Ushering in good news for UDR Inc. (UDR), Moody’s Investor Services, the rating arm of Moody’s Corp. (MCO), has upgraded the company’s senior unsecured rating to Baa1 from Baa2 with a stable outlook.
The rating upgrade comes on the back of UDR’s higher quality portfolio and cash flow improvement coupled with superior fixed charge coverage. Further, the rating agency expects UDR to experience solid operating performance, apart from enjoying adequate liquidity and lowered leverage. All these are reflected in the company’s stable outlook.
In our opinion, the rating upgrade comes as a positive for this residential real estate investment trust (REIT), as the move enhances the company’s creditworthiness in the market and is likely to boost investors’ confidence in the stock.
In fact, the rating upgrade enables the company enjoy a better pricing on its $900 million unsecured credit facility. Specifically, it lowers the spread by 10 basis points (bps) to 100 bps over LIBOR as well as the facility fee by 5 bps to 15 bps. Moreover, the spread on its $350 million of unsecured term loans also gets reduced by 10 bps to 115 bps.
Notably, UDR came up with encouraging results in the second quarter, backed by higher revenues. On Jul 29, the company reported second-quarter 2014 funds from operations (FFO) as adjusted of 39 cents per share, which exceeded the Zacks Consensus Estimate by a whisker and the year-ago quarter figure by 4 cents. The company also increased the lower end of its 2014 FFO per share range to $1.49 – $1.53 from the previous projection of $1.47–$1.53.
We believe that the ongoing portfolio restructuring activities as well as the improving U.S. apartment sector fundamentals positions this Zacks Rank #2 (Buy) stock well on the growth trajectory. In addition, UDR’s continued focus on its strategic priorities, such as disciplined capital allocation, strong balance-sheet position as well as cash-flow enhancement and operational efficiency, bodes well.
Investors interested in the residential REIT sector may consider other stocks like Avalonbay Communities Inc. (AVB) and Equity Residential (EQR). Both stocks carry the same rank as UDR.
Note: Funds 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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