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Will Favorable Demographics Aid UDR Earnings This Season?

Zacks Equity Research

UDR Inc. UDR is slated to report first-quarter 2019 results on Apr 30, after market close. The company’s performance is expected to reflect year-over-year growth in revenues and funds from operations (FFO) per share.

In the last reported quarter, this Denver, CO-based residential real estate investment trust (REIT) delivered a positive surprise of 2.04% in terms of FFO per share. The results reflected growth in revenues from operating and lease-up communities.

In the trailing four quarters, the company surpassed the Zacks Consensus Estimate on two occasions and matched the same on the other two, delivering an average surprise of 1.03%.

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For first-quarter 2019, UDR projects FFO as adjusted per share in the 48-50 cents range.

Let’s see how things are shaping up, prior to this announcement.

Factors to Consider

UDR’s high-quality properties located in some affluent regions of the United States have ensured steady rental income generation over the past few years. The company’s superior product-mix of A/B quality properties and strategic submarket locations will likely boost growth in combined new and renewal lease in the to-be-reported quarter. Further, this strategy of maintaining a diversified portfolio reduces the volatility of its same-store growth.

Moreover, going by a recent study by the real estate technology and analytics firm — RealPage, Inc. — the U.S. apartment market managed to retain the rent momentum achieved in the latter part of 2018, although new supply volumes remained elevated in the January-March quarter. Apartment rents were up 3.2% on an annual basis as of first-quarter 2019. In fact, for six straight months, annual rent growth exceeded the 3% mark. In addition, occupancy came in at 95.2% in the quarter, expanding 10 basis points year on year.

Amid these, UDR is likely to benefit from favorable demographics, household formation, healthy economy and job-market gains, which might accelerate demand for rental housing in its markets.

The company continues to focus on its strategic priorities such as disciplined capital allocation, strong balance-sheet position as well as cash-flows enhancement to support operational efficiency and dividend growth. These are likely to support its results in the quarter under review. Occupancy is likely to be higher. The Zacks Consensus Estimate for first-quarter revenues is currently pegged at $267.1 million, indicating 5.4% year-over-year growth.

However, the company’s activities during the quarter were inadequate to gain analysts’ confidence. Consequently, the Zacks Consensus Estimate remained unchanged at 50 cents over the last 30 days. Nevertheless, the figure indicates a 6.4% increase year over year.

In fact, new supply of apartment properties remained elevated in the first quarter in a number of the company’s markets. Per the above-mentioned study by RealPage, in the past six months, in the U.S. market demand could not keep up with new product deliveries that aggregated 127,121 market-rate units in fourth-quarter 2018 and first-quarter 2019.

Therefore, we remain apprehensive about UDR’s performance as the company is likely to keep dealing with high deliveries in a number of its markets. This remains a concern as elevated levels of supply limits a landlord’s ability to demand more rents, results in lesser absorption and leads to increased concession activity.

Here is what our quantitative model predicts:

UDR does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: UDR’s Earnings ESP is -0.40%.

Zacks Rank: UDR has a Zacks Rank of 2 (Buy), which increases the predictive power of ESP. However, we also need a positive ESP to be confident of a beat.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:
   
Digital Realty Trust, Inc. DLR, slated to release first-quarter earnings on Apr 25, has an Earnings ESP of +1.27% and carries a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Alexandria Real Estate Equities, Inc. ARE, scheduled to report quarterly numbers on Apr 29, has an Earnings ESP of +0.30% and holds a Zacks Rank #2.

Public Storage PSA, set to release results on May 1, has an Earnings ESP of +0.75% and carries a Zacks Rank of 3.

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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