UDR(NYSE: UDR) is an apartment real estate investment trust (REIT). It has a fairly diversified footprint, spanning rural and urban settings in the U.S. With a dividend yield of around 4.6%, income investors will probably find it an attractive option in the apartment REIT sector. Here's one more reason to like the landlord.
UDR is giving tenants a break
Housing costs in the U.S. have skyrocketed. The troubling dynamics in the housing market are complicated and not easy to solve. Notably, fast-rising interest rates have multiple and material impacts.
For people looking to buy a home, the cost of financing has risen to levels that may be unaffordable. But at the same time, those with homes and mortgages are dissuaded from selling because they would likely have to finance their new purchase with a much more expensive mortgage, interest rate wise.
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Basically, even though demand may not be robust, there's also low supply. Then there's inflation, which is driving up costs throughout the country. That includes the price of key house construction products, like lumber, fixtures, and appliances, among other things. It isn't just as simple as lowering home prices, which most sellers are reluctant to do even in less complicated times.
That's where a key metric from REIT UDR comes in. The company examines housing affordability in its markets and estimates that it is roughly 55% less expensive to rent than to buy a house where it operates. That's not a small difference, and it helps maintain the company's occupancy rates.
UDR is recouping costs, but still more affordable
That said, UDR isn't immune to the impact of inflation. It faces increased employee costs and higher operating expenses at its properties for everything from electricity to water. And rising interest rates are an income statement headwind as well. So it has been increasing rental rates.
But as it has undertaken this effort, it has focused on maintaining the rent-to-income ratio of its tenants. The goal has been to keep the rent-to-income ratio in the low- to mid-20% range. The company notes that average incomes within its properties have risen 25%.
This is just good business. And the benefit is very clear. UDR conducts exit interviews with tenants, so it can keep tabs on what is going on at the property level. At the moment, only 6% of tenants are leaving to buy a single-family home. That's a sign that UDR is executing well in an uncertain market. That said, the headwinds to buying a home today are highlighted by the fact that the 6% figure is roughly half its normal level.
UDR's occupancy currently sits at around 96.6%. That's a fairly robust figure, since there are always people moving in and out of its over 51,000 apartments. However, given the affordability it offers over buying a home today, occupancy levels might hold up historically well even if there's a recession in the cards over the next year.
Making the best of a bad situation
While the high price of buying a home is not good news, UDR is clearly doing a good job to ensure its profitability while supporting tenants in a fast-changing housing market. It is raising rents, but in a prudent fashion so it ensures that its residents can still afford to live in its properties. Given that backdrop, the attractive 4.6% dividend yield -- near the highest levels of the past decade -- might be worth a deep dive for income-focused investors today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
