UDR, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2010; financial comparisons are with the three and nine months ended September 30, 2009. UDR is a REIT focused on owning, acquiring, developing, renovating and managing apartment communities. At quarter-end, it owned 172 consolidated communities with 48,409 homes, plus 11 unconsolidated communities with 4,143 homes. UDR owned approximately 96.9% of its Operating Partnership.
Financial and operating metrics
Amounts below are UDR, Inc. consolidated figures in millions, except per-share and operating data.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $162.0 | $151.4 | $471.8 | $461.7 |
| Net loss attributable to UDR | $(23.8) | $(38.0) | $(74.4) | $(62.7) |
| Net loss attributable to common stockholders | $(26.1) | $(40.8) | $(81.5) | $(71.1) |
| Basic and diluted loss per share | $(0.16) | $(0.27) | $(0.51) | $(0.48) |
| Property NOI | $100.9 | $96.2 | $297.2 | $294.3 |
| FFO per diluted share | $0.27 | $0.18 | $0.81 | $0.87 |
- Rental income increased 6.3% in Q3 and 2.9% year to date. Property NOI rose 5.0% in Q3 and 1.0% year to date; operating expenses grew faster than rental income year to date.
- Same-community physical occupancy was 95.7%. Same-community NOI was nearly flat in Q3, up 0.1%, but down 2.7% for the first nine months. Year-to-date lower rental rates drove weaker revenue despite improved occupancy and lower concessions and vacancy loss. The same-community operating margin declined to 66.2% from 66.8% year to date.
- Operating cash flow was $157.5 million, versus $189.7 million in the prior-year period. Investing used $478.8 million, primarily reflecting acquisitions, development and other property investment; financing provided $325.5 million. Ending cash was $10.1 million.
- At September 30, total secured and unsecured debt was approximately $3.48 billion, compared with $3.43 billion at December 31, 2009. Secured debt had a 4.11% weighted average rate; approximately $953 million of UDR debt was variable-rate. Debt covenants were reported as satisfied.
- UDR had a $600 million unsecured revolver with $112.6 million drawn and $487.4 million of unused capacity, excluding $8.0 million of letters of credit. Management said operating cash flow and credit agreements should be adequate for operating needs and dividends.
Material changes versus prior period
- Q3 common-stockholder loss narrowed year over year, aided by higher NOI, lower losses from unconsolidated ventures and property-sale gains. The prior-year comparison included a $16.0 million noncash impairment charge on two joint-venture investments.
- Nine-month common-stockholder loss widened to $81.5 million from $71.1 million, despite slightly higher NOI. Higher depreciation and interest expense, lower other income and the absence of the prior-year debt-extinguishment gain were key factors; the 2009 period included a $9.8 million gain on debt repurchases.
- UDR acquired five apartment communities for $412.0 million and San Francisco land for $23.6 million. The acquisitions contributed to higher depreciation and acquisition costs. One 149-home community was sold, generating a reported $3.9 million gain in discontinued operations.
- UDR issued 18.4 million common shares in a September public offering for approximately $359.2 million net proceeds, and sold 6.1 million shares through its at-the-market program for approximately $108.6 million net proceeds over the nine months. Shares outstanding increased materially.
Outlook, commentary, risks and unusual items
- Management expected 2010 recurring capital expenditures of approximately $1,050 per home. The wholly owned development pipeline totaled 712 homes, with a $151.7 million budget, and was expected to complete through Q1 2012.
- Management described a strategy of concentrating investment in selected markets, including California, Washington, Metropolitan D.C. and Texas, and targeting markets with favorable employment, housing affordability and multifamily supply-demand conditions.
- On November 5, 2010, after quarter-end, UDR acquired Hanover’s partnership interests in a portfolio partnership with 26 operating communities (5,748 homes) and 11 development land parcels. Consideration included $63 million at closing and interest-free installments of $20 million and $10 million. UDR also agreed to indemnify Hanover for losses on $506 million of recourse loans; UDR anticipated refinancing those loans within 12 months.
- Interest-rate sensitivity: management estimated a 100-basis-point increase in rates would add approximately $3.0 million to annualized interest expense on $301.9 million of variable-rate debt not subject to swaps.
- Key risks include rent and occupancy pressure, operating-cost increases, acquisition and development execution, refinancing and capital-market access, interest-rate exposure, weather or uninsured losses, environmental liabilities, and maintaining REIT status. Derivative agreements may require collateral or settlement following specified defaults or adverse credit changes. Routine litigation was not expected to have a material adverse effect.
- UDR reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How same-community rent trends, concessions and operating expenses affect NOI and margins after Q3.
- Whether acquisition economics and integration support returns sufficient to offset added depreciation, debt and equity dilution.
- Liquidity and refinancing plans for scheduled maturities, including the Hanover portfolio’s $506 million of recourse loans and the related indemnity exposure.
- Cash available for dividends after property investment, debt service and the REIT distribution requirement; FFO is a supplemental, non-GAAP measure and is not cash flow.
- Whether variable-rate debt, derivatives, covenant compliance and future capital-market access remain consistent with management’s liquidity assessment.