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High quality UDR 10-years still hitting 2.0% yield bogey
admin | January 15, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
The REIT sector has been tightening sharply in recent weeks alongside the broader investment grade market. Emphasis on the relative safety of apartment REITs compared to higher beta segments such as retail and office has compressed spreads within the subgroup to near pre-pandemic levels. UDR (Baa1/BBB+) offers a balanced mix of stability and still-attractive overall yield relative to the tight-trading peer group, and their 10-year notes still offer investors the opportunity to hit a 2.0% yield bogey.
Exhibit 1: UDR 32s vs apartment REIT peers
Source: Amherst Pierpont Securities, Bloomberg/TRACE Indications
Bond recommendation
UDR 2.10% 08/01/32 @ +97/10-year, G+88, 2.10%, $100.00
CUSIP: 90265EAT7
Amount outstanding: $400 million, index eligible, global issue
Rating: Baa1/BBB+
Company overview
- UDR Inc. (UDR) is a mid-sized multifamily REIT with $9.3 billion in total assets, 147 properties and over 47 thousand individual units. The company is well-diversified geographically and by property price. Current same-store occupancy stands at 95.5% as of the most recent quarter. While trends that emerged from the pandemic, such as urban flight, present longer-term risks to the subgroup, apartment REITs offer relative stability to other segments within the broader REIT landscape, such as retail and office. This has been demonstrated in cash rent collections over the past several quarters.
- UDR reports that 42% of its properties are classified as urban, with the other 58% classified as suburban. The split between “A quality” and “B quality” properties is about 57%/43%. Some of the company’s largest population centers include DC, Orange County, Boston, San Francisco, and Seattle. The secondary tier of locations includes Orlando, Tampa, Nashville, Los Angeles, Monterey, and Dallas. Lastly, the third tier includes Philadelphia, Baltimore, Richmond, West Palm Beach, Austin, Denver, Portland and the surrounding regions in San Diego and LA (“Inland Empire”).
- Gross leverage has remained very stable in the mid-6x range over the past several quarters. UDR utilizes very little secured debt, as the bulk of the company’s properties are currently unencumbered, offering a potential source of funding that can be tapped in case of an emergency.
- UDR has limited development risk relative to peers. The company’s current development pipeline is less than $300 million, or about 2% of total gross assets.
- UDR has a very stable liquidity profile with no debt maturities over the next 3 years and only $16 million due in 2024. The company’s debt maturity schedule is then remarkably steady over the subsequent 5 years (2025-2029) with $300 million due in each year. Although there is limited cash currently on the balance sheet, UDR has a $1 billion revolving credit facility through 2023, and generates extremely stable cash flows (funds from operation) from year-to-year, with highly visible debt coverage for the foreseeable future.
Exhibit 2. Occupancy by REIT subgroup
Source: Amherst Pierpont Securities, Bloomberg LP, company filings
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