UDR, Inc. quarterly report, Q2 FY2017

UDR, Inc. — Q2 2017 Form 10-Q

Business context and reporting period. UDR is a REIT that owns, operates, acquires, develops and manages apartment communities. This unaudited filing covers the quarter and six months ended June 30, 2017, with comparisons to 2016. At quarter-end, UDR’s consolidated portfolio comprised 128 communities and 39,822 apartment homes; including unconsolidated communities, it had interests in a further 29 communities and 7,286 homes.

Financial results and key metrics

Amounts below are in millions of dollars except per-share data, percentages and home counts.

• Same-store performance: Q2 same-store NOI rose 4.2% and rental income rose 3.9%; for the first half, same-store NOI rose 4.5% and rental income rose 4.2%. Physical occupancy was 96.8% in both periods. Same-store operating margin increased to 71.8% in Q2 from 71.6%, and to 71.7% for the first half from 71.5%.
• Cash flow: First-half operating cash flow was $240.0 million, up from $226.5 million. Investing cash outflow was $282.7 million, versus $122.5 million, reflecting more development, acquisitions and JV investment and lower sale proceeds. Financing cash flow was positive $42.0 million, compared with a $105.6 million outflow in 2016. Cash and cash equivalents were $1.4 million at June 30; restricted cash was $19.6 million.
• Debt and liquidity: Debt, net, was $3.635 billion at June 30, 2017, versus $3.401 billion at year-end 2016; its weighted-average rate was 3.67% and weighted-average years to maturity were 5.1. Secured debt was $806.6 million and unsecured debt $2.828 billion. UDR reported no revolver borrowings against its $1.1 billion facility, $240 million of commercial paper outstanding under a $500 million program, and $40.1 million drawn on its $75 million working-capital facility. It also had a $350 million term loan outstanding. UDR said it was in compliance with debt covenants.
• Distributions: Common distributions declared were $0.31 per share in Q2 and $0.62 per share for the first half, compared with $0.295 and $0.59, respectively, in 2016.

Material changes versus the prior comparable period

• Q2 common-stockholder income declined to $9.2 million from $17.0 million, principally because Q2 2016 included a $7.3 million after-tax gain on a Bellevue retail-center sale. Q2 2017 also had higher interest expense, including debt-prepayment costs, and lower income from unconsolidated entities. Higher property NOI partly offset these factors.
• First-half common-stockholder income increased to $34.3 million from $26.5 million. Higher property NOI and a $12.2 million gain on consolidating a Seattle community contributed; lower property-sale gains than in 2016 and higher interest expense partly offset the increase.
• During the first half, UDR issued $300 million of 3.50% senior notes due 2027 and $240 million of commercial paper, and repaid $324.1 million of secured debt. It incurred $5.8 million of secured-debt prepayment costs.
• UDR acquired its JV partner’s remaining interest in a 244-home Seattle community for approximately $66 million, increasing ownership from 49% to 100%. The transaction added approximately $97 million of real estate and generated the $12.2 million consolidation gain. UDR also sold Richmond land for $3.3 million net proceeds and a $2.1 million gain.

Outlook, management commentary, risks and contingencies

• No quantified full-year earnings or operating guidance is provided in the filing. Management expects operating cash flow, credit facilities and the commercial-paper program to support operating needs, distributions and planned property improvements; long-term needs may also be met through debt or equity issuance and property dispositions. Management cautions that interim results are not necessarily indicative of full-year results.
• At June 30, the wholly owned development pipeline included two communities totaling 1,101 homes, with a $708.5 million budget and $465.7 million carrying value; completion was estimated for Q1 2018 and Q1 2019. UDR reported approximately $344.6 million of expected remaining costs across listed development, redevelopment and investment commitments.
• Key risks identified include apartment-market weakness, rent and occupancy pressure, rising property costs, development delays or cost overruns, joint-venture and preferred-equity investment risks, refinancing and interest-rate exposure, access to capital, uninsured casualty losses, environmental liabilities and maintaining REIT status. A 100-basis-point increase in rates was estimated to increase UDR’s first-half interest expense by $2.9 million based on average variable-rate borrowings.
• Routine legal claims are not expected by management to have a material adverse effect; ultimate liability cannot be determined. UDR reported no material off-balance-sheet arrangements and no significant subsequent events. Disclosure controls were assessed as effective at the reasonable-assurance level, with no material change in internal control over financial reporting reported.

Important facts for investors to verify

1. Reconcile the improvement in first-half earnings and FFO with the $12.2 million consolidation gain, debt-prepayment costs and other adjustments; assess the recurring nature of operating performance.
2. Review the $240 million commercial-paper balance and 2017 maturity, upcoming debt maturities, refinancing sources and remaining revolver and working-capital capacity.
3. Track same-store rent growth, occupancy and expense growth—particularly real-estate taxes—and compare results across UDR’s markets.
4. Assess development budgets, completion schedules, lease-up progress and remaining capital commitments, including JV projects and preferred-equity or mezzanine exposures.
5. Confirm distribution coverage using GAAP operating cash flow and recurring capital needs; FFO, FFO as Adjusted and AFFO are non-GAAP measures and are not substitutes for cash flow or liquidity.