UDR Decides Smaller Is Better With Big Sale

HIGHLANDS RANCH, CO - When it came to redefining itself, apartment owner UDR Inc. decided that bigger isn't necessarily better. The company recently unloaded more than 25,000 apartment units, about 40% of its portfolio, for $1.7 billion. Now, industry watchers want to see whether UDR, formerly known as United Dominion Realty Trust, can transform itself from a national giant renting nondescript, bread-and-butter apartments into a smaller company with a sharper focus on pricier markets and newer apartments.

While analysts like the deal and the company's shares have risen, it won't be easy. "This is a nice chunk of their assets," said Philip Kibel of Moody's Investors Service. "It could affect their leadership and their brand name."

It will affect the real-estate investment trust's earnings: Year-over-year funds from operations, a measure of REIT performance, are expected to decline about 10%, industry watchers say. The company sold off "a decent portion of that income stream," said Timothy Pire, managing director of domestic public securities for Heitman LLC, a Chicago real estate investment management firm. "Will they get back to their previous levels of earnings?" he asked. "Over time."

While it isn't clear how long that will take, next month's earnings should provide some early clues, there are other issues: Like all apartment operators, UDR faces increased competition as a foreclosure wave floods the market with bargain-priced supply. And the Highlands Ranch, Colo., company has ramped up development during the worst housing downturn in decades.

"In one transaction, it changed the entire outlook and growth strategy for the company, certainly, we think, for the better," UDR President and Chief Executive Thomas Toomey said. It "gives us a certain amount of firepower and liquidity at a time when the market is down."

For now, analysts seem supportive of the deal, which would be harder to get done today, with buyers' risk appetites changed and debt costs higher, said Haendel St. Juste, who co-manages Green Street Advisors Inc.'s residential research team. The transaction could have taken years if the communities were sold piecemeal. "You don't find too often that companies are willing to sell off large blocks of their empire, for lack of a better word," Mr. St. Juste said. "Most companies don't like to shrink their empires."