Almost two weeks after its massive $2 billion joint venture with Apollo, UDR reported third-quarter results with adjusted funds from operations of $0.65, beating analysts' estimates.

In the process, the Highlands Ranch, Colorado-based REIT, which released preliminary Q3 results with the Apollo announcement, raised its same-store net operating income guidance by 37.5 basis points at the midpoint, lowered expense guidance by 35 basis points at the midpoint to 2.9% and raised adjusted FFO guidance by $0.02 at the midpoint to $2.55, according to its earnings release.

On the Nov. 3 Q3 earnings call, UDR Chief Operating Officer Mike Lacy said the REIT’s same-store revenue growth of 1.8% was driven by 2% blended lease rate growth. It posted a delinquency rate of around 60 basis points, down 50 basis points year over year.

“Third-quarter results reflected better late-quarter leasing trends as compared to recent years,” Lacy said.

UDR’s resident retention of 52% represented a Q3 record and was 370 basis points higher than a year earlier, according to Lacy. “Fewer move-outs supported blended lease growth and occupancy, and kept same-store expense growth in check at only 2.2%,” he said.

With supply falling off, UDR’s management team appears optimistic about a Sun Belt recovery, although coastal markets still produced the strongest revenue growth in Q3. As it sees signs of future rent growth, the REIT continues to expand JV partnerships, sell properties and buy back shares.

Market report

Not surprisingly, red-hot San Francisco led the way for UDR in Q3, posting 9% YOY revenue growth, according to a filing with the Securities And Exchange Commission. The market produced blended lease rate growth of approximately 13% and occupancy above 97%, according to Lacy. Additionally, he said rent-to-income ratios remain in the low-20% range, which gives the firm room to push rents.

New York City also had a strong Q3 with 5.1% YOY revenue growth, followed by Philadelphia, at 3.5%; Baltimore, at 3.1%; and Orange County, California, at 3%.

“New York and Philadelphia continue to lead the East Coast, with weighted average same-store revenue growth of approximately 5%, driven by blended lease rate growth of 4.5% and occupancy above 97%,” Lacy said.

On the opposite end of the spectrum, supply-heavy Austin, Texas, saw revenue decline by 3.4% YOY , according to the SEC filing. However, there were signs of improvement for the REIT in Texas.

“Dallas remained our strongest Sun Belt market, exhibiting positive revenue growth during the quarter,” Lacy said. “Despite continued new lease rate growth weakness, Austin showed strong positive momentum, and was our only Sun Belt market to deliver positive year-over-year NOI growth.”

Los Angeles posted UDR’s second-weakest revenue growth market with a 1.5% decline, according to the SEC filing. In Florida, Orlando fell 1% YOY and Tampa declined 0.9% YOY, while Washington, D.C., inched down 0.1% YOY.

Roughly 20% of UDR’s NOI comes from the Sun Belt, according to Lacy. In Q3, the REIT saw rent blends of negative 1.5% in the region compared to negative 2% in Q2. “We’re starting to see a little momentum,” Lacy said.

“We feel like we have a good positioning just in terms of occupancy, lower lease expirations in the fourth quarter,” Lacy said. “We're going to try to lean in and see if we can't push rents up a little bit as we go into next year.”

Across its portfolio, UDR expects rent blends of 1.5% to 2% in Q4. Over the past 60 days, Lacy said the REIT’s market rent had increased by about 50 bps compared to a decrease of 300 bps over the past year. “The supply coming down is definitely helping out,” Lacy said.

Balance sheet maneuvers

On Oct. 21, UDR, which has been active in pursuing partnerships throughout the past two decades, announced it was forming a long-term JV with Apollo that will own a portfolio of 19 apartment properties totaling 7,059 apartment homes and valued at approximately $2 billion. 

At the fifth anniversary of closing, UDR originally announced it would have the option to repurchase Apollo’s interest in the JV at an expected 7% to 7.5% fixed return for a finite period. In yesterday’s Q3 release, UDR said the IRR would be 7%.

“To use a baseball term, with this strategic partnership, UDR has hit for the cycle, a rare feat,” UDR CEO Tom Toomey said on the Q3 call. “With one transaction, we increased UDR's access to equity capital, reduced leverage, improved the asset quality of the wholly owned portfolio and drove earnings accretion.”

In addition to the Apollo deal, UDR also expanded its JV with LaSalle Investment Management to approximately $958.3 million by contributing a 360-home property in Nashville, Tennessee, and simultaneously placing debt on that community and an existing community in the venture, per the release. The REIT received approximately $103.2 million, per its earnings release.

In Q3, UDR sold apartment properties in Seattle and Nashville, with a combined 412 units, for $183 million. It is under contract to sell a 396-apartment community in the Washington, D.C., area for $69 million, per the release.

UDR also continued to wind down its debt and preferred equity portfolio. It acquired a 286-unit property in Portland, Oregon, for an incremental cash outlay of $74.7 million, per the release. In Q3, it reached a resolution with its partner on two properties in California’s Inland Empire. The REIT also received full repayment of approximately $29.5 million on its preferred equity investment in a stabilized property in Orlando. 

Like its REIT peers, UDR is actively buying back its stock. It repurchased approximately 5.2 million shares at a weighted average share price of $35.48 for total consideration of approximately $185.1 million through the end of October, per the release.

Alexander Goldfarb, managing director and senior research analyst for investment bank and financial services company Piper Sandler, said he would like to see the firm target buybacks with the $1.34 billion in proceeds from the Apollo JV. Currently, the REIT has earmarked roughly an even split among debt paydowns, stock buybacks and acquisitions.

“Given the stock's discount, our preference is for more buybacks versus acquisitions, while maintaining a solid balance sheet,” Goldfarb wrote in a research note shared with Multifamily Dive.

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