Business context and reporting period
UDR, Inc. (UDR) is a multifamily apartment REIT. This Form 10-Q covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. At quarter-end, UDR owned and consolidated 142 communities with 40,811 apartment homes, and held interests in 35 additional communities through unconsolidated ventures.
Financial and operating performance
- Revenue: Second-quarter revenue was $203.7 million, up 7.5% from $189.5 million; six-month revenue was $401.7 million, up 7.3% from $374.4 million.
- Profit and EPS: Second-quarter net income attributable to UDR was $30.0 million, or $0.12 per diluted share, versus $5.2 million, or $0.02, in 2013. For six months, attributable net income was $48.4 million, or $0.18 per diluted share, versus $4.9 million, or $0.01. Results included real estate sale gains of $26.7 million for the quarter and $51.0 million for six months. Excluding these gains, continuing-operations income attributable to common stockholders was $29.1 million for the quarter and $46.6 million for six months.
- Property operations: Total property NOI increased 9.1% to $140.4 million in the quarter and 7.3% to $272.5 million for six months. Same-store NOI rose 5.5% in both periods; same-store rental income increased 4.4% for the quarter and 4.5% for six months. Second-quarter same-store occupancy was 96.8%, monthly income per occupied home was $1,586, and operating margin was 70.4%, compared with 96.3%, $1,529, and 69.7%, respectively, in the prior-year quarter.
- Cash flow: Six-month operating cash flow was $186.2 million, up from $172.4 million. Investing cash outflow was $279.6 million versus $35.9 million, principally reflecting greater investment in acquisitions, development and joint ventures. Financing provided $89.9 million, compared with $139.6 million used in 2013. Cash and cash equivalents were $26.8 million at June 30.
- Debt and liquidity: Total debt was $3.75 billion, comprising $1.40 billion secured and $2.35 billion unsecured; weighted-average interest rate was 3.90% and weighted-average maturity 4.7 years. UDR had $276.5 million drawn on its $900 million revolving facility, leaving $623.5 million of unused capacity before letters of credit. Management said operating cash flow and credit facilities should meet operating needs and distributions. UDR reported compliance with debt covenants.
- Distributions: Common distributions declared were $0.26 per share for the quarter and $0.52 for six months, versus $0.235 and $0.47 in 2013.
Material changes, outlook and notable items
- UDR early adopted ASU 2014-08 effective January 1, 2014. Most property sale gains are now presented separately rather than in discontinued operations; the change affected presentation, not net income, and limits line-item comparability with prior periods.
- Management attributed same-store improvement to rent growth, higher occupancy and lower vacancy loss/bad debt, partly offset by higher property expenses, including taxes and insurance. G&A increased 27.0% in the quarter, primarily from stock compensation and salary and benefit increases; interest expense also rose, partly because less interest was capitalized as projects were completed.
- UDR acquired fully entitled Huntington Beach land for $77.8 million. Its wholly owned development pipeline comprised three communities and 874 homes, with a $400.4 million budget and $275.8 million carrying value; completion was estimated for the second quarter of 2015. One redevelopment project was expected to finish in the fourth quarter of 2014. Six-month capital expenditures were $45.4 million, down 49.0% from 2013; recurring 2014 capital expenditures were projected at approximately $1,100 per home.
- During the quarter UDR issued $300 million of 3.75% unsecured notes due July 2024, using net proceeds to reduce revolver borrowings and for general corporate purposes. In July, a $26.3 million carrying-value note receivable was repaid for $36.0 million, producing an approximately $8.4 million gain. UDR also reported subsequent property sales, including an Orlando community sold for $50.1 million gross proceeds and an approximately $14.4 million gain.
- Risks include apartment demand, rent and occupancy changes, development cost and completion uncertainty, refinancing and variable-rate exposure, reliance on capital markets and Fannie Mae facilities, joint-venture and counterparty risks, natural disasters, insurance gaps, environmental matters, and continued REIT qualification. A 100-basis-point increase in variable rates was estimated to raise UDR’s six-month interest expense by $4.0 million, based on average balances. Routine litigation was not expected to have a material adverse effect, although ultimate liability could not be determined. Management reported no material off-balance-sheet arrangements and effective disclosure controls.
- No specific earnings or same-store growth guidance is provided in the filing; management’s discussion includes operating expectations and estimates, which are subject to the stated risks.
Important facts for investors to verify
- How much of reported earnings and per-share growth reflects property sale gains versus recurring operations; review FFO and AFFO alongside GAAP results.
- Whether same-store rent growth and occupancy persist, and whether rising insurance, taxes and other costs pressure margins.
- Development and redevelopment budgets, completion dates, lease-up progress and remaining capital commitments.
- Debt maturities, revolver availability, variable-rate exposure, refinancing conditions and covenant headroom.
- Realization and use of proceeds from post-quarter asset and note receivable transactions, including any 1031 exchange restrictions.