UDR Inc. (UDR Quick QuoteUDR - Free Report) , a premier multifamily real estate investment trust (REIT), is set to announce its second-quarter 2023 earnings results on Jul 26 after market close. The company, known for owning, operating, acquiring and developing high-quality apartment communities across the United States, has been a solid choice for investors seeking exposure to the multifamily real estate sector.

In the last reported quarter, this Denver, CO-based residential REIT came up with funds from operations (FFO) as adjusted per share of 60 cents, a cent lower than the consensus mark. The quarterly results reflected lower-than-anticipated revenues.

In the last four quarters, UDR’s FFO as adjusted per share surpassed the Zacks Consensus Estimate on one occasion, met the same on the other two and missed in another period, the average surprise being 0.01%. The graph below depicts the surprise history of the company:

United Dominion Realty Trust, Inc. Price and EPS Surprise

United Dominion Realty Trust, Inc. price-eps-surprise | United Dominion Realty Trust, Inc. Quote

Let’s see how things have shaped up before this announcement.

US Residential Real Estate Market in Q2

Despite cooling rent growth, apartment demand is showing signs of a solid rebound, with net absorption in the second quarter of 2023 nearing surging new supply levels. This stabilizes occupancy rates after a steep decline in 2022.

Per RealPage data, in the second quarter, net demand registered at 83,449 units, and this marked a five-quarter high. While this is still below the record numbers seen during the 2021 boom, it indicates a normalization of apartment demand. What is interesting is that this demand rebound coincides with a 50-year high in apartment construction starting to convert into peak completions, with more than 107,000 units completed in the second quarter of this year itself.

However, despite the supply surge, this solid demand is aiding in the mitigation of vacancy spikes in most markets, with U.S. apartment occupancy coming at 94.7% as of June, marking only a 0.1 percentage point decline since January. It marks a notable improvement compared to the occupancy fall of 1.2 percentage points in the first half of 2022 and then an additional 1.4 percentage points in the second half of the year.

However, rent growth remains below normal in 2023, with year-over-year effective asking rent growth at just 1.5%. This is due to apartment operators prioritizing occupancy rates over rents, leading to more options for renters and putting downward pressure on rent growth. Same-store effective asking rents increased only 0.46% between May and June 2023.

Q2 2023 Expectations for UDR

UDR is likely to have capitalized on positive trends to deliver a healthy performance in the second quarter of 2023. The rebound in apartment demand is likely to have resulted in healthy occupancy rates for the multifamily REIT.

In its May Investor Presentation, UDR noted that market rent growth has continued to
accelerate sequentially every month through May, supporting mid-3% blended lease rate growth since the beginning of the second quarter through May 11, 2023.

We estimate same-store physical occupancy at 96.7%. Moreover, our estimate for same-store net operating income growth is currently pegged at 9%.

The Zacks Consensus Estimate for quarterly revenues is currently pegged at $407.64 million. This indicates a 10.85% year-over-year rise.

Additionally, UDR enjoys a decent balance sheet position and banks on technological moves and process enhancements to fuel growth. This residential REIT focuses on enhancing cost control through its Next Generation Operating Platform. UDR projected second-quarter 2023 FFO as adjusted per share in the range of 60-62 cents.

Before the second-quarter earnings release, the company’s activities were not adequate to gain analysts’ confidence. The Zacks Consensus Estimate for the quarterly FFO as adjusted per share has remained unchanged at 62 cents in the past month. However, this suggests year-over-year growth of 8.8%.

Despite the optimistic outlook, UDR faces certain risks and challenges that could impact its second-quarter 2023 performance. These include potential headwinds from interest rate hikes, which could increase borrowing costs and affect the company's ability to refinance existing debt.

We expect interest expenses to grow 16.6% year over year in the second quarter. Further, the multifamily real estate sector could face oversupply concerns, leading to increased competition and lower rent growth.

Here Is What Our Quantitative Model Predicts:

Our proven model does not conclusively predict a surprise in terms of FFO per share for UDR this season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an FFO beat, which is not the case here.

UDR currently carries a Zacks Rank of 3 and has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks That Warrant a Look

Here are two stocks from the residential REIT sector — Equity Residential (EQR Quick QuoteEQR - Free Report) and Invitation Homes Inc. (INVH Quick QuoteINVH - Free Report) — you may want to consider as our model shows that these have the right combination of elements to report a surprise this quarter.

Equity Residential is slated to report quarterly numbers on Jul 27. EQR has an Earnings ESP of +0.85% and carries a Zacks Rank of 2 presently. You can see the complete list of today’s Zacks #1 Rank stocks here.

Invitation Homes, scheduled to report quarterly numbers on Jul 26, has an Earnings ESP of +0.90% and carries a Zacks Rank of 2.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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.