UDR, Inc. — Q2 2018 Form 10-Q
Business context and reporting period
UDR is a self-administered REIT that owns, operates, develops, renovates, and manages apartment communities. This unaudited filing covers the three and six months ended June 30, 2018, with comparisons to 2017. At quarter-end, UDR had 127 consolidated communities with 40,180 homes and interests in 31 additional unconsolidated communities with 7,950 homes.
Financial and operating results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $259.7 million | $248.0 million | $513.0 million | $491.8 million |
| Operating income | $55.2 million | $46.2 million | $103.2 million | $91.7 million |
| Net income attributable to common stockholders | $19.6 million | $9.2 million | $100.4 million | $34.3 million |
| Diluted earnings per common share | $0.07 | $0.03 | $0.37 | $0.13 |
| Total property NOI | $183.3 million | $174.6 million | $359.9 million | $346.1 million |
| FFO as Adjusted per diluted share and unit | $0.49 | $0.47 | $0.97 | $0.92 |
| AFFO per diluted share and unit | $0.45 | $0.43 | $0.90 | $0.86 |
Same-store NOI increased 3.5% in Q2 and 3.1% year to date. For Q2, same-store rental income rose 3.4%, physical occupancy was 97.0%, and monthly income per occupied home increased 3.0% to $2,132. Same-store operating margin was 71.9%, versus 71.8% a year earlier. Real estate taxes, largely reflecting higher assessed valuations, were a principal source of expense growth.
For the six months, operating cash flow was $255.1 million, investing cash flow was negative $111.3 million, and financing cash flow was negative $134.8 million. Cash, cash equivalents, and restricted cash totaled $30.9 million at June 30, including $29.9 million of restricted cash. Common distributions declared were $0.3225 per share for Q2 and $0.6450 for the first half.
Total debt, net, was $3.75 billion at June 30, compared with $3.67 billion at December 31, 2017; its weighted-average interest rate was 3.66% and weighted-average years to maturity were 4.8. Debt included $799.8 million secured and $2.95 billion unsecured. UDR had no borrowings under its $1.1 billion revolving facility, with $3.4 million of letters of credit; it had $49.9 million drawn on its $75 million working-capital facility and $355 million of commercial paper outstanding at quarter-end. Debt covenants were in compliance.
Material changes and unusual items
- Q2 common-stockholder income more than doubled year over year, supported by higher property NOI and $2.3 million lower interest expense, primarily reflecting prior-year debt-prepayment penalties.
- First-half net income included a $70.3 million gain on the sale of a 264-home Orange County community for gross proceeds of $90.5 million. The comparable 2017 period included a $2.1 million gain on a land sale. The 2018 gain materially boosted reported earnings.
- First-half income from unconsolidated entities declined to a $3.7 million loss from $9.8 million of income in 2017, largely because the prior-year period included a $12.2 million gain on consolidation of a Seattle community.
- UDR sold no properties through acquisitions during the first half and completed development of a 516-home Huntington Beach community. A wholly owned 585-home project was in development, with 230 homes completed and expected completion in Q4 2018.
- First-half repurchases totaled approximately $20.0 million, or 593,373 shares. The company reported no shares sold through its continuous equity program during the period.
Outlook, risks, and contingencies
Management provided no specific financial or same-store growth guidance in the supplied filing text. It said operating cash flow and available borrowing sources were expected to support operating needs, distributions, and planned property improvements. UDR cited approximately $31.4 million of secured debt and $355 million of commercial paper maturing during the remainder of 2018. In July, the $355 million commercial-paper balance was repaid at maturity and $395 million of new paper was issued with August maturities. A $13.2 million Denver land purchase was expected to close in Q4, subject to customary conditions; a further approximately $66.4 million purchase of a JV community interest was anticipated in 2019.
Interest-rate sensitivity disclosures estimate that a 100-basis-point increase would raise UDR’s first-half interest expense by $2.8 million, based on average variable-rate debt balances. Management identified apartment-market conditions, rent and occupancy trends, concentrated markets, development and lease-up execution, joint-venture and preferred-equity exposures, refinancing and interest-rate risk, weather and uninsured losses, cybersecurity, and REIT qualification as material risks. Four markets—Washington, D.C., Orange County, San Francisco Bay Area, and New York—generated approximately 53.4% of first-half NOI.
The filing reports ordinary-course legal proceedings and claims; management did not expect them to have a material adverse effect. No material off-balance-sheet arrangements or other-than-temporary impairments of unconsolidated investments were reported. Management stated that disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- How much of earnings growth is recurring: separate the $70.3 million property-sale gain and other non-comparable items from operating performance.
- Whether same-store rent and NOI growth can continue while real estate taxes and other operating costs rise, particularly across UDR’s concentrated markets.
- The refinancing and liquidity plan for commercial paper and upcoming maturities, including the July repayment and August reissuance, and exposure to higher variable rates.
- Development and JV commitments, project completion and lease-up assumptions, and the timing and cost of the anticipated 2019 community purchase.
- Dividend coverage and the comparability of FFO/AFFO measures, which are non-GAAP measures and are not substitutes for GAAP earnings or cash flow.