Tuesday, September 9, 2008

UDR Dividend Stock Analysis

UDR, Inc. formerly United Dominion Realty Trust, Inc., operates as a self-administered equity real estate investment trust (REIT). It owns, acquires, renovates, develops, and manages middle-market apartment communities. The company targets young professionals, blue-collar families, single parent households, older singles, immigrants, and non related parties.

UDR is a dividend champion as well as a component of the S&P 1500 index. It has been increasing its stock dividends for the past 31 consecutive years. From the end of 1997 up until August 2008 this dividend stock has delivered an annual average total return of 15% to its shareholders.













At the same time company has managed to deliver a 4.70% average annual increase in its funds from operations (FFO) since 1998. FFO is a common measurement for a REIT. It is an alternative non-GAAP measure that is considered to be a good indicator of a company’s ability to pay dividends.

The ROE has increased from its low of 5% in 1998 to a little over 20% by 2007.















Annual dividend payments have increased over the past 10 years by an average of 2.50% annually, which is lower than the growth in FFO. Using the rule of 72 a 2.5% growth in dividends translates into the dividend payment doubling almost every 29 years! The last doubling of the annual dividends took 15 years from 1992 until 2007
















If we invested $100,000 in UDR on December 31, 1997 we would have bought 8772 shares. In January 1998 this dividend stock would have produced $2210.54 in quarterly dividend income. If you kept reinvesting the dividends though instead of spending them however, your quarterly dividend payment would have risen to $6136 by July 2008. For a period of 10 years, your quarterly dividend income would have increased by 31%. If you reinvested it though, your quarterly dividend payment would have increased by 177%.
















The FFO payout has decreased from over 100% in 1998 to a little over 70% in recent years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. One thing to note is that in order to maintain their tax status for federal income tax purposes, REITs are required to distribute dividends to our stockholders aggregating annually at least 90% of their taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and are subject to income tax to the extent we distribute less than 100% of the REIT taxable income (including net capital gains). In addition to that, the fact that the company has managed to keep increasing its profits and dividends while keeping the payout form operations stable is a positive sign.
















Despite its good performance for dividend investors over the past decade as well as making it on my screen, there are several obstacles to UDR’s future dividend growth. One of it is that its annual revenues have remained flat over the past decade, increasing slightly from 482 to 500 million dollars.
















The other item is that the company is selling apartment units, which will decrease revenues in the future, but will also decrease the average age of the trust’s holdings. The dividend was not increased in April 2008, which was the case in prior years. The dividend is well covered, but the lack of dividend and revenues growth, coupled with a rising price to book ratio make this dividend stock a hold.

Disclosure: I do not own shares of UDR

Relevant Articles:

- National Retail Properties (NNN) Dividend Analysis
- Realty Income (O) Dividend Analisys
- Is Realty Income (O) a good stock to own?
- Alternative Streams of Income

3 comments:

  1. I am very impressed with the analysis.

    ReplyDelete
  2. Double,

    Thanks for stopping by. I am happy that you liked the post.

    Best Regards,

    Dividend Growth Investor

    ReplyDelete
  3. UDR is in big trouble. Almost 15 percent of the REIT's national revenue is generated in Orange County, California.

    It was recently discovered by a tenant advocacy group in California that the company is using expired DBA’s and false names to contract with tenants. The group claims that UDR did this to obtain and sustain a legal advantage over its tenants and diminish tenant based lawsuits.

    The advocacy group’s owner and founder, Erin Baldwin, can be reached for comment 714-617-4703 or at octenanthelp@aol.com. Unfortunately, the group’s recent blog reporting this information was shut down.

    UDR also fails to include the name of their agent for service of process in their leases as required by law, nor maintains an up to date address for the agent with the California Secretary of State.

    UDR leases used in California contain unlawful and oppressive exculpatory clauses as well as liquidated damages clauses in violation of the California Civil Code as well as recent case law.

    Finally, UDR Orange County property leases include a Ratio Utility Billing System (RUBS) policy and procedure that is extraordinarily uncertain, vague, unconscionable and oppressive to tenants.

    The advocacy group claims that UDR is earning a profit off of their utility services by illegally selling water, a direct violation of the Public Utilities Commission.

    ReplyDelete

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