UDR, Inc. — Q1 2011 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2011, with comparisons to Q1 2010. UDR is a REIT focused on owning, developing, renovating, and managing apartment communities. At quarter-end, it consolidated 172 communities with 48,553 homes and held interests in another 37 communities with 9,891 homes through unconsolidated ventures. The interim results are unaudited and are not necessarily indicative of full-year results.
Financial performance and position
- Revenue and earnings: Total revenue was $169.1 million, up from $146.6 million. Rental income was $164.5 million. UDR reported an operating loss of $28.3 million and a net loss attributable to UDR of $27.9 million, compared with $26.6 million and $24.1 million, respectively, in Q1 2010. The net loss attributable to common stockholders was $30.2 million, or $0.17 per diluted share, versus $26.4 million, also $0.17 per diluted share.
- Property operations and margins: Property NOI increased 12.4% to $109.3 million across the total apartment portfolio. Same-community NOI grew 3.0%; same-community rental income increased 2.6%, while operating expenses rose 2.0%. Same-community physical occupancy was 95.6%, down 0.1 percentage point, and its operating margin rose to 66.0% from 65.8%.
- FFO: NAREIT FFO was $55.9 million, or $0.30 per diluted share, compared with $45.9 million, or $0.28 per diluted share. FFO is a non-GAAP measure and is not a substitute for net income or operating cash flow.
- Cash flow: Cash from operations was $48.0 million versus $41.5 million. Investing used $56.9 million versus $57.4 million; financing provided $11.1 million versus $29.8 million. Cash increased $2.2 million to $11.7 million.
- Debt and liquidity: Balance-sheet debt was approximately $3.52 billion, including secured debt and debt on disposition properties; unsecured debt was $1.75 billion. Secured debt totaled $1.77 billion, with a 4.10% weighted-average rate and 5.8 years’ weighted-average maturity. UDR had $185.6 million drawn on its $600 million unsecured revolver, leaving $414.4 million of capacity before letters of credit. Approximately 59.7% of real estate was unencumbered by secured debt. UDR reported compliance with debt covenants.
- Distributions and equity: The common distribution declared was $0.185 per share, up from $0.180. UDR issued 4.04 million shares through its existing at-the-market program for $94.2 million net proceeds; a new program authorized sales of up to 20 million shares.
Material changes and unusual items
- Despite higher revenue and NOI, the UDR common-stockholder loss widened. Management cited higher depreciation, mainly from 2010 acquisitions and completed developments, and a $4.0 million write-off of deferred financing costs related to debt prepayment. A $3.1 million realized gain on marketable securities partly offset these items.
- Real estate depreciation and amortization increased 16.5% to $84.1 million; interest expense increased 10.4% to $40.7 million. The 2010 comparison also included a $1.8 million real-estate-tax recovery in discontinued operations, which did not recur.
- UDR repaid $202.3 million of secured debt during the quarter. Unsecured debt rose from year-end, including higher revolver borrowings. UDR called its 4.00% convertible notes due 2035; the remaining $156.9 million was redeemed on April 4, 2011, after quarter-end.
Outlook, risks, and contingencies
- Outlook: The filing provides no specific earnings or FFO guidance. Management expected short-term liquidity needs to be met through operating cash flow and credit facilities, and longer-term needs through borrowings, securities issuance, and property dispositions. Recurring capital expenditures for 2011 were expected to be approximately $1,050 per home. The wholly owned development pipeline comprised 930 homes, with a $338.9 million budget and anticipated completion through Q3 2013.
- Portfolio strategy and subsequent events: Management described a strategy of concentrating investment in selected markets, including Boston, California, Metropolitan Washington, New York, and Washington state. On April 1, UDR acquired a 493-home New York City community for $259.8 million, including assumed debt of $192.0 million. On April 5, UDR and the Operating Partnership completed a stated $500 million asset exchange involving acquisitions and dispositions; acquired communities included 1,060 homes and assumed debt of $55.8 million.
- Key risks and commitments: Risks include economic and apartment-market weakness, occupancy or rent declines, development and acquisition execution, refinancing and interest-rate exposure, access to Fannie Mae financing, and potential uninsured property, environmental, or weather losses. UDR indemnified Hanover for loans guaranteed by Hanover with $333 million outstanding at quarter-end; management anticipated refinancing those loans within twelve months. Four wholly owned developments had $226.3 million of expected costs to complete. Routine litigation was not expected by management to have a material adverse effect. No defaults on senior securities were reported.
- Controls: Management concluded disclosure controls and procedures were effective at the reasonable-assurance level as of March 31, 2011.
Important facts for investors to verify
- Reconcile the reported GAAP loss with the increase in FFO, including depreciation, debt-extinguishment costs, and the securities-sale gain.
- Track same-community rent growth, occupancy, expense growth, and NOI margin in subsequent quarters.
- Review debt maturities, revolver availability, the April 4 convertible-note redemption, and the company’s reliance on equity issuance and refinancing.
- Confirm the completion economics and financing of the April acquisitions and asset exchange, including assumed debt and properties sold.
- Monitor the Hanover loan indemnity and expected refinancing, development costs to complete, and exposure to interest-rate, property-market, and REIT qualification risks.