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United Dominion Realty L P (UDR)

Filed: 31 Jul 19, 2:06pm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                    

Commission file number

1-10524 (UDR, Inc.)

333-156002-01 (United Dominion Realty, L.P.)

UDR, Inc.

United Dominion Realty, L.P.

(Exact name of registrant as specified in its charter)

Maryland (UDR, Inc.)

54-0857512

Delaware (United Dominion Realty, L.P.)

54-1776887

(State or other jurisdiction of

(I.R.S. Employer

incorporation of organization)

Identification No.)

1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129

(Address of principal executive offices) (zip code)

(720283-6120

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01

UDR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

UDR, Inc.

Yes No

United Dominion Realty, L.P.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

UDR, Inc.

Yes No

United Dominion Realty, L.P.

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

UDR, Inc.:

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

United Dominion Realty, L.P.:

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

UDR, Inc.

United Dominion Realty, L.P.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

UDR, Inc.

Yes No

United Dominion Realty, L.P.

Yes No

The number of shares of UDR, Inc.’s common stock, $0.01 par value, outstanding as of July 29, 2019 was 285,282,476.

UDR, INC.

UNITED DOMINION REALTY, L.P.

INDEX

PAGE

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

UDR, INC.:

Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 (audited)

5

Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (unaudited)

6

Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2019 and 2018 (unaudited)

7

Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

8

Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

10

Notes to Consolidated Financial Statements (unaudited)

11

UNITED DOMINION REALTY, L.P.:

Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 (audited)

43

Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (unaudited)

44

Consolidated Statements of Changes in Capital for the three and six months ended June 30, 2019 and 2018 (unaudited)

45

Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

46

Notes to Consolidated Financial Statements (unaudited)

47

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

65

Item 3. Quantitative and Qualitative Disclosures About Market Risk

88

Item 4. Controls and Procedures

88

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

89

Item 1A. Risk Factors

89

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

103

Item 3. Defaults Upon Senior Securities

104

Item 4. Mine Safety Disclosures

104

Item 5. Other Information

104

Item 6. Exhibits

105

Signatures

107

Exhibit 31.1

Exhibit 31.2

Exhibit 31.3

Exhibit 31.4

Exhibit 32.1

Exhibit 32.2

Exhibit 32.3

Exhibit 32.4

EXPLANATORY NOTE

This Report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2019 of UDR, Inc., a Maryland corporation, and United Dominion Realty, L.P., a Delaware limited partnership, of which UDR, Inc. is the parent company and sole general partner. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” the “Company,” “UDR” or “UDR, Inc.” refer collectively to UDR, Inc., together with its consolidated subsidiaries and joint ventures, including United Dominion Realty, L.P. and UDR Lighthouse DownREIT L.P. (the “DownREIT Partnership”), also a Delaware limited partnership of which UDR is the sole general partner. Unless the context otherwise requires, the references in this Report to the “Operating Partnership” or the “OP” refer to United Dominion Realty, L.P., together with its consolidated subsidiaries. “Common stock” refers to the common stock of UDR and “stockholders” means the holders of shares of UDR’s common stock and preferred stock. The limited partnership interests of the Operating Partnership and the DownREIT Partnership are referred to as “OP Units” and “DownREIT Units,” respectively, and the holders of the OP Units and DownREIT Units are referred to as “unitholders.” This combined Form 10-Q is being filed separately by UDR and the Operating Partnership.

There are a number of differences between the Company and the Operating Partnership, which are reflected in our disclosures in this Report. UDR is a real estate investment trust (“REIT”), whose most significant asset is its ownership interest in the Operating Partnership. UDR also conducts business through other subsidiaries, including its taxable REIT subsidiary (“TRS”). UDR acts as the sole general partner of the Operating Partnership, holds interests in subsidiaries and joint ventures, owns and operates properties, issues securities from time to time and guarantees debt of certain of our subsidiaries. The Operating Partnership conducts the operations of a substantial portion of the business and is structured as a partnership with no publicly traded equity securities. The Operating Partnership has guaranteed certain outstanding debt of UDR.

As of June 30, 2019, UDR owned 110,883 units (100%) of the general partnership interests of the Operating Partnership and 176,099,189 OP Units, representing approximately 95.7% of the total outstanding OP Units in the Operating Partnership. UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and UDR’s role as the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are presented in this report for each of UDR and the Operating Partnership.

UDR, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

June 30, 

December 31, 

    

2019

    

2018

(unaudited)

(audited)

ASSETS

Real estate owned:

 

  

 

  

Real estate held for investment

$

11,011,516

$

10,196,159

Less: accumulated depreciation

 

(3,878,897)

 

(3,654,160)

Total real estate owned, net of accumulated depreciation

 

7,132,619

 

6,541,999

Cash and cash equivalents

 

981

 

185,216

Restricted cash

 

23,042

 

23,675

Notes receivable, net

 

37,494

 

42,259

Investment in and advances to unconsolidated joint ventures, net

 

769,000

 

780,869

Operating lease right-of-use assets

93,939

Other assets

 

140,191

 

137,710

Total assets

$

8,197,266

$

7,711,728

LIABILITIES AND EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Secured debt, net

$

598,389

$

601,227

Unsecured debt, net

 

3,272,200

 

2,946,560

Operating lease liabilities

88,099

Real estate taxes payable

 

23,919

 

20,608

Accrued interest payable

 

42,029

 

38,747

Security deposits and prepaid rent

 

35,222

 

35,060

Distributions payable

 

105,611

 

97,666

Accounts payable, accrued expenses, and other liabilities

 

63,250

 

76,343

Total liabilities

 

4,228,719

 

3,816,211

Commitments and contingencies (Note 13)

 

  

 

  

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

1,000,532

 

972,740

Equity:

 

  

 

  

Preferred stock, no par value; 50,000,000 shares authorized:

 

  

 

  

8.00% Series E Cumulative Convertible; 2,780,994 shares issued and outstanding at June 30, 2019 and December 31, 2018

 

46,200

 

46,200

Series F; 15,097,917 and 15,802,393 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

1

 

1

Common stock, $0.01 par value; 350,000,000 shares authorized:

 

  

 

  

283,104,643 and 275,545,900 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively

 

2,831

 

2,755

Additional paid-in capital

 

5,244,819

 

4,920,732

Distributions in excess of net income

 

(2,336,609)

 

(2,063,996)

Accumulated other comprehensive income/(loss), net

 

(7,838)

 

(67)

Total stockholders’ equity

 

2,949,404

 

2,905,625

Noncontrolling interests

 

18,611

 

17,152

Total equity

 

2,968,015

 

2,922,777

Total liabilities and equity

$

8,197,266

$

7,711,728

See accompanying notes to consolidated financial statements.

5

UDR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

2019

2018

REVENUES:

    

  

    

  

    

  

    

  

Rental income

$

278,463

$

256,634

$

546,385

$

507,117

Joint venture management and other fees

 

2,845

 

3,109

 

5,596

 

5,931

Total revenues

 

281,308

 

259,743

 

551,981

 

513,048

OPERATING EXPENSES:

 

  

 

  

 

  

 

  

Property operating and maintenance

 

42,894

 

41,452

 

84,833

 

82,039

Real estate taxes and insurance

 

35,834

 

31,907

 

72,134

 

65,189

Property management

 

8,006

 

7,057

 

15,709

 

13,945

Other operating expenses

 

2,735

 

2,825

 

8,381

 

4,834

Real estate depreciation and amortization

 

117,934

 

106,520

 

230,402

 

214,656

General and administrative

 

12,338

 

12,373

 

24,805

 

24,132

Casualty-related charges/(recoveries), net

 

246

 

746

 

246

 

1,686

Other depreciation and amortization

 

1,678

 

1,684

 

3,334

 

3,375

Total operating expenses

 

221,665

 

204,564

439,844

 

409,856

Gain/(loss) on sale of real estate owned

5,282

5,282

70,300

Operating income

 

64,925

 

55,179

 

117,419

 

173,492

Income/(loss) from unconsolidated entities

 

6,625

 

(2,032)

 

6,674

 

(3,709)

Interest expense

 

(34,417)

 

(31,598)

 

(67,959)

 

(61,541)

Interest income and other income/(expense), net

 

1,310

 

1,128

 

11,123

 

3,887

Income/(loss) before income taxes

 

38,443

 

22,677

 

67,257

 

112,129

Tax (provision)/benefit, net

 

(125)

 

(233)

 

(2,337)

 

(460)

Net income/(loss)

 

38,318

 

22,444

 

64,920

 

111,669

Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

(2,652)

 

(1,813)

 

(4,709)

 

(9,203)

Net (income)/loss attributable to noncontrolling interests

 

(47)

 

(30)

 

(89)

 

(109)

Net income/(loss) attributable to UDR, Inc.

 

35,619

 

20,601

 

60,122

 

102,357

Distributions to preferred stockholders — Series E (Convertible)

 

(1,031)

 

(971)

 

(2,042)

 

(1,926)

Net income/(loss) attributable to common stockholders

$

34,588

$

19,630

$

58,080

$

100,431

Income/(loss) per weighted average common share:

 

  

 

  

 

  

 

  

Basic

$

0.12

$

0.07

$

0.21

$

0.38

Diluted

$

0.12

$

0.07

$

0.21

$

0.37

Weighted average number of common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

281,960

 

267,311

 

279,494

 

267,428

Diluted

 

282,575

 

268,890

 

280,081

 

269,002

See accompanying notes to consolidated financial statements.

6

UDR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

2019

2018

Net income/(loss)

$

38,318

$

22,444

$

64,920

$

111,669

Other comprehensive income/(loss), including portion attributable to noncontrolling interests:

 

  

 

  

 

  

 

  

Other comprehensive income/(loss) - derivative instruments:

 

  

 

  

 

  

 

  

Unrealized holding gain/(loss)

 

(4,311)

 

282

 

(6,522)

 

1,992

(Gain)/loss reclassified into earnings from other comprehensive income/(loss)

 

(933)

 

(426)

 

(1,880)

 

(598)

Other comprehensive income/(loss), including portion attributable to noncontrolling interests

 

(5,244)

 

(144)

 

(8,402)

 

1,394

Comprehensive income/(loss)

 

33,074

 

22,300

 

56,518

 

113,063

Comprehensive (income)/loss attributable to noncontrolling interests

 

(2,320)

 

(1,830)

 

(4,167)

 

(9,432)

Comprehensive income/(loss) attributable to UDR, Inc.

$

30,754

$

20,470

$

52,351

$

103,631

See accompanying notes to consolidated financial statements.

7

UDR, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands, except per share data)

(Unaudited)

    

    

    

Distributions

    

Accumulated Other Comprehensive

    

    

Preferred

Common

Paid-in

in Excess of

Income/(Loss),

Noncontrolling

Stock

Stock

Capital

Net Income

net

Interests

Total

Balance at March 31, 2019

$

46,201

$

2,818

$

5,184,195

$

(2,281,262)

$

(2,970)

$

13,382

$

2,962,364

Net income/(loss) attributable to UDR, Inc.

 

 

 

 

35,619

 

 

 

35,619

Net income/(loss) attributable to noncontrolling interests

 

 

 

 

 

 

27

 

27

Long Term Incentive Plan Unit grants/(vestings), net

 

 

 

 

 

 

5,202

 

5,202

Other comprehensive income/(loss)

 

 

 

 

 

(4,868)

 

 

(4,868)

Issuance/(forfeiture) of common and restricted shares, net

 

 

 

1,201

 

 

 

 

1,201

Issuance of common shares through public offering, net

 

 

5

 

20,688

 

 

 

 

20,693

Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership and DownREIT Partnership

 

 

8

 

38,735

 

 

 

 

38,743

Common stock distributions declared ($0.3425 per share)

 

 

 

 

(96,962)

 

 

 

(96,962)

Preferred stock distributions declared-Series E ($0.3708 per share)

 

 

 

 

(1,031)

 

 

 

(1,031)

Adjustment to reflect redemption value of redeemable noncontrolling interests

 

 

 

 

7,027

 

 

 

7,027

Balance at June 30, 2019

$

46,201

$

2,831

$

5,244,819

$

(2,336,609)

$

(7,838)

$

18,611

$

2,968,015

    

    

    

    

Distributions

    

Accumulated Other Comprehensive

    

    

Preferred

Common

Paid-in

in Excess of

Income/(Loss),

Noncontrolling

Stock

Stock

Capital

Net Income

net

Interests

Total

Balance at December 31, 2018

$

46,201

$

2,755

$

4,920,732

$

(2,063,996)

$

(67)

$

17,152

$

2,922,777

Net income/(loss) attributable to UDR, Inc.

 

 

 

 

60,122

 

 

 

60,122

Net income/(loss) attributable to noncontrolling interests

 

 

 

 

 

 

57

 

57

Contribution of noncontrolling interests in consolidated real estate

 

 

 

 

 

 

125

 

125

Long Term Incentive Plan Unit grants/(vestings), net

 

 

 

 

 

 

1,277

 

1,277

Other comprehensive income/(loss)

 

 

 

 

 

(7,771)

 

 

(7,771)

Issuance/(forfeiture) of common and restricted shares, net

 

 

 

(298)

 

 

 

 

(298)

Issuance of common shares through public offering, net

 

 

49

 

212,823

 

 

 

 

212,872

Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership and DownREIT Partnership

 

 

27

 

111,562

 

 

 

 

111,589

Common stock distributions declared ($0.6850 per share)

 

 

 

 

(193,523)

 

 

 

(193,523)

Preferred stock distributions declared-Series E ($0.7416 per share)

 

 

 

 

(2,042)

 

 

 

(2,042)

Adjustment to reflect redemption value of redeemable noncontrolling interests

 

 

 

 

(137,170)

 

 

 

(137,170)

Balance at June 30, 2019

$

46,201

$

2,831

$

5,244,819

$

(2,336,609)

$

(7,838)

$

18,611

$

2,968,015

    

    

    

    

Distributions

    

Accumulated Other Comprehensive

    

    

Preferred

Common

Paid-in

in Excess of

Income/(Loss),

Noncontrolling

Stock

Stock

Capital

Net Income

net

Interests

Total

Balance at March 31, 2018

$

46,201

$

2,676

$

4,638,766

$

(1,808,907)

$

(1,276)

$

8,318

$

2,885,778

Net income/(loss) attributable to UDR, Inc.

 

 

 

 

20,601

 

 

 

20,601

Net income/(loss) attributable to noncontrolling interests

 

 

 

 

 

 

16

 

16

Contribution of noncontrolling interests in consolidated real estate

 

 

 

 

 

 

 

Repurchase of common shares

 

 

 

 

 

 

Long Term Incentive Plan Unit grants/(vestings), net

 

 

 

 

 

 

2,922

 

2,922

Other comprehensive income/(loss)

 

 

 

 

 

(131)

 

 

(131)

Issuance/(forfeiture) of common and restricted shares, net

 

 

 

(583)

 

 

 

 

(583)

Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership and DownREIT Partnership

 

 

1

 

964

 

 

 

 

965

Common stock distributions declared ($0.3225 per share)

 

 

 

 

(86,332)

 

 

 

(86,332)

Preferred stock distributions declared-Series E ($0.3492 per share)

 

 

 

 

(971)

 

 

 

(971)

Adjustment to reflect redemption value of redeemable noncontrolling interests

 

 

 

 

(53,515)

 

 

 

(53,515)

Balance at June 30, 2018

$

46,201

$

2,677

$

4,639,147

$

(1,929,124)

$

(1,407)

$

11,256

$

2,768,750

8

    

    

    

    

Distributions

    

Accumulated Other Comprehensive

    

    

Preferred

Common

Paid-in

in Excess of

Income/(Loss),

Noncontrolling

Stock

Stock

Capital

Net Income

net

Interests

Total

Balance at December 31, 2017

$

46,201

$

2,678

$

4,651,205

$

(1,871,603)

$

(2,681)

$

9,564

$

2,835,364

Net income/(loss) attributable to UDR, Inc.

 

 

 

 

102,357

 

 

 

102,357

Net income/(loss) attributable to noncontrolling interests

 

 

 

 

 

 

86

 

86

Contribution of noncontrolling interests in consolidated real estate

 

 

 

 

 

 

108

 

108

Repurchase of common shares

 

(6)

 

(19,982)

 

 

 

 

(19,988)

Long Term Incentive Plan Unit grants/(vestings), net

 

 

 

 

 

 

1,498

 

1,498

Other comprehensive income/(loss)

 

 

 

 

 

1,274

 

 

1,274

Issuance/(forfeiture) of common and restricted shares, net

 

 

 

(4,731)

 

 

 

 

(4,731)

Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership and DownREIT Partnership

 

 

5

 

12,655

 

 

 

 

12,660

Common stock distributions declared ($0.6450 per share)

 

 

 

 

(172,654)

 

 

 

(172,654)

Preferred stock distributions declared-Series E ($0.6984 per share)

 

 

 

 

(1,926)

 

 

 

(1,926)

Adjustment to reflect redemption value of redeemable noncontrolling interests

 

 

 

 

14,702

 

 

 

14,702

Balance at June 30, 2018

$

46,201

$

2,677

$

4,639,147

$

(1,929,124)

$

(1,407)

$

11,256

$

2,768,750

See accompanying notes to consolidated financial statements.

9

UDR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for share data)

(Unaudited)

Six Months Ended June 30, 

    

2019

    

2018

Operating Activities

  

 

  

Net income/(loss)

$

64,920

$

111,669

Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:

 

  

 

  

Depreciation and amortization

 

233,736

 

218,031

(Gain)/loss on sale of real estate owned

 

(5,282)

 

(70,300)

(Income)/loss from unconsolidated entities

 

(6,674)

 

3,709

Return on investment in unconsolidated joint ventures

 

3,078

 

1,371

Amortization of share-based compensation

 

10,316

 

7,082

Other

 

6,587

 

2,259

Changes in operating assets and liabilities:

 

  

 

  

(Increase)/decrease in operating assets

 

(2,166)

 

(15,702)

Increase/(decrease) in operating liabilities

 

(18,094)

 

(3,018)

Net cash provided by/(used in) operating activities

 

286,421

 

255,101

Investing Activities

 

  

 

  

Acquisition of real estate assets

 

(730,820)

 

Proceeds from sales of real estate investments, net

 

38,000

 

89,433

Development of real estate assets

 

(10,333)

 

(108,175)

Capital expenditures and other major improvements — real estate assets

 

(70,240)

 

(44,612)

Capital expenditures — non-real estate assets

 

(7,147)

 

(1,501)

Investment in unconsolidated joint ventures

 

(51,874)

 

(41,545)

Distributions received from unconsolidated joint ventures

 

26,906

 

17,385

Purchase deposits on pending acquisitions

(5,250)

(1,000)

Repayment/(issuance) of notes receivable, net

 

4,765

 

(21,240)

Net cash provided by/(used in) investing activities

 

(805,993)

 

(111,255)

Financing Activities

 

  

 

  

Payments on secured debt

 

(1,900)

 

(2,305)

Net proceeds/(repayment) of commercial paper

 

290,885

 

55,000

Net proceeds/(repayment) of revolving bank debt

 

33,362

 

28,180

Proceeds from the issuance of common shares through public offering, net

 

212,872

 

Repurchase of common shares

(19,988)

Distributions paid to redeemable noncontrolling interests

 

(16,805)

 

(16,140)

Distributions paid to preferred stockholders

 

(2,001)

 

(1,894)

Distributions paid to common stockholders

 

(185,423)

 

(169,357)

Other

 

3,714

 

(8,260)

Net cash provided by/(used in) financing activities

 

334,704

 

(134,764)

Net increase/(decrease) in cash, cash equivalents, and restricted cash

 

(184,868)

 

9,082

Cash, cash equivalents, and restricted cash, beginning of year

 

208,891

 

21,830

Cash, cash equivalents, and restricted cash, end of period

$

24,023

$

30,912

Supplemental Information:

 

  

 

  

Interest paid during the period, net of amounts capitalized

$

67,474

$

58,203

Cash paid/(refunds received) for income taxes

 

1,408

 

729

Non-cash transactions:

 

  

 

  

Transfer of investment in and advances to unconsolidated joint ventures to real estate owned

$

40,433

$

Recognition of operating lease right-of-use assets

94,349

Recognition of operating lease liabilities

88,336

Vesting of LTIP Units

14,742

4,397

Development costs and capital expenditures incurred but not yet paid

 

12,251

 

32,613

Conversion of Operating Partnership and DownREIT Partnership noncontrolling interests to common stock (2,690,198 shares in 2019 and 330,573 shares in 2018)

 

111,589

 

12,660

Dividends declared but not yet paid

 

105,611

 

95,131

The following reconciles cash, cash equivalents, and restricted cash to amounts as shown above:

Cash, cash equivalents, and restricted cash, beginning of year:

Cash and cash equivalents

$

185,216

$

2,038

Restricted cash

23,675

19,792

Total cash, cash equivalents, and restricted cash as shown above

$

208,891

$

21,830

Cash, cash equivalents, and restricted cash, end of period:

Cash and cash equivalents

$

981

$

1,055

Restricted cash

23,042

29,857

Total cash, cash equivalents, and restricted cash as shown above

$

24,023

$

30,912

See accompanying notes to consolidated financial statements.

10

Table of Contents

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2019

1. BASIS OF PRESENTATION

Basis of Presentation

UDR, Inc., collectively with our consolidated subsidiaries (“UDR,” the “Company,” “we,” “our,” or “us”), is a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, and manages apartment communities. The accompanying consolidated financial statements include the accounts of UDR and its subsidiaries, including United Dominion Realty, L.P. (the “Operating Partnership” or the “OP”) and UDR Lighthouse DownREIT L.P. (the “DownREIT Partnership”). As of June 30, 2019, there were 184,063,542 units in the Operating Partnership (“OP Units”) outstanding, of which 176,210,072 OP Units, or 95.7%, were owned by UDR and 7,853,470 OP Units, or 4.3%, were owned by outside limited partners. As of June 30, 2019, there were 32,367,380 units in the DownREIT Partnership (“DownREIT Units”) outstanding, of which 17,932,313, or 55.4%, were owned by UDR (including 13,470,651 DownREIT Units, or 41.6%, that were held by the Operating Partnership) and 14,435,067, or 44.6%, were owned by outside limited partners. The consolidated financial statements of UDR include the noncontrolling interests of the unitholders in the Operating Partnership and DownREIT Partnership.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of June 30, 2019, and results of operations for the three and six months ended June 30, 2019 and 2018, have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2018 appearing in UDR’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 19, 2019.

The accompanying interim unaudited consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company evaluated subsequent events through the date its financial statements were issued. No significant recognized or non-recognized subsequent events were noted other than those noted in Note 5, Joint Ventures and Partnerships, Note 7, Secured and Unsecured Debt, Net, Note 8, Income/(Loss) per Share and Note 13, Commitments and Contingencies.

2. SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Company on January 1, 2020. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amends the transition requirements and scope of ASU 2016-13 and clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. The Company is currently evaluating the effect that the updated standard will have on the consolidated financial statements and related disclosures.

11

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

In February 2016, the FASB issued ASU 2016-02, Leases. The standard amended the existing lease accounting guidance and required lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases continued to recognize lease expense in a manner similar to previous accounting. For lessors, accounting for leases under the new guidance was substantially the same as in prior periods, but eliminated current real estate-specific provisions and changed the treatment of initial direct costs. The standard was effective for the Company on January 1, 2019.

The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year.

The Company recognized right-of-use assets of $94.3 million and lease liabilities of $88.3 million as of January 1, 2019 upon adoption of the standard. The right-of-use assets included $6.0 million of prepaid rent and intangible assets that was included within Other assets on our Consolidated Balance Sheets as of December 31, 2018.

The lease liabilities represent the present value of the remaining minimum lease payments as of January 1, 2019 related to ground leases for communities where we are the lessee. The right-of-use assets represent our right to use an underlying asset for the lease term, which are calculated utilizing the lease liabilities plus any prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. Our right-of-use assets and related lease liabilities recognized as of January 1, 2019 may change as a result of updates to the projected future minimum lease payments. Certain of our ground lease agreements where we are the lessee have future minimum lease payments that reset in the future based upon a percentage of the fair market value of the land at the time of the reset. One of these resets is in process as of June 30, 2019 and is estimated to increase our right-of-use assets and lease liabilities up to a maximum of $146.5 million and $140.6 million, respectively, during the remainder of 2019. The Company will continue to recognize lease expense for these leases in a manner similar to previous accounting based on our election of the package of practical expedients. However, in the event we modify existing ground leases and/or enter into new ground leases subsequent to the adoption of the standard, such leases would likely be classified as finance leases under the standard and require expense recognition based on the effective interest method. Under the standard, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, subsequent to the adoption of the standard, we are now expensing non-incremental leasing costs as incurred.

In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which provided entities with relief from the costs of implementing certain aspects of ASU 2016-02, Leases. The ASU provided a practical expedient which allowed lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where we are the lessor. The ASU also provided a transition option that permitted entities to not recast the comparative periods presented when transitioning to the standard, which the Company also elected.

Principles of Consolidation

The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the consolidation guidance. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.

12

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

Real Estate Sales Gain Recognition

For sale transactions resulting in a transfer of a controlling financial interest of a property, the Company generally derecognizes the related assets and liabilities from its Consolidated Balance Sheets and records the gain or loss in the period in which the transfer of control occurs. If control of the property has not transferred to the counterparty, the criteria for derecognition are not met and the Company will continue to recognize the related assets and liabilities on its Consolidated Balance Sheets.

Sale transactions to entities in which the Company sells a controlling financial interest in a property but retains a noncontrolling interest are accounted for as partial sales. Partial sales resulting in a change in control are accounted for at fair value and a full gain or loss is recognized. Therefore, the Company will record a gain or loss on the partial interest sold, and the initial measurement of our retained interest will be accounted for at fair value.

Sales of real estate to joint ventures or other noncontrolled investees are also accounted for at fair value and the Company will record a full gain or loss in the period the property is contributed.

To the extent that the Company acquires a controlling financial interest in a property that it previously accounted for as an equity method investment, the Company will not remeasure its previously held interest if the acquisition is treated as an asset acquisition. The Company will include the carrying amount of its previously held equity method interest along with the consideration paid and transaction costs incurred in determining the amounts to allocate to the related assets and liabilities acquired on its Consolidated Balance Sheets. When treated as an asset acquisition, the Company will not recognize a gain or loss on consolidation of a property.

Notes Receivable

The following table summarizes our Notes receivable, net as of June 30, 2019 and December 31, 2018 (dollars in thousands):

Interest rate at

Balance Outstanding

    

June 30, 

    

June 30, 

    

December 31, 

2019

2019

2018

Note due December 2019 (a)

 

12.00

%  

$

20,000

$

20,000

Note due February 2020 (b)

 

10.00

%  

 

15,244

 

14,659

Note due October 2020 (c)

 

8.00

%  

 

2,250

 

2,000

Note due August 2022 (d)

10.00

%  

5,600

Total notes receivable, net

 

  

$

37,494

$

42,259

(a)In March 2018, the Company entered into a secured note with an unaffiliated third party with an aggregate commitment of $20.0 million, of which $20.0 million has been funded. Interest payments are due when the loan matures. In March 2019, the note’s maturity was extended to December 27, 2019, and the note is secured by a parcel of land.
(b)The Company has a secured note with an unaffiliated third party with an aggregate commitment of $16.4 million, of which $15.2 million has been funded, including $0.6 million funded during the six months ended June 30, 2019. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $5.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the eighth anniversary of the date of the note (February 2020).
(c)The Company has a secured note with an unaffiliated third party with an aggregate commitment of $2.3 million, of which $2.3 million has been funded, including $0.3 million funded during the six months ended June 30, 2019. Interest payments are due when the loan matures. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $10.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (October 2020).
(d)In January 2019, the $5.6 million secured note was repaid in full along with the contractually accrued interest of $0.2 million and an additional $8.5 million of promoted interest in conjunction with the unaffiliated third party being acquired.

13

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

The Company recognized $1.2 million and $1.1 million of interest income from notes receivable during the three months ended June 30, 2019 and 2018, respectively, and $2.3 million and $1.7 million of interest income and $8.5 million and zero of promoted interest from notes receivable during the six months ended June 30, 2019 and 2018, respectively, none of which was related party interest. Interest income and promoted interest are included in Interest income and other income/(expense), net on the Consolidated Statements of Operations.

Comprehensive Income/(Loss)

Comprehensive income/(loss), which is defined as the change in equity during each period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Consolidated Statements of Comprehensive Income/(Loss). For the three and six months ended June 30, 2019 and 2018, the Company’s other comprehensive income/(loss) consisted of the gain/(loss) on derivative instruments that are designated as and qualify as cash flow hedges, (gain)/loss on derivative instruments reclassified from other comprehensive income/(loss) into earnings, and the allocation of other comprehensive income/(loss) to noncontrolling interests. The (gain)/loss on derivative instruments reclassified from other comprehensive income/(loss) is included in Interest expense on the Consolidated Statements of Operations. See Note 11, Derivatives and Hedging Activity, for further discussion. The allocation of other comprehensive income/(loss) to redeemable noncontrolling interests during the three months ended June 30, 2019 and 2018 was $(0.4) million and $(0.1) million, respectively, and during the six months ended June 30, 2019 and 2018 was $(0.6) million and $0.1 million, respectively.

Income Taxes

Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, no provision for federal income taxes has been provided for at UDR. Historically, the Company has generally incurred only state and local excise and franchise taxes. UDR has elected for certain consolidated subsidiaries to be treated as taxable REIT subsidiaries (“TRS”).

Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date. The Company’s deferred tax assets are generally the result of differing depreciable lives on capitalized assets and timing of expense recognition for certain accrued liabilities. As of June 30, 2019 and December 31, 2018, UDR’s net deferred tax asset/(liability) was less than $(0.1) million and less than $(0.1) million, respectively.

GAAP defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. GAAP also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

The Company recognizes its tax positions and evaluates them using a two-step process. First, UDR determines whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

UDR had no material unrecognized tax benefit, accrued interest or penalties at June 30, 2019. UDR and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The tax years 2015 through 2018 remain open to examination by tax jurisdictions to which we are subject. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in Tax (provision)/benefit, net on the Consolidated Statements of Operations.

14

Table of Contents

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

3. REAL ESTATE OWNED

Real estate assets owned by the Company consist of income producing operating properties, properties under development, land held for future development, and held for disposition properties. As of June 30, 2019, the Company owned and consolidated 135 communities in 12 states plus the District of Columbia totaling 42,292 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of June 30, 2019 and December 31, 2018 (dollars in thousands):

    

June 30, 

    

December 31, 

2019

2018

Land

$

1,965,577

$

1,849,799

Depreciable property — held and used:

 

  

 

  

Land improvements

 

217,208

 

213,224

Building, improvements, and furniture, fixtures and equipment

 

8,792,777

 

8,133,136

Real estate intangible assets

35,954

Real estate owned

 

11,011,516

 

10,196,159

Accumulated depreciation

 

(3,878,897)

 

(3,654,160)

Real estate owned, net

$

7,132,619

$

6,541,999

Acquisitions

In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 386 apartment home operating community in Anaheim, California, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $33.5 million. In connection with the acquisition, the Company repaid approximately $59.8 million of joint venture construction financing. As a result, in January 2019, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture (see Note 5, Joint Ventures and Partnerships). The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately $115.7 million and recorded approximately $2.4 million of in-place lease intangibles.

In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 155 apartment home operating community located in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $20.0 million. In connection with the acquisition, the Company repaid approximately $26.0 million of joint venture construction financing. As a result, in January 2019, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture (see Note 5, Joint Ventures and Partnerships). The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately $58.1 million and recorded approximately $2.4 million of real estate intangibles and approximately $0.6 million of in-place lease intangibles.

In January 2019, the Company acquired a to-be-developed parcel of land located in Washington D.C. for approximately $27.1 million.

In February 2019, the Company acquired a to-be-developed parcel of land located in Denver, Colorado for approximately $13.7 million.

In February 2019, the Company acquired a 188 apartment home operating community located in Brooklyn, New York for approximately $132.1 million. The Company increased its real estate assets owned by approximately $97.5 million and recorded approximately $33.6 million of real estate intangibles and approximately $1.0 million of in-place lease intangibles.

In February 2019, the Company acquired a 381 apartment home operating community located in St. Petersburg, Florida for approximately $98.3 million. The Company increased its real estate assets owned by approximately $96.0 million and recorded approximately $2.3 million of in-place lease intangibles.

15

Table of Contents

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

In April 2019, the Company acquired a 498 apartment home operating community located in Towson, Maryland for approximately $86.4 million. The Company increased its real estate assets owned by approximately $82.5 million and recorded approximately $3.9 million of in-place lease intangibles.

In May 2019, the Company acquired a 313 apartment home operating community located in King of Prussia, Pennsylvania for approximately $107.3 million. The Company increased its real estate assets owned by approximately $106.4 million and recorded approximately $0.9 million of in-place lease intangibles.

In May 2019, the Company acquired a 240 apartment home operating community located in St. Petersburg, Florida for approximately $49.4 million. The Company increased its real estate assets owned by approximately $48.2 million and recorded approximately $1.2 million of in-place lease intangibles.

In June 2019, the Company acquired a 200 apartment home operating community located in Waltham, Massachusetts for approximately $84.6 million. The Company increased its real estate assets owned by approximately $82.6 million and recorded approximately $2.0 million of in-place lease intangibles.

Dispositions

In June 2019, the Company sold a parcel of land located in Los Angeles, California for $38.0 million, resulting in a gain of approximately $5.3 million. Prior to the sale, the parcel of land was subject to a ground lease, under which UDR was the lessor, scheduled to expire in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. During the second quarter, the lessee exercised the purchase option resulting in this sale by the Company and the ground lease being terminated.

Prior to the sale, the purchase option was not deemed to be a bargain purchase option. This ground lease existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As a result, this ground lease continued to be classified as an operating lease and the land parcel subject to the ground lease continued to be recognized in Real estate held for investment on our Consolidated Balance Sheets until the sale in June 2019.

Other Activity

Predevelopment, development, and redevelopment projects and related costs are capitalized and reported on the Consolidated Balance Sheets as Total real estate owned, net of accumulated depreciation. The Company capitalizes costs directly related to the predevelopment, development, and redevelopment of a capital project, which include, but are not limited to, interest, real estate taxes, insurance, and allocated development and redevelopment overhead related to support costs for personnel working on the capital projects. We use our professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. These costs, excluding the direct costs of development and redevelopment and capitalized interest, for the three months ended June 30, 2019 and 2018, were $1.8 million and $1.6 million, respectively, and $5.0 million and $5.0 million for the six months ended June 30, 2019 and 2018, respectively. Total interest capitalized was $1.2 million and $3.6 million for the three months ended June 30, 2019 and 2018, respectively, and $2.3 million and $8.2 million for the six months ended June 30, 2019 and 2018, respectively. As each home in a capital project is completed and becomes available for lease-up, the Company ceases capitalization on the related portion of the costs and depreciation commences over the estimated useful life.

In connection with the acquisition of certain properties, the Company agreed to pay certain of the tax liabilities of certain contributors if the Company sells one or more of the properties contributed in a taxable transaction prior to the expiration of specified periods of time following the acquisition. The Company may, however, sell, without being required to pay any tax liabilities, any of such properties in a non-taxable transaction, including, but not limited to, a tax-deferred Section 1031 exchange. 

16

Table of Contents

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

Further, the Company has agreed to maintain certain debt that may be guaranteed by certain contributors for specified periods of time following the acquisition. The Company, however, has the ability to refinance or repay guaranteed debt or to substitute new debt if the debt and the guaranty continue to satisfy certain conditions.

4. VARIABLE INTEREST ENTITIES

The Company has determined that the Operating Partnership and DownREIT Partnership are VIEs as the limited partners lack substantive kick-out rights and substantive participating rights. The Company has concluded that it is the primary beneficiary of, and therefore consolidates, the Operating Partnership and DownREIT Partnership based on its role as the sole general partner of the Operating Partnership and DownREIT Partnership. The Company’s role as community manager and its equity interests give us the power to direct the activities that most significantly impact the economic performance and the obligation to absorb potentially significant losses or the right to receive potentially significant benefits of the Operating Partnership and DownREIT Partnership.

See the consolidated financial statements of the Operating Partnership presented within this Report and Note 4, Unconsolidated Entities, to the Operating Partnership’s consolidated financial statements for the results of operations of the DownREIT Partnership.

5. JOINT VENTURES AND PARTNERSHIPS

UDR has entered into joint ventures and partnerships with unrelated third parties to own, operate, acquire, renovate, develop, redevelop, dispose of, and manage real estate assets that are either consolidated and included in Real estate owned on the Consolidated Balance Sheets or are accounted for under the equity method of accounting, and are included in Investment in and advances to unconsolidated joint ventures, net, on the Consolidated Balance Sheets. The Company consolidates the entities that we control as well as any variable interest entity where we are the primary beneficiary. Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.

UDR’s joint ventures and partnerships are funded with a combination of debt and equity. Our losses are limited to our investment and except as noted below, the Company does not guarantee any debt, capital payout or other obligations associated with our joint ventures and partnerships.

The Company recognizes earnings or losses from our investments in unconsolidated joint ventures and partnerships consisting of our proportionate share of the net earnings or losses of the joint ventures and partnerships. In addition, we may earn fees for providing management services to the unconsolidated joint ventures and partnerships.

17

Table of Contents

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

The following table summarizes the Company’s investment in and advances to unconsolidated joint ventures and partnerships, net, which are accounted for under the equity method of accounting as of June 30, 2019 and December 31, 2018 (dollars in thousands):

Number of

Number of

Apartment

 

Properties

Homes

Investment at

UDR’s Ownership Interest

  

Location of

  

June 30, 

  

June 30, 

  

June 30, 

  

December 31, 

June 30, 

  

December 31, 

 

Joint Venture

  

Properties

  

2019

    

2019

  

2019

  

2018

2019

  

2018

 

Operating and development:

  

  

  

  

  

  

  

  

 

UDR/MetLife I

Los Angeles, CA

1

operating community

150

$

30,292

$

30,839

50.0

%  

50.0

%

UDR/MetLife II

 

Various

 

18

operating communities

 

4,059

 

302,236

 

296,807

50.0

%  

50.0

%

Other UDR/MetLife

 

Various

 

5

operating communities

 

1,437

 

107,350

 

115,668

50.6

%  

50.6

%

Joint Ventures

 

 

UDR/MetLife Vitruvian Park®

 

Addison, TX

 

4

operating communities;

 

1,879

 

74,049

 

71,730

50.0

%  

50.0

%

 

  

 

1

development community (a);

 

  

 

  

 

  

  

 

  

 

4

land parcels

 

 

 

UDR/KFH (b)

 

Washington, D.C.

 

2

operating communities

 

443

 

(2,006)

 

5,507

30.0

%  

30.0

%

West Coast Development Joint Ventures (c)

Los Angeles, CA

1

operating community

293

35,394

36,143

47.0

%

47.0

%

Investment in and advances to unconsolidated joint ventures, net, before participating loan investment, preferred equity investments and other investments

 

  

$

547,315

$

556,694

  

 

  

Income/(loss) from investments

Investment at

Three Months Ended

Six Months Ended

  

  

  

Years To

UDR

  

June 30, 

  

December 31, 

  

June 30, 

June 30, 

Developer Capital Program (d)

  

Location

  

Rate

  

Maturity

Commitment (e)

  

2019

  

2018

  

2019

  

2018

  

2019

  

2018

Preferred equity investments:

 

  

 

  

 

  

 

  

 

  

  

  

  

West Coast Development Joint Ventures (c)

 

Various

 

6.5

%

N/A

$

$

17,295

$

65,417

$

(10)

$

153

$

(171)

$

949

1532 Harrison (f)

San Francisco, CA

11.0

%

3.0

24,645

28,943

24,986

774

430

1,522

771

1200 Broadway (g)

Nashville, TN

8.0

%

3.3

55,558

61,395

58,982

1,206

603

2,375

1,011

Junction (h)

Santa Monica, CA

12.0

%

3.1

8,800

9,773

9,211

287

562

1300 Fairmount (i)

Philadelphia, PA

Variable

4.1

51,393

23,373

8,318

519

794

Essex (j)

Orlando, FL

12.5

%

4.2

12,886

13,905

9,940

407

739

Modera Lake Merritt (k)

Oakland, CA

9.0

%

5.0

27,250

14,549

256

256

Other investments:

The Portals (l)

Washington, D.C.

11.0

%

1.9

38,559

45,574

43,167

1,234

829

2,407

1,508

Other investment ventures

N/A

N/A

N/A

$

18,000

6,878

4,154

$

(100)

$

(95)

$

25

$

(185)

Total Developer Capital Program

221,685

224,175

Total investment in and advances to unconsolidated joint ventures, net

$

769,000

$

780,869

 

  

(a)The number of apartment homes for the communities under development presented in the table above is based on the projected number of total homes upon completion of development. As of June 30, 2019, no apartment homes had been completed in the development community held by UDR/MetLife Vitruvian Park®.
(b)In May 2019, the joint venture sold one community, a 217 home operating community in Arlington, Virginia, for a sales price of approximately $74.8 million. As a result, the Company recorded a gain on the sale of approximately $5.3 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations. As of June 30, 2019, the remaining two communities held by the joint venture were classified as held for disposition.

In July 2019, the joint venture sold the second community, a 151 home operating community in Silver Spring, Maryland, for a sales price of approximately $43.5 million. As a result, the Company recorded a gain on the sale of approximately $5.3 million.

During the three months ended June 30, 2019, the Company entered into a contract to acquire the third community for a purchase price at 100% of approximately $184.0 million. As the Company currently holds a 30% ownership interest in the community, it expects to pay approximately $128.8 million for the remaining 70% ownership interest. As such, the Company has disclosed a purchase price commitment (see Note 13, Commitments and Contingencies). The acquisition is expected to close in 2019, subject to customary closing conditions. Upon closing of the acquisition, the UDR/KFH joint venture will terminate.

(c)In 2015, the Company entered into a joint venture agreement with an unaffiliated joint venture partner and paid $136.3 million for a 48% ownership interest in a portfolio of five communities that were under construction. The communities are located in three of the Company’s core, coastal markets: Seattle, Washington, Los Angeles, California and Orange County, California. UDR earns a 6.5% preferred return on its investment through each individual community’s date of stabilization, defined as when a community reaches 80% occupancy for 90 consecutive days, while the joint venture partner is allocated all operating income and expense during the pre-

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stabilization period. Upon stabilization, income and expense are shared based on each partner’s ownership percentage and the Company no longer receives a 6.5% preferred return on its investment in the stabilized community. The Company serves as property manager and earns a management fee during the lease-up phase and subsequent operation of each of the communities. The unaffiliated joint venture partner is the general partner of the joint venture and the developer of the communities. The Company has concluded it does not control the joint ventures and, therefore, accounts for them under the equity method of accounting.

At inception of the agreement, the Company had a fixed-price option to acquire the remaining interest in each community commencing one year after completion. The unaffiliated joint venture partner is providing certain guaranties.

During 2017, the Company exercised its fixed-price option to purchase the joint venture partner’s ownership interest in one of the five communities, and the joint venture sold two of the four remaining communities.

In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in one of the two remaining communities, a 386 apartment home operating community in Orange County, California, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $33.5 million. As a result, the Company consolidated the operating community and it is no longer accounted for as a preferred equity investment in an unconsolidated joint venture (see Note 3, Real Estate Owned). In connection with the purchase, the construction loan on the community was paid in full.

The Company and its joint venture partner plan to continue operating the one remaining community.

In 2017, the Company entered into two additional joint venture agreements with the unaffiliated joint venture partner and paid $15.5 million for a 49% ownership interest in a 155 apartment home community in Seattle, Washington and $16.1 million for a 49% ownership interest in a 276 apartment home community in Hillsboro, Oregon (together with the 2015 joint venture described above, the “West Coast Development Joint Ventures”). UDR earns a 6.5% preferred return on its investments through the communities’ date of stabilization, as defined above, while our joint venture partner is allocated all operating income and expense during the pre-stabilization period. Upon stabilization of the communities, income and expense will be shared based on each partner’s ownership percentage and the Company will no longer receive a 6.5% preferred return on its investment. The Company will serve as property manager and will earn a management fee during the lease-up phase and subsequent operation of the stabilized communities. The unaffiliated joint venture partner is the general partner and the developer of the communities. The Company has concluded it does not control the joint ventures and, therefore, accounts for them under the equity method of accounting.

The Company has a fixed-price option to acquire the remaining interest in the communities beginning one year after completion. The unaffiliated joint venture partner is providing certain guaranties and there are construction loans on the communities.

In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in the 155 apartment home operating community in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $20.0 million. As a result, the Company consolidated the operating community and it is no longer accounted for as a preferred equity investment in an unconsolidated joint venture (see Note 3, Real Estate Owned). In connection with the purchase, the construction loan on the community was paid in full.

The Company’s recorded equity investment in the West Coast Development Joint Ventures at June 30, 2019 and December 31, 2018, of $52.7 million and $101.6 million, respectively, is inclusive of outside basis costs and our accrued but unpaid preferred return.

(d)The Developer Capital Program is a program through which the Company makes investments, including preferred equity investments, mezzanine loans or other structured investments that may receive a fixed or variable yield on the investment and may include provisions pursuant to which the Company participates in the increase in value of the property upon monetization of the applicable property and/or holds fixed price purchase options.
(e)Represents UDR’s maximum funding commitment only and therefore excludes other activity such as income from investments.
(f)In June 2017, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 136 apartment home community in San Francisco, California. The Company’s preferred

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JUNE 30, 2019

equity investment of up to $24.6 million earns a preferred return of 11.0% per annum. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.
(g)In September 2017, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 313 apartment home community in Nashville, Tennessee. The Company’s preferred equity investment of up to $55.6 million earns a preferred return of 8.0% per annum and receives a variable percentage of the value created from the project upon a capital or liquidating event. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.
(h)In August 2018, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 66 apartment home community in Santa Monica, CA. The Company’s preferred equity investment of $8.8 million earns a preferred return of 12.0% per annum. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.
(i)In August 2018, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 471 apartment home community in Philadelphia, PA. The Company’s preferred equity investment of up to $51.4 million earns a preferred return between 8.5% and 12.0% per annum and receives a variable percentage of the value created from the project upon a capital or liquidating event. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.
(j)In September 2018, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 330 apartment home community in Orlando, FL. The Company’s preferred equity investment of up to $12.9 million earns a preferred return of 12.5% per annum. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.
(k)In April 2019, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 173 apartment home community in Oakland, CA. The Company’s preferred equity investment of up to $27.3 million earns a preferred return of 9.0% per annum and receives a variable percentage of the value created from the project upon a capital or liquidating event. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.
(l)In May 2017, the Company entered into a joint venture agreement with an unaffiliated joint venture partner. The joint venture has made a mezzanine loan to a third party developer of a 373 apartment home community in Washington, D.C. The unaffiliated joint venture partner is the managing member of the joint venture. The mezzanine loan is for up to $71.0 million at an interest rate of 13.5% per annum and carries a term of four years with one 12-month extension option. The Company’s commitment to the joint venture is approximately $38.6 million and earns a weighted average return of approximately 11.0% per annum. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting.

As of June 30, 2019 and December 31, 2018, the Company had deferred fees of $10.6 million and $11.0 million, respectively, which will be recognized through earnings over the weighted average life of the related properties, upon the disposition of the properties to a third party, or upon completion of certain development obligations.

The Company recognized management fees of $2.8 million and $3.1 million during the three months ended June 30, 2019 and 2018, respectively, and $5.6 million and $5.8 million for the six months ended June 30, 2019 and 2018, respectively, for management of the communities held by the joint ventures and partnerships. The management fees are included in Joint venture management and other fees on the Consolidated Statements of Operations.

The Company may, in the future, make additional capital contributions to certain of our joint ventures and partnerships should additional capital contributions be necessary to fund acquisitions or operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

We evaluate our investments in unconsolidated joint ventures and partnerships when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. The Company did not recognize any other-than-temporary impairments in the value of its investments in unconsolidated joint ventures or partnerships during the three and six months ended June 30, 2019 and 2018.

Combined summary balance sheets relating to the unconsolidated joint ventures and partnerships (not just our proportionate share) are presented below as of June 30, 2019 and December 31, 2018 (dollars in thousands):

June 30, 

December 31, 

    

2019

    

2018

Total real estate, net

 

$

3,065,052

 

$

3,311,034

Assets held for disposition

 

124,037

 

Cash and cash equivalents

 

41,192

 

49,867

Other assets

143,228

124,428

Total assets

 

$

3,373,509

 

$

3,485,329

Third party debt, net

$

1,886,009

$

2,125,350

Liabilities held for disposition

 

130,938

 

Accounts payable and accrued liabilities

65,565

71,272

Total liabilities

 

2,082,512

 

2,196,622

Total equity

 

$

1,290,997

 

$

1,288,707

Combined summary financial information relating to the unconsolidated joint ventures’ and partnerships’ operations (not just our proportionate share) is presented below for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Total revenues

 

$

76,926

 

$

70,980

 

$

158,458

 

$

138,937

Property operating expenses

 

29,256

 

28,402

 

59,568

 

55,339

Real estate depreciation and amortization

 

28,054

 

28,670

 

57,634

 

55,518

Operating income/(loss)

 

19,616

13,908

 

41,256

28,080

Interest expense

 

(21,606)

 

(21,665)

 

(43,530)

 

(41,071)

Gain/(loss) on sale of property

18,357

18,357

Other income/(loss)

9

106

1,634

101

Net income/(loss)

 

$

16,376

 

$

(7,651)

 

$

17,717

 

$

(12,890)

6. LEASES

Lessee - Ground and Office Leases

UDR owns six communities that are subject to ground leases, under which UDR is the lessee, expiring between 2043 and 2103, inclusive of extension options we are reasonably certain will be exercised. In addition, UDR is a lessee to an operating lease related to office space rented by the Company with an expiration date in 2021. All of these leases existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As such, these leases will continue to be classified as operating leases through the lease term expiration. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the remaining lease term. We currently do not hold any finance leases.

As of June 30, 2019, the Operating lease right-of-use assets was $93.9 million and the Operating lease liabilities was $88.1 million on our Consolidated Balance Sheets related to our ground and office space leases. The value of the Operating lease right-of-use assets exceeds the value of the Operating lease liabilities due to prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. The calculation of these

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JUNE 30, 2019

amounts includes minimum lease payments over the remaining lease term (described further in the table below). Variable lease payments are excluded from the right-of-use assets and lease liabilities and are recognized in earnings in the period in which the obligation for those payments is incurred.

As the discount rate implicit in the leases was not readily determinable, we determined the discount rate for these leases utilizing the Company’s incremental borrowing rate at a portfolio level, adjusted for the remaining lease term, and the form of underlying collateral.

The weighted average remaining lease term for these leases was 70.5 years at June 30, 2019 and the weighted average discount rate was 5.2% at June 30, 2019.

Future minimum lease payments and total operating lease liabilities from our ground leases and office space as of June 30, 2019 are as follows (dollars in thousands):

Ground Leases

Office Space

Total

2019

$

2,451

$

39

$

2,490

2020

4,901

76

4,977

2021

4,901

32

4,933

2022

4,901

-

4,901

2023

4,901

-

4,901

Thereafter

313,918

-

313,918

Total future minimum lease payments (undiscounted)

335,973

147

336,120

Difference between future undiscounted cash flows and discounted cash flows

(248,014)

(7)

(248,021)

Total operating lease liabilities (discounted)

$

87,959

$

140

$

88,099

For purposes of recognizing our ground lease contracts, the Company uses the minimum lease payments, if stated in the agreement. For ground lease agreements where there is a rent reset provision based on fair market value or changes in the consumer price index but that does not include a specified minimum lease payment, the Company uses the current rent over the remainder of the lease term. We are currently in a dispute with the lessor of one of our ground lease contracts as it relates to a rent reset provision that requires both parties to agree to a new rent based on the current fair market value of the land or, absent agreement, have it determined by an appraisal process. The current annual lease payment under the ground lease contract to which the dispute relates, exclusive of variable payments, is $0.5 million, which is reflected in the table above. Depending on the outcome of the dispute, the future annual lease payments under such ground lease contract are likely to be between $1.2 million and $4.0 million.

The components of operating lease expenses from our ground leases and office space were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

June 30, 2019

June 30, 2019

Ground lease expense:

Contractual lease rent expense

$

2,139

$

4,278

Variable ground lease expense (a)

143

282

Total ground lease expense (b)

2,282

4,560

Contractual office space expense (b)

19

38

Total operating lease expense (c)

$

2,301

$

4,598

(a)Variable ground lease expense includes adjustments such as changes in the consumer price index and payments based on a percentage of income of the lessee.
(b)Ground lease expense is reported within the line item Other operating expenses and office space expense is recorded in General and administrative on the Consolidated Statements of Operations.
(c)For the six months ended June 30, 2019, Operating lease right-of-use assets and Operating lease liabilities amortized by $0.4 million and $0.2 million, respectively. The Company recorded $0.1 million and $0.2 million of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

total operating lease expense during the three and six months ended June 30, 2019, respectively, due to the net impact of the amortization. 

Lessor - Apartment Home, Retail and Commercial Space Leases

UDR’s communities and retail and commercial space are leased to tenants under operating leases. As of June 30, 2019, our apartment home leases generally have initial terms of 12 months or less and represent approximately 98.2% of our total lease revenue. As of June 30, 2019, our retail and commercial space leases generally have initial terms of between 5 and 15 years and represent approximately 1.8% of our total lease revenue. Our apartment home leases are generally renewable at the end of the lease term, subject to potential increases in rental rates, and our retail and commercial space leases generally have renewal options, subject to associated increases in rental rates and certain other conditions. (See Note 14, Reportable Segments for further discussion around our major revenue streams and disaggregation of our revenue.)

We previously owned a parcel of land subject to a ground lease under which UDR was the lessor, expiring in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. In June 2019, the lessee exercised the purchase option and acquired the parcel of land for $38.0 million. (See Note 3, Real Estate for further discussion.)

Future minimum lease payments from our retail and commercial leases as of June 30, 2019 are as follows (dollars in thousands):

Retail and Commercial Leases

2019

$

10,041

2020

20,781

2021

19,944

2022

18,214

2023

16,861

Thereafter

92,492

Total future minimum lease payments (a)

$

178,333

(a)We have excluded our apartment home leases from this table as our apartment home leases generally have initial terms of 12 months of less.

Certain of our leases with retail and commercial tenants provide for the payment by the lessee of additional variable rent based on a percentage of the tenant’s revenue. The amounts shown in the table above do not include these variable percentage rents. The Company recorded variable percentage rents of $0.1 million and $0.2 million during the three and six months ended June 30, 2019.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

7. SECURED AND UNSECURED DEBT, NET

The following is a summary of our secured and unsecured debt at June 30, 2019 and December 31, 2018 (dollars in thousands):

Principal Outstanding

As of June 30, 2019

Weighted

Weighted

Average

Average

Number of

June 30, 

December 31, 

Interest

Years to

Communities

    

2019

    

2018

    

Rate

    

Maturity

    

Encumbered

Secured Debt:

  

  

  

  

  

Fixed Rate Debt

 

  

 

  

 

  

 

  

 

  

Mortgage notes payable (a)

$

414,972

$

417,989

 

3.82

%  

5.4

 

7

Fannie Mae credit facilities (b)

 

90,000

 

90,000

 

3.95

%  

1.0

 

1

Deferred financing costs

 

(1,208)

 

(1,343)

 

  

 

  

 

  

Total fixed rate secured debt, net

 

503,764

 

506,646

 

3.84

%  

4.6

 

8

Variable Rate Debt

 

  

 

  

 

  

 

  

 

  

Tax-exempt secured notes payable (c)

 

94,700

 

94,700

 

2.17

%  

3.7

 

2

Deferred financing costs

 

(75)

 

(119)

 

  

 

  

 

  

Total variable rate secured debt, net

 

94,625

 

94,581

 

2.17

%  

3.7

 

2

Total Secured Debt, net

 

598,389

 

601,227

 

3.58

%  

4.5

 

10

Unsecured Debt:

 

  

 

  

 

  

 

  

 

  

Variable Rate Debt

 

  

 

  

 

  

 

  

 

  

Borrowings outstanding under unsecured credit facility due January 2023 (d) (j)

 

 

 

%  

3.6

 

  

Borrowings outstanding under unsecured commercial paper program due July 2019 (e) (j)

392,000

101,115

2.65

%  

0.1

Borrowings outstanding under unsecured working capital credit facility due January 2021 (f)

 

33,378

 

16

 

3.22

%  

1.5

 

  

Term Loan due September 2023 (d) (j)

 

35,000

 

35,000

 

3.34

%  

4.3

 

  

Fixed Rate Debt

 

  

 

  

 

  

 

  

 

  

3.70% Medium-Term Notes due October 2020 (net of discounts of $10 and $14, respectively) (j)

 

299,990

 

299,986

 

3.70

%  

1.3

 

  

4.63% Medium-Term Notes due January 2022 (net of discounts of $907 and $1,087, respectively) (j)

 

399,093

 

398,913

 

4.63

%  

2.5

 

  

1.93% Term Loan due September 2023 (d) (j)

315,000

 

315,000

 

1.93

%  

4.3

3.75% Medium-Term Notes due July 2024 (net of discounts of $521 and $574, respectively) (g) (j)

 

299,479

 

299,426

 

3.75

%  

5.0

 

  

8.50% Debentures due September 2024

 

15,644

 

15,644

 

8.50

%  

5.2

 

  

4.00% Medium-Term Notes due October 2025 (net of discounts of $430 and $465, respectively) (h) (j)

 

299,570

 

299,535

 

4.00

%  

6.3

 

  

2.95% Medium-Term Notes due September 2026 (j)

 

300,000

 

300,000

 

2.95

%  

7.2

 

  

3.50% Medium-Term Notes due July 2027 (net of discounts of $564 and $600, respectively) (j)

299,436

299,400

3.50

%  

8.0

3.50% Medium-Term Notes due January 2028 (net of discounts of $1,013 and $1,072, respectively) (j)

298,987

298,928

3.50

%  

8.5

4.40% Medium-Term Notes due January 2029 (net of discounts of $6 and $6, respectively) (i) (j)

299,994

299,994

4.40

%  

9.6

Other

 

14

 

16

 

  

 

  

 

  

Deferred financing costs

 

(15,385)

 

(16,413)

 

  

 

  

 

  

Total Unsecured Debt, net

 

3,272,200

 

2,946,560

 

3.55

%  

5.0

 

  

Total Debt, net

$

3,870,589

$

3,547,787

 

3.64

%  

4.9

 

  

For purposes of classification of the above table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively established a fixed interest rate for the underlying debt instrument.

Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. As of June 30, 2019, secured debt encumbered $1.3 billion or 11.9%

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JUNE 30, 2019

of UDR’s total real estate owned based upon gross book value ($9.7 billion or 88.1% of UDR’s real estate owned based on gross book value is unencumbered).

(a) At June 30, 2019, fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2020 through September 2028 and carry interest rates ranging from 3.15% to 4.35%.

The Company will from time to time acquire properties subject to fixed rate debt instruments. In those situations, the Company records the debt at its estimated fair value and amortizes any difference between the fair value and par value to interest expense over the life of the underlying debt instrument.

During the three months ended June 30, 2019 and 2018, the Company had $0.6 million and $0.7 million, respectively, and during the six months ended June 30, 2019 and 2018, the Company had $1.1 million and $1.5 million, respectively, of amortization of the fair market adjustment of debt assumed in the acquisition of properties, which was included in Interest expense on the Consolidated Statements of Operations. The unamortized fair market adjustment was a net premium of $3.9 million and $5.0 million at June 30, 2019 and December 31, 2018, respectively.

(b) UDR had one secured credit facility with Fannie Mae with a commitment of $90.0 million at June 30, 2019. The Fannie Mae credit facility matures in July 2020 and bears interest at a fixed rate of 3.95%.

Further information related to this credit facility is as follows (dollars in thousands):

    

June 30, 

    

December 31, 

 

2019

2018

 

Borrowings outstanding

$

90,000

$

90,000

Weighted average borrowings during the period ended

 

90,000

 

253,813

Maximum daily borrowings during the period ended

 

90,000

 

314,869

Weighted average interest rate during the period ended

 

4.0

%  

 

4.7

%

Weighted average interest rate at the end of the period

 

4.0

%  

 

4.0

%

(c) The variable rate mortgage notes payable that secure tax-exempt housing bond issues mature in August 2019 and March 2032. Interest on these notes is payable in monthly installments. The variable rate mortgage notes have interest rates ranging from 2.13% to 2.18% as of June 30, 2019.
(d) The Company has a $1.1 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $350.0 million unsecured term loan (the “Term Loan”). The credit agreement for these facilities (the “Credit Agreement”) allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2023, with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date of September 30, 2023.

Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points and a facility fee of 15 basis points, and the Term Loan has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 75 to 145 basis points, the facility fee ranges from 10 to 30 basis points, and the margin under the Term Loan ranges from 80 to 165 basis points.

The Credit Agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Credit Agreement also includes customary events of default, in certain cases subject to customary periods to cure. The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the Credit Agreement to be immediately due and payable.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

The following is a summary of short-term bank borrowings under the Revolving Credit Facility at June 30, 2019 and December 31, 2018 (dollars in thousands):

    

June 30, 

    

December 31, 

 

2019

 

2018

Total revolving credit facility

$

1,100,000

$

1,100,000

Borrowings outstanding at end of period (1)

 

 

Weighted average daily borrowings during the period ended

 

 

Maximum daily borrowings during the period ended

 

 

Weighted average interest rate during the period ended

 

%  

 

%

Interest rate at end of the period

 

%  

 

%

(1)Excludes $2.7 million and $3.3 million of letters of credit at June 30, 2019 and December 31, 2018, respectively.
(e) The Company has an unsecured commercial paper program. Under the terms of the program, the Company may issue unsecured commercial paper up to a maximum aggregate amount outstanding of $500.0 million. The notes are sold under customary terms in the United States commercial paper market and rank pari passu with all of the Company’s other unsecured indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership.

The following is a summary of short-term bank borrowings under the unsecured commercial paper program at June 30, 2019 and December 31, 2018 (dollars in thousands):

    

June 30, 

    

December 31, 

 

2019

2018

 

Total unsecured commercial paper program

 

$

500,000

$

500,000

Borrowings outstanding at end of period

 

392,000

 

101,115

Weighted average daily borrowings during the period ended

 

217,590

 

344,235

Maximum daily borrowings during the period ended

 

435,000

 

440,000

Weighted average interest rate during the period ended

 

2.8

%  

 

2.4

%

Interest rate at end of the period

 

2.6

%  

 

2.9

%

(f) The Company has a working capital credit facility, which provides for a $75.0 million unsecured revolving credit facility (the “Working Capital Credit Facility”) with a scheduled maturity date of January 15, 2021. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points. Depending on the Company’s credit rating, the margin ranges from 75 to 145 basis points.

The following is a summary of short-term bank borrowings under the Working Capital Credit Facility at June 30, 2019 and December 31, 2018 (dollars in thousands):

    

June 30, 

    

December 31, 

 

2019

2018

 

Total working capital credit facility

$

75,000

$

75,000

Borrowings outstanding at end of period

 

33,378

 

16

Weighted average daily borrowings during the period ended

 

27,768

 

26,101

Maximum daily borrowings during the period ended

 

66,170

 

64,633

Weighted average interest rate during the period ended

 

3.3

%  

 

2.9

%

Interest rate at end of the period

 

3.2

%  

 

3.3

%

(g) The Company previously entered into forward starting interest rate swaps to hedge against interest rate risk on $100.0 million of this debt. The all-in weighted average interest rate, inclusive of the impact of these interest rate swaps, was 3.69%.
(h) The Company previously entered into forward starting interest rate swaps to hedge against interest rate risk on $200.0 million of this debt. The all-in weighted average interest rate, inclusive of the impact of these interest rate swaps, was 4.53%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

(i) The Company previously entered into forward starting interest rate swaps to hedge against interest rate risk on $150.0 million of this debt. The all in weighted average interest rate, inclusive of the impact of these interest rate swaps, was 4.27%.
(j) The Operating Partnership is the guarantor of this debt.

The aggregate maturities, including amortizing principal payments on secured and unsecured debt, of total debt for the next ten calendar years subsequent to June 30, 2019 are as follows (dollars in thousands):

    

Total Fixed

    

Total Variable

    

Total 

    

Total 

    

Total 

Year

Secured Debt

Secured Debt

Secured Debt

Unsecured Debt

Debt

2019

$

1,923

$

67,700

$

69,623

$

392,000

$

461,623

2020

198,076

198,076

300,000

498,076

2021

 

1,117

 

 

1,117

 

33,378

 

34,495

2022

 

1,157

 

 

1,157

 

400,000

 

401,157

2023

 

41,245

 

 

41,245

 

350,000

 

391,245

2024

 

 

 

 

315,644

 

315,644

2025

 

127,600

 

 

127,600

 

300,000

 

427,600

2026

 

50,000

 

 

50,000

 

300,000

 

350,000

2027

 

 

 

 

300,000

 

300,000

2028

 

80,000

 

 

80,000

 

300,000

 

380,000

Thereafter

 

 

27,000

 

27,000

 

300,000

 

327,000

Subtotal

 

501,118

 

94,700

 

595,818

 

3,291,022

 

3,886,840

Non-cash (a)

 

2,646

 

(75)

 

2,571

 

(18,822)

 

(16,251)

Total

$

503,764

$

94,625

$

598,389

$

3,272,200

$

3,870,589

(a)Includes the unamortized balance of fair market value adjustments, premiums/discounts and deferred financing costs. The Company amortized $1.1 million and $1.1 million, respectively, during the three months ended June 30, 2019 and 2018, and $2.1 million and $2.1 million, respectively, during the six months ended June 30, 2019 and 2018, of deferred financing costs into Interest expense.

We were in compliance with the covenants of our debt instruments at June 30, 2019.

On July 2, 2019, the Company issued $300.0 million of 3.20% senior unsecured medium-term notes due January 15, 2030. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The notes were priced at 99.66% of the principal amount at issuance. The Company will use the net proceeds for the repayment of debt, including amounts outstanding under the Company’s commercial paper program, Revolving Credit Facility and Working Capital Credit Facility, or for other general corporate purposes. The Operating Partnership is the guarantor of this debt. The Company previously entered into forward starting interest rate swaps to hedge against the interest rate risk of this debt. The all-in weighted average interest rate, inclusive of the impact of these interest rate swaps, was 3.46%.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

8. INCOME/(LOSS) PER SHARE

The following table sets forth the computation of basic and diluted income/(loss) per share for the periods presented (dollars and shares in thousands, except per share data):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Numerator for income/(loss) per share:

  

  

Net income/(loss)

$

38,318

$

22,444

$

64,920

$

111,669

Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

(2,652)

 

(1,813)

 

(4,709)

 

(9,203)

Net (income)/loss attributable to noncontrolling interests

 

(47)

 

(30)

 

(89)

 

(109)

Net income/(loss) attributable to UDR, Inc.

 

35,619

 

20,601

 

60,122

 

102,357

Distributions to preferred stockholders — Series E (Convertible)

 

(1,031)

 

(971)

 

(2,042)

 

(1,926)

Income/(loss) attributable to common stockholders - basic and diluted

$

34,588

$

19,630

$

58,080

$

100,431

Denominator for income/(loss) per share:

 

  

 

  

 

  

 

  

Weighted average common shares outstanding

 

282,215

 

267,620

 

279,769

 

267,791

Non-vested restricted stock awards

 

(255)

 

(309)

 

(275)

 

(363)

Denominator for basic income/(loss) per share

 

281,960

 

267,311

 

279,494

 

267,428

Incremental shares issuable from assumed conversion of stock options, unvested LTIP Units and unvested restricted stock

 

615

 

1,579

 

587

 

1,574

Denominator for diluted income/(loss) per share

 

282,575

 

268,890

 

280,081

 

269,002

Income/(loss) per weighted average common share:

 

  

 

  

 

  

 

  

Basic

$

0.12

$

0.07

$

0.21

$

0.38

Diluted

$

0.12

$

0.07

$

0.21

$

0.37

Basic income/(loss) per common share is computed based upon the weighted average number of common shares outstanding. Diluted income/(loss) per common share is computed based upon the weighted average number of common shares outstanding plus the common shares issuable from the assumed conversion of the OP Units and DownREIT Units, convertible preferred stock, stock options, unvested long-term incentive plan units (“LTIP Units”), unvested restricted stock and continuous equity program forward sales agreements. Only those instruments having a dilutive impact on our basic income/(loss) per share are included in diluted income/(loss) per share during the periods. For the three and six months ended June 30, 2019 and 2018, the effect of the conversion of the OP Units, DownREIT Units, LTIP Units and the Company’s Series E preferred stock was not dilutive and therefore not included in the above calculation.

In July 2017, the Company entered into an ATM sales agreement under which the Company may offer and sell up to 20 million shares of its common stock, from time to time, to or through its sales agents and may enter into separate forward sales agreements to or through its forward purchasers. Upon entering into the ATM sales agreement, the Company simultaneously terminated the sales agreement for its prior at-the-market equity offering program, which was entered into in April 2017, which replaced the prior at-the-market equity offering program entered into in April 2012. During the three months ended June 30, 2019, the Company sold 0.5 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $21.0 million at a weighted average price per share of $45.64. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $0.3 million, were approximately $20.7 million, which were primarily used to fund the Company’s recent acquisitions. During the six months ended June 30, 2019, the Company sold 4.8 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $216.0 million at a weighted average price per share of $44.88. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $3.0 million, were approximately $212.9 million, which were primarily used to fund the Company’s recent acquisitions. As of June 30, 2019, we had 15.2 million shares of common stock available for future issuance under the ATM program.

In July 2019, the Company sold 2.2 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $100.5 million at a weighted average price per share of $46.19. Aggregate net proceeds

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $1.1 million, were approximately $99.4 million, which were primarily used to fund acquisition activity.

For the three and six months ended June 30, 2019 and 2018, the Company did not enter into any forward purchase agreements under its continuous equity program.

The following table sets forth the additional shares of common stock outstanding by equity instrument if converted to common stock for each of the three and six months ended June 30, 2019 and 2018 (in thousands):

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2019

2018

2019

2018

OP/DownREIT Units

    

22,736

    

24,574

    

23,504

    

24,540

    

Convertible preferred stock

 

3,011

 

3,011

 

3,011

 

3,011

 

Stock options, unvested LTIP Units and unvested restricted stock

 

615

 

1,579

 

587

 

1,574

 

9. NONCONTROLLING INTERESTS

Redeemable Noncontrolling Interests in the Operating Partnership and DownREIT Partnership

Interests in the Operating Partnership and the DownREIT Partnership held by limited partners are represented by OP Units and DownREIT Units, respectively. The income is allocated to holders of OP Units/DownREIT Units based upon net income attributable to common stockholders and the weighted average number of OP Units/DownREIT Units outstanding to total common shares plus OP Units/DownREIT Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the partnership agreements of the Operating Partnership and the DownREIT Partnership.

Limited partners of the Operating Partnership and the DownREIT Partnership have the right to require such partnership to redeem all or a portion of the OP Units/DownREIT Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the Operating Partnership or the DownREIT Partnership, as applicable), provided that such OP Units/DownREIT Units have been outstanding for at least one year, subject to certain exceptions. UDR, as the general partner of the Operating Partnership and the DownREIT Partnership may, in its sole discretion, purchase the OP Units/DownREIT Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of the Company for each OP Unit/DownREIT Unit), as defined in the partnership agreement of the Operating Partnership or the DownREIT Partnership, as applicable. Accordingly, the Company records the OP Units/DownREIT Units outside of permanent equity and reports the OP Units/DownREIT Units at their redemption value using the Company’s stock price at each balance sheet date.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

The following table sets forth redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership for the following period (dollars in thousands):

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, December 31, 2018

    

$

972,740

Mark-to-market adjustment to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

137,170

Conversion of OP Units/DownREIT Units to Common Stock

 

(111,589)

Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

4,709

Distributions to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

(16,609)

Vesting of Long-Term Incentive Plan Units

14,742

Allocation of other comprehensive income/(loss)

 

(631)

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, June 30, 2019

$

1,000,532

Noncontrolling Interests

Noncontrolling interests represent interests of unrelated partners and unvested LTIP Units in certain consolidated affiliates, and are presented as part of equity on the Consolidated Balance Sheets since these interests are not redeemable. Net (income)/loss attributable to noncontrolling interests was less than $(0.1) million during each of the three months ended June 30, 2019 and 2018, and $(0.1) million during each of the six months ended June 30, 2019 and 2018.

The Company grants LTIP Units to certain employees and non-employee directors. The LTIP Units represent an ownership interest in the Operating Partnership and have vesting terms of between one and three years, specific to the individual grants.

Noncontrolling interests related to long-term incentive plan units represent the unvested LTIP Units of these employees and non-employee directors in the Operating Partnership. The net income/(loss) allocated to the unvested LTIP Units is included in Net (income)/loss attributable to noncontrolling interests on the Consolidated Statements of Operations.

10. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS

Fair value is based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of June 30, 2019 and December 31, 2018, are summarized as follows (dollars in thousands):

Fair Value at June 30, 2019, Using

Total

Quoted

Carrying

Prices in

Amount in

Active

Statement of

Markets

Significant

Financial

Fair Value

for Identical

Other

Significant

Position at

Estimate at

Assets or

Observable

Unobservable

June 30, 

June 30, 

Liabilities

Inputs

Inputs

2019

2019

 

(Level 1)

(Level 2)

(Level 3)

Description:

    

  

    

  

    

  

    

  

    

Notes receivable (a)

$

37,494

$

41,544

$

$

$

41,544

Derivatives - Interest rate contracts (b)

 

1,616

 

1,616

 

 

1,616

 

Total assets

$

39,110

$

43,160

$

$

1,616

$

41,544

Derivatives - Interest rate contracts (b)

$

253

$

253

$

$

253

$

Secured debt instruments - fixed rate: (c)

 

  

 

  

 

  

 

  

 

Mortgage notes payable

414,972

425,284

425,284

Fannie Mae credit facilities

 

90,000

 

90,605

 

 

 

90,605

Secured debt instruments - variable rate: (c)

 

  

 

  

 

  

 

  

 

Tax-exempt secured notes payable

 

94,700

 

94,700

 

 

 

94,700

Unsecured debt instruments: (c)

 

  

 

  

 

  

 

  

 

Working capital credit facility

33,378

33,378

33,378

Commercial paper program

392,000

392,000

392,000

Unsecured notes

2,862,207

2,978,114

2,978,114

Total liabilities

$

3,887,510

$

4,014,334

$

$

253

$

4,014,081

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership (d)

$

1,000,532

$

1,000,532

$

$

1,000,532

$

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

Fair Value at December 31, 2018, Using

Total

Quoted

Carrying

Prices in

Amount in

Active

Statement of

Markets

Significant

Financial

Fair Value

for Identical

Other

Significant

Position at

Estimate at

Assets or

Observable

Unobservable

December 31, 

December 31, 

Liabilities

Inputs

Inputs

 

2018

2018

(Level 1)

(Level 2)

(Level 3)

Description:

    

  

    

  

    

  

    

  

    

Notes receivable (a)

$

42,259

$

45,026

$

$

$

45,026

Derivatives - Interest rate contracts (b)

 

4,757

 

4,757

 

 

4,757

 

Total assets

$

47,016

$

49,783

$

$

4,757

$

45,026

Derivatives - Interest rate contracts (b)

$

356

$

356

$

$

356

$

Secured debt instruments - fixed rate: (c)

 

  

 

  

 

  

 

  

 

Mortgage notes payable

417,989

416,314

416,314

Fannie Mae credit facilities

 

90,000

 

90,213

 

 

 

90,213

Secured debt instruments - variable rate: (c)

 

  

 

  

 

  

 

  

 

Tax-exempt secured notes payable

 

94,700

 

94,700

 

 

 

94,700

Unsecured debt instruments: (c)

 

 

  

 

  

 

  

 

Working capital credit facility

16

16

16

Commercial paper program

101,115

101,115

101,115

Unsecured notes

2,861,842

2,829,390

2,829,390

Total liabilities

$

3,566,018

$

3,532,104

$

$

356

$

3,531,748

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership (d)

$

972,740

$

972,740

$

$

972,740

$

(a)See Note 2, Significant Accounting Policies.
(b)See Note 11, Derivatives and Hedging Activity.
(c)See Note 7, Secured and Unsecured Debt, Net.
(d)See Note 9, Noncontrolling Interests.

There were no transfers into or out of any of the levels of the fair value hierarchy during the six months ended June 30, 2019.

Financial Instruments Carried at Fair Value

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2019 and December 31, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. In conjunction with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership have a redemption feature and are marked to their redemption value. The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership are classified as Level 2.

Financial Instruments Not Carried at Fair Value

At June 30, 2019 and December 31, 2018, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments, which includes notes receivable and debt instruments, are classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs that are utilized in their respective valuations.

We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair value. Our estimates of fair value represent our best estimate based upon Level 3 inputs such as industry trends and reference to market rates and transactions.

We consider various factors to determine if a decrease in the value of our Investment in and advances to unconsolidated joint ventures, net is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. Based on the significance of the unobservable inputs, we classify these fair value measurements within Level 3 of the valuation hierarchy. The Company did not incur any other-than-temporary impairments in the value of its investments in unconsolidated joint ventures during the three and six months ended June 30, 2019 and 2018.

After determining an other-than-temporary decrease in the value of an equity method investment has occurred, we estimate the fair value of our investment by estimating the proceeds we would receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs reflect management’s best estimate of what market participants would use in pricing the investment giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture assets. The inputs and assumptions utilized to estimate the future cash flows of the underlying assets are based upon the Company’s evaluation of the economy, market trends, operating results, and other factors, including judgments regarding costs to complete any construction activities, lease up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate the projected cash flows at the disposition, and discount rates.

11. DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

Amounts reported in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets related to derivatives that will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Through June 30, 2020, the Company estimates that an additional $8.5 million will be reclassified as a decrease to Interest expense.

As of June 30, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):

    

Number of

    

Product

Instruments

Notional

Interest rate swaps (a)

4

$

315,000

Interest rate caps

 

1

$

65,197

(a)

In addition to the interest rate swaps summarized above, the Company entered into an additional interest rate swap with a notional value of $315.0 million that will become effective in January 2020 upon the maturity of the interest rate swaps summarized above. Additionally, the Company had previously entered into two additional interest rate swaps with a notional value totaling $75.0 million that were subsequently terminated and settled during the three months ended June 30, 2019 in conjunction with the July 2019 issuance of $300.0 million of senior unsecured medium-term notes as disclosed in Note 7, Secured and Unsecured, Net.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in no gain or loss for both the three and six months ended June 30, 2019 and 2018.

As of June 30, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):

    

Number of

    

Product

Instruments

Notional

Interest rate caps

1

$

19,880

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018 (dollars in thousands):

Asset Derivatives

Liability Derivatives

(included in Other assets)

(included in Other liabilities)

Fair Value at:

Fair Value at:

June 30, 

December 31, 

June 30, 

December 31, 

2019

2018

2019

2018

Derivatives designated as hedging instruments:

    

  

    

  

    

  

    

  

Interest rate products

$

1,616

$

4,757

$

253

$

356

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (dollars in thousands):

Gain/(Loss) Recognized in

Gain/(Loss) Reclassified

Interest expense

Unrealized holding gain/(loss) 

from Accumulated OCI into

(Amount Excluded from

Recognized in OCI

Interest expense

Effectiveness Testing)

Derivatives in Cash Flow Hedging Relationships

    

2019

    

2018

    

2019

    

2018

    

2019

    

2018

Three Months Ended June 30, 

Interest rate products

$

(4,311)

$

282

$

933

$

426

$

$

Six Months Ended June 30, 

Interest rate products

$

(6,522)

$

1,992

$

1,880

$

598

$

$

Three Months Ended

Six Months Ended

June 30, 

June 30, 

2019

2018

2019

2018

Total amount of Interest expense presented on the Consolidated Statements of Operations

$

34,417

$

31,598

$

67,959

$

61,541

The Company did not recognize any gain/(loss) in Interest income and other income/(expense), net related to derivatives not designated during each of the three and six months ended June 30, 2019 and 2018.

Credit-risk-related Contingent Features

The Company has agreements with its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.

The Company has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the Company or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity’s creditworthiness is materially weaker than the original party to the derivative agreement.

As of June 30, 2019, the fair value of derivatives was in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, of $1.7 million.

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JUNE 30, 2019

Tabular Disclosure of Offsetting Derivatives

The Company has elected not to offset derivative positions on the consolidated financial statements. The tables below present the effect on its financial position had the Company made the election to offset its derivative positions as of June 30, 2019 and December 31, 2018 (dollars in thousands):

    

    

Gross

    

Net Amounts of

    

Gross Amounts Not Offset

Amounts

Assets

in the Consolidated

Gross

Offset in the

Presented in the

Balance Sheet

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance Sheets

Financial

Collateral

Offsetting of Derivative Assets

Assets

Sheets

(a)

Instruments

    

Received

    

Net Amount

June 30, 2019

$

1,616

$

$

1,616

$

(253)

$

$

1,363

December 31, 2018

$

4,757

$

$

4,757

$

$

$

4,757

(a)Amounts reconcile to the aggregate fair value of derivative assets in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.

    

    

Gross

    

Net Amounts of

    

Gross Amounts Not Offset

Amounts

Liabilities

in the Consolidated

Gross

Offset in the

Presented in the

Balance Sheet

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance Sheets

Financial

Collateral

Offsetting of Derivative Liabilities

    

Liabilities

    

Sheets

    

(a)

    

Instruments

    

Posted

    

Net Amount

June 30, 2019

$

253

$

$

253

$

(253)

$

$

December 31, 2018

$

356

$

$

356

$

$

$

356

(a)Amounts reconcile to the aggregate fair value of derivative liabilities in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.

12. STOCK BASED COMPENSATION

The Company recognized stock based compensation expense, inclusive of awards granted to our non-employee directors, net of capitalization, of $4.4 million and $3.6 million during the three months ended June 30, 2019 and 2018, respectively, and $8.5 million and $7.1 million during the six months ended June 30, 2019 and 2018, respectively.

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JUNE 30, 2019

13. COMMITMENTS AND CONTINGENCIES

Commitments

Real Estate Commitments

The following summarizes the Company’s real estate commitments at June 30, 2019 (dollars in thousands):

Number

UDR's

UDR's Remaining

Properties

Investment (a)

Commitment

Wholly-owned — redevelopment

 

2

$

4,621

$

30,879

 

Joint ventures:

 

  

 

  

 

  

 

Unconsolidated joint ventures - development

 

1

 

11,648

 

23,536

(b)

Preferred equity investments

 

2

37,922

(c)

41,937

(d)

Other investments

-

6,879

10,800

(e)

Total

 

  

$

61,070

$

107,152

 

(a)Represents UDR’s investment as of June 30, 2019.
(b)Represents UDR’s proportionate share of expected remaining costs to complete the development.
(c)Represents UDR’s investment in 1300 Fairmount and Modera Lake Merritt for the properties under development as of June 30, 2019.
(d)Represents UDR’s remaining commitment for 1300 Fairmount and Modera Lake Merritt.
(e)Represents UDR’s remaining commitment for other investment ventures.

Purchase Commitments

As described in Note 5, Joint Ventures and Partnerships, during the three months ended June 30, 2019, the Company entered into a contract to acquire a community held by the UDR/KFH joint venture for a purchase price at 100% of approximately $184.0 million. As the Company currently holds a 30% ownership interest in the community, it expects to pay approximately $128.8 million for the remaining 70% ownership. The community will be consolidated upon closing of the acquisition. The Company made a $5.0 million deposit on the purchase which, as of June 30, 2019, is generally non-refundable other than due to the failure to satisfy one of the closing conditions pursuant to the terms of the purchase agreement. The acquisition is expected to close in 2019, subject to customary closing conditions. Upon closing of the acquisition, the UDR/KFH joint venture will terminate.

In July 2019, the Company entered into a contract to acquire a 185 home operating community in Englewood, New Jersey for a purchase price of approximately $83.6 million. The Company made a $5.0 million deposit on the purchase, which is generally non-refundable other than due to the failure to satisfy one of the closing conditions pursuant to the terms of the purchase agreement. The acquisition is expected to close in 2019, subject to customary closing conditions.

Contingencies

Litigation and Legal Matters

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. The Company believes that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition, results of operations or cash flows.

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JUNE 30, 2019

14. REPORTABLE SEGMENTS

GAAP guidance requires that segment disclosures present the measure(s) used by the Chief Operating Decision Maker to decide how to allocate resources and for purposes of assessing such segments’ performance. UDR’s Chief Operating Decision Maker is comprised of several members of its executive management team who use several generally accepted industry financial measures to assess the performance of the business for our reportable operating segments.

UDR owns and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The primary financial measures for UDR’s apartment communities are rental income and net operating income (“NOI”). Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. NOI is defined as rental income less direct property rental expenses. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI is property management expense, which is calculated as 2.875% of property revenue to cover the regional supervision and accounting costs related to consolidated property operations, and land rent. UDR’s Chief Operating Decision Maker utilizes NOI as the key measure of segment profit or loss.

UDR’s two reportable segments are Same-Store Communities and Non-Mature Communities/Other:

Same-Store Communities represent those communities acquired, developed, and stabilized prior to April 1, 2018 (for quarter-to-date comparison) or January 1, 2018 (for year-to-date comparison) and held as of June 30, 2019. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.
Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties.

Management evaluates the performance of each of our apartment communities on a Same-Store Community and Non-Mature Community/Other basis, as well as individually and geographically. This is consistent with the aggregation criteria under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Company’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the Chief Operating Decision Maker.

Revenue is measured based on consideration specified in contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by providing the services specified in a contract to the customer. All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of UDR’s total revenues during the three and six months ended June 30, 2019 and 2018.

The following is a description of the principal streams from which the Company generates its revenue:

Lease Revenue

Lease revenue related to leases is recognized on an accrual basis when due from residents or tenants in accordance with ASC 842, Leases. Rental payments are generally due on a monthly basis and recognized on a straight-line basis over the noncancellable lease term because collection of the lease payments was probable at lease commencement, inclusive of any periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. In addition, in circumstances where a lease incentive is provided to tenants, the incentive is recognized as a reduction of lease revenue on a straight-line basis over the lease term.

Lease revenue also includes all pass-through revenue from retail and residential leases and common area maintenance reimbursements from retail leases. These services represent non-lease components in a contract as the Company transfers a service to the lessee other than the right to use the underlying asset. The Company has elected the

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JUNE 30, 2019

practical expedient under the leasing standard to not separate lease and non-lease components from its resident and retail lease contracts as the timing and pattern of revenue recognition for the non-lease component and related lease component are the same and the combined single lease component would be classified as an operating lease.

Other Revenue

Other revenue is generated by services provided by the Company to its retail and residential tenants and other unrelated third parties. These fees are generally recognized as earned.

Joint venture management and other fees

The Joint venture management and other fees revenue consists of management fees charged to our equity method joint ventures per the terms of contractual agreements and other fees. Joint venture fee revenue is recognized monthly as the management services are provided and the fees are earned or upon a transaction whereby the Company earns a fee. Joint venture management and other fees are not allocable to a specific reportable segment or segments.

The following table details rental income and NOI for UDR’s reportable segments for the three and six months ended June 30, 2019 and 2018, and reconciles NOI to Net income/(loss) attributable to UDR, Inc. on the Consolidated Statements of Operations (dollars in thousands):

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

JUNE 30, 2019

Three Months Ended

Six Months Ended

June 30, (a)

June 30, (b)

    

2019

    

2018

    

2019

    

2018

Reportable apartment home segment lease revenue

Same-Store Communities

  

    

  

    

  

    

  

West Region

$

97,979

$

93,895

$

193,978

$

186,274

Mid-Atlantic Region

 

52,390

 

51,107

 

104,353

 

101,576

Southeast Region

 

28,203

 

27,109

 

56,011

 

53,781

Northeast Region

 

29,756

 

29,161

 

59,454

 

58,284

Southwest Region

 

15,453

 

15,049

 

27,060

 

26,302

Non-Mature Communities/Other

 

33,515

 

19,751

 

63,718

 

40,894

Total segment and consolidated rental income

$

257,296

$

236,072

$

504,574

$

467,111

Reportable apartment home segment other revenue

Same-Store Communities

  

    

  

    

  

    

  

West Region

$

7,899

$

7,376

$

15,619

$

14,400

Mid-Atlantic Region

 

4,241

 

3,951

 

8,581

 

7,912

Southeast Region

 

3,473

 

3,342

 

6,985

 

6,707

Northeast Region

 

1,308

 

1,154

 

2,433

 

2,197

Southwest Region

 

1,520

 

1,508

 

2,756

 

2,608

Non-Mature Communities/Other

 

2,726

 

3,231

 

5,437

 

6,182

Total segment and consolidated rental income

$

21,167

$

20,562

$

41,811

$

40,006

Total reportable apartment home segment rental income

Same-Store Communities

  

    

  

    

  

    

  

West Region

$

105,878

$

101,271

$

209,597

$

200,674

Mid-Atlantic Region

 

56,631

 

55,058

 

112,934

 

109,488

Southeast Region

 

31,676

 

30,451

 

62,996

 

60,488

Northeast Region

 

31,064

 

30,315

 

61,887

 

60,481

Southwest Region

 

16,973

 

16,557

 

29,816

 

28,910

Non-Mature Communities/Other

 

36,241

 

22,982

 

69,155

 

47,076

Total segment and consolidated rental income

$

278,463

$

256,634

$

546,385

$

507,117

Reportable apartment home segment NOI

 

  

 

  

 

  

 

  

Same-Store Communities

 

  

 

  

 

  

 

  

West Region

$

80,833

$

76,829

$

159,271

$

151,808

Mid-Atlantic Region

 

40,045

 

38,739

 

79,224

 

76,245

Southeast Region

 

22,159

 

21,160

 

44,169

 

42,208

Northeast Region

 

21,475

 

21,120

 

42,453

 

42,070

Southwest Region

 

10,444

 

10,064

 

17,952

 

17,114

Non-Mature Communities/Other

 

24,779

 

15,363

 

46,349

 

30,444

Total segment and consolidated NOI

 

199,735

 

183,275

 

389,418

 

359,889

Reconciling items:

 

  

 

  

 

  

 

  

Joint venture management and other fees

 

2,845

 

3,109

 

5,596

 

5,931

Property management

 

(8,006)

 

(7,057)

 

(15,709)

 

(13,945)

Other operating expenses

 

(2,735)

 

(2,825)

 

(8,381)

 

(4,834)

Real estate depreciation and amortization

 

(117,934)

 

(106,520)

 

(230,402)

 

(214,656)

General and administrative

 

(12,338)

 

(12,373)

 

(24,805)

 

(24,132)

Casualty-related (charges)/recoveries, net

 

(246)

 

(746)

 

(246)

 

(1,686)

Other depreciation and amortization

 

(1,678)

 

(1,684)

 

(3,334)

 

(3,375)

Gain/(loss) on sale of real estate owned

5,282

5,282

70,300

Income/(loss) from unconsolidated entities

 

6,625

 

(2,032)

 

6,674

 

(3,709)

Interest expense

 

(34,417)

 

(31,598)

 

(67,959)

 

(61,541)

Interest income and other income/(expense), net

 

1,310

 

1,128

 

11,123

 

3,887

Tax (provision)/benefit, net

 

(125)

 

(233)

 

(2,337)

 

(460)

Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

(2,652)

 

(1,813)

 

(4,709)

 

(9,203)

Net (income)/loss attributable to noncontrolling interests

 

(47)

 

(30)

 

(89)

 

(109)

Net income/(loss) attributable to UDR, Inc.

$

35,619

$

20,601

$

60,122

$

102,357

(a)Same-Store Community population consisted of 38,177 apartment homes.

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(b)Same-Store Community population consisted of 37,959 apartment homes.

The following table details the assets of UDR’s reportable segments as of June 30, 2019 and December 31, 2018 (dollars in thousands):

    

June 30, 

    

December 31, 

2019

2018

Reportable apartment home segment assets:

 

  

 

  

Same-Store Communities:

 

  

 

  

West Region

$

3,784,500

$

3,763,366

Mid-Atlantic Region

 

2,330,886

 

2,317,369

Southeast Region

 

792,036

 

779,310

Northeast Region

 

1,496,248

 

1,491,994

Southwest Region

 

594,238

 

589,188

Non-Mature Communities/Other

 

2,013,608

 

1,254,932

Total segment assets

 

11,011,516

 

10,196,159

Accumulated depreciation

 

(3,878,897)

 

(3,654,160)

Total segment assets — net book value

 

7,132,619

 

6,541,999

Reconciling items:

 

  

 

  

Cash and cash equivalents

 

981

 

185,216

Restricted cash

 

23,042

 

23,675

Notes receivable, net

 

37,494

 

42,259

Investment in and advances to unconsolidated joint ventures, net

 

769,000

 

780,869

Operating lease right-of-use assets

93,939

Other assets

 

140,191

 

137,710

Total consolidated assets

$

8,197,266

$

7,711,728

Markets included in the above geographic segments are as follows:

i.West Region — Orange County, San Francisco, Seattle, Los Angeles, Monterey Peninsula, Other Southern California and Portland
ii.Mid-Atlantic Region — Metropolitan D.C., Richmond and Baltimore
iii.Southeast Region — Orlando, Tampa, Nashville and Other Florida
iv.Northeast Region — New York and Boston
v.Southwest Region — Dallas, Austin and Denver

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42

UNITED DOMINION REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for unit data)

    

June 30,