United Dominion Realty Trust (UDR)

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United Dominion Realty Trust owns and rents multi-family residential apartment communities. Operating over 70,000 apartment units across nearly 250 properties, the company's properties are focused largely in California (17.5% of units), Florida (16.2%), Texas (15.9%), and North Carolina (9.3%). The company's properties generally target the middle-market of apartment lessees, with an average monthly rent payment around $820 per unit^[1] compared to a median of $650 in the U.S overall.^[2]

UDR is intricately tied to interest rate tides, which have several important effects:

• While the company competes for tenants with other apartment operators, it also competes on the relative attractiveness of owning a home versus renting an apartment. When home prices are high, renting becomes more attractive (and vice versa). Interest rates determine the attractiveness of mortgage financing. When interest rates are high, renting becomes more appealing as financing a mortgage becomes more expensive.
• It is also important to note that UDR operates as a real estate investment trust (REIT). As such, the company must distribute at least 90% of its cash flow to shareholders every year in the form of a dividend. When interest rates rise, so do demands for investment yields on dividends, which can depress a REIT's stock price.

[edit] Financial and Operating Metrics

Below are several metrics of operating performance for the company. The company has been able to steadily increase its rental revenue per apartment unit over time, fighting inflation and driving organic growth. It has lowered its total apartment base over the previous three years, selling off more properties (at a gain) than it has redeployed into purchasing new units. This "recycling" of capital is a standard opportunistic practice of REITs, which most believe allow them to take advantage and mitigate the risks of the real estate cycle. It also leads to somewhat large income line items from "discontinued operations."

[edit] Trends and Drivers

• National and Local Job Market and Employment. The strength of the labor market has important implications for the company.^[5] Jobs fuel demand for all types of housing, including multi-family/apartment dwellings. Strong job growth can drive higher occupancy rates and lead to increased unit rental revenue. High unemployment and slow job growth, on the other hand, can hamper the apartment rental market and, when job growth is negative, the company can experience falling occupancy rates and lower revenue per unit, which leads to less efficient apartment buildings as the utilization of the complex falls.

• The Housing Market and New Home Construction. Factors driving the non-apartment, alternative housing market can have a substantial impact on the company. Throughout 2007, falling housing prices in the company’s key markets, coupled with decreasing new home construction and the rising cost of financing mortgages increased demand for apartments relative to houses and other living alternatives. However, if housing prices continue to fall, houses can become more attractive to purchasers, and they may substitute away from apartments and opt for single-family housing instead.

• Interest Rates. Rising interest rates have several effects on this company and other apartment REITs:^[6]

1. Other investments become more attractive, thereby hampering demand for apartment investors. This, in turn, decreases the market prices of the company’s properties.
2. Available and existing financing becomes less attractive. Getting favorable terms on any new debt to finance building purchases becomes more difficult. The company’s interest expense on its floating rate debt increases, pressuring margins and increasing financial risk.
3. The stock price can fall as investor’s demand a greater dividend yield. As a REIT, the company must, by law, distribute at least 90% of its cash flow to shareholders in the form of a regular dividend. When interest rates rise, investors demand higher dividend yields on REITs, thereby driving down their stock prices.

• Mortgage Rates. The attractiveness of mortgage financing for home purchasers has important ramifications for the apartment REITs. If mortgage rates fall and credit is plentiful, buying a home becomes more attractive than renting an apartment, thus stifling demand for the company’s rental units. On the other hand, if the availability and attractiveness of mortgages declines, as did during the fallout from the subprime lending crisis, renting an apartment becomes more appealing, so occupancy rates and rental revenue per apartment increase.

• Local population growth. The rate of population growth in the company's operating regions is another key determinant of the company's success. In towns whose populations are rapidly increasing, limited housing supply and/or the lag time in building houses leads to greater demand for the company's apartment units. The growth in local population is also closely correlated to the rate of job growth (see National and Local Job Market and Employmentabove).

• Dependence on California, Florida, Texas, and North Carolina. Nearly 60% of the company's properties are located in one of these four states, typically in or around the larger cities in these states (e.g. Los Angeles, San Francisco, Houston, etc.). This allows them to leverage scale in these regions, but also exposes them to more geographic, local risk for these properties. The economies and real estate markets of CA, FL, TX, and NC are important drivers for the companies ability to attract and retain tenants while being able to increase rents over time.

[edit] Competition and Market Share

The company competes against a wide array of other apartment rental owner/operators. The National Multi Housing Council estimates that around 17 million apartment units exist nationwide. The median rental income per unit is around $650 per month.^[8]

The market for multi-family housing is highly fragmented geographically as well as within any given region. To the left are industry statistics for each of the major markets of publicly traded apartment REITs. The company’s real estate portfolio is highly diversified across geographic region, and operates in nearly every state. Based on data compiled by the National Multi Housing Council, the company was the largest operator of apartment units across the nation.^[9]

Furthermore, below is a table of relevant competitive data as compared to rival or comparable companies:^[10]

[edit] Footnotes

1. ↑ UDR 2006 10-K, "Properties," pg 18
2. ↑ Apartment Rental data, 2005, compiled by National Multi Housing Council
3. ↑ UDR 2006 10-K, "Selected Financial Data," pg 24.
4. ↑ UDR 2004, 2005, 2006 10-K, "Business," pg 1.
5. ↑ UDR 2006 10-K, "Risk Factors," pg 9.
6. ↑ AIV 2006 10-K, "Risk Factors," pg 10.
7. ↑ Data from Apartment Stock data, 2006, compiled by National Multi Housing Council
8. ↑ Apartment Rental data, 2005, compiled by National Multi Housing Council
9. ↑ Apartment Stock data, 2006, compiled by National Multi Housing Council
10. ↑ All data from annual reports of companies. Market share statistics were taken as the percentage of addressable units owned by the company. "Addressable" refers to units in the companies' stated target markets