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UDR Inc. UDR is well-poised to benefit from a diversified portfolio, healthy rental demand, technological initiatives and a solid balance sheet position, though the elevated supply of rental units and high interest rates remain concerns.

What’s Aiding UDR?

UDR has a geographically diversified portfolio with a superior product mix of A/B quality properties throughout the United States in coastal and Sunbelt locations, with a mix of 31% urban and 69% suburban communities. This diversified portfolio saves the company from concentration and volatility risks, thereby providing steady rental cash flows.

In UDR’s market, the cost of home ownership is high due to elevated interest rates, making renting apartments an affordable option. Moreover, the demographic trend in its markets is dominated by the young adult age cohort, which prefers renting over ownership, given the flexibility and locational advantage it offers. These factors are expected to drive the demand for apartment rental units in the upcoming period, poising the company well for growth.

UDR is leveraging technological initiatives and process enhancements to bring about operational resiliency across its platform. Such efforts are likely to give UDR a competitive edge over others and enable it to capture additional net operating income (NOI), driving long-term profitability.

The company focuses on maintaining an investment-grade balance sheet and ample cash liquidity to support operational efficiency and dividend growth. As of Mar 31, 2024, UDR had $960 million of liquidity. The company’s total indebtedness as of Mar 31, 2024 was $5.8 billion, with only $291.2 million, or 5.1% of total consolidated debt, maturing through 2025, including principal amortization and excluding amounts on the company’s commercial paper program and working capital credit facility.

The net debt-to-EBITDAre remained unchanged at 5.7X in the first quarter from the year-ago period. UDR’s debt maturity schedule is well-laddered, with weighted average years to maturity of 5.4 years and a weighted average interest rate of 3.38%. Also, 86.7% of its NOI is unencumbered.

The company has increased its dividend five times in the last five years, and the five-year annualized dividend growth rate is 4.79 %, which is encouraging. Consistent dividend payouts are justified by its solid financial position, making it an attractive investment option for investors.

Over the past three months, shares of this Zacks Rank #3 (Hold) company have risen 9.7% compared with the industry's upside of 5.5%.

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What’s Hurting UDR?

The markets in which UDR operates are expected to face higher deliveries in 2024. Specifically, the Sunbelt markets are anticipated to witness higher absolute deliveries than the coastal markets, although all regions are likely to face higher relative supply in 2024 compared to their long-term averages. An elevated supply relative to demand is expected to weigh on the rental rate and occupancy growth of this residential REIT.

Moreover, a high interest rate environment is a concern for UDR. The company may find it difficult to purchase or develop real estate with borrowed funds as the costs are likely to be on the higher side. UDR has a substantial debt burden, and its total debt was approximately $5.76 billion as of Mar 31, 2024.

Stocks to Consider

Some better-ranked stocks from the broader REIT sector are Invitation Homes INVH and Essex Property Trust, Inc. ESS, 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 Invitation Home’s current-year FFO per share has been raised marginally over the past two months to $1.88.

The Zacks Consensus Estimate for Essex Property Trust’s current-year FFO per share has been raised five cents upward over the past month to $15.40.

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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