UDR, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. UDR is a multifamily REIT; its consolidated portfolio comprised 132 communities and 40,728 apartment homes, plus interests in 28 unconsolidated communities with 6,947 homes.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 / prior balance |
|---|---|---|
| Total revenue | $234.8 million | $219.8 million |
| Net income attributable to UDR common stockholders; diluted EPS | $9.5 million; $0.04 | $72.9 million; $0.28 |
| Funds from operations (FFO), diluted per share and unit | $125.9 million; $0.43 | $116.0 million; $0.43 |
| FFO as adjusted, diluted per share and unit | $125.7 million; $0.43 | $108.4 million; $0.40 |
| Adjusted FFO (AFFO), per share and unit | $118.7 million; $0.41 | $101.1 million; $0.37 |
| Net cash from operating activities | $112.5 million | $96.0 million |
| Net cash used in investing / financing activities | $(45.0) million / $(70.6) million | $(49.5) million / $(55.4) million |
| Cash and cash equivalents at period-end | $3.7 million | $6.7 million at Dec. 31, 2015 |
| Total debt, net | $3.412 billion | $3.571 billion at Dec. 31, 2015 |
- Same-store rental income rose 6.4% to $186.7 million; same-store NOI increased 8.0% to $133.0 million. Same-store physical occupancy was 96.5%, down 0.2 percentage points, while monthly income per occupied home increased 6.7% to $1,897. Same-store NOI margin increased to 71.2% from 70.2%.
- Total property NOI increased 14.3% to $164.1 million. Rental income growth and contributions from acquired, developed, and redeveloped communities supported the increase.
- Debt had a 3.95% weighted-average interest rate and 4.9-year weighted-average maturity. Secured debt was $1.375 billion and unsecured debt was $2.037 billion. About 25.2% of gross-book-value real estate was encumbered.
- UDR had $70.0 million drawn on its $1.1 billion unsecured revolver, leaving about $1.0 billion of unused capacity, excluding letters of credit; it also had $23.7 million unused on its $30 million working-capital facility. The company reported compliance with debt covenants.
Material changes versus Q1 2015
- Common-stockholder net income fell to $9.5 million from $72.9 million, largely because Q1 2015 included a $59.1 million gain from a Texas joint-venture property sale and $9.6 million of related promote and fee income. Q1 2016 included a $3.1 million after-tax gain on two Santa Monica land parcels.
- Operating income declined to $38.1 million from $45.3 million despite stronger property NOI. Joint-venture management and other fees fell to $2.9 million from $12.7 million, and real estate depreciation and amortization increased 18.7% to $105.3 million. Interest expense rose 8.0% to $31.1 million.
- FFO per share and unit was flat at $0.43; adjusted FFO and AFFO per share and unit increased from $0.40 to $0.43 and $0.37 to $0.41, respectively.
- Operating cash flow improved by $16.5 million. A March 2016 offering of 5.0 million common shares generated approximately $173.3 million net proceeds; UDR used proceeds for working capital and general corporate purposes.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flow and credit-facility borrowings should be adequate for near-term operating needs and dividends. Approximately $146.9 million of secured debt and $11.7 million of unsecured debt were due during the remainder of 2016; management expected to fund repayment through operations, financing, property sales, or credit facilities.
- UDR was developing two wholly owned communities totaling 1,101 homes, with a $708.5 million budget and $196.4 million carrying value; completion was expected in Q1 2018 and Q1 2019. Four wholly owned redevelopments were expected to finish in Q1 2017. Recurring capital expenditures for 2016 were projected at approximately $1,150 per home.
- A 100-basis-point increase in market rates was estimated to raise UDR’s quarterly interest expense by $1.7 million, based on period-average balances. Management identified apartment-market conditions, rent and occupancy trends, competition, development execution, refinancing and interest-rate exposure, insurance losses, and REIT qualification as principal risks.
- Routine litigation was disclosed; management did not expect it to materially adversely affect financial condition, results, or cash flow. No material off-balance-sheet arrangements or significant subsequent events were reported. Management found disclosure controls effective at the reasonable-assurance level.
- ASU 2015-02 was adopted January 1, 2016; the Operating Partnership and DownREIT Partnership were classified as variable-interest entities, with UDR continuing to consolidate them. The company was evaluating lease accounting changes effective in 2019 and revenue-recognition changes effective in 2018.
Important facts for investors to verify
- Whether same-store rent growth and high occupancy persist, and how supply, concessions, and operating-cost inflation affect NOI.
- Whether the 2015 Texas joint-venture gain explains most of the GAAP earnings decline, while recurring FFO and AFFO trends provide a more comparable operating picture.
- Development and redevelopment budgets, completion dates, lease-up performance, and expected returns, particularly given the substantial remaining development spend.
- Debt maturities, revolver availability, covenant headroom, and exposure to variable rates and refinancing conditions.
- The sustainability of distributions: Q1 common distributions declared were $0.295 per share, versus $0.2775 a year earlier; non-GAAP FFO and AFFO are supplemental measures, not substitutes for GAAP cash flow or liquidity.