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Is It Wise to Retain UDR Stock in Your Portfolio for Now?

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UDR, Inc. (UDR - Free Report) is well-poised to benefit from a diversified portfolio, with a superior product mix of A/B quality properties in urban and suburban communities in both coastal and Sunbelt locations.

The company’s efforts to diversify its portfolio with respect to geographies and price points limit its exposure to volatility and concentration risks alongside assuring stable cash flows. Moreover, in recent quarters, UDR has been experiencing strong pricing power, as evidenced by blended lease rate growth.

UDR is also leveraging technological investments and process enhancements to drive innovation and margin expansion. Its Next Generation Operating Platform allows the company to electronically interact with and provide service to residents and prospects throughout its diversified portfolio. These efforts are likely to give UDR a competitive edge over its peers.

The company maintains a healthy balance sheet position with ample liquidity. It exited 2022 with $1 billion of liquidity. UDR’s debt maturity schedule is well-laddered, with weighted average years to maturity of 6.7 years and a weighted average interest rate of 3.17%. Also, 88.2% of its net operating income is unencumbered. With enough financial flexibility, UDR is well-poised to capitalize on long-term growth opportunities.

Solid dividend payouts are the biggest enticement for REIT investors, and UDR remains committed to that. It has increased its dividend five times in the last five years, and the five-year annualized dividend growth rate is 3.77%. Given its solid financial position and strong cash flows from operations, the company’s dividend payout seems sustainable.

Shares of this Zacks Rank #3 (Hold) company have rallied 7.3% in the past six months compared with its industry’s increase of 1.5%.

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However, the struggle to lure renters is likely to persist as supply volumes are expected to remain elevated in several of its markets. With the ongoing construction standing at a high level, a sizeable number of apartment deliveries are expected in the upcoming period.

Moreover, UDR faces stiff competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase rent, thereby restricting its growth momentum to some extent.

Furthermore, a hike in the interest rate is a concern for UDR. Rising rates imply higher borrowing costs for the company, affecting its ability to purchase or develop real estate. The company has a substantial debt burden and its total debt as of Dec 31, 2022, was approximately $5.5 billion.

Our estimate for 2023 interest expenses indicates a year-over-year rise of 11%. Moreover, the dividend payout might become less attractive than the yields on fixed income and money market accounts.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are VICI Properties Inc. (VICI - Free Report) , Americold Realty Trust, Inc. (COLD - Free Report) and Terreno Realty Corporation (TRNO - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for VICI Properties’ 2022 funds from operations (FFO) per share has moved marginally north to $2.12 over the past month.

The Zacks Consensus Estimate for Americold Realty’s 2023 FFO per share is currently pegged at $1.19, which suggests 7.2% year-over-year growth.

The Zacks Consensus Estimate for Terreno Realty Corporation’s ongoing year’s FFO per share has been raised a cent over the past two months to $2.17.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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