REIT Rides Prosperity Wave

These have been good times for rental apartment real-estate investment trusts, with values, rents and occupancies rising and stocks trading near their 52-week highs.

UDR Inc. wants more. The once-sleepy REIT that owned apartments in markets like Arkansas and New Mexico, is hoping to ride this wave of prosperity to complete its metamorphosis into one of the leading landlords in top cities.

In the latest sign of this, UDR just established beachheads in Boston and New York with big deals in those markets. Denver-based UDR plans more purchases in the Big Apple and wants to enter Chicago and Miami.

But going prime time has saddled UDR with debt: It says it has nearly $500 million maturing next year, and some analysts expect it to issue additional equity, which will likely dilute current shareholders.

Also, the big-time price tags on its recent deals have raised eyebrows: UDR’s $260.8 million purchase of 10 Hanover Square in Manhattan, some $484,000 per apartment, is one of the largest multifamily transactions in the country recently.

Tom Toomey, a veteran real-estate executive who has been UDR’s chief executive for a decade, says the strategy is to “take advantage of that demographic wave coming at us” by focusing on “cities 25-to-35 year olds would be moving to.”

UDR now controls nearly 60,000 units in 24 markets with average rents of nearly $1,200 a month, up from about $700 a decade ago. Its portfolio includes high rises with rooftop pools, downtown lofts and units with sleek, modern kitchens. It is a tech-savvy operator that Tweets, has iPad and iPhone apps and offers its own social-networking site to residents.

“It’s all going after the younger generation,” says Alexander Goldfarb, a Sandler O’Neill + Partners LP analyst.

Under Mr. Toomey, success has never been a function of size. The company, founded as United Dominion Realty Trust in 1972, owned some 110,000 units in 63 markets in 2000. But, it began exiting from Middle America, figuring more money could be made focusing on younger people paying higher rents in highly populated markets.

UDR has expanded into major markets such as Boston and New York. Above, UDR purchased this building at 32 Garrison St. in Boston in September. 

UDR picked up the pace of sales about three years ago when it sold some 40% of its portfolio for $1.7 billion, dumping tens of thousands of units largely in ho-hum areas. The idea was to quickly shrink the size and focus on quality, a plan it hoped would put it in the leagues of leading apartment REITs Equity Residential and AvalonBay Communities Inc.

But the strategy was slowed by the economic downturn that sent shares of UDR and its peers plummeting, sidelining building purchases. UDR’s stock, which hit its record of $34.10 in February of 2007, was trading below $8 about two years later.

Apartment REITs have rebounded as the economy has improved, making renters more secure about leaving roommate situations or moving out of mom and dad’s basement. Improving rents and occupancies, coupled with low interest rates, pushed building values higher.

More growth is expected. Consumers burned by the housing crash and youngsters graduating from college are expected to add another 4.4 million rental households by 2015. UDR’s shares hit a 52-week high of $24.42 on March 1. Shares were trading up 34 cents at $23.85 at midafternoon Tuesday on the New York Stock Exchange.

With the market improving, UDR has increased deals, boosting its presence in key areas including Seattle and Washington, D.C. In November, it announced a joint venture with MetLife for nearly 6,000 apartments, each with an average rent of nearly $2,200, and 11 development sites. The company expects a 9% return on its $93 million investment.

Analysts say UDR is now within reach of being labeled one of the sector’s top-tier players. The company “has come a long way,” said Haendel St. Juste, a senior REIT analyst with Keefe, Bruyette & Woods. “UDR has a much better quality portfolio with above-average growth prospects than the UDR that people knew five, 10 years ago.”

To be sure, all multifamily operators are at risk of rising interest rates, which could deflate some of the recent gains in building values. And if job growth doesn’t pick up, continued growth in rents may be difficult in some markets.

For now, UDR says it isn’t worried. Its portfolio is 96% full and shares of the company have soared nearly 40% in the past year. “This is a company that’s well positioned for the next five-to-10 years in light of the demographics, in light of the operating platform,” Mr. Toomey says. “I hate to say it, but there’s not much that can go wrong in our business.” (credit d. wotapka,wsj)

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