Is UDR Inc (NYSE:UDR) A Healthy REIT?

UDR Inc is a US$10.30b large-cap, real estate investment trust (REIT) based in Highlands Ranch, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess UDR.

REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of UDR’s daily operations. For UDR, its FFO of US$519.15m makes up 75.70% of its gross profit, which means the majority of its earnings are high-quality and recurring.

In order to understand whether UDR has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take UDR to pay off its debt using its income from its main business activities, and gives us an insight into UDR’s ability to service its borrowings. With a ratio of 14.14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take UDR 7.07 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at UDR's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 4.03x, it’s safe to say UDR is generating an appropriate amount of cash from its borrowings.

In terms of valuing UDR, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. UDR's price-to-FFO is 19.89x, compared to the long-term industry average of 16.5x, meaning that it is slightly overvalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. UDR can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

1. Future Outlook: What are well-informed industry analysts predicting for UDR’s future growth? Take a look at our free research report of analyst consensus for UDR’s outlook.
2. Valuation: What is UDR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether UDR is currently mispriced by the market.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.