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Staying Neutral on UDR

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On Oct 9, 2013, we reiterated our long-term recommendation on UDR Inc. (UDR - Free Report) – one of the leading apartment real estate investment trusts (REITs) – at Neutral. The decision depicts the company’s better-than-expected second-quarter results, strong and flexible balance sheet and successful execution of its strategic initiatives. However, increasing interest rates, capital market volatility and stiff competition from other housing alternatives remain matters of concern.

Why the Reiteration?

Aided by higher revenues, same-store physical occupancy level and strong portfolio restructuring activity, UDR’s second-quarter 2013 adjusted funds from operations (FFO) of 35 cents per share came in above the Zacks Consensus Estimate by a penny and the year-ago quarter figure by 2 cents. Also, the 2013 adjusted FFO per share guidance increase by the company raises investors’ confidence on the stock.

UDR is among the best-positioned apartment REITs in the U.S., with the majority of its portfolio located in the Western and Mid-Atlantic U.S. Additionally, the company’s strategy of expanding its reach through the introduction of a resident Internet portal and an apartment search application in iPhone and iPod devices bodes well for its overall growth.

Moreover, going forward, we believe that the rise in apartment demand generated by ‘echo boomers’ – children of the baby boomer generation – will offer UDR ample growth opportunities. Further, the company has been allocating its capital efficiently, reducing financial leverage over time and improving cash flow.

Yet, rising interest rates and the capital market volatility will likely limit UDR’s ability to refinance existing debt and undertake portfolio-restructuring initiatives, thereby denting the company’s growth prospects to some extent. Also, though the company’s decent development and redevelopment pipeline is encouraging, this increases operational risks in the current volatile market and exposes it to rising construction costs, entitlement delays and lease-up risks.

Over the last 60 days, the Zacks Consensus Estimate for 2013 FFO per share remained stable at $1.41. On the other hand, for 2014, it dipped 0.7% to $1.48. Thus, UDR now carries a Zacks Rank #3 (Hold).

UDR is scheduled to release its third-quarter 2013 results on Oct 29, 2013, before the opening bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 35 cents per share, which represents a year-over-year increase of 5.13%.

Other Stocks to Consider

Other REITs that are currently performing better include Select Income REIT Common Share (SIR - Free Report) , Education Realty Trust, Inc. (EDR - Free Report) and Simon Property Group Inc. (SPG - Free Report) . All these stocks carry a Zacks Rank #2 (Buy).

Note: FFO, 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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