UDR, Inc. (UDR), a leading multifamily real estate investment trust (REIT), has recently completed the acquisition of 21 Chelsea – a 210-unit luxury apartment community in New York City, for $138 million.
The purchase price included the assumption of a $31 million first mortgage loan secured by the property, which is scheduled to mature in June 2012 and can be pre-paid at par in December 2011. The transaction was funded with cash and availability in the credit facility of the company.
The acquisition is part of the portfolio restructuring program of the company that seeks to own properties in markets that are characterized by above-average job growth, low home affordability and limited new supply – three of the key parameters that drive strong rental growth.
The property is located in the premium Chelsea neighborhood of Manhattan in close proximity to High Line Park, Hudson River Park and Chelsea Piers. The apartment also provides easy access to major transportation facilities and the convenience of shopping through outlets of leading retailers within its proximity.
UDR further intends to invest about $6-$8 million over the next two years for redeveloping the apartment community to include new kitchens and baths with new cabinets, granite countertops, a redesigned lobby and improved rooftop space by adding new landscaping and outdoor furniture and grills. With the refurbished features, UDR expects to increase the average rents of the property by 20% from their current levels.
UDR is among the best-positioned apartment REITs in the U.S., with the majority of its portfolio located in California, Florida and on the Atlantic Coast. These are areas where housing costs have soared in the past few years, and despite the drop in home values, the rental-versus-ownership spread still remains high. The housing meltdown will continue to help apartment REITs like UDR and we expect this sector to remain comparatively stable in the coming quarters as well.
Furthermore, UDR has a geographic diversification that increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of the earnings.
UDR has also continuously upgraded the overall quality of its portfolio by selling assets in smaller market, older properties and replacing them with newer assets in better long-term markets. This provides an upside potential for the company.
We maintain our Neutral recommendation on UDR, which currently retains a Zacks #2 Rank that translates into a short-term Buy rating. We also have a ‘Neutral’ rating and a Zacks #3 Rank (short-term Hold) for Equity Residential (EQR), one of the competitors of UDR.
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