UDR: Sunbelt Supply Slowdown Will Support Multifamily Sector Recovery

Key Takeaways

• Strong rental demand and strategic market focus are driving revenue and rent growth while minimizing downside risk.
  
• Innovation and disciplined capital allocation are improving operational efficiency, margins, and long-term earnings potential.
  
• Prolonged supply pressures, regulatory risks, rising costs, and demographic shifts threaten rental growth, occupancy, margins, and long-term portfolio and earnings expansion.

Catalysts

UDR, Inc. (NYSE: UDR), an S&P 500 company, is a leading multifamily real estate investment trust with a demonstrated performance history of delivering superior and dependable returns by successfully managing, buying, selling, developing and redeveloping attractive real estate communities in targeted U.S.

• Declining affordability of homeownership and persistent housing shortages are driving increased demand for multifamily rentals, as evidenced by strong year-to-date occupancy (averaging near 97%) and record apartment absorption, positioning UDR for sustained revenue and rent growth.
  
• Urban migration patterns, combined with better-than-expected job and wage growth in core coastal cities like San Francisco, Seattle, Boston, and D.C., are supporting ongoing high occupancy and high renewal rent growth, which should enhance UDR's top-line revenue and minimize downside risk.
  
• Portfolio optimization-rotating out of lower-growth assets into higher-yielding East/West Coast and selected Sunbelt markets with robust fundamentals-continues to support higher average rent roll growth and NOI expansion, improving UDR's earnings trajectory.
  
• Innovations such as smart home upgrades, customer experience initiatives, and offering value-added services (leading to double-digit other income growth) are driving operational efficiencies and tenant retention, likely supporting higher margins and long-term net operating income growth.
  
• UDR's strong balance sheet, ample liquidity, and disciplined capital allocation enable opportunistic acquisitions and development as new supply wanes, allowing the company to capture external growth opportunities and underpin future earnings and NAV expansion.

UDR Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UDR's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 11.9% in 3 years time.
• Analysts expect earnings to reach $227.8 million (and earnings per share of $0.72) by about September 2028, up from $127.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $296.4 million in earnings, and the most bearish expecting $148.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 88.2x on those 2028 earnings, down from 101.6x today. This future PE is greater than the current PE for the US Residential REITs industry at 32.5x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

UDR Future Earnings Per Share Growth

Risks

• Persistent elevated supply in Sunbelt and select urban markets (e.g., Austin, Orlando) is still pressuring rental growth and keeping year-to-date same-store revenue in these regions slightly negative, which may weigh on overall revenue and NOI growth if absorption fails to keep pace with completions over the long term.
  
• Ongoing or potential regulatory risks in core high-cost markets-such as rent control measures in California's Monterey Peninsula and possible similar moves elsewhere-could cap renewal rent growth and compress margins, impacting long-term revenue and net operating income.
  
• Slower growth or lack of distress-driven opportunities in acquisitions and development, alongside rising construction costs and limited yield spreads to buying stabilized properties, may impede portfolio expansion and long-term earnings growth if capital can't be efficiently deployed.
  
• Technology and operational cost inflation (e.g., recurring Wi-Fi, CRM, cybersecurity investments) and episodic casualty/legal costs could structurally raise operating expenses relative to revenue, limiting margin expansion and pressuring long-term free cash flow.
  
• Heavy concentration in major coastal (West/East Coast) and urban gateway markets leaves UDR exposed to demographic and remote work trends that may favor suburban or exurban living, potentially reducing long-term demand and occupancy, thereby putting downward pressure on NOI and cash flow growth.

Valuation

• The analysts have a consensus price target of $44.119 for UDR based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $49.0, and the most bearish reporting a price target of just $37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.9 billion, earnings will come to $227.8 million, and it would be trading on a PE ratio of 88.2x, assuming you use a discount rate of 7.3%.
• Given the current share price of $38.98, the analyst price target of $44.12 is 11.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.