UDR, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. UDR is a REIT that owns, develops, renovates, and manages apartment communities. This filing covers the quarter and nine months ended September 30, 2012, and also includes results for its operating partnership. At quarter-end, UDR consolidated 145 communities with 41,827 homes and held interests in 43 additional communities through unconsolidated joint ventures.
Financial performance and position
- Revenue: Q3 total revenue was $186.3 million, up from $169.1 million a year earlier. Nine-month revenue was $542.9 million versus $464.9 million.
- Earnings: Q3 net loss attributable to common stockholders was $10.0 million ($0.04 per share), compared with a $15.6 million loss ($0.07 per share). Nine-month net income attributable to common stockholders was $216.6 million ($0.92 per share), versus a $33.7 million loss ($0.17 per share).
- FFO: Funds from operations, a non-GAAP REIT measure, was $85.6 million, or $0.33 per diluted share, in Q3 versus $72.1 million, or $0.32 per share. Nine-month FFO was $248.4 million, or $1.02 per diluted share, versus $190.6 million, or $0.94 per share.
- Property operations: Same-community NOI increased 6.4% in Q3 and 6.8% for the nine months. Same-community occupancy was 95.8% in Q3; operating margin was 67.4%, compared with 66.8% a year earlier. Across the total apartment portfolio, NOI decreased 4.1% in Q3 but increased 5.6% for the nine-month period.
- Cash flow: Nine-month operating cash flow was $245.4 million, compared with $182.9 million. Investing activities used $59.3 million, compared with $1.09 billion used in 2011; financing activities used $116.3 million, versus $907.9 million provided. Cash and cash equivalents were $82.4 million at September 30, up from $12.5 million at year-end 2011.
- Debt and liquidity: UDR reported $1.44 billion of secured debt and $1.90 billion of unsecured debt, down from $3.92 billion of total debt at December 31, 2011. Its $900 million unsecured revolver had no borrowings outstanding, excluding $4.1 million of letters of credit. UDR reported compliance with debt covenants.
- Distributions: Common distributions declared were $0.22 per share for Q3 and $0.66 per share for the nine months, compared with $0.20 and $0.585, respectively, in 2011.
Material changes and unusual items
- Nine-month 2012 earnings included $260.2 million of gains on community sales and a $27.9 million net tax benefit in continuing operations, primarily from reversing a $22.9 million deferred-tax valuation allowance. These items materially affected GAAP net income; UDR excluded the valuation-allowance benefit from its FFO calculation.
- UDR sold 21 communities containing 6,507 homes during the first nine months of 2012; there were no community sales in Q3. The 2011 comparative periods included fewer dispositions. Portfolio sales and related changes in depreciation contributed to period-to-period earnings and NOI differences.
- Interest expense declined, reflecting debt extinguishment and repayments. UDR issued $400 million of 4.625% notes due 2022 and raised approximately $538.8 million net from a June public offering of 19 million common shares. It also redeemed all Series G preferred shares for approximately $82.1 million.
- Investment in unconsolidated joint ventures rose to $579.3 million from $213.0 million at year-end, including formation of a 50/50 MetLife venture with a stated $1.3 billion portfolio. The company also made development and redevelopment investments.
Outlook, risks, and contingencies
- Management described operating cash flow and available credit as expected sources for near-term needs, with debt and equity issuance, property sales, and borrowings also available for longer-term maturities, development, and acquisitions. No numerical earnings or FFO guidance is provided in the filing.
- UDR expected 2012 recurring capital expenditures of approximately $1,200 per home. Its wholly owned development pipeline comprised 1,921 homes, with a $651.8 million budget and estimated completions through Q2 2014. Five redevelopment projects had a $279.0 million budget.
- Management intends to concentrate investment in markets it views as attractive, including Boston, California, Metropolitan Washington, D.C., New York, and Washington state. Risks include apartment-market weakness, rent and occupancy pressure, operating-cost growth, construction delays or overruns, joint-venture disagreements, property-sale execution, refinancing and interest-rate exposure, and potential uninsured losses. UDR estimated that a 100-basis-point increase in rates would add $2.0 million to annual interest expense on the specified $201.6 million of unhedged variable-rate debt.
- Various ordinary-course legal claims are pending; management said any liability not covered by insurance or otherwise provided for was not expected to materially affect financial condition, results, or cash flow. Management concluded disclosure controls were effective at a reasonable assurance level.
- A transaction scheduled for October 31, 2012 would exchange UDR interests in certain communities and land parcels, plus $10 million cash, for an additional 41% interest in The Olivian, bringing UDR’s interest to 50%. Confirm the closing and final terms.
Important facts for investors to verify
- Separate recurring operating performance from the large property-sale gain and deferred-tax valuation-allowance benefit when assessing nine-month GAAP earnings and FFO.
- Review same-community rent, occupancy, expenses, and NOI trends alongside the decline in total Q3 portfolio NOI and the effect of property dispositions.
- Track debt maturities, variable-rate exposure, derivative obligations, revolver availability, and the effect of the common-stock issuance and preferred-stock redemption on capital structure.
- Assess the funding, completion timing, leasing, and returns of development and redevelopment projects, as well as capital commitments and potential additional joint-venture contributions.
- Confirm the subsequent Olivian transaction’s completion and consider that FFO is a supplemental, non-GAAP measure, not a substitute for GAAP earnings or operating cash flow.