On Jan 17, 2013, we reiterated our long-term recommendation on UDR Inc. (UDR) – a real estate investment trust (REIT) – at Neutral. The decision is based on the company’s decent operating performance and portfolio repositioning moves. Yet, stiff competition from other housing alternatives and a huge development pipeline remain matters of concern.
Why the Neutral Stance?
UDR’s third-quarter 2013 FFO (funds from operations) as adjusted came in at 36 cents per share, beating the Zacks Consensus Estimate by a cent and the year-ago quarter figure by 3 cents. The favorable results at UDR were attributable to higher revenues, same-store physical occupancy level and strong portfolio restructuring activity.
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. 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.
We believe that the extensive portfolio repositioning activity of UDR will offer notable growth prospects. Furthermore, the company’s focus on allocating its capital efficiently and improving cash flow is encouraging. Such efforts are expected to fortify its balance sheet and enhance shareholder returns going forward.
In recent times, UDR has expanded its ties with MetLife, Inc. (MET) through the sale of 49% stake in 399 Fremont land parcel and a simultaneous 51%/49% joint venture (JV) agreement with the latter. The JV plans to develop a luxury apartment residential project on this land parcel for $317 million.
Yet, a huge development and redevelopment pipeline increases its operational risks. Also, stiff competition from other housing alternatives cuts any robust growth in demand for its properties. Hence, we have a Neutral stance on the stock.
Over the last 30 days, the Zacks Consensus Estimate for 2013 and 2014 FFO (funds from operations) per share remained flat at $1.44 and $1.48, respectively. The company currently has a Zacks Rank #2 (Buy).
UDR is scheduled to release its fourth-quarter 2013 results on Feb 4, 2014, before the opening bell. The Zacks Consensus Estimate for FFO per share for the upcoming quarter is pegged at 36 cents per share, which represents a year-over-year increase of 2.38%.
Other Stocks to Consider
Other players in the REIT- Equity Trust – Other industry, which look attractive at current levels, include BRE Properties Inc. (BRE) and Education Realty Trust, Inc. (EDR). Both these stocks have 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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