UDR, Inc. annual report, FY2015

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Business context and reporting period

UDR, Inc. is a self-administered REIT focused on owning, operating, acquiring, renovating, developing and managing multifamily communities, primarily in high-barrier-to-entry U.S. markets. This Form 10-K covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. At year-end, UDR consolidated 133 communities with 40,728 completed homes and held interests in 28 unconsolidated communities with 6,696 homes. The filing also reports separately for United Dominion Realty, L.P., UDR’s operating partnership.

Financial performance and key metrics

  • Revenue: Rental income was $871.9 million, up from $805.0 million in 2014; total revenue, including joint-venture management and other fees, was $894.6 million versus $818.0 million.
  • Profit: Net income attributable to common stockholders was $336.7 million ($1.29 diluted per share), compared with $150.6 million ($0.59) in 2014. Income from continuing operations was $105.5 million. The increase in reported profit was substantially affected by real-estate sale gains.
  • Operating performance: Total property NOI, a non-GAAP measure, rose 10.3% to $613.9 million. Same-store rental income increased 5.6%, same-store NOI increased 6.7% to $469.1 million, and same-store occupancy was 96.7%, unchanged year over year. Same-store operating margin increased to 71.1% from 70.3%.
  • REIT supplemental measures: Diluted FFO was $459.3 million, or $1.66 per share and unit; diluted FFO as adjusted was $461.9 million, or $1.67; AFFO was $416.5 million, or $1.51. These non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.
  • Cash flow: Operating cash flow was $431.6 million, versus $392.4 million in 2014. Investing activities used $238.4 million and financing activities used $201.6 million. Cash and cash equivalents were $6.7 million at year-end.
  • Debt and liquidity: Year-end debt, net of financing costs, was $3.57 billion: $1.38 billion secured and $2.19 billion unsecured. UDR reported $3.82 billion of total liabilities and $7.66 billion of total assets. Its new unsecured revolving facility was $1.1 billion, with $150 million drawn at year-end; a $350 million term loan was also in place. UDR said it was in compliance with debt covenants and expected operating cash flow and credit facilities to meet liquidity needs.
  • Dividends and equity: UDR declared $1.11 per common share for 2015, a 6.7% increase from 2014, and paid $1.0925 per share during the year. It issued 6.34 million common shares for approximately $210 million net proceeds.

Material changes versus the prior comparable period

  • Common-stockholder net income more than doubled, while rental income grew about 8%. The $251.7 million gain on real-estate sales and $59.4 million gain from the Texas joint venture were important contributors; earnings growth therefore was not solely from recurring apartment operations.
  • Same-store revenue and NOI growth strengthened, while occupancy remained high. UDR attributed same-store revenue gains mainly to higher rents and fee and reimbursement income; operating expenses increased 3.0%.
  • UDR acquired six Washington, D.C.-area properties from Home Properties for a contractual purchase price of $900.6 million. Consideration included DownREIT units, assumed debt, Section 1031 exchange proceeds and cash. The transaction also increased redeemable noncontrolling interests.
  • UDR sold 12 communities with 2,735 homes for $408.7 million gross proceeds and recorded $251.7 million in gains. The eight-property Texas joint venture sale also generated a $59.4 million gain and $10.0 million of promote and disposition fee income.
  • UDR refinanced and extended credit facilities, replacing a $900 million revolver with a $1.1 billion facility and replacing two term loans with a $350 million term loan. It issued $300 million of 4.00% notes due 2025.
  • Capital expenditures on communities, excluding development and commercial properties, increased 23.5% to $111.3 million, including a 125.2% increase in revenue-enhancing improvements.

Quarterly information, outlook, risks and unusual items

  • Fourth quarter: Unaudited quarterly data reports rental income of $234.4 million, income from continuing operations of $4.5 million, and net income attributable to common stockholders of $161.3 million, or $0.61 diluted per share. Quarterly results were affected by transactions and allocations; the filing does not provide a standalone fourth-quarter adjusted operating outlook.
  • Outlook: No formal numerical 2016 earnings or rent-growth guidance is provided in the supplied filing text. Management stated that 2016 revenue growth could be affected by economic conditions, occupancy, concessions, new supply and bad debt. It planned to continue investing selectively in revenue-enhancing improvements and concentrating investment in markets it views as attractive.
  • Development and commitments: UDR had one wholly owned 516-home development in Huntington Beach, with a $342 million budget, $124.1 million carrying value and expected completion in first-quarter 2018. The filing also lists $217.9 million of remaining development costs and $82.1 million of unfunded joint-venture commitments.
  • Unusual accounting and transaction items: The Operating Partnership contributed seven communities to the newly formed DownREIT Partnership, deconsolidated them and deferred a $296.4 million gain. UDR early adopted new debt-issuance-cost presentation guidance, retrospectively changing balance-sheet presentation but not changing operating cash flow.
  • Risks and contingencies: Key risks include apartment-market weakness, new supply and competition, development delays or cost overruns, refinancing and interest-rate exposure, natural disasters and uninsured losses, environmental liability, joint-venture limitations, cyber or systems disruption, and maintaining REIT qualification. A 100-basis-point increase in rates was estimated to raise UDR interest expense by $8.0 million based on average variable-rate debt. Ordinary-course legal claims were disclosed; management did not expect them to have a material adverse effect, although ultimate liability was undetermined.
  • Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at year-end. Ernst & Young issued unqualified opinions on UDR’s financial statements and internal control over financial reporting.

Important facts for investors to verify

  • How much of the 2015 increase in GAAP earnings came from property operations versus property-sale and joint-venture gains; compare recurring FFO/AFFO with GAAP net income.
  • The economics, financing, noncontrolling interests and eventual redemption features of the Home Properties/DownREIT transaction, including the deferred gain and the Operating Partnership’s deconsolidation.
  • The performance and lease-up assumptions behind the Huntington Beach development, redevelopment projects and West Coast joint-venture investments, as well as remaining funding commitments.
  • Debt maturities, covenant headroom, available revolver capacity and sensitivity to higher rates. The filing listed $244.1 million of 2016 maturities; it also notes that $83.3 million of notes were repaid in January 2016 using the revolver.
  • Whether same-store rental and NOI growth can continue if supply, concessions, expenses or market conditions worsen, and whether cash generation supports dividend growth after capital spending and debt service.