UDR Inc. UDR is well-poised to benefit from its diversified residential portfolio, with a superior product mix of A/B quality properties in the coastal and Sunbelt markets. Efforts to leverage technological moves to enhance operational efficiency augur well. Its focus on a strong balance sheet position and disciplined capital distribution is encouraging.

However, the elevated supply of residential rental units in some of its markets may affect its rent growth momentum. High interest expenses add to its concerns.

As per a recent fourth-quarter update provided by the company, preliminary same-store weighted average physical occupancy improved to 96.8% from 96.3% sequentially.  However, the effective blended lease rate for the fourth quarter showed a decline of 0.6% against the 1.8% growth reported in the last quarter. The residential REIT expects funds from operations (FFO) as adjusted per share to be 63 cents for the fourth quarter of 2024 and $2.48 for 2024.

What’s Aiding UDR?

UDR has a geographically diverse portfolio with a superior product mix of A/B quality properties, including 30% urban and 70% suburban communities in coastal and Sunbelt locations. This diversification limits volatility and concentration risks while aiding the company in generating steady operating cash flows.

In UDR’s markets, the demographic growth continues to be encouraging in the young-adult age cohort, which has a higher propensity to rent. This age cohort has witnessed a considerable part of net job growth, which has helped spur primary renter demand. Also, a majority of them prefer to remain renters to enjoy a locational advantage as well as the flexibility that rental apartments offer. These factors are expected to drive the demand for apartment rental units in the upcoming period, poising the company well for growth. We estimate a weighted average physical occupancy level of 96.8% for 2024.

UDR is leveraging technological initiatives and process enhancements to bring operational resiliency across its platform, aiding in enhanced customer experience. Such efforts are likely to give it a competitive edge over others and enable it to capture additional net operating income (NOI), driving long-term profitability. We estimate the same-property NOI to increase 1.8% and 1.9% for 2025 and 2026, respectively.

UDR continues to focus on disciplined capital distribution and maintaining a healthy balance sheet position. As of Sept. 30, 2024, UDR had $1.0 billion of liquidity and 87.3% of its NOI was unencumbered. The investment-grade credit ratings of Baa1(Stable) and BBB+(Stable) from Moody's Investors Service and S&P Global Ratings, respectively, enable it to procure debt financing at an attractive cost.

UDR has increased its dividend five times in the last five years, and its five-year annualized dividend growth rate is 4.88%, which is encouraging. Given UDR’s solid financial position, its dividend seems sustainable and well-covered by cash flow from operations. Such efforts boost investors’ confidence in the stock.

Shares of this REIT, carrying a Zacks Rank #3 (Hold), have risen 6.2% over the past year, outperforming the industry’s growth of 0.8%.

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What’s Hurting UDR?

The struggle to lure renters is likely to persist as the volume of new deliveries remains elevated in several markets where the company operates. The Sunbelt markets experienced increased absorption of higher absolute deliveries at the cost of more concessions and reduced pricing power.

Despite the Federal Reserve announcing rate cuts in recent times, the interest rate is still high and is a concern for UDR. The company has a substantial debt burden, and its total debt as of Sept. 30, 2024 was $5.9 billion. We estimate interest expenses to increase 6.8% year over year in 2024.

Analysts seem bearish on this stock, with the Zacks Consensus Estimate for its 2025 funds from operations (FFO) per share being lowered marginally over the past week to $2.51.

Stocks to Consider

Some better-ranked stocks from the residential REIT sector are Equity Lifestyle Properties ELS and Veris Residential VRE, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Equity Lifestyle Properties’ 2025 FFO per share is pegged at $3.11, suggesting year-over-year growth of 6.6%.

The Zacks Consensus Estimate for Veris Residential’s 2025 FFO per share stands at 61 cents, implying year-over-year growth of 1.1%.

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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