United Dominion's Intriguing Valuation

Pretend for a moment that you're managing a real estate investment trust (REIT) that you believe has a strong outlook, is delivering steadily better operating and financial results, and has just increased its dividend for the 30th consecutive year, yet it's still trading at steep discount to peers such as AvalonBay Communities (NYSE: AVB  ) and BRE Properties (NYSE: BRE  ) . What would you do? If you answered "buy back shares," congratulations. That's just what United Dominion Realty Trust (NYSE: UDR  ) is doing.

The apartment-focused REIT reported its Q1 results after the close on Monday, and the numbers came in largely as expected. Funds from operations for the quarter were a penny ahead of the consensus analyst estimate, and the company maintained its full-year guidance. From an operating standpoint, United Dominion posted its ninth consecutive quarter of same-store revenue growth, and same-store net operating income increased 6.6% over the previous year.

The company also reported a 26% reduction in concessions compared with the first quarter of 2005. And while for most of us the word "concessions" brings to mind good things like beer, hot dogs, and snow cones, it means something very bad to an apartment REIT executive: free rent. Concessions are more prevalent during periods of weak market conditions, when apartment owners are trying to entice renters to sign a lease. Often, the concession will come in the form of offering one month or more free on a 12-month lease. So, the dramatic drop in concessions for United Dominion in the quarter points to an improving market outlook.

Yet for all of the positives on the earnings front and in the market outlook, shares of the company trade at a significant discount to the peer group. United Dominion currently trades at roughly 16.7 times the 2006 consensus analyst estimate of $1.69 per share, or nearly 20% below the peer group's average multiple of 20.8. And the stock isn't receiving much love from the analyst community, where it gets only four "buy" ratings from the 14 analysts who cover it. The remainder rate the stock a lukewarm "hold."

That takes us back to United Dominion's stock buyback. The REIT repurchased 3.2 million shares during the fourth quarter of 2005 at an average price of $23 per share (implying a 22% return at today's price), and in February, the board of directors authorized another repurchase, this one for 10 million shares.

If the company is buying its own shares, perhaps you should take a look as well.

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Fool contributor Sean P. Smith is a freelance writer living in St. Louis. He does not own shares of any company mentioned in this article. You can check out more discussion on the Fool's United Dominion message board.


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