Multifamily REIT Goes On A Cleanse (UDR)

Tonight a multifamily REIT operator called UDR, Inc. (NYSE: UDR) is announcing a transformational deal along with its earnings.  The company reported funds from operations (FFO) of $0.43 before a one-time adjustment (and $0.40 after) and it looks like the street was expecting $0.50.  This is down almost 8% after realignments.  But because this company is going to be greatly different, we are not focusing on the past results so much here.  UDR has signed an agreement to sell 25,684 apartment homes in 86 communities for $1.7 Billion, and it will receive $1.5 Billion in cash and a $200 million note upon the March 2008 expected close date.  The sale is to DRA Advisors LLC in a joint venture with Steven D. Bell & Company.

UDR will own 40,183 homes in 146 communities upon completion of the transaction; and it will have some 47% of its base on the Pacific Coast, 24% in the Virgina-Washington D.C. corridor, 19% in Florida, and another 10% elsewhere.  As a reminder, these are "renters, not owners" in these markets and we don’t buy into the notion that  just because renters can’t buy a home that they want to become homeless or move back in with mom and dad.  UDR now believes that the average total monthly income in 2008 per home for the 40,183 homes it owns upon completion of the sale will exceed $1,200, operating margin will exceed 70 percent, and recurring capital expenditures will be 35 percent less per home than the portfolio being sold, with an average age of the portfolio being 15 years.

As far as the proceeds, it already has a planned path:

• UDR plans to invest $500 to $600 million of the proceeds in acquisitions, with about $320 million currently under contract in targeted markets;
• It plans to spend $500 million to $600 million to reduce debt;
• The $300 to $500 million of remaining proceeds and $200 million from the note will be used to fund additional acquisitions, repurchase stock and for a potential special dividend.  UDR simultaneously increased its 7 million share buyback plan to a much higher 22 million share buyback plan;
• UDR plans to maintain its current quarterly dividend of $0.33 per share. 

One thing that a673b.bigscoots-temp.com likes to watch out for is transformational asset sales that will take a company into a cleaner and leaner operating position.  We review these for our Special Situation Investing Newsletter and we also review these for our email distribution lists.

We have to run more numbers on this to reflect the new asset base versus the old asset base, and compare this new capital structure to the old one before making any formal newsletter recommendations.  But we have been reviewing the apartment and home rental REIT sector for some time as many values have been overly punished.  this looks like it will also de-leverage UDR’s balance sheet.  The analysts that follow this are mostly "Cautious to Hold" on this, so any weakness from downgrades based upon the miss on FFO targets would probably be an opportunity more than another panic situation. 

UDR’s dividend would result in a 5.87% dividend yield based on a $22.46 share price.  Its 52-week trading range is $18.29 to $34.10.

Jon C. Ogg
January 29, 2008