UDR, Inc. — Q1 2017 Form 10-Q
Business context and period: UDR is a multifamily REIT that owns, operates, develops, and manages apartment communities. This filing covers the three months ended March 31, 2017, compared with Q1 2016, and reports results for UDR, Inc. and its Operating Partnership. UDR reported 128 consolidated communities with 39,698 homes, plus interests in 28 unconsolidated communities with 7,131 homes.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $243.8 million | $234.8 million |
| Operating income | $45.5 million | $38.1 million |
| Net income attributable to UDR | $26.0 million | $10.4 million |
| Net income attributable to common stockholders | $25.0 million | $9.5 million |
| Diluted earnings per share | $0.09 | $0.04 |
| Funds from operations (FFO), diluted, per share and unit | $0.45 | $0.43 |
| FFO as adjusted, diluted, per share and unit | $0.45 | $0.43 |
| Adjusted FFO (AFFO), diluted, per share and unit | $0.43 | $0.41 |
| Net cash from operating activities | $120.5 million | $112.8 million |
Property performance: Total property NOI, a non-GAAP measure, was $171.5 million, up 4.5%. Same-store rental income rose 4.6% and same-store NOI increased 4.9% to $151.5 million; expenses rose 3.8%. Same-store physical occupancy was 96.8%, versus 96.3%, and operating margin increased to 71.6% from 71.4%. Rental rates and reimbursement and fee income supported growth; higher real estate taxes were a notable cost pressure.
Cash flow and investment: Investing activities used $162.8 million, primarily for acquisitions, development, and joint-venture investments; financing activities provided $42.7 million. Cash and cash equivalents were $2.5 million at quarter-end, excluding $19.8 million of restricted cash. UDR declared common distributions of $0.31 per share, up from $0.295.
Balance sheet, debt, and liquidity
- Total assets were $7.74 billion at March 31, 2017. Secured and unsecured debt, net of financing costs, totaled $3.54 billion, compared with $3.40 billion at year-end 2016; weighted-average interest rate was 3.67% and weighted-average maturity was 4.6 years.
- UDR had $1.1 billion of unused capacity under its revolving credit facility, excluding letters of credit, and $280 million of unused capacity under its $500 million commercial paper program. It also had $38.9 million of unused working-capital facility capacity.
- Quarter-end unsecured balances included $220 million of commercial paper, $36.1 million under the working-capital facility, and $350 million under term loans. The filing states the company was in compliance with debt covenants.
- Management expected to meet short-term liquidity needs through property operating cash flow and credit facilities/commercial paper, and longer-term needs through borrowings, debt or equity issuance, and/or property dispositions. UDR expected $220 million of commercial paper and about $49.9 million of secured debt to mature during the remainder of 2017.
Material changes and unusual items
- Net income attributable to UDR increased substantially year over year, but included a $12.2 million gain on consolidation after UDR bought its joint-venture partner’s interest in a 244-home Seattle community for approximately $66 million. UDR’s ownership rose from 49% to 100%.
- UDR sold a Richmond land parcel for $3.5 million gross proceeds and recorded a $2.1 million net gain. The prior-year comparison included $3.1 million of net gains from two Santa Monica land sales.
- UDR began a $500 million commercial paper program in January 2017 and issued $220 million at a weighted-average annualized rate of 1.24%, partly using proceeds to prepay secured debt.
- UDR’s wholly owned development pipeline comprised two communities totaling 1,101 homes, with a $708.5 million budget and $393.8 million carrying value; estimated completion dates were Q1 2018 and Q1 2019. Expected costs to complete were approximately $314.7 million.
- UDR recorded $0.5 million of net casualty-related charges. Litigation and ordinary-course claims were disclosed; management did not expect them to have a material adverse effect. No material off-balance-sheet arrangements or significant subsequent events were reported.
Outlook, commentary, and risks
The filing provides no specific numerical full-year earnings or operating guidance. Management described liquidity as adequate for operating needs and distributions, and said it planned to selectively pursue revenue-enhancing improvements expected to earn returns above its cost of capital. It noted that most apartment leases are 12 months or shorter, allowing rents to adjust relatively quickly, while acknowledging that cost escalation could affect residents’ ability to absorb increases.
Key disclosed risks include weaker apartment demand, rent or occupancy pressure, new supply and competition, rising property taxes and operating costs, development delays or cost overruns, joint-venture and preferred-equity exposure, interest-rate and refinancing risk, access to capital, natural disasters and uninsured losses, environmental liabilities, and maintaining REIT qualification. A 100-basis-point increase in rates on UDR’s identified unhedged variable-rate debt was estimated to increase quarterly interest expense by $1.4 million, based on average balances. Disclosure controls were concluded effective at the reasonable-assurance level.
Important facts for investors to verify
- How much of the earnings increase reflects ongoing property operations versus the $12.2 million consolidation gain and land-sale gains.
- Whether same-store rent growth, occupancy, NOI margins, and expense trends—especially real estate taxes—persist in subsequent quarters.
- How the $220 million of commercial paper due during the remainder of 2017 will be repaid or refinanced, and the effect of any changes in short-term rates or market access.
- Whether development projects meet stated cost and completion expectations, and how remaining joint-venture commitments and purchase options affect liquidity.
- Whether operating cash flow and FFO/AFFO support the distribution level, noting that FFO and AFFO are non-GAAP measures and are not cash-flow substitutes.