Is It Wise to Retain UDR Stock in Your Portfolio for Now?
UDR, Inc. UDR is well-poised to benefit from a diversified portfolio, with a superior product mix of A/B quality properties in urban and suburban communities in both coastal and Sunbelt locations.
The company’s efforts to diversify its portfolio with respect to geographies and price points limit its exposure to volatility and concentration risks, alongside assuring stable cash flows. Moreover, in recent quarters, UDR has been experiencing strong pricing power, as evidenced by blended lease rate growth. For 2023, management expects year-over-year same-store revenue growth (on a cash basis) of 5.5-7.5%. Our estimate for the same indicates a year-over-year rise of 5.9%.
UDR is also leveraging technological investments and process enhancements to drive innovation and margin expansion. Its Next Generation Operating Platform allows the company to electronically interact with and provide service to residents and prospects throughout its diversified portfolio. These efforts are likely to give UDR a competitive edge over its peers. For 2023, management expects year-over-year same-store NOI growth (on a cash basis) of 6-8.5%. We estimate the same to increase 6.5% year over year.
The company maintains a healthy balance sheet position with ample liquidity. It exited the first quarter of 2023 with $957.4 million of liquidity. UDR’s debt maturity schedule is well-laddered, with a weighted average year to maturity of 6.3 years and a weighted average interest rate of 3.25%. Also, 88.4% of its NOI is unencumbered.
Recently, UDR announced the formation of a $510 million joint venture with LaSalle, which will lead to the REIT receiving $250 million in cash proceeds. With enough financial flexibility, UDR is well-poised to capitalize on long-term growth opportunities.
Solid dividend payouts are the biggest enticements for REIT investors, and UDR remains committed to that. It has increased its dividend five times in the last five years, and the five-year annualized dividend growth rate is 3.77%.
Moreover, backed by healthy operating fundamentals, we expect the FFO as adjusted (FFOA) to improve 7.9% in 2023. Given our FFOA growth projections and UDR’s solid financial position, the latest dividend hike seems sustainable and well-covered by cash flow from operations. Such efforts boost investors’ confidence in the stock.
Shares of this Zacks Rank #3 (Hold) company have rallied 12.7% in the past six months compared with its industry's increase of 6.5%.
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However, the struggle to lure renters is likely to persist as supply volumes are expected to remain elevated in a number of its markets. With the ongoing construction standing at a high level, a sizeable number of apartment deliveries are expected in the upcoming period.
Moreover, UDR faces stiff competition from other housing alternatives, such as rental apartments, condominiums and single-family homes. Such a competitive landscape limits the company’s ability to increase the rent, thereby restricting its growth momentum to some extent.
Furthermore, a high-interest rate is a concern for UDR. Elevated rates imply high borrowing costs for the company, affecting its ability to purchase or develop real estate. Our estimate for 2023 interest expenses indicates a year-over-year rise of 12.7%. Moreover, the dividend payout might become less attractive than the yields on fixed income and money market accounts.
Stocks to Consider
Some better-ranked stocks from the REIT sector are Invitation Homes Inc. INVH and BRT Apartments Corp. BRT. While Invitation Homes currently carries a Zacks Rank #2 (Buy), BRT Apartments sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Invitation Homes’ current-year FFO per share has been revised 1.1% north over the past month to $1.78.
The Zacks Consensus Estimate for BRT Apartments’ 2023 FFO per share has been revised 33.6% north in the past two months to $1.55.
Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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