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UDR Inc. (UDR - Analyst Report), a real estate investment trust (REIT), reported fourth quarter 2012 FFO (funds from operations), excluding non-recurring items, of 35 cents per share, 2 cents ahead of the Zacks Consensus Estimate of 33 cents and a cent above the prior-year quarter figure. The quarterly results benefited from increased rental income and higher occupancy level.

For full year 2012, the company’s FFO, excluding non-recurring items, came in at $1.35 per share, a cent ahead of the Zacks Consensus Estimate of $1.34 and 7 cents above the year-ago figure of $1.28.

UDR’s reported FFO stood at $80.7 million or 31 cents per share, compared with 79.3 million or 35 cents in the year-earlier quarter. For full year 2012, reported FFO was $329.1 million or $1.32 per share, ahead of $269.9 million or $1.28 recorded a year ago.

Total revenue during the quarter stood at $182.4 million, up 6.9% from $170.7 million in the prior-year quarter. However, it fell short of the Zacks Consensus Estimate of $185 million. For full year 2012, the company generated total revenue of $713.9 million, representing an increase of 14.6% from a year ago. Yet, it missed the Zacks Consensus Estimate of $743 million.

Quarter in Detail

Same-store revenue increased 5.7% year over year in the reported quarter, while same-store net operating income escalated 7.3% over the same time frame. Same-store physical occupancy moved up 60 basis points to 95.8% as compared to the prior-year period.

Notable Portfolio Activities

UDR started construction of its Pier 4 development in the South Boston Seaport area of downtown Boston, Mass. The company estimates total construction cost of $218 million for this project that will comprise 369 homes and 11,000 square feet of retail space. It is slated to be completed in the second quarter of 2015. Notably, before the construction, the company acquired the remaining 2% ownership interest in Pier 4 from its former joint venture partner.  

On Oct 29, 2012, UDR exchanged its ownership stake in 4 operating communities and 2 land parcels in the UDR-MetLife I joint venture, (along with $10 million in cash), with an increase in its stake in the A-quality operating community - The Olivian. The company now owns 50% of The Olivian that is part of the UDR/MetLife II joint venture. UDR continues to fee manage the 4 operating communities it exchanged.

The 4 operating communities and 2 land parcels for which UDR entered into arrangements to exchange have a combined debt of $134.7 million with a weighted average interest rate of 3.5% and a 7 year term. The Olivian's debt stood at $63.4 million with an interest of 4.5% and a term of 7 years.

Liquidity

As of Dec 31, 2012, UDR’s liquidity amounted to $913 million through a combination of cash and undrawn capacity on its credit facilities. As of that date, the company had total debt of $3.4 billion.

Its net debt-to-EBITDA, adjusted for non-recurring items, was 7.0x at year-end 2012 versus 8.6x a year ago. UDR ended the quarter with 87% fixed-rated debt at a total blended interest rate of 4.4% and a weighted average debt maturity of 4.5 years.

2013 Outlook

For full year 2013, UDR currently expects FFO, excluding non-recurring items, to range between $1.33 – $1.39 per share, based on revenue growth of 4% to 5%, net operating income of 4.25% to 6.00% and physical occupancy of 95.5%.

For first quarter 2013, UDR projects FFO, excluding non-recurring items, to range between 31 cents – 33 cents per share.

Change of Management

During the quarter, UDR appointed Tom Herzog as the new Chief Financial Officer (CFO) and Senior Vice President of the company. He took over the reins effective Jan 1, 2013. Herzog previously held top executive posts at many industry giants.

Prior to joining UDR, he served a real estate investment private company called Amstar as CFO. He also served as CFO for 4 years at Apartment Investment & Management Co. (AIV - Analyst Report), popularly known as Aimco. Herzog’s REIT experience also includes two years as CFO at HCP Inc. (HCP - Analyst Report) – a hybrid REIT firm.

Dividend Update

UDR paid a fourth quarter 2012 cash dividend of 22 cents per share on its common stock. The dividend was paid on Jan 31, 2013 to shareholders of record as of Jan 10. Notably, this represented the company’s dividend payment on its common stock for 161 straight quarters.
 
Our Take

We remain encouraged with UDR’s improved results in the fourth quarter. The company has a strong portfolio of apartment properties in prime business locations in the U.S., and operates across multiple markets that mitigate geographical risks.

Furthermore, UDR is repositioning its portfolio to focus on markets that have better job and rent growth prospects. Recent development and joint venture activities are expected to further position the company well for future growth. It has automated most of its businesses and has introduced electronic renewal initiatives, enabling its customers to renew their leases online.

Yet, the company has a significant development pipeline, which increases operational risks in the current credit-constrained market and undermines its growth potential to some extent.

UDR currently retains a Zacks Rank #3 (Hold). Another stock in the same REIT industry – BRE Properties Inc. also has the same Zacks rank.

Note: Fund from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.
 

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