UDR, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed July 27, 2023. UDR is a multifamily REIT. At quarter-end, it owned 162 communities with 53,832 apartment homes and had interests in 9,956 additional completed or planned homes through unconsolidated ventures and partnerships.
Financial and operating performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $404.5 million | $369.2 million | $804.1 million | $726.4 million |
| Net income attributable to common stockholders | $346.3 million | $4.0 million | $376.1 million | $16.6 million |
| Diluted earnings per share | $1.05 | $0.01 | $1.14 | $0.05 |
| Operating cash flow | Not presented by quarter | $410.0 million | $398.1 million | |
| FFO per diluted share and unit | $0.63 | $0.52 | $1.22 | $1.06 |
| FFOA per diluted share and unit | $0.61 | $0.57 | $1.21 | $1.12 |
| AFFO per diluted share and unit | $0.55 | $0.52 | $1.12 | $1.03 |
Q2 Same-Store NOI increased 6.7% to $260.5 million; Same-Store rental income rose 6.9% while operating expenses increased 7.4%. Physical occupancy was 96.6%, down 0.4 percentage points year over year. Same-Store operating margin was 69.6%, versus 69.7%. For the first half, Same-Store NOI grew 8.1% and margin was 69.8%, versus 69.4%.
Net income rose sharply chiefly because of a $325.9 million gain on a partial sale of four communities. This gain included the fair-value measurement of UDR’s retained interest and is not a measure of recurring property operations. FFO and AFFO provide supplemental, non-GAAP measures and should not be treated as cash flow or substitutes for GAAP earnings.
Balance sheet, debt, and liquidity
- At June 30, total assets were $11.09 billion, total liabilities $6.03 billion, and total equity $4.12 billion.
- Net carrying value of secured and unsecured debt was $5.43 billion, down from $5.49 billion at December 31, 2022. Weighted-average interest rate was 3.21%, with 6.3 years’ weighted-average maturity. About 89% of real estate, by gross book value, was unencumbered.
- Debt included $1.05 billion of secured debt and $4.38 billion of unsecured debt. Variable-rate debt not covered by swaps was $297 million. A 100-basis-point increase in variable rates was estimated to add $2.6 million to first-half interest expense, based on average borrowings.
- UDR had no balance outstanding on its $1.3 billion revolving credit facility, $250 million of commercial paper outstanding at a 5.48% period-end rate, and $20.0 million drawn on its $75 million working-capital facility. Cash and restricted cash totaled $30.4 million; restricted cash was $28.8 million.
- First-half investing cash outflow was $60.7 million and financing cash outflow was $349.1 million. Cash distributions paid to common stockholders were $263.3 million.
Material changes, outlook, and risks
- In June, UDR contributed four communities totaling 1,328 homes to a new joint venture, retaining a 51% interest and receiving approximately $247.9 million in cash. The transaction generated the $325.9 million reported gain.
- Interest expense increased to $45.1 million in Q2 from $36.8 million, primarily reflecting higher average interest rates. Property operating costs also rose, including repair and maintenance, utilities, and real estate taxes.
- UDR reported no specific earnings or operating guidance in the supplied filing text. Management stated it expects operating cash flow and borrowing capacity to remain adequate for operating needs and REIT distributions, while noting that capital-market access depends on market conditions.
- At quarter-end, two wholly owned developments comprised 415 homes, with a $187.5 million budget and $108.4 million carrying value; completion of the remaining homes was estimated for Q2 2024. In July, UDR signed contracts to acquire six Texas communities totaling 1,753 homes for about $401.9 million, with closing expected in August 2023.
- Key risks include rent and occupancy pressure from local market conditions and new supply; inflation in operating and construction costs; higher rates and refinancing or capital-market risk; rent regulation; weather, climate and insurance exposure; development execution; and performance of joint-venture partners and borrowers. UDR reported compliance with debt covenants and no impairment charges for the periods presented. Management said routine legal matters are not expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time joint-venture transaction gain versus recurring property performance; review FFO, FFOA, and AFFO reconciliations and definitions.
- The valuation assumptions behind the $325.9 million gain and retained joint-venture interest, and the venture’s future performance and distribution terms.
- Whether the July Texas acquisitions closed on expected terms and how they will be funded.
- Exposure to refinancing and variable-rate costs, including the $250 million commercial-paper maturity in 2023 and the working-capital facility’s January 2024 maturity.
- Whether rent growth can continue to offset expense inflation, occupancy changes, and higher repair, utility, tax, insurance, and development costs.