UDR Inc. (UDR), a leading multifamily real estate investment trust (REIT), has recently announced its plans to enter the apartment market in Manhattan with the acquisition of 10 Hanover Square, a 493-unit apartment community in the thriving Financial District of New York City. The company purchased the property for about $260.8 million at an estimated price of $484,000 per apartment home.
UDR will fund the acquisition through the assumption of an existing $192.0 million fixed-rated mortgage debt, secondary offering of operating partnership units worth approximately $64.3 million (with a floor price of $25 per unit) and approximately $4.5 million cash-in-hand.
The company will purchase the property from the Witkoff Group, a fully integrated real estate investment firm that owns a diverse portfolio of real estate assets in select U.S. markets. The acquired 23-storyed building previously housed the corporate headquarters of The Goldman Sachs Group, Inc. (GS) before being renovated in 2005 to a residential condominium.
The renovation process included an overall lobby and front entrance overhaul; revamp of the total elevator system; introduction of new information technology infrastructure; new Uninterruptible Power Supply (UPS) and Emergency Power Supply (EPS) systems; a complete overhaul of the central plant and control room; a new cafeteria and fitness center; and renovation of seventeen tenant floors. The property presently offers studio, one-, two- and three-bedroom apartments averaging 708 square feet of space.
The apartment features open floor plans, granite countertops, maple cabinets, solid oak wood flooring, two lounges, and a rooftop deck besides amenities such as a 24-hour concierge service and a discounted membership to Xtreme Gym New York – a 28,000 square foot on-site fitness center. The acquired property also contains 41,650 square feet of retail space that is fully leased to leading retailers such as Starbucks Corp. (SBUX), Fresco on the Go Restaurant, and The Original Soupman Restaurant.
UDR is among the best-positioned apartment REITs in the U.S., with the majority of its portfolio located in California, Florida and on the Atlantic Coast. These are areas where housing costs have soared in the past few years, and despite the drop in home values, the rent versus own spread still remains high.
UDR has a geographic diversification that increases investment opportunities and hedges against the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of the earnings. Furthermore, UDR has continuously upgraded the overall quality of its portfolio by selling smaller market, older properties and replacing them with newer assets in better long-term markets. This provides a strong upside potential for the company.
However, UDR has a significant development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays and lease-up risk. Consequently, we maintain our long-term Neutral rating on UDR. Presently, UDR has a Zacks #3 Rank that translates into a short-term ‘Hold’ recommendation and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months.
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