Apartment-focused residential real estate investment trust (REIT) UDR (NYSE: UDR) has done a fantastic job creating shareholder value over the years. Investors who bought $10,000 of its stock 20 years ago would have seen that investment grow into more than $99,000. That's triple what an investor would have earned if they'd put that money into an S&P 500 index fund and ahead of what they would have made by investing it into most other apartment REITs.
If UDR can maintain its market-beating pace, the REIT could eventually turn a relatively modest investment into a million-dollar windfall, given enough time, thanks to the wonders of compound interest. Here's a look at what it would take for the REIT to mint millionaires.
The math to $1 million
It's quite possible to turn a small investment into a million-dollar nest egg, given enough time and rate of return. For example, $1,000 invested into an S&P 500 index fund should grow into $1 million in about 75 years, assuming the market continues to produce total returns of around 10% per year. Meanwhile, investors can shorten that time frame by bumping up the initial investment or rate of return.
For example, $10,000 invested in a company like UDR that has produced an 11.6% compound annual total shareholder return over the last 20 years would grow into $1 million in 40 years if it maintained that pace. Thus, it's conceivable that UDR could eventually be a millionaire-maker stock as investors who bought shares two decades ago are theoretically halfway there.
UDR's millionaire-making ability
UDR has outperformed both the Nareit apartment index and S&P 500 over the last 20 years due in part to its ability to grow its same-store NOI at an above-average pace. The company has done that by focusing on maximizing the income produced at its properties. That has included implementing a proactive pricing strategy to charge a premium for apartments with higher-than-average occupancy rates due to views or location. It has also increased revenue by renting out common areas, parking, and package lockers.
Meanwhile, the company has also done an excellent job allocating capital to grow shareholder value. It has invested money in renovation projects that enhance NOI, redeveloped older communities, developed new ones, and made acquisitions. When combined with its initiatives to boost same-store NOI, these investments have helped drive above-average FFO growth over the years.
While UDR has an excellent history of creating value, the big question is whether it can continue doing so in the future. On the one hand, there's reason to believe it can. The company's management team continues to focus on operational excellence to maximize its same-store NOI. Meanwhile, the REIT has a strong investment-grade balance sheet to continue making value-enhancing investments.
However, there is some concern about whether the company and its apartment REIT peers can continue growing rental rates in the near term. That's because high-cost urban core markets like New York, San Francisco, and Boston -- which each contribute more than 5% of the company's NOI -- are under pressure since renters who can telecommute are moving to lower-cost suburban areas. This headwind could remain well after the pandemic if companies offer employees more flexibility to work from home, which would likely reduce demand for urban apartments that offer a shorter commute.
Another headwind facing apartment owners is that some renters are taking advantage of historically low interest rates to buy homes. Because of that, UDR's occupancy rate, even after adjusting for the impact of major coastal cities, still declined this year.
It could be quite a while before rental rates and occupancy levels improve to their pre-pandemic levels. Because of that, UDR's stock, which has already underperformed the S&P 500 over the last five years -- might continue to do so until market conditions improve.
UDR doesn't seem like a millionaire-maker stock
While UDR has outperformed the market over the last 20 years, its more recent performance has been subpar. Those lackluster returns could continue for the next couple of years, given the pressure facing apartment owners with exposure to large coastal markets. Because of that, there's some concern about the REIT's ability to generate the returns needed to turn a modest investment into $1 million faster than the S&P 500.