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United Dominion Realty L P (UDR)

Filed: 7 May 20, 4:25pm

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 March 31, 2020

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 May 6, 2020 was 294,886,013.

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 March 31, 2020 (unaudited) and December 31, 2019 (audited)

5

Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)

6

Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2020 and 2019 (unaudited)

7

Consolidated Statements of Changes in Equity for the three months ended March 31, 2020 and 2019 (unaudited)

8

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

9

Notes to Consolidated Financial Statements (unaudited)

10

UNITED DOMINION REALTY, L.P.:

Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 (audited)

40

Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)

41

Consolidated Statements of Changes in Capital for the three months ended March 31, 2020 and 2019 (unaudited)

42

Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)

43

Notes to Consolidated Financial Statements (unaudited)

44

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

61

Item 3. Quantitative and Qualitative Disclosures About Market Risk

82

Item 4. Controls and Procedures

82

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

83

Item 1A. Risk Factors

83

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

99

Item 3. Defaults Upon Senior Securities

100

Item 4. Mine Safety Disclosures

100

Item 5. Other Information

100

Item 6. Exhibits

101

Signatures

103

Exhibit 4.1

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 March 31, 2020 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 March 31, 2020, UDR owned 0.1 million units (100%) of the general partnership interests of the Operating Partnership and 176.1 million OP Units, representing approximately 95.3% 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)

March 31, 

December 31, 

    

2020

    

2019

(unaudited)

(audited)

ASSETS

Real estate owned:

 

  

 

  

Real estate held for investment

$

12,608,022

$

12,532,324

Less: accumulated depreciation

 

(4,231,269)

 

(4,131,330)

Real estate held for investment, net

 

8,376,753

 

8,400,994

Real estate under development (net of accumulated depreciation of $81 and $23, respectively)

 

95,245

 

69,754

Real estate held for disposition (net of accumulated depreciation of $41,121 and $0, respectively)

 

73,529

 

Total real estate owned, net of accumulated depreciation

 

8,545,527

 

8,470,748

Cash and cash equivalents

 

980

 

8,106

Restricted cash

 

21,949

 

25,185

Notes receivable, net

 

151,543

 

153,650

Investment in and advances to unconsolidated joint ventures, net

 

588,395

 

588,262

Operating lease right-of-use assets

203,410

204,225

Other assets

 

179,301

 

186,296

Total assets

$

9,691,105

$

9,636,472

LIABILITIES AND EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Secured debt, net

$

1,144,201

$

1,149,441

Unsecured debt, net

 

3,740,937

 

3,558,083

Operating lease liabilities

197,829

198,558

Real estate taxes payable

 

33,134

 

29,445

Accrued interest payable

 

31,494

 

45,199

Security deposits and prepaid rent

 

48,474

 

48,353

Distributions payable

 

115,259

 

109,382

Accounts payable, accrued expenses, and other liabilities

 

82,254

 

90,032

Total liabilities

 

5,393,582

 

5,228,493

Commitments and contingencies (Note 13)

 

  

 

  

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership

 

819,133

 

1,018,665

Equity:

 

  

 

  

Preferred stock, 0 par value; 50,000,000 shares authorized:

 

  

 

  

8.00% Series E Cumulative Convertible; 2,780,994 shares issued and outstanding at March 31, 2020 and December 31, 2019

 

46,200

 

46,200

Series F; 14,543,281 and 14,691,274 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

1

 

1

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

 

  

 

  

294,881,038 and 294,588,305 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

2,949

 

2,946

Additional paid-in capital

 

5,788,471

 

5,781,975

Distributions in excess of net income

 

(2,360,636)

 

(2,462,132)

Accumulated other comprehensive income/(loss), net

 

(12,870)

 

(10,448)

Total stockholders’ equity

 

3,464,115

 

3,358,542

Noncontrolling interests

 

14,275

 

30,772

Total equity

 

3,478,390

 

3,389,314

Total liabilities and equity

$

9,691,105

$

9,636,472

See accompanying notes to consolidated financial statements.

5

UDR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

Three Months Ended

March 31, 

    

2020

2019

REVENUES:

    

  

    

  

Rental income

$

320,093

$

267,922

Joint venture management and other fees

 

1,388

 

2,751

Total revenues

 

321,481

 

270,673

OPERATING EXPENSES:

 

  

 

  

Property operating and maintenance

 

49,483

 

41,939

Real estate taxes and insurance

 

45,145

 

36,300

Property management

 

9,203

 

7,703

Other operating expenses

 

4,966

 

5,646

Real estate depreciation and amortization

 

155,476

 

112,468

General and administrative

 

14,978

 

12,467

Casualty-related charges/(recoveries), net

 

1,251

 

Other depreciation and amortization

 

2,025

 

1,656

Total operating expenses

282,527

 

218,179

Operating income

 

38,954

 

52,494

Income/(loss) from unconsolidated entities

 

3,367

 

49

Interest expense

 

(39,317)

 

(33,542)

Interest income and other income/(expense), net

 

2,700

 

9,813

Income/(loss) before income taxes

 

5,704

 

28,814

Tax (provision)/benefit, net

 

(164)

 

(2,212)

Net income/(loss)

 

5,540

 

26,602

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

 

(313)

 

(2,057)

Net (income)/loss attributable to noncontrolling interests

 

(6)

 

(42)

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

 

5,221

 

24,503

Distributions to preferred stockholders — Series E (Convertible)

 

(1,066)

 

(1,011)

Net income/(loss) attributable to common stockholders

$

4,155

$

23,492

Income/(loss) per weighted average common share:

 

  

 

  

Basic

$

0.01

$

0.08

Diluted

$

0.01

$

0.08

Weighted average number of common shares outstanding:

 

  

 

  

Basic

 

294,457

 

277,002

Diluted

 

295,160

 

277,557

See accompanying notes to consolidated financial statements.

6

UDR, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

Three Months Ended

March 31, 

2020

2019

Net income/(loss)

$

5,540

$

26,602

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

 

  

 

  

Other comprehensive income/(loss) - derivative instruments:

 

  

 

  

Unrealized holding gain/(loss)

 

(2,917)

 

(2,210)

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

 

357

 

(945)

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

 

(2,560)

 

(3,155)

Comprehensive income/(loss)

 

2,980

 

23,447

Comprehensive (income)/loss attributable to noncontrolling interests

 

(181)

 

(1,847)

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

$

2,799

$

21,600

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 December 31, 2019

$

46,201

$

2,946

$

5,781,975

$

(2,462,132)

$

(10,448)

$

30,772

$

3,389,314

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

 

 

 

 

5,221

 

 

 

5,221

Net income/(loss) attributable to noncontrolling interests

 

 

 

 

 

 

(10)

 

(10)

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

 

 

 

 

 

 

(16,487)

 

(16,487)

Other comprehensive income/(loss)

 

 

 

 

 

(2,422)

 

 

(2,422)

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

 

 

1

 

(1,332)

 

 

 

 

(1,331)

Cumulative effect upon adoption of ASC 326

 

 

 

(2,182)

 

 

 

(2,182)

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

 

 

2

 

7,828

 

 

 

 

7,830

Common stock distributions declared ($0.36 per share)

 

 

 

 

(106,190)

 

 

 

(106,190)

Preferred stock distributions declared-Series E ($0.3898 per share)

 

 

 

 

(1,066)

 

 

 

(1,066)

Adjustment to reflect redemption value of redeemable noncontrolling interests

 

 

 

 

205,713

 

 

 

205,713

Balance at March 31, 2020

$

46,201

$

2,949

$

5,788,471

$

(2,360,636)

$

(12,870)

$

14,275

$

3,478,390

    

    

    

    

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.

 

 

 

 

24,503

 

 

 

24,503

Net income/(loss) attributable to noncontrolling interests

 

 

 

 

 

 

30

 

30

Contribution of noncontrolling interests in consolidated real estate

 

 

 

 

 

 

125

 

125

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

 

 

 

 

 

 

(3,925)

 

(3,925)

Other comprehensive income/(loss)

 

 

 

 

 

(2,903)

 

 

(2,903)

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

 

 

 

(1,499)

 

 

 

 

(1,499)

Issuance of common shares through public offering, net

 

 

44

 

192,135

 

 

 

 

192,179

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

 

 

19

 

72,827

 

 

 

 

72,846

Common stock distributions declared ($0.3425 per share)

 

 

 

 

(96,561)

 

 

 

(96,561)

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

 

 

 

 

(1,011)

 

 

 

(1,011)

Adjustment to reflect redemption value of redeemable noncontrolling interests

 

 

 

 

(144,197)

 

 

 

(144,197)

Balance at March 31, 2019

$

46,201

$

2,818

$

5,184,195

$

(2,281,262)

$

(2,970)

$

13,382

$

2,962,364

See accompanying notes to consolidated financial statements.

8

UDR, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for share data)

(Unaudited)

Three Months Ended March 31, 

    

2020

    

2019

Operating Activities

  

 

  

Net income/(loss)

$

5,540

$

26,602

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

 

  

 

  

Depreciation and amortization

 

157,501

 

114,124

(Income)/loss from unconsolidated entities

 

(3,367)

 

(49)

Return on investment in unconsolidated joint ventures

 

1,741

 

1,977

Amortization of share-based compensation

 

6,808

 

5,937

Other

 

(1,215)

 

3,910

Changes in operating assets and liabilities:

 

  

 

  

(Increase)/decrease in operating assets

 

114

 

2,295

Increase/(decrease) in operating liabilities

 

(31,666)

 

(17,463)

Net cash provided by/(used in) operating activities

 

135,456

 

137,333

Investing Activities

 

  

 

  

Acquisition of real estate assets

 

(141,727)

 

(403,245)

Development of real estate assets

 

(23,087)

 

(6,237)

Capital expenditures and other major improvements — real estate assets

 

(32,983)

 

(31,264)

Capital expenditures — non-real estate assets

 

(2,479)

 

(3,346)

Investment in unconsolidated joint ventures

 

(16,139)

 

(21,389)

Distributions received from unconsolidated joint ventures

 

3,271

 

10,797

Purchase deposits on pending acquisitions

(10,350)

Repayment/(issuance) of notes receivable, net

 

(900)

 

5,285

Net cash provided by/(used in) investing activities

 

(214,044)

 

(459,749)

Financing Activities

 

  

 

  

Payments on secured debt

 

(2,781)

 

(962)

Net proceeds from the issuance of unsecured debt

 

211,320

 

Net proceeds/(repayment) of commercial paper

 

(85,000)

 

(11,115)

Net proceeds/(repayment) of revolving bank debt

 

58,214

 

54,294

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

 

 

192,179

Distributions paid to redeemable noncontrolling interests

 

(7,618)

 

(8,553)

Distributions paid to preferred stockholders

 

(1,015)

 

(959)

Distributions paid to common stockholders

 

(100,930)

 

(88,911)

Other

 

(3,964)

 

1,706

Net cash provided by/(used in) financing activities

 

68,226

 

137,679

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

 

(10,362)

 

(184,737)

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

 

33,291

 

208,891

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

$

22,929

$

24,154

Supplemental Information:

 

  

 

  

Interest paid during the period, net of amounts capitalized

$

57,320

$

44,271

Cash paid/(refunds received) for income taxes

 

323

 

241

Non-cash transactions:

 

  

 

  

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

$

14,700

$

40,433

Acquisition of intellectual property in exchange for cancellation of secured note receivable

2,250

Recognition of allowance for credit losses

2,182

Recognition of operating lease right-of-use assets

94,349

Recognition of operating lease liabilities

88,336

Vesting of LTIP Units

23,018

14,335

Development costs and capital expenditures incurred but not yet paid

 

25,568

 

10,745

Conversion of Operating Partnership and DownREIT Partnership noncontrolling interests to common stock (167,631 shares in 2020 and 1,838,133 shares in 2019)

 

7,830

 

72,846

Dividends declared but not yet paid

 

115,259

 

105,548

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

$

8,106

$

185,216

Restricted cash

25,185

23,675

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

$

33,291

$

208,891

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

Cash and cash equivalents

$

980

$

1,043

Restricted cash

21,949

23,111

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

$

22,929

$

24,154

See accompanying notes to consolidated financial statements.

9

Table of Contents

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2020

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 March 31, 2020, there were 184.8 million units in the Operating Partnership (“OP Units”) outstanding, of which 176.2 million OP Units (including 0.1 million of general partnership units), or 95.3%, were owned by UDR and 8.6 million OP Units, or 4.7%, were owned by outside limited partners. As of March 31, 2020, there were 32.4 million units in the DownREIT Partnership (“DownREIT Units”) outstanding, of which 18.6 million, or 57.4%, were owned by UDR (including 13.5 million DownREIT Units, or 41.6%, that were held by the Operating Partnership) and 13.8 million, or 42.6%, 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 March 31, 2020, and results of operations for the three months ended March 31, 2020 and 2019, 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, particularly in light of the novel coronavirus disease (“COVID-19”) pandemic and measures intended to mitigate its spread. 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, 2019 appearing in UDR’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 18, 2020.

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 2, Significant Accounting Policies, Note 3, Real Estate Owned, Note 7, Secured and Unsecured Debt, Net and Note 15, Subsequent Event.

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 required 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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amended the transition requirements and scope of ASU 2016-13 and clarified 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 updated standard became effective for the Company on January 1, 2020 and was adopted on a modified retrospective

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basis through a cumulative-effect adjustment to retained earnings of approximately $2.2 million on that date, which was primarily associated with our notes receivable. The Company concluded the cumulative effect was not material to our consolidated financial statements. Disclosures were updated pursuant to the requirements of the ASU.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. The Company does not expect the ASU to have a material impact on the consolidated financial statements.

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.

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.

Allowance for Credit Losses

The Company accounts for allowance for credit losses under the current expected credit loss (“CECL”) impairment model for its financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and presents the net amount of the financial instrument expected to be collected. The CECL impairment model excludes operating lease receivables. The CECL impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, that considers forecasts of future economic conditions in addition to information about past events and current conditions. Based on this model, we analyze the following criteria, as applicable in developing allowances for credit losses: historical loss information, the borrower’s

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ability to make scheduled payments, the remaining time to maturity, the value of underlying collateral, projected future performance of the borrower and macroeconomic trends.

The Company measures credit losses of financial assets on a collective (pool) basis when similar risk characteristics exist. If the Company determines that a financial asset does not share risk characteristics with its other financial assets, the Company evaluates the financial asset for expected credit losses on an individual basis. Allowance for credit losses are recorded as a direct reduction from an asset’s amortized cost basis. Credit losses and recoveries are recorded in Interest income and other income/(expense), net on the Consolidated Statements of Operations. Recoveries of financial assets previously written off are recorded when received.

The Company has made the optional election provided by the standard not to measure allowance for credit losses for accrued interest receivables as the Company writes off any uncollectible accrued interest receivables in a timely manner. The Company periodically evaluates the collectability of its accrued interest receivables. A write-off is recorded when the Company concludes that all or a portion of its accrued interest receivable balance is no longer collectible.

Notes Receivable

Notes receivable relate to financing arrangements which are typically secured by real estate, real estate related projects or other assets. Certain of the loans we extend may include characteristics such as options to purchase the project within a specific time window following expected project completion. These characteristics can cause the loans to fall under the definition of a VIE, and thus trigger consolidation consideration. We consider the facts and circumstances pertinent to each loan, including the relative amount of financing we are contributing to the overall project cost, decision making rights or control we hold, and our rights to expected residual gains or our obligations to absorb expected residual losses from the project. If we are deemed to be the primary beneficiary of a VIE due to holding a controlling financial interest, the majority of decision making control, or by other means, consolidation of the VIE would be required. The Company has concluded that it is not the primary beneficiary of the borrowing entities which were deemed to be VIEs.

Additionally, we analyze each loan arrangement that involves real estate development to consider whether the loan qualifies for accounting as a loan or as an investment in a real estate development project. The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required by ASC 310-10. For each loan, the Company has concluded that the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.

The following table summarizes our Notes receivable, net as of March 31, 2020 and December 31, 2019 (dollars in thousands):

Interest rate at

Balance Outstanding

    

March 31, 

    

March 31, 

    

December 31, 

2020

2020

2019

Note due April 2020 (a)

 

12.00

%  

$

20,000

$

20,000

Note due October 2020 (b)

 

8.00

%  

 

 

2,250

Note due October 2022 (c)

 

4.75

%  

 

115,000

 

115,000

Note due January 2023 (d)

10.00

%  

17,300

16,400

Notes Receivable

152,300

153,650

Allowance for credit losses

(757)

Total notes receivable, net

 

  

$

151,543

$

153,650

(a)The Company has a secured note with an unaffiliated third party with an aggregate commitment of $20.0 million, all of which has been funded. The note is secured by a parcel of land and related land improvements. Interest payments up to December 2019 are due when the loan matures and interest payments after December 2019 are due monthly. In April 2020, the terms of the secured note were amended to extend the term to May 30, 2022, to adjust the interest rate to 8.0% and to add some covenants of the Borrower.

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(b)In March 2020, the Company entered into a purchase agreement to acquire all of the unaffiliated third party’s intellectual property in exchange for cancellation of the secured note and accrued interest. All property acquired was recorded in Other assets on the Consolidated Balance Sheets.
(c)The Company has a secured note with an unaffiliated third party with an aggregate commitment of $115.0 million, all of which has been funded. Interest payments are due when the loan matures. The note is secured by a first priority deed of trust on an under construction 259 apartment home operating community in Bellevue, Washington, which is expected to be completed in 2020. When the note was funded, the Company also entered into a purchase option agreement and paid a deposit of $10.0 million, which gives the Company the option to acquire the community at a fixed price of $170.0 million. The purchase option must be exercised within 30 days following the date the temporary certificate of occupancy for the residential portion of the project is issued. The deposit is generally nonrefundable other than due to a failure of closing conditions pursuant to the terms of the agreement. If the Company does not exercise the purchase option, or if the Company exercises and fails to close the purchase other than due to seller’s failure or other breaches in the purchase option agreement, per the terms of the agreement, the note will be modified to extend the maturity date to 10 years following the date the temporary certificate of occupancy is issued. Upon modification, the loan will be interest only for the first three years and after such date payments will be based on a 30-year amortization schedule.
(d)The Company has a secured note with an unaffiliated third party with an aggregate commitment of $20.0 million, of which $17.3 million has been funded, including $0.9 million funded during the three months ended March 31, 2020. 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) January 2023.

During 2020, the terms of this secured note were amended to increase the aggregate commitment from $16.4 million to $20.0 million, to extend the maturity date of the note to January 2023 and for the April 2020 through July 2020 interest payments to be deferred and paid when the note matures.

The Company recognized $2.6 million and $1.1 million of interest income for the notes receivable described above during the three months ended March 31, 2020 and 2019, respectively, NaN of which was related party interest. Interest income is 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 months ended March 31, 2020 and 2019, 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 March 31, 2020 and 2019 was $(0.1) million and $(0.3) million, respectively.

Income Taxes

Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, 0 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

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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/(liabilities) are generally the result of differing depreciable lives on capitalized assets, temporary differences between book and tax basis of assets and liabilities and timing of expense recognition for certain accrued liabilities. As of March 31, 2020 and December 31, 2019, UDR’s net deferred tax asset/(liability) was $(1.4) million and $(1.6) 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.

The Company invests in assets that qualify for federal investment tax credits (“ITC”) through our TRS. An ITC reduces federal income taxes payable when qualifying depreciable property is acquired. The ITC is determined as a percentage of cost of the assets. The Company accounts for ITCs under the deferral method, under which the tax benefit from the ITC is deferred and amortized as a tax benefit into Tax (provision)/benefit, net on the Consolidated Statements of Operations over the book life of the qualifying depreciable property. The ITCs are recorded in Accounts payable, accrued expenses and other liabilities on the Consolidated Balance Sheets.

UDR had 0 material unrecognized tax benefit, accrued interest or penalties at March 31, 2020. UDR and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The tax years 2016 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.

Forward Sales Agreements

The Company utilizes forward sales agreements for the future issuance of its common stock. When the Company enters into a forward sales agreement, the contract requires the Company to sell its shares to a counterparty at a predetermined price at a future date. The net sales price and proceeds attained by the Company will be determined on the dates of settlement, with adjustments during the term of the contract for the Company’s anticipated dividends as well as for a daily interest factor that varies with changes in the federal funds rate. The Company generally has the ability to determine the dates and method of settlement (i.e., gross physical settlement, net share settlement or cash settlement), subject to certain conditions and the right of the counterparty to accelerate settlement under certain circumstances.

The Company accounts for the shares of common stock reserved for issuance upon settlement as equity in accordance with ASC 815-40, Contracts in Entity's Own Equity, which permits equity classification when a contract is considered indexed to its own stock and the contract requires or permits the issuing entity to settle the contract in shares (either physically or net in shares).

The guidance establishes a two-step process for evaluating whether an equity-linked financial instrument is considered indexed to its own stock, first, evaluating the instrument’s contingent exercise provisions and second, evaluating the instrument’s settlement provisions. When entering into forward sales agreements, we determined that (i) none of the agreement’s exercise contingencies are based on observable markets or indices besides those related to the market for our own stock price; and (ii) none of the settlement provisions preclude the agreements from being indexed to our own stock.

Before the issuance of shares of common stock, upon physical or net share settlement of the forward sales agreements, the Company expects that the shares issuable upon settlement of the forward sales agreements will be reflected in its diluted income/(loss) per share calculations using the treasury stock method. Under this method, the

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number of shares of common stock used in calculating diluted income/(loss) per share is deemed to be increased by the excess, if any, of the number of shares of common stock that would be issued upon full physical settlement of the forward sales agreements over the number of shares of common stock that could be purchased by the Company in the open market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). When the Company physically or net share settles any forward sales agreement, the delivery of shares of common stock would result in an increase in the number of weighted average common shares outstanding and dilution to basic income/(loss) per share. (See Note 8, Income/(Loss) per Share for further discussion.)

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 March 31, 2020, the Company owned and consolidated 150 communities in 13 states plus the District of Columbia totaling 47,579 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of March 31, 2020 and December 31, 2019 (dollars in thousands):

    

March 31, 

    

December 31, 

2020

2019

Land

$

2,163,055

$

2,164,032

Depreciable property — held and used:

 

  

 

  

Land improvements

 

225,850

 

224,964

Building, improvements, and furniture, fixtures and equipment

 

10,178,547

 

10,102,758

Real estate intangible assets

40,570

40,570

Under development:

 

  

 

  

Land and land improvements

 

29,226

 

29,226

Building, improvements, and furniture, fixtures and equipment

 

66,100

 

40,551

Real estate held for disposition:

 

  

 

  

Land and land improvements

 

16,245

 

Building, improvements, and furniture, fixtures and equipment

 

98,405

 

Real estate owned

 

12,817,998

 

12,602,101

Accumulated depreciation

 

(4,272,471)

 

(4,131,353)

Real estate owned, net

$

8,545,527

$

8,470,748

Acquisitions

In January 2020, the Company acquired a 294 apartment home operating community located in Tampa, Florida for approximately $85.2 million. The Company increased its real estate assets owned by approximately $83.1 million and recorded approximately $2.1 million of in-place lease intangibles.

In January 2020, the Company increased its ownership interest from 49% to 100% in a 276 apartment home operating community located in Hillsboro, Oregon, for a cash purchase price of approximately $21.6 million. In connection with the acquisition, the Company repaid approximately $35.6 million of joint venture construction financing. As a result, 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 $67.8 million and recorded approximately $1.7 million of in-place lease intangibles.

Dispositions

In March 2020, the Company received a nonrefundable deposit on the pending sale of an operating community located in Seattle, Washington. The asset is included in Real estate held for disposition on the Consolidated Balance

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Sheet as of March 31, 2020. The sale is expected to close in the second quarter of 2020 at a gross sales price of $49.7 million.

In May 2020, the Company sold an operating community in Seattle, Washington with a total of 196 apartment homes for gross proceeds of $92.9 million, resulting in a gain of approximately $31.7 million. The asset is included in Real estate held for disposition on the Consolidated Balance Sheet as of March 31, 2020.

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 March 31, 2020 and 2019, were $6.9 million and $3.3 million, respectively. Total interest capitalized was $1.4 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively. As each apartment 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. 

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.

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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 typically 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.

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 March 31, 2020 and December 31, 2019 (dollars in thousands):

Number of

Number of

Operating

Apartment

 

Income/(loss) from investments

Communities

Homes

Investment at

UDR’s Ownership Interest

Three Months Ended

  

Location of

  

March 31, 

  

March 31, 

  

March 31, 

  

December 31, 

March 31, 

  

December 31, 

 

March 31, 

Joint Venture

  

Properties

  

2020

    

2020

  

2020

  

2019

2020

  

2019

 

2020

  

2019

Operating:

  

  

  

  

  

  

  

 

UDR/MetLife I

Los Angeles, CA

1

150

$

28,570

$

28,812

50.0

%  

50.0

%

$

(454)

$

(576)

UDR/MetLife II

 

Various

 

7

 

1,250

 

150,652

 

150,893

50.0

%  

50.0

%

(91)

434

Other UDR/MetLife Joint Ventures

 

Various

 

5

 

1,437

 

94,109

 

98,441

50.6

%  

50.6

%

(1,811)

(1,777)

West Coast Development Joint Ventures

Los Angeles, CA

1

293

34,943

34,907

47.0

%

47.0

%

(77)

(149)

Sold Joint Ventures

%

%

(1,819)

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

 

  

$

308,274

$

313,053

  

 

  

$

(2,433)

$

(3,887)

Income/(loss) from investments

Investment at

Three Months Ended

Developer Capital Program

  

  

  

Years To

UDR

  

March 31, 

  

December 31, 

  

March 31, 

and Other Investments (a)

  

Location

  

Rate

  

Maturity

Commitment (b)

  

2020

  

2019

  

2020

  

2019

Preferred equity investments:

 

  

 

  

 

  

 

  

 

  

  

  

West Coast Development Joint Ventures (c)

 

Hillsboro, OR

 

6.5

%

N/A

$

$

$

17,064

$

(46)

$

(161)

1532 Harrison

San Francisco, CA

11.0

%

2.3

24,645

31,426

30,585

836

748

1200 Broadway (d)

Nashville, TN

8.0

%

2.5

55,558

65,254

63,958

1,281

1,169

Junction

Santa Monica, CA

12.0

%

2.3

8,800

10,693

10,379

314

275

1300 Fairmount (d)

Philadelphia, PA

Variable

3.4

51,393

55,840

51,215

1,166

275

Essex

Orlando, FL

12.5

%

3.4

12,886

15,270

14,804

466

332

Modera Lake Merritt (d)

Oakland, CA

9.0

%

4.0

27,250

28,653

22,653

574

Thousand Oaks (e)

Thousand Oaks, CA

9.0

%

4.9

20,059

5,994

24

Other investments:

The Portals

Washington, D.C.

11.0

%

1.2

38,559

49,323

48,181

1,335

1,173

Other investment ventures

N/A

N/A

N/A

$

34,500

14,364

13,598

(150)

125

Total Developer Capital Program and Other Investments

276,817

272,437

5,800

3,936

Total Joint Ventures and Developer Capital Program Investments, net (f)

$

585,091

$

585,490

$

3,367

  

$

49

(a)The Developer Capital Program is the program through which the Company makes investments, including preferred equity investments, mezzanine loans or other structured investments that may receive a fixed 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.
(b)Represents UDR’s maximum funding commitment only and therefore excludes other activity such as income from investments.
(c)In January 2020, the Company increased its ownership interest from 49% to 100% in the 276 apartment home operating community located in Hillsboro, Oregon, for a cash purchase price of approximately $21.6 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 Company repaid the joint venture’s construction loan of approximately $35.6 million.
(d)The Company’s preferred equity investment receives a variable percentage of the value created from the project upon a capital or liquidating event.

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(e)In February 2020, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 142 apartment home community in Thousand Oaks, CA. The Company’s preferred equity investment of up to $20.1 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.
(f)As of March 31, 2020, the Company’s negative investment in 13th and Market Properties LLC of $3.3 million is included in Other UDR/MetLife Joint Ventures in the table above and recorded in Accounts payable, accrued expenses, and other liabilities on the Consolidated Balance Sheet.

As of March 31, 2020 and December 31, 2019, the Company had deferred fees of $9.0 million and $9.0 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 $1.4 million and $2.8 million for the three months ended March 31, 2020 and 2019, 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.

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 months ended March 31, 2020 and 2019.

Combined summary balance sheets relating to the unconsolidated joint ventures’ and partnerships’ (not just our proportionate share) are presented below as of March 31, 2020 and December 31, 2019 (dollars in thousands):

March 31, 

December 31, 

    

2020

    

2019

Total real estate, net

 

$

1,868,502

 

$

1,901,081

Cash and cash equivalents

 

32,486

 

29,823

Other assets

180,893

 

172,941

Total assets

 

$

2,081,881

 

$

2,103,845

Third party debt, net

$

1,136,306

$

1,148,048

Accounts payable and accrued liabilities

50,262

55,114

Total liabilities

 

1,186,568

 

1,203,162

Total equity

 

$

895,313

 

$

900,683

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

Combined summary financial information relating to the unconsolidated joint ventures’ and partnerships’ operations (not just our proportionate share) is presented below for the three months ended March 31, 2020 and 2019 (dollars in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Total revenues

 

$

41,314

 

$

81,532

Property operating expenses

 

15,297

 

30,312

Real estate depreciation and amortization

 

16,243

 

29,580

Operating income/(loss)

 

9,774

21,640

Interest expense

 

(10,347)

 

(21,924)

Net unrealized gain/(loss) on held investments

1,522

Other income/(loss)

(8)

103

Net income/(loss)

 

$

(581)

 

$

1,341

(1)

6. LEASES

Lessee - Ground Leases

UDR owns 6 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. All of these leases are classified as operating leases through the lease term expiration based on our election of the practical expedient provided by the leasing standard. 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. The Company also elected the short-term lease exception provided by the leasing standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year. No leases qualified for the short-term lease exception during the three months ended March 31, 2020 and 2019.

As of March 31, 2020, the Operating lease right-of-use assets was $203.4 million and the Operating lease liabilities was $197.8 million on our Consolidated Balance Sheet related to our ground 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 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 44.5 years at March 31, 2020 and the weighted average discount rate was 5.0% at March 31, 2020.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

Future minimum lease payments and total operating lease liabilities from our ground leases as of March 31, 2020 are as follows (dollars in thousands):

Ground Leases

2020

$

9,330

2021

12,442

2022

12,442

2023

12,442

2024

12,442

Thereafter

455,221

Total future minimum lease payments (undiscounted)

514,319

Difference between future undiscounted cash flows and discounted cash flows

(316,490)

Total operating lease liabilities (discounted)

$

197,829

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 a change in an index or a rate (i.e., changes in fair market rental rates 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. If there is a contingency upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based, which is resolved such that those payments now meet the definition of lease payments, the Company will remeasure the right-of-use asset and lease liability on the reset date.

The components of operating lease expenses were as follows (dollars in thousands):

Three Months Ended March 31, 

2020

2019

Lease expense:

Contractual lease expense

$

3,170

$

2,159

Variable lease expense (a)

43

139

Total operating lease expense (b)(c)

$

3,213

$

2,298

(a)Variable lease expense includes adjustments such as changes in the consumer price index and payments based on a percentage of income of the lessee.
(b)Lease expense is reported within the line item Other operating expenses on the Consolidated Statements of Operations.
(c)For the three months ended March 31, 2020, Operating lease right-of-use assets and Operating lease liabilities amortized by $0.8 million and $0.7 million, respectively, and for the three months ended March 31, 2019 Operating lease right-of-use assets and Operating lease liabilities amortized by $0.2 million and $0.1 million, respectively. The Company recorded $0.1 million and $0.1 million of total operating lease expense during the three months ended March 31, 2020 and 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 March 31, 2020, our apartment home leases generally have initial terms of 12 months or less and represent approximately 98.4% of our total lease revenue. As of March 31, 2020, our retail and commercial space leases generally have initial terms of between 5 and 15 years and represent approximately 1.6% 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 due to market based or fixed price renewal options and certain other conditions. (See Note 14, Reportable Segments for further discussion around our major revenue streams and disaggregation of our revenue.)

Future minimum lease payments from our retail and commercial leases as of March 31, 2020 are as follows (dollars in thousands):

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

Retail and Commercial Leases

2020

$

16,849

2021

22,487

2022

20,781

2023

19,317

2024

17,594

Thereafter

81,662

Total future minimum lease payments (a)

$

178,690

(a)We have excluded our apartment home leases from this table as our apartment home leases generally have initial terms of 12 months or 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 less than $0.2 million during the three months ended March 31, 2020 and 2019, respectively.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

7. SECURED AND UNSECURED DEBT, NET

The following is a summary of our secured and unsecured debt at March 31, 2020 and December 31, 2019 (dollars in thousands):

Principal Outstanding

As of March 31, 2020

Weighted

Weighted

Average

Average

Number of

March 31, 

December 31, 

Interest

Years to

Communities

    

2020

    

2019

    

Rate

    

Maturity

    

Encumbered

Secured Debt:

  

  

  

  

  

Fixed Rate Debt

 

  

 

  

 

  

 

  

 

  

Mortgage notes payable (a)

$

883,249

$

884,869

 

3.61

%  

5.9

 

15

Credit facilities (b)

 

203,429

 

204,590

 

4.90

%  

2.8

 

4

Deferred financing costs and other non-cash adjustments

 

30,585

 

33,046

 

  

 

  

 

  

Total fixed rate secured debt, net

 

1,117,263

 

1,122,505

 

3.85

%  

5.3

 

19

Variable Rate Debt

 

  

 

  

 

  

 

  

 

  

Tax-exempt secured notes payable (c)

 

27,000

 

27,000

 

1.91

%  

12.0

 

1

Deferred financing costs

 

(62)

 

(64)

 

  

 

  

 

  

Total variable rate secured debt, net

 

26,938

 

26,936

 

1.91

%  

12.0

 

1

Total Secured Debt, net

 

1,144,201

 

1,149,441

 

3.80

%  

5.5

 

20

Unsecured Debt:

 

  

 

  

 

  

 

  

 

  

Variable Rate Debt

 

  

 

  

 

  

 

  

 

  

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

 

50,000

 

 

1.75

%  

2.8

 

  

Borrowings outstanding under unsecured commercial paper program due April 2020 (e) (m) (n)

215,000

300,000

1.58

%  

0.1

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

 

24,797

 

16,583

 

1.82

%  

0.8

 

  

Term Loan due September 2023 (d) (m)

 

35,000

 

35,000

 

2.48

%  

3.5

 

  

Fixed Rate Debt

 

  

 

  

 

  

 

  

 

  

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

315,000

 

315,000

 

1.93

%  

3.5

3.75% Medium-Term Notes due July 2024 (net of discounts of $443 and $470, respectively) (g) (m)

 

299,557

 

299,530

 

3.75

%  

4.3

 

  

8.50% Debentures due September 2024

 

15,644

 

15,644

 

8.50

%  

4.5

 

  

4.00% Medium-Term Notes due October 2025 (net of discounts of $379 and $396, respectively) (h) (m)

 

299,621

 

299,604

 

4.00

%  

5.5

 

  

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

 

300,000

 

300,000

 

2.95

%  

6.4

 

  

3.50% Medium-Term Notes due July 2027 (net of discounts of $511 and $529, respectively) (m)

299,489

299,471

3.50

%  

7.3

3.50% Medium-Term Notes due January 2028 (net of discounts of $924 and $954, respectively) (m)

299,076

299,046

3.50

%  

7.8

4.40% Medium-Term Notes due January 2029 (net of discounts of $5 and $5, respectively) (i) (m)

299,995

299,995

4.40

%  

8.8

3.20% Medium-Term Notes due January 2030 (net of premiums of $13,442 and $2,281, respectively) (j) (m)

613,442

402,281

3.20

%  

9.8

3.00% Medium-Term Notes due August 2031 (net of discounts of $1,099 and $1,123, respectively) (k) (m)

398,901

398,877

3.00

%  

11.4

3.10% Medium-Term Notes due November 2034 (net of discounts of $1,287 and $1,309, respectively) (l) (m)

298,713

298,691

3.10

%  

14.6

Other

 

12

 

13

 

  

 

  

 

  

Deferred financing costs

 

(23,310)

 

(21,652)

 

  

 

  

 

  

Total Unsecured Debt, net

 

3,740,937

 

3,558,083

 

3.29

%  

7.5

 

  

Total Debt, net

$

4,885,138

$

4,707,524

 

3.28

%  

7.1

 

  

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.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. As of March 31, 2020, secured debt encumbered $2.1 billion or 16.6% of UDR’s total real estate owned based upon gross book value ($10.7 billion or 83.4% of UDR’s real estate owned based on gross book value is unencumbered).

(a) At March 31, 2020, fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2020 through February 2030 and carry interest rates ranging from 2.70% 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.

(b) UDR had one secured credit facility with New York Life with an outstanding balance of $203.4 million at March 31, 2020. The New York Life credit facility matures in January 2023 and bears interest at a fixed rate of 4.90%.

During the three months ended March 31, 2020 and 2019, the Company had $2.6 million and $0.6 million, respectively, of amortization of the fair market adjustment of debt assumed in the acquisition of properties inclusive of its fixed rate mortgage notes payable and credit facilities, which was included in Interest expense on the Consolidated Statements of Operations. The unamortized fair market adjustment was a net premium of $32.7 million and $35.3 million at March 31, 2020 and December 31, 2019, respectively.

(c) The variable rate mortgage note payable secures a tax-exempt housing bond issue that matures in March 2032. Interest on this note is payable in monthly installments. As of March 31, 2020, the variable interest rate on the mortgage note was 1.91%.
(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 2 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)

MARCH 31, 2020

The following is a summary of short-term bank borrowings under the Revolving Credit Facility at March 31, 2020 and December 31, 2019 (dollars in thousands):

    

March 31, 

    

December 31, 

 

2020

 

2019

Total revolving credit facility

$

1,100,000

$

1,100,000

Borrowings outstanding at end of period (1)

 

50,000

 

Weighted average daily borrowings during the period ended

 

11,538

 

55

Maximum daily borrowings during the period ended

 

50,000

 

20,000

Weighted average interest rate during the period ended

 

1.8

%  

 

2.6

%

Interest rate at end of the period

 

1.8

%  

 

%

(1)Excludes $2.5 million and $2.9 million of letters of credit at March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019 (dollars in thousands):

    

March 31, 

    

December 31, 

 

2020

2019

 

Total unsecured commercial paper program

 

$

500,000

$

500,000

Borrowings outstanding at end of period

 

215,000

 

300,000

Weighted average daily borrowings during the period ended

 

346,978

 

173,353

Maximum daily borrowings during the period ended

 

500,000

 

435,000

Weighted average interest rate during the period ended

 

1.8

%  

 

2.5

%

Interest rate at end of the period

 

1.6

%  

 

2.0

%

(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 March 31, 2020 and December 31, 2019 (dollars in thousands):

    

March 31, 

    

December 31, 

 

2020

2019

 

Total working capital credit facility

$

75,000

$

75,000

Borrowings outstanding at end of period

 

24,797

 

16,583

Weighted average daily borrowings during the period ended

 

25,212

 

23,487

Maximum daily borrowings during the period ended

 

46,419

 

66,170

Weighted average interest rate during the period ended

 

2.2

%  

 

3.1

%

Interest rate at end of the period

 

1.8

%  

 

2.6

%

(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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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

(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 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 3.42% for the initial $300.0 million issued. In connection with the additional $100.0 million issued in October 2019, the Company entered into treasury lock agreements to hedge against interest rate risk on all of this debt. The all-in weighted average interest rate, inclusive of the impact of the treasury locks, was 3.24% for the 2030 notes.

In February 2020, the Company issued $200.0 million of 3.20% senior unsecured medium-term notes due 2030. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2020. The notes were priced at 105.660% of the principal amount at issuance. This was a further issuance of the 2030 notes, and forms a single series with, the $300.0 million aggregate principal amount of the Company’s 3.20% notes due 2030 that were issued in July 2019 and the $100.0 million aggregate principal amount of the Company’s 3.20% notes due 2030 that were issued in October 2019. As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was $600.0 million. 

(k) The Company entered into a treasury lock agreement 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 the treasury lock, was 3.01%.
(l) 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 3.13%.
(m) 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 March 31, 2020 are as follows (dollars in thousands):

    

Total Fixed

    

Total Variable

    

Total 

    

Total 

    

Total 

Year

Secured Debt

Secured Debt

Secured Debt

Unsecured Debt

Debt

2020

$

112,592

$

$

112,592

$

215,000

(a)

$

327,592

2021

8,763

8,763

24,797

33,560

2022

 

9,159

 

 

9,159

 

 

9,159

2023

 

295,965

 

 

295,965

 

400,000

 

695,965

2024

 

95,280

 

 

95,280

 

315,644

 

410,924

2025

 

173,189

 

 

173,189

 

300,000

 

473,189

2026

 

51,070

 

 

51,070

 

300,000

 

351,070

2027

 

1,111

 

 

1,111

 

300,000

 

301,111

2028

 

122,465

 

 

122,465

 

300,000

 

422,465

2029

 

144,584

 

 

144,584

 

300,000

 

444,584

Thereafter

 

72,500

 

27,000

 

99,500

 

1,300,000

 

1,399,500

Subtotal

 

1,086,678

 

27,000

 

1,113,678

 

3,755,441

 

4,869,119

Non-cash (b)

 

30,585

 

(62)

 

30,523

 

(14,504)

 

16,019

Total

$

1,117,263

$

26,938

$

1,144,201

$

3,740,937

$

4,885,138

(a)All unsecured debt due in the remainder of 2020 is related to the Company’s commercial paper program.
(b)Includes the unamortized balance of fair market value adjustments, premiums/discounts and deferred financing costs. The Company amortized $1.0 million and $1.0 million, respectively, during the three months ended March 31, 2020 and 2019, of deferred financing costs into Interest expense.

We were in compliance with the covenants of our debt instruments at March 31, 2020.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

(n) In April 2020, the entire $215.0 million of outstanding unsecured commercial paper as of March 31, 2020 was repaid at maturity with draws on the Company’s Revolving Credit Facility and Working Capital Credit Facility.

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

March 31, 

    

2020

    

2019

Numerator for income/(loss) per share:

  

Net income/(loss)

$

5,540

$

26,602

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

 

(313)

 

(2,057)

Net (income)/loss attributable to noncontrolling interests

 

(6)

 

(42)

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

 

5,221

 

24,503

Distributions to preferred stockholders — Series E (Convertible)

 

(1,066)

 

(1,011)

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

$

4,155

$

23,492

Denominator for income/(loss) per share:

 

  

 

  

Weighted average common shares outstanding

 

294,731

 

277,297

Non-vested restricted stock awards

 

(274)

 

(295)

Denominator for basic income/(loss) per share

 

294,457

 

277,002

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

 

703

 

555

Denominator for diluted income/(loss) per share

 

295,160

 

277,557

Income/(loss) per weighted average common share:

 

  

 

  

Basic

$

0.01

$

0.08

Diluted

$

0.01

$

0.08

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 months ended March 31, 2020 and 2019, the effect of the conversion of the OP Units, DownREIT Units, LTIP Units, the Company’s Series E preferred stock and shares issuable upon settlement of forward sales agreements 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 20.0 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 March 31, 2020, the Company did not sell any shares of common stock through its ATM program. As of March 31, 2020, we had 11.7 million shares of common stock available for future issuance under the ATM program, including an aggregate of 2.1 million shares subject to the forward sales agreements described below.

In connection with any forward sales agreement under the Company’s ATM program, the relevant forward purchasers will borrow from third parties and, through the relevant sales agent, acting in its role as forward seller, sell a number of shares of the Company’s common stock equal to the number of shares underlying the agreement. The Company does not initially receive any proceeds from any sale of borrowed shares by the forward seller.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

During the three months ended March 31, 2020, the Company entered into forward sales agreements under its ATM program for a total of 2.1 million shares of common stock at a weighted average initial forward price per share of $49.56. The initial forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current federal funds rate and the amount of dividends paid to holders of UDR common stock over the term of the forward sales agreement. As of March 31, 2020, no shares under the forward sales agreements have been settled. The final dates by which shares sold under the forward sales agreements must be settled range between February 12, 2021 and March 3, 2021.

The Company generally has the ability to determine the dates and method of settlement (i.e., gross physical settlement, net share settlement or cash settlement), subject to certain conditions and the right of the counterparty to accelerate settlement under certain circumstances. The Company currently expects to fully physically settle each forward sales agreement with the relevant forward purchaser on one or more dates specified by the Company on or prior to the maturity date of that particular forward sales agreement, in which case the Company expects to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward sales agreement multiplied by the relevant forward sale price. However, subject to certain exceptions, the Company may also elect, in its discretion, to cash settle or net share settle a particular forward sales agreement, in which case the Company may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and the Company may owe cash (in the case of cash settlement) or shares of UDR common stock (in the case of net share settlement) to the relevant forward purchaser.

The following table sets forth the additional shares of common stock issuable, by equity instrument, if such equity instrument were converted to or redeemed for common stock for each of the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended

March 31, 

2020

2019

OP/DownREIT Units

    

22,228

    

24,280

    

Convertible preferred stock

 

3,011

 

3,011

 

Unvested LTIP Units and unvested restricted stock

 

703

 

555

 

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)

MARCH 31, 2020

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, 2019

    

$

1,018,665

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

 

(205,713)

Conversion of OP Units/DownREIT Units to Common Stock

 

(7,830)

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

 

313

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

 

(9,182)

Vesting of Long-Term Incentive Plan Units

23,018

Allocation of other comprehensive income/(loss)

 

(138)

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, March 31, 2020

$

819,133

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 March 31, 2020 and 2019.

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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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of March 31, 2020 and December 31, 2019, are summarized as follows (dollars in thousands):

Fair Value at March 31, 2020, 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

March 31, 

March 31, 

Liabilities

Inputs

Inputs

2020 (a)

2020

(Level 1)

(Level 2)

(Level 3)

Description:

    

  

    

  

    

  

    

  

    

Notes receivable (b)

$

151,543

$

160,515

$

$

$

160,515

Total assets

$

151,543

$

160,515

$

$

$

160,515

Derivatives - Interest rate contracts (c)

$

3,075

$

3,075

$

$

3,075

$

Secured debt instruments - fixed rate: (d)

 

  

 

  

 

  

 

  

 

Mortgage notes payable

903,243

908,088

908,088

Credit facilities

 

216,181

 

213,026

 

 

 

213,026

Secured debt instruments - variable rate: (d)

 

  

 

  

 

  

 

  

 

Tax-exempt secured notes payable

 

27,000

 

27,000

 

 

 

27,000

Unsecured debt instruments: (d)

 

  

 

  

 

  

 

  

 

Revolving credit facility

50,000

50,000

50,000

Working capital credit facility

24,797

24,797

24,797

Commercial paper program

215,000

215,000

215,000

Unsecured notes

3,474,450

3,466,082

3,466,082

Total liabilities

$

4,913,746

$

4,907,068

$

$

3,075

$

4,903,993

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

$

819,133

$

819,133

$

$

819,133

$

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

Fair Value at December 31, 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

December 31, 

December 31, 

Liabilities

Inputs

Inputs

 

2019 (a)

2019

(Level 1)

(Level 2)

(Level 3)

Description:

    

  

    

  

    

  

    

  

    

Notes receivable (b)

$

153,650

$

160,197

$

$

$

160,197

Derivatives - Interest rate contracts (c)

 

6

 

6

 

 

6

 

Total assets

$

153,656

$

160,203

$

$

6

$

160,197

Derivatives - Interest rate contracts (c)

$

142

$

142

$

$

142

$

Secured debt instruments - fixed rate: (d)

 

  

 

  

 

  

 

  

 

Mortgage notes payable

906,228

898,329

898,329

Credit facilities

 

218,490

 

213,661

 

 

 

213,661

Secured debt instruments - variable rate: (d)

 

  

 

  

 

  

 

  

 

Tax-exempt secured notes payable

 

27,000

 

27,000

 

 

 

27,000

Unsecured debt instruments: (d)

 

 

  

 

  

 

  

 

Working capital credit facility

16,583

16,583

16,583

Commercial paper program

300,000

300,000

300,000

Unsecured notes

3,263,152

3,397,622

3,397,622

Total liabilities

$

4,731,595

$

4,853,337

$

$

142

$

4,853,195

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

$

1,018,665

$

1,018,665

$

$

1,018,665

$

(a)Balances include fair market value adjustments and exclude deferred financing costs.
(b)See Note 2, Significant Accounting Policies.
(c)See Note 11, Derivatives and Hedging Activity.
(d)See Note 7, Secured and Unsecured Debt, Net.
(e)See Note 9, Noncontrolling Interests.

There were 0 transfers into or out of any of the levels of the fair value hierarchy during the three months ended March 31, 2020.

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.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

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, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, 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 months ended March 31, 2020 and 2019.

After determining that 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.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

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 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 months ended March 31, 2020 and 2019, 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 March 31, 2021, the Company estimates that an additional $4.6 million will be reclassified as an increase to Interest expense.

As of March 31, 2020, 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

1

$

315,000

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 0 gain or loss for both the three months ended March 31, 2020 and 2019.

As of March 31, 2020, 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)

MARCH 31, 2020

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 March 31, 2020 and December 31, 2019 (dollars in thousands):

Asset Derivatives

Liability Derivatives

(included in Other assets)

(included in Other liabilities)

Fair Value at:

Fair Value at:

March 31, 

December 31, 

March 31, 

December 31, 

2020

2019

2020

2019

Derivatives designated as hedging instruments:

    

  

    

  

    

  

    

  

Interest rate products

$

$

6

$

3,075

$

142

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 months ended March 31, 2020 and 2019 (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

    

2020

    

2019

    

2020

    

2019

    

2020

    

2019

Three Months Ended March 31, 

Interest rate products

$

(2,917)

$

(2,210)

$

(357)

$

945

$

$

Three Months Ended

March 31, 

2020

2019

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

$

39,317

$

33,542

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 months ended March 31, 2020 and 2019.

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.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

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 March 31, 2020 and December 31, 2019 (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

March 31, 2020

$

$

$

$

$

$

December 31, 2019

$

6

$

$

6

$

(3)

$

$

3

(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

March 31, 2020

$

3,075

$

$

3,075

$

$

$

3,075

December 31, 2019

$

142

$

$

142

$

(3)

$

$

139

(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 $6.8 million and $5.9 million during the three months ended March 31, 2020 and 2019, respectively.

13. COMMITMENTS AND CONTINGENCIES

Commitments

Real Estate Commitments

The following summarizes the Company’s real estate commitments at March 31, 2020 (dollars in thousands):

Number

UDR's

UDR's Remaining

Properties

Investment (a)

Commitment

Wholly-owned — under development

 

3

$

95,326

$

183,174

 

Wholly-owned — redevelopment

 

2

17,660

7,840

 

Joint ventures:

 

  

 

  

 

  

 

Preferred equity investments

 

2

34,647

(b)

14,348

(c)

Other investments

-

14,364

23,700

(d)

Total

 

  

$

161,997

$

229,062

 

(a)Represents UDR’s investment as of March 31, 2020.
34
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2020
(b)Represents UDR’s investment in Modera Lake Merritt and Thousand Oaks, which were under development as of March 31, 2020.
(c)Represents UDR’s remaining commitment for Modera Lake Merritt and Thousand Oaks.
(d)Represents UDR’s remaining commitment for other investment ventures.

Purchase Commitments

 

In 2019, the Company entered into a contract to purchase a development land parcel located in King of Prussia, Pennsylvania for a purchase price of approximately $14.8 million. The Company made a $0.8 million deposit on the purchase, which is generally non-refundable other than due to a failure of closing conditions pursuant to the terms of the purchase agreement. The acquisition is expected to close in 2020, subject to completion of entitlement and 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.

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 2 reportable segments are Same-Store Communities and Non-Mature Communities/Other:

Same-Store Communities represent those communities acquired, developed, and stabilized prior to January 1, 2019 and held as of March 31, 2020. 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

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

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 months ended March 31, 2020 and 2019.

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 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 months ended March 31, 2020 and 2019, and reconciles NOI to Net income/(loss) attributable to UDR, Inc. on the Consolidated Statements of Operations (dollars in thousands):

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

March 31, (a)

    

2020

    

2019

Reportable apartment home segment lease revenue

Same-Store Communities (a)

  

    

  

West Region

$

102,616

$

98,633

Mid-Atlantic Region

 

56,085

 

54,300

Northeast Region

 

30,942

 

30,193

Southeast Region

 

30,677

 

29,531

Southwest Region

 

16,626

 

16,077

Non-Mature Communities/Other

 

74,676

 

30,169

Total segment and consolidated lease revenue

$

311,622

$

258,903

Reportable apartment home segment other revenue

Same-Store Communities (a)

  

    

  

West Region

$

2,774

$

3,076

Mid-Atlantic Region

 

1,573

 

2,002

Northeast Region

 

501

 

629

Southeast Region

 

1,429

 

1,790

Southwest Region

 

590

 

763

Non-Mature Communities/Other

 

1,604

 

759

Total segment and consolidated other revenue

$

8,471

$

9,019

Total reportable apartment home segment rental income

Same-Store Communities (a)

  

    

  

West Region

$

105,390

$

101,709

Mid-Atlantic Region

 

57,658

 

56,302

Northeast Region

 

31,443

 

30,822

Southeast Region

 

32,106

 

31,321

Southwest Region

 

17,216

 

16,840

Non-Mature Communities/Other

 

76,280

 

30,928

Total segment and consolidated rental income

$

320,093

$

267,922

Reportable apartment home segment NOI

 

  

 

  

Same-Store Communities (a)

 

  

 

  

West Region

$

79,823

$

76,984

Mid-Atlantic Region

 

40,377

 

39,179

Northeast Region

 

20,614

 

20,977

Southeast Region

 

22,617

 

22,010

Southwest Region

 

11,056

 

10,328

Non-Mature Communities/Other

 

50,978

 

20,205

Total segment and consolidated NOI

 

225,465

 

189,683

Reconciling items:

 

  

 

  

Joint venture management and other fees

 

1,388

 

2,751

Property management

 

(9,203)

 

(7,703)

Other operating expenses

 

(4,966)

 

(5,646)

Real estate depreciation and amortization

 

(155,476)

 

(112,468)

General and administrative

 

(14,978)

 

(12,467)

Casualty-related (charges)/recoveries, net

 

(1,251)

 

Other depreciation and amortization

 

(2,025)

 

(1,656)

Income/(loss) from unconsolidated entities

 

3,367

 

49

Interest expense

 

(39,317)

 

(33,542)

Interest income and other income/(expense), net

 

2,700

 

9,813

Tax (provision)/benefit, net

 

(164)

 

(2,212)

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

 

(313)

 

(2,057)

Net (income)/loss attributable to noncontrolling interests

 

(6)

 

(42)

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

$

5,221

$

24,503

(a)Same-Store Community population consisted of 37,910 apartment homes.

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UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2020

The following table details the assets of UDR’s reportable segments as of March 31, 2020 and December 31, 2019 (dollars in thousands):

    

March 31, 

    

December 31, 

2020

2019

Reportable apartment home segment assets:

 

  

 

  

Same-Store Communities (a):

 

  

 

  

West Region

$

3,704,480

$

3,696,544

Mid-Atlantic Region

 

2,356,688

 

2,350,341

Northeast Region

 

1,501,767

 

1,500,597

Southeast Region

 

810,984

 

806,830

Southwest Region

 

603,082

 

600,350

Non-Mature Communities/Other

 

3,840,997

 

3,647,439

Total segment assets

 

12,817,998

 

12,602,101

Accumulated depreciation

 

(4,272,471)

 

(4,131,353)

Total segment assets — net book value

 

8,545,527

 

8,470,748

Reconciling items:

 

  

 

  

Cash and cash equivalents

 

980

 

8,106

Restricted cash

 

21,949

 

25,185

Notes receivable, net

 

151,543

 

153,650

Investment in and advances to unconsolidated joint ventures, net

 

588,395

 

588,262

Operating lease right-of-use assets

203,410

204,225

Other assets

 

179,301

 

186,296

Total consolidated assets

$

9,691,105

$

9,636,472

(a)Same-Store Community population consisted of 37,910 apartment homes.

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.Northeast Region — New York and Boston
iv.Southeast Region — Orlando, Nashville, Tampa and Other Florida
v.Southwest Region — Dallas, Austin and Denver

15. Subsequent Event

The Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business. The extent of the pandemic’s effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic and the duration of government measures to mitigate the pandemic, all of which are uncertain and difficult to predict. Although the effect on our results of operations and cash flows through the date of issuance of our financial statements was not material, given the uncertainty, we cannot predict the effect on future periods, but the adverse impact on the Company's future financial condition, results of operations and cash flows could be material, including, but not limited to, as a result of eviction moratoriums, rent deferrals, payment plans, lease concessions, waiving late payment fees, charges from potential adjustments of the carrying amount of receivables, and asset impairment charges.

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39

UNITED DOMINION REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for unit data)

    

March 31, 

    

December 31, 

2020

2019

(unaudited)

(audited)

ASSETS

 

  

 

  

Real estate owned:

 

  

 

  

Real estate held for investment

$

3,886,613

$

3,875,160

Less: accumulated depreciation

 

(1,831,814)

 

(1,796,568)

Total real estate owned, net of accumulated depreciation

 

2,054,799

 

2,078,592

Cash and cash equivalents

 

40

 

24

Restricted cash

 

14,121

 

13,998

Investment in unconsolidated entities

 

69,617

 

76,222

Operating lease right-of-use assets

204,723

205,668

Other assets

 

24,042

 

24,241

Total assets

$

2,367,342

$

2,398,745

LIABILITIES AND CAPITAL

 

  

 

  

Liabilities:

 

  

 

  

Secured debt, net

$

99,082

$

99,071

Notes payable due to the General Partner

 

635,738

 

637,233

Operating lease liabilities

199,149

200,001

Real estate taxes payable

 

8,639

 

2,801

Accrued interest payable

 

219

 

217

Security deposits and prepaid rent

 

17,854

 

17,946

Distributions payable

 

66,833

 

63,364

Accounts payable, accrued expenses, and other liabilities

 

10,426

 

12,226

Total liabilities

 

1,037,940

 

1,032,859

Commitments and contingencies (Note 11)

 

  

 

  

Capital:

 

  

 

  

Partners’ capital:

 

  

 

  

General partner:

 

  

 

  

110,883 OP Units outstanding at March 31, 2020 and December 31, 2019

 

833

 

859

Limited partners:

 

  

 

  

184,724,677 and 183,952,659 OP Units outstanding at March 31, 2020 and December 31, 2019, respectively

 

1,310,642

 

1,347,622

Total partners’ capital

 

1,311,475

 

1,348,481

Noncontrolling interests

 

17,927

 

17,405

Total capital

 

1,329,402

 

1,365,886

Total liabilities and capital

$

2,367,342

$

2,398,745

See accompanying notes to the consolidated financial statements.

40

UNITED DOMINION REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit data)

(Unaudited)

Three Months Ended

March 31, 

    

2020

2019

REVENUES:

    

  

    

  

Rental income

$

112,165

$

108,334

OPERATING EXPENSES:

 

  

 

  

Property operating and maintenance

 

16,837

 

16,531

Real estate taxes and insurance

 

13,773

 

12,664

Property management

 

3,225

 

2,979

Other operating expenses

 

3,859

 

2,400

Real estate depreciation and amortization

 

35,300

 

34,654

General and administrative

 

5,308

 

4,661

Casualty-related charges/(recoveries), net

 

(2)

 

Total operating expenses

78,300

 

73,889

Operating income

 

33,865

 

34,445

Income/(loss) from unconsolidated entities

 

(1,761)

 

(2,740)

Interest expense

 

(742)

 

(190)

Interest expense on notes payable due to the General Partner

 

(6,722)

 

(7,181)

Net income/(loss)

 

24,640

 

24,334

Net (income)/loss attributable to noncontrolling interests

 

(522)

 

(388)

Net income/(loss) attributable to OP unitholders

$

24,118

$

23,946

Net income/(loss) per weighted average OP Unit - basic and diluted

$

0.13

$

0.13

Weighted average OP Units outstanding - basic and diluted

 

184,503

 

183,949

See accompanying notes to the consolidated financial statements.

41

UNITED DOMINION REALTY, L.P.

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL

(In thousands)

(Unaudited)

Limited

 

Class A

Partners

UDR, Inc.

Total

 

Limited

and LTIP

Limited

General

Partners’

Noncontrolling

 

  

Partner

  

Units

  

Partner

  

Partner

  

Capital

  

Interests

  

Total

Balance at December 31, 2019

81,803

284,580

981,239

859

1,348,481

17,405

1,365,886

Net income/(loss)

229

896

22,979

14

24,118

522

24,640

Distributions

(631)

(2,588)

(63,399)

(40)

(66,658)

(66,658)

Adjustment to reflect limited partners’ capital at redemption value

(17,395)

(37,545)

54,940

Long-Term Incentive Plan Unit grants

5,534

5,534

5,534

Balance at March 31, 2020

$

64,006

$

250,877

$

995,759

$

833

$

1,311,475

$

17,927

$

1,329,402

Limited

 

Class A

Partners

UDR, Inc.

Total

 

Limited

and LTIP

Limited

General

Partners’

Noncontrolling

 

  

Partner

  

Units

  

Partner

  

Partner

  

Capital

  

Interests

  

Total

Balance at December 31, 2018

$

69,401

$

302,545

$

1,099,174

$

950

$

1,472,070

$

13,819

$

1,485,889

Net income/(loss)

228

812

22,892

14

23,946

388

24,334

Distributions

(599)

(2,570)

(60,262)

(38)

(63,469)

(63,469)

OP Unit redemptions for common shares of UDR

(71,673)

71,673

Adjustment to reflect limited partners’ capital at redemption value

10,601

44,716

(55,317)

Long-Term Incentive Plan Unit grants

10,032

10,032

10,032

Balance at March 31, 2019

$

79,631

$

283,862

$

1,078,160

$

926

$

1,442,579

$

14,207

$

1,456,786

See accompanying notes to the consolidated financial statements.

42

UNITED DOMINION REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

Three Months Ended March 31, 

2020

2019

Operating Activities

    

  

    

  

Net income/(loss)

$

24,640

$

24,334

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

 

  

 

  

Depreciation and amortization

 

35,300

 

34,654

(Income)/loss from unconsolidated entities

 

1,761

 

2,740

Other

 

880

 

1,364

Changes in operating assets and liabilities:

 

 

  

(Increase)/decrease in operating assets

 

(500)

 

2,529

Increase/(decrease) in operating liabilities

 

3,324

 

3,006

Net cash provided by/(used in) operating activities

 

65,405

 

68,627

Investing Activities

 

  

 

  

Capital expenditures and other major improvements — real estate assets

 

(10,960)

 

(14,271)

Distributions received from unconsolidated entities

 

4,844

 

4,613

Net cash provided by/(used in) investing activities

 

(6,116)

 

(9,658)

Financing Activities

 

  

 

  

Issuance/(repayment) of notes payable to the General Partner

(56,497)

(55,599)

Distributions paid to partnership unitholders

 

(2,653)

 

(2,989)

Net cash provided by/(used in) financing activities

 

(59,150)

 

(58,588)

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

 

139

 

381

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

 

14,022

 

13,688

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

$

14,161

$

14,069

Supplemental Information:

 

  

 

  

Interest paid during the period, net of amounts capitalized

$

10,665

$

5,031

Non-cash transactions:

 

  

 

  

Development costs and capital expenditures incurred but not yet paid

3,383

3,676

Recognition of operating lease right-of-use assets

94,174

Recognition of operating lease liabilities

88,161

LTIP Unit grants

 

5,534

 

10,032

Distributions declared but not yet paid

66,833

63,451

The following reconciles cash, cash equivalents, and restricted cash to the total of the same amounts as shown above:

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

Cash and cash equivalents

$

24

$

125

Restricted cash

13,998

13,563

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

$

14,022

$

13,688

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

Cash and cash equivalents

$

40

$

59

Restricted cash

14,121

14,010

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

$

14,161

$

14,069

See accompanying notes to the consolidated financial statements.

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UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

1. CONSOLIDATION AND BASIS OF PRESENTATION

Basis of Presentation

United Dominion Realty, L.P. (“UDR, L.P.,” the “Operating Partnership,” “we” or “our”) is a Delaware limited partnership, that owns, acquires, renovates, redevelops, manages, and disposes of multifamily apartment communities generally located in high barrier to entry markets located in the United States. The high barrier to entry markets are characterized by limited land for new construction, difficult and lengthy entitlement process, expensive single-family home prices and significant employment growth potential. UDR, L.P. is a subsidiary of UDR, Inc. (“UDR” or the “General Partner”), a self-administered real estate investment trust, or REIT, through which UDR conducts a significant portion of its business. During the three months ended March 31, 2020 and 2019, rental revenues of the Operating Partnership represented 35% and 40%, respectively, of the General Partner’s consolidated rental revenues. As of March 31, 2020, the Operating Partnership’s apartment portfolio consisted of 52 communities located in 15 markets consisting of 16,434 apartment homes.

Interests in UDR, L.P. are represented by operating partnership units (“OP Units”). The Operating Partnership’s net income is allocated to the partners, which is initially based on their respective distributions made during the year and secondly, their percentage interests. Distributions are made in accordance with the terms of the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. (the “Operating Partnership Agreement”), on a per unit basis that is generally equal to the dividend per share on UDR’s common stock, which is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “UDR.”

As of March 31, 2020, there were 184.8 million OP Units outstanding, of which 176.2 million, or 95.3%, were owned by UDR and affiliated entities and 8.6 million, or 4.7%, were owned by non-affiliated limited partners. There were 184.1 million OP Units outstanding as of December 31, 2019, of which 176.2 million, or 95.7%, were owned by UDR and affiliated entities and 7.9 million, or 4.3%, were owned by non-affiliated limited partners. See Note 10, Capital Structure.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 March 31, 2020, and results of operations for the three months ended March 31, 2020 and 2019, 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, particularly in light of the novel coronavirus disease (“COVID-19”) pandemic and measures intended to mitigate its spread. 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, 2019 included in the Annual Report on Form 10-K filed by UDR and the Operating Partnership with the SEC on February 18, 2020.

The accompanying interim unaudited consolidated 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 intercompany accounts and transactions have been eliminated in consolidation.

The Operating Partnership 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 6, Debt, net and Note 13, Subsequent Event.

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UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

March 31, 2020

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 required 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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amended the transition requirements and scope of ASU 2016-13 and clarified 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

updated standard became effective for the Operating Partnership on January 1, 2020 and was adopted on a modified

retrospective basis. However, as the Operating Partnership’s financial assets primarily relate to receivables arising from operating leases, the ASU did not have a material impact on the consolidated financial statements. Disclosures were updated pursuant to the requirements of the ASU.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the first quarter of 2020, the Operating Partnership elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Operating Partnership continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur. The Operating Partnership does not expect the ASU to have a material impact on the consolidated financial statements.

Principles of Consolidation

The Operating Partnership accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the consolidation guidance. The Operating Partnership first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Operating Partnership 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 Operating Partnership consolidates an entity when it controls the entity through ownership of a majority voting interest.

Income/(Loss) Per Operating Partnership Unit

Basic income/(loss) per OP Unit is computed by dividing net income/(loss) attributable to the general and limited partner unitholders by the weighted average number of general and limited partner units outstanding during the year. Diluted income/(loss) per OP Unit reflects the potential dilution that could occur if securities or other contracts to issue OP Units were exercised or converted into OP Units or resulted in the issuance of OP Units and then shared in the income/(loss) of the Operating Partnership.

Real Estate Sales Gain Recognition

For sale transactions resulting in a transfer of a controlling financial interest of a property, the Operating Partnership 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 Operating Partnership will continue to recognize the related assets and liabilities on its Consolidated Balance Sheets.

Sale transactions to entities in which the Operating Partnership 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

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UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

March 31, 2020

accounted for at fair value and a full gain or loss is recognized. Therefore, the Operating Partnership 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 Operating Partnership will record a full gain or loss in the period the property is contributed.

To the extent that the Operating Partnership acquires a controlling financial interest in a property that it previously accounted for as an equity method investment, the Operating Partnership will not remeasure its previously held interest if the acquisition is treated as an asset acquisition. The Operating Partnership 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 Operating Partnership will not recognize a gain or loss on consolidation of a property.

Income Taxes

The taxable income or loss of the Operating Partnership is reported on the tax returns of the partners. Accordingly, no provision has been made in the accompanying financial statements for federal or state income taxes on income that is passed through to the partners. However, any state or local revenue, excise or franchise taxes that result from the operating activities of the Operating Partnership are recorded at the entity level. The Operating Partnership’s tax returns are subject to examination by federal and state taxing authorities. Net income for financial reporting purposes differs from the net income for income tax reporting purposes primarily due to temporary differences, principally real estate depreciation and the tax deferral of certain gains on property sales. The differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.

The Operating Partnership evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Operating Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management of the Operating Partnership is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Operating Partnership has no examinations in progress and none are expected at this time.

Management of the Operating Partnership has reviewed all open tax years (2016 through 2018) of tax jurisdictions and concluded there is 0 tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken in future tax returns.

3. REAL ESTATE OWNED

Real estate assets owned by the Operating Partnership consist of income producing operating properties, properties under development, land held for future development, and sold or held for disposition properties. At March 31, 2020, the Operating Partnership owned and consolidated 52 communities in 9 states plus the District of Columbia totaling 16,434 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of March 31, 2020 and December 31, 2019 (dollars in thousands):

    

March 31, 

    

December 31, 

2020

2019

Land

$

711,256

$

711,256

Depreciable property — held and used:

 

 

Land improvements

97,807

96,864

Buildings, improvements, and furniture, fixtures and equipment

 

3,077,550

 

3,067,040

Real estate owned

 

3,886,613

 

3,875,160

Accumulated depreciation

 

(1,831,814)

 

(1,796,568)

Real estate owned, net

$

2,054,799

$

2,078,592

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UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

March 31, 2020

Acquisitions

The Operating Partnership did not have any acquisitions of real estate during the three months ended March 31, 2020.

Dispositions

The Operating Partnership did not have any dispositions of real estate during the three months ended March 31, 2020.

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 Operating Partnership 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, were $0.4 million and less than $0.1 million for the three months ended March 31, 2020 and 2019, respectively. During both of the three months ended March 31, 2020 and 2019, total interest capitalized was less than $0.1 million and less than $0.1 million, respectively. As each apartment home in a capital project is completed and becomes available for lease-up, the Operating Partnership 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 Operating Partnership agreed to pay certain of the tax liabilities of certain contributors if the Operating Partnership 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 Operating Partnership 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. 

Further, the Operating Partnership has agreed to maintain certain debt that may be guaranteed by certain contributors for specified periods of time following the acquisition. The Operating Partnership, 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. UNCONSOLIDATED ENTITIES

The DownREIT Partnership is accounted for by the Operating Partnership under the equity method of accounting and is included in Investment in unconsolidated entities on the Consolidated Balance Sheets. The Operating Partnership recognizes earnings or losses from its investments in unconsolidated entities consisting of our proportionate share of the net earnings or losses of the partnership in accordance with the Partnership Agreement.

The DownREIT Partnership is a VIE as the limited partners lack substantive kick-out rights and substantive participating rights. The Operating Partnership is not the primary beneficiary of the DownREIT Partnership as it lacks the power to direct the activities that most significantly impact its economic performance and will continue to account for its interest as an equity method investment. See Note 2, Significant Accounting Policies.

As of March 31, 2020, the DownREIT Partnership owned 12 communities with 5,657 apartment homes. The Operating Partnership’s investment in the DownREIT Partnership was $69.6 million and $76.2 million as of March 31, 2020 and December 31, 2019, respectively.

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UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)

March 31, 2020

Combined summary balance sheets relating to all of the DownREIT Partnership (not just our proportionate share) are presented below as of March 31, 2020 and December 31, 2019 (dollars in thousands):

March 31, 

December 31, 

    

2020

    

2019

Total real estate, net

 

$

1,088,125

 

$

1,106,703

Cash and cash equivalents

 

20

 

20

Note receivable from the General Partner

 

220,622

 

222,853

Other assets

 

5,312

 

4,829

Total assets

 

$

1,314,079

 

$

1,334,405

Secured debt, net

$

426,724

$

427,592

Other liabilities

 

23,628

 

28,087

Total liabilities

 

450,352

 

455,679

Total capital

$

863,727

$

878,726

Combined summary financial information relating to all of the DownREIT Partnership (not just our proportionate share) is presented below for the three months ended March 31, 2020 and 2019 (dollars in thousands):

Three Months Ended

March 31, 

    

2020

    

2019

Total revenue

$

32,678

 

$

31,606

Property operating expenses

 

(13,309)

 

(13,096)

Real estate depreciation and amortization

 

(20,986)

 

(20,294)

Operating income/(loss)

 

(1,617)

 

(1,784)

Interest expense