UDR, Inc. — 2011 Form 10-K Summary
Business context and reporting period
UDR is a self-administered apartment REIT. This combined filing covers UDR, Inc. and its operating partnership for the fiscal year ended December 31, 2011; it is an annual report, not a standalone fourth-quarter filing. At year-end, UDR reported 163 consolidated communities with 47,343 completed homes and interests in 39 unconsolidated communities. Its two reportable segments are Same Communities and Non-Mature/Other Communities.
Financial and operating performance
- Revenue: Continuing-operations revenue was $708.7 million, including $691.3 million of rental income, versus $586.6 million and $574.1 million, respectively, in 2010.
- Profit: UDR reported a $111.6 million loss from continuing operations, but net income attributable to common stockholders was $10.5 million, or $0.05 per diluted share, compared with a $112.4 million loss, or $0.68 per share, in 2010. The 2011 result included $132.2 million of discontinued-operations income, including $138.5 million of property-sale gains and $13.2 million of related tax expense.
- FFO: Diluted funds from operations, a non-GAAP measure, increased to $273.6 million from $192.8 million. The filing cautions that FFO is not a substitute for GAAP net income or operating cash flow.
- NOI and margins: Total apartment-property NOI was $475.2 million, up 17.4% from $404.7 million. Same-community NOI rose 5.6% to $344.4 million; same-community rental income increased 4.1%, while operating expenses rose 1.4%. Same-community physical occupancy was 95.5%, down 0.2 percentage point, and its operating margin increased to 66.8% from 65.9%.
- Cash flow: Operating cash flow was $244.2 million, compared with $214.2 million in 2010. Investing activities used $1.053 billion, chiefly for acquisitions and joint-venture investments; financing activities provided $812.0 million. Year-end cash and equivalents were $12.5 million.
- Debt and liquidity: Total debt was $3.918 billion, comprising $1.892 billion secured and $2.027 billion unsecured, versus $3.568 billion in 2010. The $900 million revolving facility had $421 million drawn and $479 million of unused capacity at year-end, excluding letters of credit. UDR reported covenant compliance. About $1.1 billion of debt was variable-rate; management estimated a 100-basis-point rate increase would add $9.2 million to annual interest expense.
- Capital and distributions: UDR raised approximately $879.8 million net through common-stock offerings and equity-distribution programs during 2011. It declared $0.80 per common share and paid $0.77. Recurring capital expenditures were $51.9 million; total capital expenditures including major renovations were $81.9 million.
Material changes versus 2010
- UDR acquired eight operating communities with 3,161 homes for approximately $1.54 billion and sold 18 communities with 4,488 homes for $593.4 million. The acquisitions and sales materially changed the portfolio and contributed to higher depreciation and reported NOI.
- Same-community operating performance improved: NOI growth recovered from a 2010 decline, although occupancy edged down.
- Reported common-stockholder results turned positive, primarily because of the much larger property-sale gains; continuing operations remained loss-making.
- Total debt increased approximately $350.9 million, while stockholders’ equity rose to $2.314 billion from $1.606 billion, supported in part by substantial common-equity issuance.
Outlook, risks, contingencies and unusual items
- Management said 2012 revenue growth could be affected by economic weakness, lower occupancy, increased concessions, bad debt and other factors. It expected recurring capital expenditures of approximately $1,150 per apartment home.
- UDR expected approximately $207.8 million of secured debt and $99.4 million of unsecured debt to mature in 2012, with repayment planned from operations, financing, property sales and secured-debt extension rights. In January 2012, it issued $400 million of 4.625% notes due 2022.
- At year-end, UDR’s wholly owned development pipeline comprised seven communities and 2,108 homes, with a total budget of $674.3 million and expected completion from Q1 2012 through Q4 2013. The filing lists $425.5 million of remaining costs for these projects.
- Principal risks include apartment-market and economic weakness, competition and rent pressure, acquisition and development execution, refinancing and interest-rate exposure, reliance on capital markets, REIT qualification, environmental and insurance liabilities, and joint-venture risks. The Operating Partnership also guarantees certain UDR debt; the filing describes an indemnity related to $51 million of remaining UDR/MetLife I loan exposure.
- Management stated that ordinary-course legal matters were not expected to have a material adverse effect. The independent auditor gave an unqualified opinion on UDR’s financial statements and internal controls; management concluded controls were effective.
- The filing’s portfolio descriptions are not fully consistent: it cites 22 markets in some sections and 24 in another, and gives differing totals for homes held through unconsolidated ventures. Verify the correct counts in the underlying exhibits and notes.
Important facts for investors to verify
- How much of 2011’s positive common-stockholder income and FFO increase reflects recurring operations versus the $138.5 million of property-sale gains and other nonrecurring items.
- Whether same-community rent growth can continue while occupancy has declined slightly, and how concessions, bad debt and operating costs evolve in 2012.
- The financing plan and terms for 2012 maturities, development commitments and the post-year-end $400 million note issuance, including the effect on leverage and interest expense.
- The returns, funding obligations and guarantees associated with joint ventures, development projects and the Operating Partnership’s guarantees of parent-company debt.
- The degree of dilution from equity issuance and whether future common distributions are supported by recurring cash generation.