UDR, Inc. — Q2 2015 Form 10-Q
Business and period. UDR is a multifamily REIT that owns, develops, renovates, and manages apartment communities. This filing covers the quarter and six months ended June 30, 2015, compared with the same 2014 periods. At quarter-end, UDR’s consolidated portfolio comprised 136 communities and 39,404 homes; it also held interests in 28 unconsolidated communities with 6,696 homes.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $215.9 million | $203.7 million | $435.6 million | $401.7 million |
| Net income attributable to UDR | $86.9 million | $30.0 million | $160.7 million | $48.4 million |
| Net income attributable to common stockholders | $85.9 million | $29.1 million | $158.8 million | $46.5 million |
| Diluted EPS | $0.33 | $0.12 | $0.61 | $0.18 |
| FFO per diluted share and unit | $0.41 | $0.39 | $0.84 | $0.75 |
| FFO as Adjusted per diluted share and unit | $0.42 | $0.39 | $0.82 | $0.74 |
| AFFO per diluted share and unit | $0.38 | $0.34 | $0.76 | $0.68 |
Figures are rounded. FFO, FFO as Adjusted, and AFFO are non-GAAP measures; the filing cautions they are not substitutes for GAAP earnings or cash flow.
- Property operations: Total property NOI was $150.4 million in Q2, up 7.2%, and $294.0 million for six months, up 7.9%. Same-store NOI rose 6.8% and 6.6%, respectively. Same-store Q2 occupancy was 96.9%, monthly income per occupied home was $1,703, and operating margin increased to 71.5% from 70.5%.
- Cash flow: Six-month operating cash flow was $217.0 million versus $186.2 million. Investing cash use was $163.8 million versus $279.6 million; financing cash use was $65.5 million, versus $89.9 million provided in 2014. Cash and equivalents ended at $3.0 million.
- Balance sheet and debt: Total assets were $6.94 billion and total liabilities $3.79 billion at June 30. Debt totaled $3.56 billion, comprising $1.35 billion secured and $2.21 billion unsecured; weighted-average interest rate was 3.58% and weighted-average maturity 4.1 years. Restricted cash was $22.9 million. UDR had $457 million drawn on its $900 million revolving facility and $443 million unused capacity, excluding letters of credit. The company reported compliance with debt covenants.
- Distributions: Common distributions declared were $0.2775 per share for Q2 and $0.5550 for the first half, compared with $0.2600 and $0.5200 in 2014.
Material changes and notable items
- GAAP earnings increased substantially, but were materially boosted by $79.0 million of after-tax gains from selling three communities in the first half. The Texas joint venture sale also contributed $59.1 million of income, including $24.2 million of previously deferred gains; UDR reported $58.6 million of income from unconsolidated entities for the six months.
- Same-store rental income increased 5.4% in Q2 and 5.2% for the first half; management attributed growth primarily to higher rents, with occupancy also improving year over year. Operating expense growth was lower than rental income growth.
- Interest expense fell 6.4% in Q2 and 9.4% for the first half, principally after repayment of $325.2 million of 5.25% notes in January and refinancing/replacement at lower rates.
- UDR issued 3.44 million common shares through its equity distribution program in the first half, for approximately $108.7 million net proceeds, primarily to fund development and redevelopment.
- Investment in unconsolidated joint ventures rose to $914.8 million from $718.2 million, including a $133.6 million investment in a West Coast development venture.
Outlook, risks, and contingencies
- Management said operating cash flow and credit-facility borrowings were expected to meet operating needs and distributions; longer-term needs, including maturities, development financing, and acquisitions, may be funded with debt, equity, property sales, or operating cash flow. No specific earnings or FFO guidance was provided in the supplied filing text.
- UDR projected 2015 recurring capital expenditures of approximately $1,150 per home. One wholly owned 516-home development had a $342 million budget, was expected to complete in Q1 2018, and had $92.6 million carrying value at period-end.
- A June agreement contemplated acquiring up to six Home Properties communities valued at $908 million, subject to conditions and anticipated to close in Q4 2015. If all eligible Home unitholders elected DownREIT units, illustrative consideration included about $753 million of units, assumption of $90 million debt, and $65 million cash; final consideration depends on elections and transaction conditions.
- UDR identified apartment-market and economic weakness, competition, development and lease-up execution, refinancing and interest-rate exposure, access to capital, joint-venture risks, uninsured property losses, environmental matters, and maintaining REIT qualification as material risks. A 100-basis-point rise in rates was estimated to increase UDR’s six-month interest expense by $4.4 million based on the period’s average balance of variable-rate debt not subject to swaps.
- Ordinary-course litigation was disclosed; management did not expect it to have a material adverse effect. The company reported no material off-balance-sheet arrangements and no significant subsequent events.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring property operations versus property-sale and joint-venture gains; review FFO/AFFO reconciliations and adjustments.
- Final terms, funding mix, property selection, and closing conditions for the proposed Home Properties transaction.
- Execution, remaining costs, lease-up, and returns from development, redevelopment, and joint-venture commitments.
- Debt maturities and refinancing plans, revolver availability, interest-rate exposure, and the effect of additional equity issuance.
- Whether rent growth and high occupancy can persist while property taxes, labor, utilities, and other operating costs rise.