UDR Offers Common Shares - Analyst Blog

UDR Inc. (UDR), a leading multifamily real estate investment trust (REIT), has recently announced plans to offer 13.5 million common shares to raise cash. The company will also grant the underwriters an option to purchase an additional 2.0 million shares to cover any over-allotments.

BofA Merrill Lynch, the investment banking and wealth management division of Bank of America Corporation (BAC) and Wells Fargo Securities, part of Wells Fargo & Company (WFC) are acting as joint book-running managers for the public offering.

UDR expects to utilize the net proceeds from the offer to fund potential acquisition opportunities due to distressed selling by property owners who could not refinance their assets. The company also expects to utilize a part of the proceeds to repay its outstanding debt.

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 vs. own spread still remains high. The housing meltdown will continue to help apartment REITs and we expect this sector to remain comparatively stable in the coming quarters.

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 strong upside potential for the company. Consequently, we maintain our long-term Outperform rating on UDR.

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. 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.