- Q3 interest expense rose $4.3 million year over year, primarily due to higher debt balances and rates and lower capitalized interest. Nine-month interest expense rose $1.4 million; prior-year debt prepayment penalties partly explain the comparison.
- Income from unconsolidated entities declined to a $1.4 million Q3 loss from $1.8 million of income, and to a $5.1 million nine-month loss from $11.6 million of income. The prior-year periods included gains on joint-venture property sales and consolidation.
- UDR sold a 264-home Orange County community for gross proceeds of $90.5 million, recognizing a $70.3 million gain. The proceeds were used in a tax-deferred exchange tied to an October 2017 acquisition. UDR reported no real estate acquisitions in the first nine months of 2018.
- After quarter-end, UDR agreed to sell a 604-home Fairfax, Virginia community for approximately $160 million, with closing expected in Q4 2018. It also issued $300 million of 4.40% senior notes due 2029 on October 26, intending to repay debt, including $195.8 million of Fannie Mae facilities, and for general corporate purposes.
- UDR entered a new $1.1 billion revolving credit facility and $350 million term loan in September, extending their scheduled maturities to 2023 from 2020 under the prior agreement. During the nine months, it repurchased approximately $20 million of common shares.
Outlook, risks and contingencies
Management said operating cash flow and available borrowing capacity were expected to meet operating needs and support distributions; long-term needs could be funded through operating cash flow, debt or equity issuance, and property dispositions. No specific earnings, rent-growth or occupancy guidance was provided in the filing text. UDR expected its sole wholly owned development project, budgeted at $362.5 million, to be completed in Q4 2018; 470 of 585 homes were complete at quarter-end. The company also completed a 516-home Huntington Beach development during the nine-month period.
Management identified risks including apartment-market and economic weakness, competition and rent pressure, rising property expenses and interest rates, refinancing and capital-market access, development delays or cost overruns, joint-venture and preferred-equity exposure, natural disasters and uninsured losses, cybersecurity, environmental matters, and maintaining REIT status. Approximately 52.4% of nine-month NOI came from the Washington, D.C. metro, Orange County, the San Francisco Bay Area and New York, creating geographic concentration. UDR reported routine legal claims for which ultimate liability could not be determined, but did not expect them to materially adversely affect results; it reported no material off-balance-sheet arrangements.
Investor verification priorities
- Separate recurring operating performance from the $70.3 million property-sale gain when assessing nine-month GAAP earnings.
- Review same-store rent, occupancy and expense trends by market, especially real estate tax growth and the concentrated NOI contribution of major markets.
- Confirm the use of proceeds from the $300 million post-quarter note issuance and progress in repaying the identified Fannie Mae debt.
- Assess near-term commercial-paper refinancing, secured maturities, variable-rate exposure and the availability of committed liquidity.
- Track completion, lease-up and remaining costs for the development pipeline, the Fairfax sale closing, and UDR’s joint-venture and preferred-equity commitments.
- Compare FFO, FFO as Adjusted and AFFO definitions and reconciliations with GAAP results and cash flows; these measures are non-GAAP.