Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10524 (UDR, Inc.)
Commission file number 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 or organization)
Identification No.)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (720) 283-6120
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, $0.01 par value
UDR
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☑
No ◻
Yes ◻
No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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.
Yes þ
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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 þ
Accelerated Filer ◻
Non-Accelerated Filer ◻
Smaller Reporting Company ☐
Emerging Growth Company ☐
United Dominion Realty, L.P.:
Large Accelerated Filer ◻
Non-Accelerated Filer þ
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.◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐
The aggregate market value of the shares of common stock of UDR, Inc. held by non-affiliates on June 28, 2019 was approximately $4.9 billion. This calculation excludes shares of common stock held by the registrant’s officers and directors and each person known by the registrant to beneficially own more than 5% of the registrant’s outstanding shares, as such persons may be deemed to be affiliates. This determination of affiliate status should not be deemed conclusive for any other purpose. As of February 17, 2020, there were 294,631,463 shares of UDR, Inc.’s common stock outstanding.
There is no public trading market for the partnership units of United Dominion Realty, L.P. As a result, an aggregate market value of the partnership units of United Dominion Realty, L.P. cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from UDR, Inc.’s definitive proxy statement for the 2020 Annual Meeting of Stockholders.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business
3
Item 1A. Risk Factors
11
Item 1B. Unresolved Staff Comments
26
Item 2. Properties
27
Item 3. Legal Proceedings
28
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
29
Item 6. Selected Financial Data
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
63
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
64
PART III
Item 10. Directors, Executive Officers and Corporate Governance
65
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
66
Item 16. Form 10-K Summary
73
EXPLANATORY NOTE
This Report combines the annual reports on Form 10-K for the fiscal year ended December 31, 2019 of UDR, Inc., a Maryland corporation, and United Dominion Realty, L.P., a Delaware limited partnership, of which UDR, Inc. is the parent company and sole general partner. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” the “Company,” “UDR” or “UDR, Inc.” refer collectively to UDR, Inc., together with its consolidated subsidiaries and joint ventures, including United Dominion Realty, L.P. and UDR Lighthouse DownREIT L.P. (the “DownREIT Partnership”), also a Delaware limited partnership of which UDR is the sole general partner. Unless the context otherwise requires, the references in this Report to the “Operating Partnership” or the “OP” refer to United Dominion Realty, L.P., together with its consolidated subsidiaries. “Common stock” refers to the common stock of UDR and “stockholders” means the holders of shares of UDR’s common stock and preferred stock. The limited partnership interests of the Operating Partnership and the DownREIT Partnership are referred to as “OP Units” and “DownREIT Units,” respectively, and the holders of the OP Units and DownREIT Units are referred to as “unitholders.” This combined Form 10-K 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 December 31, 2019, UDR owned 0.1 million units (100%) of the general partnership interests of the Operating Partnership and 176.1 million OP Units, representing approximately 95.7% of the total outstanding OP Units in the Operating Partnership. UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and UDR’s role as the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities” and “Control and Procedures” are presented in this report for each of UDR and the Operating Partnership. In addition, certain disclosures in “Business” are separated by entity to the extent that the discussion relates to UDR’s business outside of the Operating Partnership.
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unfavorable changes in the apartment market, changing economic conditions, the impact of inflation/deflation on rental rates and property operating expenses, expectations concerning the availability of capital and the stability of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments and redevelopments, delays in completing lease-ups on schedule or at expected rent and occupancy levels, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, expectations on occupancy levels and rental rates, expectations concerning joint ventures and partnerships with third parties, expectations that automation will help grow net operating income, and expectations on annualized net operating income.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
●general economic conditions;
●unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates;
●the failure of acquisitions to achieve anticipated results;
●possible difficulty in selling apartment communities;
●competitive factors that may limit our ability to lease apartment homes or increase or maintain rents;
●insufficient cash flow that could affect our debt financing and create refinancing risk;
●failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders;
●development and construction risks that may impact our profitability;
●potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs to us;
●risks from climate change that impacts our properties or operations;
●risks from extraordinary losses for which we may not have insurance or adequate reserves;
●risks from cybersecurity breaches of our information technology systems and the information technology systems of our third party vendors and other third parties;
●uninsured losses due to insurance deductibles, self-insurance retention, uninsured claims or casualties, or losses in excess of applicable coverage;
●delays in completing developments and lease-ups on schedule;
●our failure to succeed in new markets;
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●risks that third parties who have an interest in or are otherwise involved in projects in which we have an interest, including mezzanine borrowers, joint venture partners or other investors, do not perform as expected;
●changing interest rates, which could increase interest costs and affect the market price of our securities;
●potential liability for environmental contamination, which could result in substantial costs to us;
●the imposition of federal taxes if we fail to qualify as a REIT under the Code in any taxable year;
●our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price; and
●changes in real estate laws, tax laws, rent control or stabilization laws or other laws affecting our business.
A discussion of these and other factors affecting our business and prospects is set forth in Part I, Item 1A. Risk Factors. We encourage investors to review these risk factors.
Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
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Item 1. BUSINESS
General
UDR is a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, disposes of, and manages multifamily apartment communities generally located in high barrier-to-entry markets throughout the United States. The high barrier-to-entry markets are characterized by limited land for new construction, difficult and lengthy entitlement processes, low single-family home affordability and strong employment growth potential. At December 31, 2019, our consolidated real estate portfolio consisted of 148 communities located in 20 markets, consisting of 47,010 completed apartment homes, which are held directly or through our subsidiaries, including the Operating Partnership and the DownREIT Partnership, and consolidated joint ventures. In addition, we have an ownership interest in 5,268 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships, including 2,138 apartment homes owned by entities in which we hold preferred equity investments. At December 31, 2019, the Company was developing three wholly-owned communities totaling 878 homes, none of which have been completed.
At December 31, 2019, the Operating Partnership’s consolidated real estate portfolio included 52 communities located in 15 markets, with a total of 16,434 completed apartment homes. The Operating Partnership owns, operates, acquires, renovates, develops, redevelops, disposes of, and manages multifamily apartment communities generally located in high barrier-to-entry markets located throughout the United States. During the year ended December 31, 2019, rental revenues of the Operating Partnership represented approximately 39% of our total rental revenues.
UDR has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to in this Report as the “Code.” To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than our net capital gains) to our stockholders annually. As a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent we distribute such net income to our stockholders annually. In 2019, we declared total distributions of $1.37 per common share and paid dividends of $1.35 per common share.
Dividends
Declared in
Paid in
2019
First Quarter
$
0.3425
0.3225
Second Quarter
Third Quarter
Fourth Quarter
Total
1.3700
1.3500
UDR was formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. The Operating Partnership is the successor-in-interest to United Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations in 1995. The Operating Partnership was redomiciled in 2004 as a Delaware limited partnership. Our corporate offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado and our telephone number is (720) 283-6120. Our website is www.udr.com. The information contained on our website, including any information referred to in this Report as being available on our website, is not a part of or incorporated into this Report.
As of February 17, 2020, we had 1,330 full-time associates and 21 part-time associates, all of whom were employed by UDR.
Reporting Segments
We report in two segments: Same-Store Communities and Non-Mature Communities/Other.
Our Same-Store Communities segment represents those communities acquired, developed, and stabilized prior to January 1, 2018, and held as of December 31, 2019. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the communities are not classified as held for disposition at year end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.
Our Non-Mature Communities/Other segment represents 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. For additional information regarding our operating segments, see Note 16, Reportable Segments, in the Notes to the UDR Consolidated Financial Statements included in this Report and Note 12, Reportable Segments, in the Notes to the Operating Partnership’s Consolidated Financial Statements included in this Report.
Business Objectives
Our principal business objective is to maximize the economic returns of our apartment communities to provide our stockholders with the greatest possible total return and value. To achieve this objective, we intend to continue to pursue the following goals and strategies:
2019 Highlights
●In July 2019, the Company marked its 47th year as a REIT and, in October 2019, paid its 188th consecutive quarterly dividend. The Company’s annualized declared 2019 dividend of $1.37 represented a 6.2% increase over the previous year.
●
Total revenues increased 10.1% over the prior year primarily due to communities acquired during 2019 and rent growth.
●We achieved Same-Store revenue growth of 3.6% and Same-Store net operating income (“NOI”) growth of 4.0%.
●We commenced the development of three communities located in Denver, Colorado, Dublin, California, and Addison, Texas, with a total of 878 apartment homes.
●We acquired eight communities with a total of 2,919 apartment homes located in Brooklyn, New York, St. Petersburg, Florida, Towson, Maryland, King of Prussia, Pennsylvania, Waltham, Massachusetts, Norwood, Massachusetts, and Englewood, New Jersey, for a total of approximately $911.9 million.
●We acquired two to-be-developed land parcels located in Washington, D.C., and Denver, Colorado, for a total of approximately $40.8 million.
●We increased our ownership interest in two communities from our West Coast Development joint venture with a total of 541 apartment homes, located in Anaheim, California and Seattle, Washington, for a total cash purchase price of approximately $53.5 million after the repayment of joint venture construction financing.
●We increased our ownership interest in one community from our UDR/KFH joint venture with a total of 292 apartment homes, located in Washington, D.C., for a total of $186.8 million and sold our 30% ownership interest in two communities from our UDR/KFH joint venture with a total of 368 apartment homes, located in Arlington, Virginia and Silver Spring, Maryland, for a collective sales price of $118.3 million, resulting in a gain on sale of approximately $10.6 million.
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●We acquired the approximately 50% ownership interest not previously owned in 10 UDR/MetLife joint venture operating communities, one development community and four land parcels valued at $1.1 billion, or $564.2 million at our share, and sold our approximately 50% ownership interest in five UDR/MetLife joint venture operating communities valued at $645.8 million, or $322.9 million at our share, to MetLife, and recognized a net gain on sale of $114.9 million at our share.
●We recognized a gain of $5.3 million from the sale of a parcel of land in Los Angeles, California.
●We contributed $67.0 million to four investments under our Developer Capital Program, which earn preferred returns ranging between 9.0% to 12.5%.
●We sold 7.0 million shares of common stock for aggregate net proceeds of $312.3 million at a weighted average price per share of $45.29 under our ATM program, and sold 1.3 million shares of common stock through a forward sales agreement for aggregate net proceeds of $63.5 million at a weighted average price per share of $47.41, which was also under our ATM program.
●We sold an additional 7.5 million shares of common stock in an underwritten public offering for net proceeds of $349.8 million at a price per share of $46.65.
Refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for further information on the Company’s and the Operating Partnership’s activities in 2019.
Our Strategic Vision
Our strategic vision is to be the multifamily public REIT of choice. We intend to realize this vision by executing on our strategic objectives, which are:
Maintaining a Diversified Portfolio and Allocating Capital to Accretive Investment Opportunities
We believe greater portfolio diversification, as defined by geographic concentration, location within a market (i.e., urban or suburban) and property quality (i.e., A or B), reduces the volatility of our same-store growth throughout the real estate cycle, appeals to a wider renter and investor audience and lessens the market risk associated with owning a homogenous portfolio. Diversified characteristics of our portfolio include:
We are focused on increasing our presence in markets with favorable job formation, high propensity to rent, low single-family home affordability, and a favorable demand/supply ratio for multifamily housing. Portfolio investment decisions consider internal analyses and third-party research.
Acquisitions and Dispositions
When evaluating potential acquisitions, we consider a wide variety of factors, including:
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We regularly monitor our assets to increase the quality and performance of our portfolio. Factors we consider in deciding whether to dispose of a property include:
The following table summarizes our apartment community acquisitions and dispositions and our consolidated year-end ownership position for the past five years (dollars in thousands):
2018
2017
2016
2015
Homes acquired
7,079
—
462
508
3,246
Homes disposed
868
218
1,782
2,735
Homes owned at December 31,
47,010
39,931
39,998
39,454
40,728
Total real estate owned, at cost
12,602,101
10,196,159
10,177,206
9,615,753
9,190,276
The following table summarizes the Operating Partnership’s apartment community acquisitions and dispositions and year-end ownership position for the past five years (dollars in thousands):
421
264
276
4,256
(a)
16,434
16,698
16,974
3,875,160
3,811,985
3,816,956
3,674,704
3,630,905
Includes 3,107 homes deconsolidated in 2015 upon contribution of communities by the Operating Partnership to the DownREIT Partnership.
6
Development Activities
Our objective in developing a community is to create value while improving the quality of our portfolio. How demographic trends, economic drivers, and multifamily fundamentals and valuations have trended over the long-term and our portfolio strategy generally govern our review process on where and when to allocate development capital. At December 31, 2019, the Company was developing three wholly-owned communities located in Denver, Colorado, Addison, Texas, and Dublin, California, totaling 878 homes, none of which have been completed, with a budget of $278.5 million, in which we have a carrying value of $69.8 million. The communities are estimated to be completed between the first quarter of 2021 and the second quarter of 2022.
Redevelopment Activities
Our objective in redeveloping a community is twofold: we aim to grow rental rates while also producing a higher yielding and more valuable asset through asset quality improvement. During the year ended December 31, 2019, we incurred $35.6 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings. As of December 31, 2019, the Company was redeveloping 653 apartment homes, 250 of which have been completed, at two wholly-owned communities, located in Boston, Massachusetts and New York, New York, both of which are expected to be completed in the first quarter of 2021. The redevelopments include the renovation of building exteriors, corridors, and common area amenities as well as individual apartment homes.
Joint Venture and Partnership Activities
We have entered into, and may continue in the future to enter into, joint ventures (including limited liability companies or partnerships) through which we would own an indirect economic interest of less than 100% of the community or communities owned directly by such joint ventures. Our decision to either hold an apartment community in fee simple or have an indirect interest in the community through a joint venture is based on a variety of factors and considerations, including: (i) the economic and tax terms required by the seller of land or a community; (ii) our desire to diversify our portfolio of communities by market, submarket and product type; (iii) our desire at times to preserve our capital resources to maintain liquidity or balance sheet strength; and (iv) our projections, in some circumstances, that we will achieve higher returns on our invested capital or reduce our risk if a joint venture vehicle is used. Each joint venture agreement is individually negotiated, and our ability to operate and/or dispose of a community in our sole discretion may be limited to varying degrees depending on the terms of the joint venture agreement.
Maintaining a Strong Balance Sheet
We maintain a capital structure that we believe allows us to proactively source potential investment opportunities in the marketplace. We have structured our debt maturity schedule to be able to opportunistically access both secured and unsecured debt markets when appropriate.
Financing Activities
As part of our plan to finance our activities, we utilize proceeds from debt and equity offerings and refinancings to extend maturities, pay down existing debt, fund development and redevelopment activities, and acquire apartment communities.
Consistently Driving Operational Excellence
Investment in new technologies continues to drive operating efficiencies in our business and help us to better meet the changing needs of our business and our residents. Our residents can conduct business with us 24 hours a day, 7 days a week and complete online leasing applications and renewals throughout our portfolio using our web-based resident internet portal or, increasingly, a smart-device application.
As a result of transforming our operations through technology, residents’ satisfaction has improved, and our operating teams have become more efficient. Web-based technologies have also resulted in declining marketing and advertising costs, improved cash management, and better pricing management of our available apartment homes.
Operating Partnership Strategies and Vision
The Operating Partnership’s long-term strategic vision is the same as that of the Company described above.
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Competitive Conditions
Competition for new residents is generally intense across our markets. Some competing communities offer amenities that our communities do not have. Competing communities can use rental concessions or lower rents to obtain temporary competitive advantages. Also, some competing communities are larger or newer than our communities. The competitive position of each community is different depending upon many factors, including sub-market supply and demand. In addition, other real estate investors compete with us to acquire existing properties, redevelop existing properties, and to develop new properties. These competitors include insurance companies, pension and investment funds, public and private real estate companies, investment companies and other public and private apartment REITs, some of which may have greater resources, or lower capital costs, than we do.
We believe that, in general, we are well-positioned to compete effectively for residents and investments. We believe our competitive advantages include:
Moving forward, we will continue to optimize lease management, improve expense control, increase resident retention efforts and align employee incentive plans with metrics that impact our bottom-line performance. We believe this plan of operation, coupled with the portfolio’s strengths in targeting renters across a geographically diverse platform, should position us for continued operational upside.
Communities
At December 31, 2019, our consolidated real estate portfolio included 148 communities with a total of 47,010 completed apartment homes, which included the Operating Partnership’s consolidated real estate portfolio of 52 communities with a total of 16,434 completed apartment homes. The overall quality of our portfolio enables us to raise rents and to attract residents with higher levels of disposable income who are more likely to absorb such rents.
At December 31, 2019, the Company was developing three wholly-owned communities located in Denver, Colorado, Dublin, California, and Addison, Texas, totaling 878 homes, none of which have been completed, with a budget of $278.5 million, in which we have a carrying value of $69.8 million. The communities are estimated to be completed between the first quarter of 2021 and the second quarter of 2022.
At December 31, 2019, the Company was redeveloping 653 apartment homes, 250 of which have been completed, at two wholly-owned communities, located in Boston, Massachusetts and New York, New York, both of which are expected to be completed in the first quarter of 2021. The redevelopments include the renovation of building exteriors, corridors, and common area amenities as well as individual apartment homes.
Same-Store Community Comparison
We believe that one pertinent quantitative measurement of the performance of our portfolio is tracking the results of our Same-Store Communities’ NOI, which is total rental revenue, less rental and other operating expenses excluding property management. Our Same-Store Community population is comprised of operating communities which we own and have stabilized occupancy, revenues and expenses as of the beginning of the prior year.
Net income attributable to common stockholders was $180.9 million as compared to $199.2 million in the prior year period. The decrease was primarily driven by higher gains on the sale of real estate in the prior year and an increase in depreciation expense and interest expense in 2019, partially offset by higher total revenue and gains on the sale of unconsolidated real estate.
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For the year ended December 31, 2019, our Same-Store NOI increased by $26.7 million compared to the prior year. Our Same-Store Community properties provided 85.4% of our total NOI for the year ended December 31, 2019. The increase in NOI for the 37,959 Same-Store apartment homes, or 80.7% of our portfolio, was primarily driven by an increase in rental rates, an increase in reimbursement, ancillary and fee income and a decrease in personnel expense, partially offset by an increase in repair and maintenance expense and real estate taxes.
For the year ended December 31, 2019, the Operating Partnership’s Same-Store NOI increased by $10.3 million compared to the prior year. The Operating Partnership’s Same-Store Community properties provided 92.9% of its total NOI for the year ended December 31, 2019. The increase in NOI for the 15,723 Same-Store apartment homes, or 95.7% of the Operating Partnership’s portfolio, was primarily driven by an increase in rental rates, an increase in reimbursement, ancillary and fee income and a decrease in personnel expense, partially offset by an increase in repair and maintenance expense and real estate taxes.
Revenue growth in 2020 may be impacted by adverse developments affecting the general economy, reduced occupancy rates, increased rental concessions, new supply, increased bad debt and other factors which may adversely impact our ability to increase rents.
Tax Matters
UDR has elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, UDR must continue to meet certain tests that, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than net capital gains) to our stockholders annually. Provided we maintain our qualification as a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent such net income is distributed to our stockholders annually. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.
We may utilize our taxable REIT subsidiary (“TRS”) to engage in activities that REITs may be prohibited from performing, including the provision of management and other services to third parties and the conduct of certain nonqualifying real estate transactions. Our TRS generally is taxable as a regular corporation, and therefore, subject to federal, state and local income taxes.
The Operating Partnership intends to qualify as a partnership for federal income tax purposes. As a partnership, the Operating Partnership generally is not a taxable entity and does not incur federal income tax liability. However, any state or local revenue, excise or franchise taxes that result from the operating activities of the Operating Partnership are incurred at the entity level.
Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and material costs, the majority of our apartment leases have initial terms of 12 months or less, which generally enables us to compensate for any inflationary effects by increasing rents on our apartment homes. Although an extreme escalation in costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the year ended December 31, 2019.
Environmental Matters
Various environmental laws govern certain aspects of the ongoing operation of our communities. Such environmental laws include those regulating the existence of asbestos-containing materials in buildings, management of surfaces with lead-based paint (and notices to residents about the lead-based paint), use of active underground petroleum storage tanks, and waste-management activities. The failure to comply with such requirements could subject us to a government enforcement action and/or claims for damages by a private party.
To date, compliance with federal, state and local environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position. We have a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigations and reports have been completed for each property we acquire. In addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase or development
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of any property. Nevertheless, it is possible that the environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we have abandoned otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. We believe that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a relatively conservative posture toward accepting known environmental risk, we can minimize our exposure to potential liability associated with environmental hazards.
Federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and imposes treble damages for failure to provide such notification. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.
We are unaware of any environmental hazards at any of our properties that individually or in the aggregate may have a material adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise aware, of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties. We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on us or our financial condition or results of operations. Future environmental laws, regulations, or ordinances, however, may require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on us in the future, the costs of compliance could have a material adverse effect on our results of operations and our financial condition.
Insurance
We carry comprehensive general liability coverage on our communities, with limits of liability customary within the multi-family apartment industry to insure against liability claims and related defense costs. We are also insured, with limits of liability customary within the multi-family apartment industry, against the risk of direct physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.
Available Information
Both UDR and the Operating Partnership file electronically with the Securities and Exchange Commission their respective annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports on the day of filing with the SEC on our website at www.udr.com, or by sending an e-mail message to ir@udr.com.
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Item 1A.
RISK FACTORS
There are many factors that affect the business and the results of operations of the Company and the Operating Partnership, some of which are beyond the control of the Company and the Operating Partnership. The following is a description of important factors that may cause the actual results of operations of the Company and the Operating Partnership in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Report relating to our financial results, operations and business prospects. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
Risks Related to Our Real Estate Investments and Our Operations
Unfavorable Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels, Rental Revenues and the Value of Our Real Estate Assets. Unfavorable market conditions in the areas in which we operate or unfavorable economic conditions generally may significantly affect our occupancy levels, our rental rates and collections, the value of our properties and our ability to acquire or dispose of apartment communities on economically favorable terms. Our ability to lease our properties at favorable rates is adversely affected by the increase in supply in the multifamily and other rental markets and is dependent upon the overall level in the economy, which is adversely affected by, among other things, job losses and unemployment levels, recession, debt levels, housing markets, stock market volatility and uncertainty about the future. Some of our major expenses generally do not decline when related rents decline. We would expect that declines in our occupancy levels and rental revenues would cause us to have less cash available to pay our indebtedness and to distribute to UDR’s stockholders, which could adversely affect our financial condition or the market value of our securities. Factors that may affect our occupancy levels, our rental revenues, and/or the value of our properties include the following, among others:
The Geographic Concentration of Our Communities in Certain Markets Could Have an Adverse Effect on Our Operations if a Particular Market is Adversely Impacted by Economic or Other Conditions. For the year ended December 31, 2019, approximately 52.7% of our total NOI was generated from communities located in the Washington, D.C. metropolitan area (16.2%), Orange County, CA (14.2%), the San Francisco Bay Area, CA (12.2%) and New York, NY (10.1%). As a result, if any one or more of these markets is adversely impacted by regional or local economic conditions or real estate market conditions, such conditions may have a greater adverse impact on our results of operations than if our portfolio was more geographically diverse. In addition, if one or more of these markets is adversely affected by changes in regional or local regulations, including those related to rent control or stabilization, such regulations may have a greater adverse impact on our results of operation than if our portfolio was more geographically diverse.
We May Be Unable to Renew Leases or Relet Apartment Units as Leases Expire, or the Terms of Renewals or New Leases May Be Less Favorable Than Current Leases. When our residents decide to leave our apartments, whether because they decide not to renew their leases or they leave prior to their lease expiration date, we may not be able to relet their apartment units. Even if the residents do renew or we can relet the apartment units, the terms of renewal or reletting may be less favorable than current lease terms. Furthermore, because the majority of our apartment leases have initial terms of 12 months or less, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms. If we are unable to promptly renew the leases or relet the apartment units, or if the rental rates upon renewal or reletting are lower than expected rates, then our results of operations and financial condition may be adversely affected. If residents do not experience increases in their income, we may be unable to increase rent and/or delinquencies may increase.
We Face Certain Risks Related to Our Retail and Commercial Space. Certain of our properties include retail or commercial space that we lease to third parties. The long term nature of our retail and commercial leases (generally five to ten years with market-based or fixed-price renewal options) and the characteristics of many of our tenants (generally small and/or local businesses) may subject us to certain risks. The longer term leases could result in below market lease rates over time. Tenants may provide guarantees and other credit support which may prove to be inadequate or uncollectable, and the failure rate of small and/or local businesses may be higher than average. We may not be able to lease new space for rents that are consistent with our projections or for market rates. Also, when leases for our retail or commercial space terminate either at the end of the lease or because a tenant leaves early, the space may not be relet or the terms of reletting, including the cost of allowances and concessions to tenants, may be less favorable than the prior lease terms. Our properties compete with other properties with retail or commercial space. The presence of competitive alternatives may adversely affect our ability to lease space and the level of rents we can obtain. If our retail or commercial tenants experience financial distress or bankruptcy, they may fail to comply with their contractual obligations, seek concessions in order to continue operations, or cease their operations, which could adversely impact our results of operations and financial condition.
Risk of Inflation/Deflation. Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses. The general risk of inflation is that interest on our debt, general and administrative expenses and other expenses increase at a rate faster than increases in our rental rates, which could adversely affect our financial condition or results of operations.
We Are Subject to Certain Risks Associated with Selling Apartment Communities, Which Could Limit Our Operational and Financial Flexibility. We periodically dispose of apartment communities that no longer meet our strategic objectives, but adverse market conditions may make it difficult to sell apartment communities we own. We cannot predict whether we will be able to sell any property for the price or on the terms we set, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold or the purchase price may be reduced to cover any cost of correcting defects or making improvements. These conditions may limit our ability to dispose of properties and to change our portfolio in order to meet our strategic objectives, which could in turn adversely affect our financial condition, results of operations or our ability to fund other activities in which we may want to engage such as the purchase of properties, development or redevelopment, or funding the Developer Capital Program. We are also subject to the following risks in connection with sales of our apartment communities, among others:
Competition Could Limit Our Ability to Lease Apartment Homes or Increase or Maintain Rents. Our apartment communities compete with numerous housing alternatives in attracting residents, including other apartment communities, condominiums and single-family rental homes, as well as owner occupied single- and multi-family homes. Competitive housing in a particular area could adversely affect our ability to lease apartment homes and increase or maintain rents, which could materially adversely affect our results of operations and financial condition.
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We May Not Realize the Anticipated Benefits of Past or Future Acquisitions, and the Failure to Integrate Acquired Communities and New Personnel Successfully Could Create Inefficiencies. We have selectively acquired in the past, and if presented with attractive opportunities we intend to selectively acquire in the future, apartment communities that meet our investment criteria. Our acquisition activities and their success are subject to the following risks, among others:
Competition Could Adversely Affect Our Ability to Acquire Properties. In the past, other real estate investors, including insurance companies, pension and investment funds, developer partnerships, investment companies and other public and private apartment REITs, have competed with us to acquire existing properties and to develop new properties, and such competition in the future may make it more difficult for us to acquire attractive investment opportunities on favorable terms, which could adversely affect our ability to grow or acquire properties profitably or with attractive returns.
Development and Construction Risks Could Impact Our Profitability. In the past we have selectively pursued the development and construction of apartment communities, and we intend to do so in the future as appropriate opportunities arise. Development activities have been, and in the future may be, conducted through wholly-owned affiliated companies or through joint ventures with unaffiliated parties. Our development and construction activities are subject to the following risks, among others:
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Bankruptcy or Defaults of Our Counterparties Could Adversely Affect Our Performance. We have relationships with and, from time to time, we execute transactions with or receive services from many counterparties, such as general contractors engaged in connection with our development activities or joint venture partners, among others. As a result, bankruptcies or defaults by these counterparties or their subcontractors could result in services not being provided, projects not being completed on time, or on budget, or at all, or volatility in the financial markets and economic weakness could affect the counterparties’ ability to complete transactions with us as intended, both of which could result in disruptions to our operations that may adversely affect our financial condition and results of operations.
Property Ownership Through Partnerships and Joint Ventures May Limit Our Ability to Act Exclusively in Our Interest. We have in the past and may in the future develop and/or acquire properties in partnerships and joint ventures, including those in which we own a preferred interest, with other persons or entities when we believe circumstances warrant the use of such structures. As of December 31, 2019, we had active joint ventures and partnerships, including our preferred equity investments, with a total equity investment of $588.3 million. We could become engaged in a dispute with one or more of our partners which could adversely impact us. Moreover, our partners may have business, economic or other objectives that are inconsistent with our objectives, including objectives that relate to the appropriate timing and terms of any sale or refinancing of a property. In some instances, our partners may have competing interests in our markets that could create conflicts of interest. Also, our partners might fail to make capital contributions when due, which may require us to contribute additional capital or may negatively impact the project. In addition, we may be responsible to our partners for indemnifiable losses. In general, we and our partners may each have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction and may result in the valuation of our interest in the partnership or joint venture (if we are the seller) or of the other partner’s interest in the partnership or joint venture (if we are the buyer) at levels which may not be representative of the valuation that would result from an arm’s length marketing process and could cause us to recognize unanticipated capital gains or losses or the loss of fee income.
We are also subject to other risks in connection with partnerships or joint ventures, including (i) a deadlock if we and our partner are unable to agree upon certain major and other decisions (which could result in litigation or disposing of an asset at a time at which we otherwise would not sell the asset), (ii) limitations on our ability to liquidate our position in the partnership or joint venture without the consent of the other partner, and (iii) requirements to provide guarantees in favor of lenders with respect to the indebtedness of the joint venture.
We May Not be Permitted to Dispose of Certain Properties or Pay Down the Indebtedness Associated with Those Properties When We Might Otherwise Desire to do so Without Incurring Additional Costs. In connection with certain property acquisitions, we have agreed with the sellers that we will not dispose of the acquired properties or reduce the mortgage indebtedness on such properties for significant periods of time unless we pay certain of the resulting tax costs of the sellers or dispose of the property in a transaction in which a gain is not recognized for federal income tax purposes by such sellers, and we may enter into similar agreements in connection with future property acquisitions. These agreements could result in us retaining properties that we would otherwise sell or not paying down or refinancing indebtedness that we would otherwise pay down or refinance. However, subject to certain conditions, we retain the right to substitute other property or debt to meet these obligations to the sellers.
We Could Incur Significant Insurance Costs and Some Potential Losses May Not Be Adequately Covered by Insurance. We have a comprehensive insurance program covering our properties and operating activities with limits of liability, deductibles and self-insured retentions customary within the multifamily industry. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, certain types of extraordinary losses which may not be adequately covered under our insurance program. In addition, we will sustain losses due to insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess of applicable coverage.
If an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Material losses
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in excess of insurance proceeds may occur in the future. If one or more of our significant properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could materially and adversely affect our financial condition and results of operations.
The cost of insuring our apartment communities is a component of expense. Insurance premiums and the terms and conditions of insurance policies are subject to significant fluctuations and changes, which are generally outside of our control. We insure our properties with insurance companies that we believe have a good rating at the time our policies are put into effect. The financial condition of one or more insurance companies that we hold policies with may be negatively impacted, which could result in their inability to pay on future insurance claims. Their inability to pay future claims may have a negative impact on our financial results. In addition, the failure, or exit or partial exit from an insurance market, of one or more insurance companies may affect our ability to obtain insurance coverage in the amounts that we seek, or at all, or increase the costs to renew or replace our insurance policies, or cause us to self-insure a portion of the risk, or increase the cost of insuring properties.
Failure to Succeed in New Markets May Limit Our Growth. We have acquired in the past, and we may acquire in the future if appropriate opportunities arise, apartment communities that are outside of our existing markets. Entering into new markets may expose us to a variety of risks, and we may not be able to operate successfully in new markets. These risks include, among others:
Failure to Succeed with New Initiatives May Limit Our Ability to Grow Same-Store NOI. We have in the past developed and may in the future develop initiatives that are intended to drive operating efficiencies and grow same-store NOI, including smart home technologies and self-service options that are accessible to residents through smart devices. We may incur significant costs and divert resources in connection with such initiatives, and these initiatives may not perform as projected, which could adversely affect our results of operations and the market price of UDR’s common stock.
Potential Liability for Environmental Contamination Could Result in Substantial Costs. Under various federal, state and local environmental laws, as a current or former owner or operator of real estate, we could be required to investigate and remediate the effects of contamination of currently or formerly owned real estate by hazardous or toxic substances, often regardless of our knowledge of or responsibility for the contamination and solely by virtue of our current or former ownership or operation of the real estate. In addition, we could be held liable to a governmental authority or to third parties for property damage and for investigation and clean-up costs incurred in connection with the contamination or we could be required to incur additional costs to change how the property is constructed or operated due to presence of such substances. These costs could be substantial, and in many cases environmental laws create liens in favor of governmental authorities to secure their payment. The presence of such substances or a failure to properly remediate any resulting contamination could materially and adversely affect our ability to borrow against, sell or rent an affected property.
In addition, our properties are subject to various federal, state and local environmental, health and safety laws, including laws governing the management of wastes and underground and aboveground storage tanks. Noncompliance with these environmental, health and safety laws could subject us to liability. Changes in laws could increase the potential costs of compliance with environmental laws, health and safety laws or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise adversely affect our financial condition and results of operations.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements.
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These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.
We cannot assure you that costs or liabilities incurred as a result of environmental or building condition issues will not adversely affect our financial condition and results of operations.
Our Properties May Contain or Develop Harmful Mold or Suffer from Other Indoor Air Quality Issues, Which Could Lead to Liability for Adverse Health Effects or Property Damage or Cost for Remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation, which could adversely affect our results of operations and cash flow. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others for property damage or personal injury.
Compliance or Failure to Comply with the Americans with Disabilities Act of 1990 or Other Safety Regulations and Requirements Could Result in Substantial Costs. The Americans with Disabilities Act generally requires that public buildings, including our properties, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. Claims have been asserted, and in the future claims may be asserted, against us with respect to some of our properties under the Americans with Disabilities Act. If, under the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations. In addition, if claims arise, we may expend resources and incur costs in investigating and resolving such claims even if our property was in compliance with the law.
Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements and federal, state and local accessibility requirements in addition to those imposed by the Americans with Disabilities Act. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that could adversely affect our financial condition or results of operations.
The Adoption of, or Changes to, Rent Control, Rent Stabilization, Eviction, Tenants’ Rights and Similar Laws and Regulations in Our Markets Could Have an Adverse Effect on Our Results of Operations and Property Values. Various state and local governments have enacted and may continue to enact rent control, rent stabilization, or limitations, and similar laws and regulations that could limit our ability to raise rents or charge certain fees, including laws or court orders, either of which could have a retroactive effect. For example, in June 2019, the State of New York enacted new rent control regulations known as the Housing Stability and Tenant Protection Act of 2019 and, in October of 2019, the State of California enacted the Tenant Protection Act of 2019. We have seen a recent increase in governments enacting or considering, or being urged to consider, such laws and regulations. State and local governments or courts also may make changes to laws related to allowable fees, eviction and other tenants’ rights laws and regulations (including changes that apply retroactively) that could adversely impact our results of operations and the value of our properties. Laws and regulations regarding rent control, rent stabilization, eviction, tenants’ rights, and similar matters, as well as any lawsuits against us arising from such laws and regulations, may limit our ability to charge market rents, limit our ability to increase rents, evict delinquent tenants or change fees, or recover increases in our operating expenses, which could have an adverse effect on our results of operations and the value of our properties.
Compliance with or Changes in Real Estate Tax and Other Laws and Regulations Could Adversely Affect Our Funds from Operations and Our Ability to Make Distributions to Stockholders. We are subject to federal, state and local laws, regulations, rules and ordinances at locations where we operate regarding a wide variety of matters that could affect, directly or indirectly, our operations. Generally, we do not directly pass through costs resulting from compliance with or changes in real estate tax laws to residential property tenants. We also do not generally pass through increases in income, service or other taxes to tenants under leases. These costs may adversely affect net operating income and the
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ability to make distributions to stockholders. Similarly, compliance with or changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions, (ii) laws and regulations regulating housing, such as the Americans with Disabilities Act and the Fair Housing Amendments Act of 1988, or (iii) employment related laws, may result in significant unanticipated expenditures, which could adversely affect our financial condition and results of operations. In addition, changes in federal and state legislation and regulation on climate change may result in increased capital expenditures to improve the energy efficiency of our existing communities and also may require us to spend more on our new development communities without a corresponding increase in revenue.
Risk of Damage from Catastrophic Weather and Natural Events. Our communities are located in areas that may experience catastrophic weather and other natural events from time to time, including mudslides, fires, hurricanes, tornadoes, floods, snow or ice storms, or other severe inclement weather. These adverse weather and natural events could cause damage or losses that may be greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could adversely affect our financial condition and results of operations.
Risk of Potential Climate Change. To the extent significant changes in the climate in areas where our communities are located occur, we may experience extreme weather conditions and changes in precipitation and temperature, all of which could result in physical damage to, and/or a decrease in demand for, our communities located in these areas or communities that are otherwise affected by these changes. Should the impact of such climate changes be material in nature, or occur for lengthy periods of time, our financial condition and results of operations could be adversely affected.
Risk of Earthquake Damage. Some of our communities are located in areas subject to earthquakes, including in the general vicinity of earthquake faults. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We may also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could adversely affect our financial condition and results of operations. Insurance coverage for earthquakes can be costly due to limited industry capacity. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in management’s view, economically impractical.
Risk of Accidental Death or Injury Due to Fire, Natural Disasters or Other Hazards. The accidental death or injury of persons living in our communities due to fire, natural disasters or other hazards could have an adverse effect on our business and results of operations. Our insurance coverage may not cover all losses associated with such events, and we may experience difficulty marketing communities where any such events have occurred, which could have an adverse effect on our financial condition and results of operations.
Actual or Threatened Terrorist Attacks May Have an Adverse Effect on Our Business and Operating Results and Could Decrease the Value of Our Assets. Actual or threatened terrorist attacks and other acts of violence or war could have an adverse effect on our business and operating results. Attacks that directly impact one or more of our apartment communities could significantly affect our ability to operate those communities and thereby impair our ability to achieve our expected results. Further, our insurance coverage may not cover all losses caused by a terrorist attack. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have an adverse effect on our financial condition and results of operations.
Risk of Pandemics or Other Health Crisis. A pandemic, epidemic, or other health crisis where our communities are located or areas in which vendors on which we rely are located, could have an adverse effect on our business and results of operations.
Mezzanine Loan Assets Involve Greater Risks of Loss than Senior Loans Secured by Income-Producing Properties. We have in the past and may in the future originate mezzanine loans, which take the form of subordinated loans secured by second mortgages on the underlying property or subordinated loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. Mezzanine loans may involve a higher degree of risk than a senior mortgage secured by real property, because the security for the loan may lose all or substantially all of its value as a result of foreclosure by the senior lender and because it is in second position and there may not be adequate equity in the property. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may
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not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some of or all our investment. In addition, mezzanine loans typically have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.
Risk Related to Preferred Equity Investments. We have in the past and may in the future make preferred equity investments in corporations, limited partnerships, limited liability companies or other entities that have been formed for the purpose of acquiring, developing or managing real property. Generally, we will not have the ability to control the daily operations of the entity, and we will not have the ability to select or remove a majority of the members of the board of directors, managers, general partner or partners or similar governing body of the entity or otherwise control its operations. Although we would seek to maintain sufficient influence over the entity to achieve our objectives, our partners may have interests that differ from ours and may be in a position to take actions without our consent or that are inconsistent with our interests. Further, if our partners were to fail to invest additional capital in the entity when required, we may have to invest additional capital to protect our investment. Our partners may fail to develop or operate the real property or refinance property indebtedness or sell the real property in the manner intended and as a result the entity may not be able to redeem our investment or pay the return expected to us in a timely manner if at all. In addition, we may not be able to dispose of our investment in the entity in a timely manner or at the price at which we would want to divest. In the event that such an entity fails to meet expectations or becomes insolvent, we may lose our entire investment in the entity.
Risks Related to Ground Leases. We have in the past and may in the future enter into, as either landlord or tenant, a long-term ground lease with respect to a property or a portion thereof. Such ground leases may contain a rent reset provision that requires both parties to agree to a new rent or is based upon factors, for example fair market rent, that are not objective and are not within our control. We may not be able to agree with the counterparty to a revised rental rate, or the revised rental rate may be set by external factors, which could result in a different rental rate than we forecasted. In the past we have had disagreements with respect to revised rental rates and certain of such disagreements have gone to arbitration (for resolution as provided in the applicable lease agreement) and have been resolved in a manner adverse to us. In addition, the other party may not perform as expected under the ground lease or there may be a dispute with the other party to the ground lease. Any of these circumstances could have an adverse effect on our business, financial condition or operating results.
We May Experience a Decline in the Fair Value of Our Assets and Be Forced to Recognize Impairment Charges, Which Could Adversely Impact Our Financial Condition, Liquidity and Results of Operations and the Market Price of UDR’s Common Stock. A decline in the fair value of our assets may require us to recognize an impairment against such assets under generally accepted accounting principles as in effect in the United States (“GAAP”), if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we are required to recognize asset impairment charges in the future, these charges could adversely affect our financial condition, liquidity, results of operations and the per share trading price of UDR’s common stock.
Any Material Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an Adverse Effect on UDR’s Stock Price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we fail to maintain the adequacy of our internal controls over financial reporting, including any failure to implement required new or improved controls as a result of changes to our business or otherwise, or if we experience difficulties in their implementation, our business, results of operations and financial condition could be materially adversely harmed and we could fail to meet our reporting obligations. In addition, if we have one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on the per share trading price of UDR’s common stock.
A Breach of Information Technology Systems On Which We Rely Could Materially and Adversely Impact Our Business, Financial Condition, Results of Operations and Reputation. We rely on information technology systems, including the internet and networks and systems maintained and controlled by third party vendors and other third parties,
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to process, transmit and store information and to manage or support our business processes. Third party vendors collect and hold personally identifiable information and other confidential information of our tenants, prospective tenants and employees. We also maintain confidential financial and business information regarding us and persons and entities with which we do business on our information technology systems. While we take steps, and generally require third party vendors to take steps, to protect the security of the information maintained in our and third party vendors’ information technology systems, including associate training and testing and the use of commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing of the information, it is possible that our or our third party vendors’ security measures will not be able to prevent human error or the systems’ improper functioning, or the loss, misappropriation, disclosure or corruption of personally identifiable information or other confidential or sensitive information, including information about our tenants and employees. Cybersecurity breaches, including physical or electronic break-ins, computer viruses, phishing scams, attacks by hackers, breaches due to employee error or misconduct, and similar breaches, can create system disruptions, shutdowns or unauthorized access to information maintained on our information technology systems or the information technology systems of our third party vendors or other third parties or otherwise cause disruption or negative impacts to occur to our business and adversely affect our financial condition and results of operations. While we maintain cyber risk insurance to provide some coverage for certain risks arising out of cybersecurity breaches, there is no assurance that such insurance would cover all or a significant portion of the costs or consequences associated with a cybersecurity breach. We have in the past experienced cybersecurity breaches on our information technology systems, and, while none to date have been material, we expect such breaches may occur in the future. As the techniques used to obtain unauthorized access to information technology systems become more varied and sophisticated and the occurrence of such breaches becomes more frequent, we and our third party vendors and other third parties may be unable to adequately anticipate these techniques or breaches and implement appropriate preventative measures. Any failure to prevent cybersecurity breaches and maintain the proper function, security and availability of our or our third party vendors’ and other third parties’ information technology systems could interrupt our operations, damage our reputation and brand, damage our competitive position, make it difficult for us to attract and retain tenants, and subject us to liability claims or regulatory penalties that could adversely affect our business, financial condition and results of operations.
Our Business and Operations Would Suffer in the Event of Information Technology System Failures. Despite system redundancy and the existence of a disaster recovery plan for our information technology systems, our information technology systems and the information technology systems maintained by our third party vendors are vulnerable to damage arising from any number of sources beyond our or our third party vendors’ control, including energy blackouts, natural disasters, terrorism, war, and telecommunication failures. Any failure to maintain proper function and availability of our or third party vendors’ information technology systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could adversely affect our business, financial condition and results of operations.
Social Media Presents Risks. The use of social media could cause us to suffer brand damage or unintended information disclosure. Negative posts or communications about us on a social networking website could damage our reputation. Further, employees or others may disclose non-public information regarding us or our business or otherwise make negative comments regarding us on social networking or other websites, which could adversely affect our business and results of operations. As social media evolves we will be presented with new risks and challenges.
Our Success Depends on Our Senior Management. Our success depends upon the retention of our senior management, whose continued service is not guaranteed. We may not be able to find qualified replacements for the individuals who make up our senior management if their services should no longer be available to us. The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations.
Changes in U.S. Accounting Standards May Materially and Adversely Affect Our Reported Results of Operations. Accounting for public companies in the United States is in accordance with GAAP, which is established by the Financial Accounting Standards Board (the “FASB”), an independent body whose standards are recognized by the SEC as authoritative for publicly held companies. Uncertainties posed by various initiatives of accounting standard-setting by the FASB and the SEC, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements.
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Third-Party Expectations Relating to Environmental, Social and Governance Factors May Impose Additional Costs and Expose Us to New Risks. There is an increasing focus from certain investors, tenants, employees, and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance factors. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased in number, resulting in varied and in some cases inconsistent standards. In addition, the criteria by which companies’ corporate responsibility practices are assessed are evolving, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. Alternatively, if we elect not to or are unable to satisfy such new criteria or do not meet the criteria of a specific third-party provider, some investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies. Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, tenants and other stakeholders or our initiatives are not executed as planned, our reputation and financial results could be adversely affected.
Risks Related to Our Indebtedness and Financings
Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are subject to the risks normally associated with debt financing, including the risk that our operating income and cash flow will be insufficient to make required payments of principal and interest, or could restrict our borrowing capacity under our line of credit due to debt covenant restraints. Sufficient cash flow may not be available to make all required debt payments and satisfy UDR’s distribution requirements to maintain its status as a REIT for federal income tax purposes. In addition, the amounts under our line of credit may not be available to us and we may not be able to access the commercial paper market if our operating performance falls outside the constraints of our debt covenants. We are also likely to need to refinance substantially all of our outstanding debt as it matures. We may not be able to refinance existing debt, or the terms of any refinancing may not be as favorable as the terms of the existing debt, which could create pressures to sell assets or to issue additional equity when we would otherwise not choose to do so. In addition, our failure to comply with our debt covenants could result in a requirement to repay our indebtedness prior to its maturity, which could have a material adverse effect on our financial condition and cash flow, and increase our financing costs and impact our ability to make distributions to UDR’s stockholders.
Failure to Generate Sufficient Income Could Impair Debt Service Payments and Distributions to Stockholders. If our apartment communities do not generate sufficient revenue to meet rental expenses, our ability to make required payments of interest and principal on our debt securities and to pay distributions to UDR’s stockholders or the Operating Partnership’s or the DownREIT Partnership’s unitholders will be adversely affected. The following factors, among others, may affect the income generated by our apartment communities:
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Expenses associated with our investment in an apartment community, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in revenue from that community. If a community is mortgaged to secure payment of debt and we are unable to make the mortgage payments, we could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgage holder.
Changing Interest Rates Could Increase Interest Costs and Adversely Affect Our Cash Flow and the Market Price of Our Securities. We currently have, and expect to incur in the future, interest-bearing debt, including unsecured commercial paper, at rates that vary with market interest rates. As of December 31, 2019, UDR had approximately $378.6 million of variable rate indebtedness outstanding, which constitutes approximately 8.0% of total outstanding indebtedness as of such date. As of December 31, 2019, the Operating Partnership had approximately $27.0 million of variable rate indebtedness outstanding, which constitutes approximately 27.1% of total outstanding indebtedness as of such date. An increase in interest rates would increase our interest expenses and increase the costs of refinancing existing indebtedness and of issuing new debt, including unsecured commercial paper. Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and to make distributions to security holders. The effect of prolonged interest rate increases could negatively impact our ability to make acquisitions and develop properties.
The Phase-Out of LIBOR and Transition to SOFR as a Benchmark Interest Rate Could Have Adverse Effects. In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2021, it is expected that new contracts will not reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including us, are impacted by the risks associated with this transition and therefore it could adversely affect our operations and cash flows.
Our Debt Level May Be Increased. Our ability to incur debt is limited by covenants in our bank and other credit agreements. We manage our debt to be in compliance with these debt covenants, but subject to compliance with these covenants, we may increase the amount of our debt at any time without a concurrent improvement in our ability to service the additional debt.
Financing May Not Be Available and Could Be Dilutive. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit, construction loans and other forms of secured debt, commercial paper and other forms of unsecured debt, and equity financing, including common and preferred equity. We and other companies in the real estate industry have experienced limited availability of financing from time to time, including due to regulatory changes directly or indirectly affecting financing markets, for example the changes in terms on construction loans brought about by the Basel III capital requirements and the associated “High Volatility Commercial Real Estate” designation, which has adversely impacted the availability of loans, including construction loans, and the proceeds of and the interest rate thereon. Restricted lending practices could impact our ability to obtain financing or refinancing for our properties. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of UDR’s existing stockholders could be diluted.
Failure To Maintain Our Current Credit Ratings Could Adversely Affect Our Cost of Funds, Related Margins, Liquidity, and Access to Capital Markets. Moody’s and Standard & Poor’s routinely evaluate our debt and have given us ratings on our senior unsecured debt, commercial paper program and preferred stock. These ratings are based on a number of factors, which included their assessment of our financial strength, liquidity, capital structure, asset quality, and sustainability of cash flow and earnings. Due to changes in these factors and market conditions, we may not be able to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity, and access to capital markets, including our ability to access the commercial paper market.
Disruptions in Financial Markets May Adversely Impact Availability and Cost of Credit and Have Other Adverse Effects on Us and the Market Price of UDR’s Stock. Our ability to make scheduled payments on, or to refinance, our debt obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond our control. During the global financial crisis and the economic recession that followed it, the United States stock and credit markets experienced significant price volatility, dislocations and liquidity disruptions, which caused market prices of many stocks to fluctuate substantially and the spreads on debt financings to widen considerably. Those circumstances materially impacted liquidity in the financial markets at times, making terms for certain financings less attractive, and in some cases resulted in the unavailability of financing, such as the commercial paper market. Any future disruptions or uncertainty in the stock and credit markets may negatively impact our ability to refinance existing indebtedness and access additional financing for
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acquisitions, development of our properties and other purposes at reasonable terms or at all, which may negatively affect our business and the market price of UDR’s common stock. If we are not successful in refinancing our existing indebtedness when it becomes due, we may be forced to dispose of properties on disadvantageous terms, which might adversely affect our ability to service other debt and to meet our other obligations. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of UDR’s common or preferred stock.
A Change in U.S. Government Policy or Support Regarding Fannie Mae or Freddie Mac Could Have a Material Adverse Impact on Our Business. While in recent years we have decreased our borrowing from Fannie Mae and Freddie Mac, Fannie Mae and Freddie Mac are a major source of financing to participants in the multifamily housing market including potential purchasers of our properties. Potential options for the future of agency mortgage financing in the U.S. have been, and may in the future be, suggested that could involve a reduction in the amount of financing Fannie Mae and Freddie Mac are able to provide, limitations on the loans that the agencies may make, which may not include loans secured by properties like our properties, or the phase out of Fannie Mae and Freddie Mac. While we believe Fannie Mae and Freddie Mac will continue to provide liquidity to our sector, should they discontinue doing so, have their mandates changed or reduced or be disbanded or reorganized by the government, or if there is reduced government support for multifamily housing generally, it may adversely affect interest rates, capital availability, development of multifamily communities and the value of multifamily residential real estate and, as a result, may adversely affect our business and results of operations.
The Soundness of Financial Institutions Could Adversely Affect Us. We have relationships with many financial institutions, including lenders under our credit facilities, and, from time to time, we execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, financial institutions or the financial services industry generally, could result in losses or defaults by these institutions. In the event that the volatility of the financial markets adversely affects these financial institutions or counterparties, we or other parties to the transactions with us may be unable to complete transactions as intended, which could adversely affect our results of operations.
Interest Rate Hedging Contracts May Be Ineffective and May Result in Material Charges. From time to time when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. We may do this to increase the predictability of our financing costs. Also, from time to time we may rely on interest rate hedging contracts to limit our exposure under variable rate debt to unfavorable changes in market interest rates. If the terms of new debt securities are not within the parameters of, or market interest rates fall below that which we incur under a particular interest rate hedging contract, the contract is ineffective. Furthermore, the settlement of interest rate hedging contracts has involved and may in the future involve material charges. In addition, our use of interest rate hedging arrangements may expose us to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Termination of these hedging agreements typically involves costs, such as transaction fees or breakage costs.
Risks Related to Tax Laws
We Would Incur Adverse Tax Consequences if UDR Failed to Qualify as a REIT. UDR has elected to be taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. We intend that our current organization and method of operation enable us to continue to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future. In addition, U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect UDR’s stockholders.
If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including, for periods prior to 2018, any applicable alternative minimum tax) on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to UDR’s stockholders in computing our taxable income. Also, unless the
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Internal Revenue Service granted us relief under certain statutory provisions, we could not re-elect REIT status until the fifth calendar year after the year in which we first failed to qualify as a REIT. The additional tax liability from the failure to qualify as a REIT would reduce or eliminate the amount of cash available for investment or distribution to UDR’s stockholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In addition, we would no longer be required to make distributions to UDR’s stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.
Certain of our subsidiaries have also elected to be taxed as REITs under the Code, and are therefore subject to the same risks in the event that any such subsidiary fails to qualify as a REIT in any taxable year.
Dividends Paid by REITs Generally Do Not Qualify for Reduced Tax Rates. In general, the maximum U.S. federal income tax rate for dividends paid to individual U.S. stockholders is 20%. Unlike dividends received from a corporation that is not a REIT, our regular dividends (i.e., dividends other than capital gain dividends) paid to individual stockholders generally are not eligible for the reduced rates. However, individual U.S. stockholders generally may deduct 20% of such regular dividends under Section 199A of the Code, reducing the effective tax rate applicable to such dividends (although such provision will expire after 2025 absent future legislation).
UDR May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which Are Subject to Certain Tax Risks. We have established taxable REIT subsidiaries. Despite UDR’s qualification as a REIT, its taxable REIT subsidiaries must pay income tax on their taxable income. In addition, we must comply with various tests to continue to qualify as a REIT for federal income tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not constitute permissible income and investments for certain of these tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature or are otherwise not respected.
REIT Distribution Requirements Limit Our Available Cash. As a REIT, UDR is subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth. We generally must distribute annually at least 90% of our net REIT taxable income, excluding any net capital gain, in order for our distributed earnings not to be subject to corporate income tax. We intend to make distributions to UDR’s stockholders to comply with the requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code.
Certain Property Transfers May Generate Prohibited Transaction Income, Resulting in a Penalty Tax on Gain Attributable to the Transaction. From time to time, we may transfer or otherwise dispose of some of our properties. Under the Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction and subject to a 100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction and we may jeopardize our ability to retain future gains on real property sales. In addition, income from a prohibited transaction might adversely affect UDR’s ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
Changes to the U.S. Federal Income Tax Laws, including the Enactment of Certain Tax Reform Measures, Could Have an Adverse Impact on Our Business and Financial Results. In recent years, numerous legislative, judicial and administrative changes have been made to the U.S. federal income tax laws applicable to investments in real estate and REITs, including the passage of the Tax Cuts and Jobs Act of 2017, the full impact of which may not become evident for some period of time. There can be no assurance that future changes to the U.S. federal income tax laws or regulatory changes will not be proposed or enacted that could impact our business and financial results. The REIT rules are regularly under review by persons involved in the legislative process and by the Internal Revenue Service and the
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U.S. Treasury Department, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain of such changes could have an adverse impact on our business and financial results.
We cannot predict whether, when or to what extent any new U.S. federal tax laws, regulations, interpretations or rulings will impact the real estate investment industry or REITs. Prospective investors are urged to consult their tax advisors regarding the effect of potential future changes to the federal tax laws on an investment in our shares.
We May Be Adversely Affected by Changes in State and Local Tax Laws and May Become Subject to Tax Audits from Time to Time. Because UDR is organized and qualifies as a REIT, it is generally not subject to federal income taxes, but it is subject to certain state and local taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. A shortfall in tax revenues for states and local jurisdictions in which we own apartment communities may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional state and local taxes. These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to UDR’s stockholders. In the normal course of business, we or our affiliates (including entities through which we own real estate) may also become subject to federal, state or local tax audits. If we (or such entities) become subject to federal, state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition and results of operations.
The Operating Partnership and the DownREIT Partnership Intend to Qualify as Partnerships, but Cannot Guarantee That They Will Qualify. The Operating Partnership and the DownREIT Partnership intend to qualify as partnerships for federal income tax purposes, and intend to take that position for all income tax reporting purposes. If classified as partnerships, the Operating Partnership and the DownREIT Partnership generally will not be taxable entities and will not incur federal income tax liability. However, the Operating Partnership and the DownREIT Partnership would be treated as corporations for federal income tax purposes if they were “publicly traded partnerships,” unless at least 90% of their income was qualifying income as defined in the Code. A “publicly traded partnership” is a partnership whose partnership interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). Although neither the Operating Partnership’s nor the DownREIT Partnership’s partnership units are traded on an established securities market, because of the redemption rights of their limited partners, the Operating Partnership’s and DownREIT Partnership’s units held by limited partners could be viewed as readily tradable on a secondary market (or the substantial equivalent thereof), and the Operating Partnership and the DownREIT Partnership may not qualify for one of the “safe harbors” under the applicable tax regulations. Qualifying income for the 90% test generally includes passive income, such as real property rents, dividends and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most respects. The Operating Partnership and the DownREIT Partnership may not meet this qualifying income test. If either the Operating Partnership or the DownREIT Partnership were to be taxed as a corporation, it would incur substantial tax liabilities, and UDR would then fail to qualify as a REIT for tax purposes, unless it qualified for relief under certain statutory savings provisions, and our ability to raise additional capital would be impaired. In addition, even if the 90% test were met if the Operating Partnership or the DownREIT Partnership were a publicly traded partnership, there could be adverse tax impacts for certain limited partners.
Qualifying as a REIT Involves Highly Technical and Complex Provisions of the Code. Our qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the REIT income and asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we will not obtain independent appraisals, and upon our ability to successfully manage the composition of our income and assets on an ongoing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
Risks Related to Our Organization and Ownership of UDR’s Stock
Changes in Market Conditions and Volatility of Stock Prices Could Adversely Affect the Market Price of UDR’s Common Stock. The stock markets, including the New York Stock Exchange (“NYSE”), on which we list UDR’s common stock, have experienced significant price and volume fluctuations. As a result, the market price of UDR’s
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common stock could be similarly volatile, and investors in UDR’s common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. In addition to the risks listed in this “Risk Factors” section, a number of factors could negatively affect the price per share of UDR’s common stock, including:
Many of the factors listed above are beyond our control. These factors may cause the market price of shares of UDR’s common stock to decline, regardless of our financial condition, results of operations, business or our prospects.
We May Change the Dividend Policy for UDR’s Common Stock in the Future. The decision to declare and pay dividends on UDR’s common stock, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, funds from operations, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements under the REIT provisions of the Code, state law and such other factors as our board of directors considers relevant. Any change in our dividend policy could have an adverse effect on the market price of UDR’s common stock.
Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in UDR’s Stockholders’ Best Interests. Maryland business statutes may limit the ability of a third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws which may have the effect of discouraging offers to acquire our Company and of increasing the difficulty of consummating any such offers, even if our acquisition would be
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in UDR’s stockholders’ best interests. The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of UDR’s stock representing 10% or more of the voting power without our board of directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 66 2/3 % of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides generally that a person who acquires shares of our equity stock that represents 10% (and certain higher levels) of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote.
Limitations on Share Ownership and Limitations on the Ability of UDR’s Stockholders to Effect a Change in Control of Our Company Restricts the Transferability of UDR’s Stock and May Prevent Takeovers That are Beneficial to UDR’s Stockholders. One of the requirements for maintenance of our qualification as a REIT for U.S. federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Code, during the last half of any taxable year. Our charter contains ownership and transfer restrictions relating to UDR’s stock primarily to assist us in complying with this and other REIT ownership requirements; however, the restrictions may have the effect of preventing a change of control, which does not threaten REIT status. These restrictions include a provision that generally limits ownership by any person of more than 9.9% of the value of our outstanding equity stock, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. Absent such an exemption from our board of directors, the transfer of UDR’s stock to any person in excess of the applicable ownership limit, or any transfer of shares of such stock in violation of the ownership requirements of the Code for REITs, will be considered null and void, and the intended transferee of such stock will acquire no rights in such shares. These provisions of our charter may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for UDR’s stockholders or might otherwise be in UDR’s stockholders’ best interests.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
At December 31, 2019, our consolidated apartment portfolio included 148 communities located in 20 markets, with a total of 47,010 completed apartment homes.
The tables below set forth a summary of real estate portfolio by geographic market of the Company and of the Operating Partnership at December 31, 2019.
SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2019
UDR, INC.
Percentage
Average
Number of
of Total
Carrying
Home Size
Apartment
Value
Encumbrances
Cost per
Physical
(in square
Homes
(in thousands)
Home
Occupancy
feet)
WEST REGION
Orange County, CA
5,336
12.8
%
1,607,866
301,324
95.9
San Francisco, CA
2,751
7.0
881,394
27,000
320,390
96.8
841
Seattle, WA
2,992
8.4
1,063,695
70,931
355,513
96.6
890
Los Angeles, CA
1,225
3.6
458,189
374,032
967
Monterey Peninsula, CA
1,565
1.5
182,630
116,696
729
Other Southern California
817
1.6
207,986
42,698
254,573
95.8
1,014
Portland, OR
476
0.4
50,395
105,872
903
MID-ATLANTIC REGION
Metropolitan D.C.
8,305
18.3
2,322,872
252,067
279,696
97.4
909
Richmond, VA
1,358
1.2
151,726
111,728
1,018
Baltimore, MD
1,597
2.6
331,777
58,600
207,750
95.3
938
SOUTHEAST REGION
Orlando, FL
2,500
1.9
233,098
93,239
96.4
946
Nashville, TN
2,260
1.8
220,566
97,596
97.5
933
Tampa, FL
2,908
3.3
411,847
141,626
979
Other Florida
636
0.7
87,518
137,607
96.1
1,130
NORTHEAST REGION
New York, NY
2,318
12.3
1,543,545
665,895
97.0
754
Boston, MA
4,299
13.0
1,640,478
389,639
381,595
95.1
987
Philadelphia, PA
313
0.9
107,350
342,971
82.7
1,054
SOUTHWEST REGION
Dallas, TX
3,864
4.5
565,356
275,524
146,314
96.3
Austin, TX
1,272
1.3
167,217
131,460
97.3
913
Denver, CO
1.1
144,252
661,706
94.6
955
Total Operating Communities
148
98.2
12,379,757
1,116,459
263,343
908
Real Estate Under Development (a)
0.6
69,777
Land
87,615
Other
0.5
64,952
32,982
Total Real Estate Owned
100.0
1,149,441
UNITED DOMINION REALTY, L.P.
3,119
19.3
746,564
239,360
805
2,185
15.8
611,361
279,799
96.7
829
932
5.9
229,423
246,162
869
344
3.0
116,446
338,506
96.5
976
4.7
414
75,187
181,611
989
2,068
14.7
564,334
272,889
96.9
894
540
2.8
106,373
196,987
1,612
3.9
155,207
96,282
925
942
110,065
116,842
1,043
2.3
996
16.0
619,246
621,733
687
387
74,757
72,500
193,171
1,069
3.7
52
3,873,758
99,500
235,716
871
1,402
(429)
99,071
Item 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims arising in the ordinary course of business. We cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. We believe 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 flow.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
UDR, Inc.’s common stock has been listed on the New York Stock Exchange (“NYSE”) under the symbol “UDR” since May 7, 1990.
On February 17, 2020, there were 3,255 holders of record of the 294,631,463 outstanding shares of our common stock.
We have determined that, for federal income tax purposes, approximately 73% of the distributions for 2019 represented ordinary income, less than 1% represented qualified ordinary income, 1% represented long-term capital gain, 5% represented unrecaptured section 1250 gain, and 21% represented nondividend distributions.
UDR pays regular quarterly distributions to holders of its common stock. Future distributions will be at the discretion of our Board of Directors and will depend on our actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code, and other factors.
Series E Preferred Stock
The Series E Cumulative Convertible Preferred Stock (“Series E”) has no stated par value and a liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each share of the Series E is convertible at any time at the holder’s option into 1.083 shares of our common stock. The holders of the Series E are entitled to vote on an as-converted basis as a single class in combination with the holders of common stock at any meeting of our stockholders for the election of directors or for any other purpose on which the holders of common stock are entitled to vote. The Series E has no stated maturity and is not subject to any sinking fund or any mandatory redemption. In connection with a special dividend (declared on November 5, 2008), the Company reserved for issuance upon conversion of the Series E additional shares of common stock to which a holder of the Series E would have received if the holder had converted the Series E immediately prior to the record date for this special dividend.
Distributions declared on the Series E for the years ended December 31, 2019 and 2018 were $1.4832 per share, or $0.3708 per quarter, and $1.3968 per share, or $0.3492 per quarter, respectively. The Series E is not listed on any exchange. At December 31, 2019, a total of 2.8 million shares of the Series E were outstanding.
Series F Preferred Stock
We are authorized to issue up to 20.0 million shares of our Series F Preferred Stock (“Series F”). The Series F may be purchased by holders of our Operating Partnership Units, or OP Units, described below under “Operating Partnership Units,” and holders of limited partnership interests in the DownREIT Partnership at a purchase price of $0.0001 per share. OP/DownREIT unitholders are entitled to subscribe for and purchase one share of the Series F for each OP/DownREIT Unit held.
As of December 31, 2019, a total of 14.7 million shares of the Series F were outstanding. Holders of the Series F are entitled to one vote for each share of the Series F they hold, voting together with the holders of our common stock, on each matter submitted to a vote of security holders at a meeting of our stockholders. The Series F does not entitle its holders to any other rights, privileges or preferences.
Distribution Reinvestment and Stock Purchase Plan
We have a Distribution Reinvestment and Stock Purchase Plan under which holders of our common stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of our common stock. Stockholders who do not participate in the plan continue to receive distributions as and when declared. As of February 17, 2020, there were approximately 1,935 participants in the plan.
Operating Partnership Units
There is no established public trading market for United Dominion Realty, L.P.’s Operating Partnership Units. From time to time we issue shares of our common stock in exchange for OP Units tendered to the Operating Partnership for redemption in accordance with the provisions of the Operating Partnership’s limited partnership agreement. At December 31, 2019, there were 184.1 million OP Units outstanding in the Operating Partnership, of which 176.2 million OP Units or 95.7% were owned by UDR and affiliated entities and 7.9 million OP Units or 4.3% were owned by non-affiliated limited partners. Under the terms of the Operating Partnership’s limited partnership agreement, the holders of OP Units have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the holder in exchange for a cash payment based on the market value of our common stock at the time of redemption. However, the Operating Partnership’s obligation to pay the cash amount is subject to the prior right of the Company to acquire such OP Units in exchange for either the cash amount or the number of shares of our common stock equal to the number of OP Units being redeemed.
During the three months ended December 31, 2019, we issued less than 0.1 million shares of our common stock upon redemption of OP Units in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933.
Purchases of Equity Securities
In February 2006, UDR’s Board of Directors authorized a 10 million share repurchase program. In January 2008, UDR’s Board of Directors authorized a new 15 million share repurchase program. Under the two share repurchase programs, UDR may repurchase shares of our common stock in open market purchases, block purchases, privately negotiated transactions or otherwise. The following table summarizes all of UDR’s repurchases of shares of common stock under these programs during the quarter ended December 31, 2019 (shares in thousands):
Total Number
Maximum
of Shares
Purchased as
Shares that
Part of
May Yet Be
Publicly
Purchased
Shares
Price Paid
Announced Plans
Under the Plans
Period
per Share
or Programs
or Programs (a)
Beginning Balance
10,561
22.66
14,439
October 1, 2019 through October 31, 2019
November 1, 2019 through November 30, 2019
December 1, 2019 through December 31, 2019
Balance as of December 31, 2019
30
Comparison of Five-year Cumulative Total Returns
The following graph compares the five-year cumulative total returns for UDR common stock with the comparable cumulative return of the Nareit Equity REIT Index, Standard & Poor’s 500 Stock Index, the Nareit Equity Apartment Index and the MSCI U.S. REIT Index. The graph assumes that $100 was invested on December 31, 2014, in each of our common stock and the indices presented. Historical stock price performance is not necessarily indicative of future stock price performance. The comparison assumes that all dividends are reinvested.
Period Ending
Index
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
100.00
125.96
126.30
137.81
146.64
178.14
Nareit Equity Apartment Index
116.45
119.78
124.24
128.83
162.74
MSCI U.S. REIT Index
102.52
111.34
116.98
111.64
140.48
S&P 500 Index
101.38
113.51
138.29
132.23
173.86
Nareit Equity REIT Index
103.20
111.99
117.84
112.39
141.61
The performance graph and the related chart and text, are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of ours, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Item 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other information of UDR, Inc. and of the Operating Partnership as of and for each of the years in the five-year period ended December 31, 2019. The tables should be read in conjunction with each of UDR, Inc.’s and the Operating Partnership’s respective consolidated financial
statements and the notes thereto, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Report.
Year Ended December 31,
(In thousands, except per share data
and apartment homes owned)
OPERATING DATA:
Rental income
1,138,138
1,035,105
984,309
948,461
871,928
Net income/(loss)
199,579
221,542
132,655
320,380
357,159
Distributions to preferred stockholders
4,104
3,868
3,708
3,717
3,722
Net income/(loss) attributable to common stockholders
180,861
199,238
117,850
289,001
336,661
Common stock distributions declared
395,113
348,079
331,974
315,102
289,500
Income/(loss) per weighted average common share — basic
0.63
0.74
0.44
1.09
1.30
Income/(loss) per weighted average common share — diluted
1.08
1.29
Weighted average number of Common Shares outstanding — basic
285,247
268,179
267,024
265,386
258,669
Weighted average number of Common Shares outstanding — diluted
286,015
269,483
268,830
267,311
263,752
Weighted average number of Common Shares outstanding, OP Units/DownREIT Units and Common Stock equivalents outstanding — diluted
311,799
297,042
296,672
295,469
276,699
Common stock distributions declared - per share
1.37
1.24
1.18
1.11
Balance Sheet Data:
Real estate owned, at cost (a)
Accumulated depreciation (a)
4,131,353
3,654,160
3,330,166
2,923,625
2,646,874
Total real estate owned, net of accumulated depreciation (a)
8,470,748
6,541,999
6,847,040
6,692,128
6,543,402
Total assets
9,636,472
7,711,728
7,733,273
7,679,584
7,663,844
Secured debt, net (a)
601,227
803,269
1,130,858
1,376,945
Unsecured debt, net
3,558,083
2,946,560
2,868,394
2,270,620
2,193,850
Total liabilities
5,228,493
3,816,211
3,949,771
3,673,132
3,816,797
Total stockholders’ equity
3,358,542
2,905,625
2,825,800
3,093,110
2,899,755
Number of Common Shares outstanding
294,588
275,546
267,822
267,259
261,845
Other Data (a)
Total consolidated apartment homes owned (at end of year)
Weighted average number of consolidated apartment homes owned during the year
42,579
39,406
39,692
40,543
39,501
Cash Flow Data:
Cash provided by/(used in) operating activities
630,704
560,676
518,915
536,568
457,162
Cash provided by/(used in) investing activities
(1,686,687)
(113,548)
(407,406)
(112,720)
(265,538)
Cash provided by/(used in) financing activities
880,383
(260,067)
(111,785)
(429,282)
(201,648)
Funds from Operations (b):
Funds from operations attributable to common stockholders and unitholders — basic
629,279
570,254
538,916
527,096
455,565
Funds from operations attributable to common stockholders and unitholders — diluted
633,383
574,122
542,624
530,813
459,287
32
Management considers FFO a useful metric for investors as the Company uses FFO in evaluating property acquisitions and its operating performance, and believes that FFO should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company’s activities in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of funds available to fund our cash needs.
See “Funds from Operations” in Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations for a reconciliation of Net income/(loss) attributable to common stockholders to FFO.
33
(In thousands, except per OP unit data
441,773
431,920
419,377
404,415
440,408
103,995
231,485
107,855
79,262
215,063
Net income/(loss) attributable to OP unitholders
102,163
229,763
106,307
77,818
213,301
Income/(loss) per weighted average OP Unit — basic and diluted
0.56
1.25
0.58
0.42
1.16
Weighted average number of OP Units outstanding — basic and diluted
184,034
183,609
183,344
183,279
3,630,950
1,796,568
1,658,161
1,543,652
1,408,815
1,281,258
2,078,592
2,153,824
2,273,304
2,265,889
2,349,647
2,398,745
2,304,590
2,395,573
2,415,535
2,554,808
26,929
159,845
433,974
475,964
1,032,859
818,701
520,443
797,036
833,478
Total partners’ capital
1,348,481
1,472,070
1,464,295
1,578,202
1,713,412
Advances (to)/from the General Partner
397,899
19,659
(11,270)
Number of OP units outstanding
184,064
183,637
183,351
Other Data:
Total consolidated apartment homes owned (at end of year) (a)
255,093
255,668
235,257
228,941
224,396
(43,906)
71,683
(105,989)
(9,455)
23,485
(210,853)
(326,535)
(128,846)
(221,483)
(247,747)
34
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on the consolidated financial statements for the years ended December 31, 2019, and 2018 of each UDR, Inc. and United Domination Realty, L.P.
This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018 of UDR, Inc. and United Domination Realty, L.P. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Business Overview
We are a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, disposes of, and manages multifamily apartment communities. We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include the Operating Partnership and the DownREIT Partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the Company,” or “UDR” refer collectively to UDR, Inc., its subsidiaries and its consolidated joint ventures.
At December 31, 2019, our consolidated real estate portfolio consisted of 148 communities located in 13 states plus the District of Columbia consisting of 47,010 apartment homes. In addition, we have an ownership interest in 5,268 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships, including 2,138 apartment homes owned by entities in which we hold preferred equity investments.
36
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations as well as involves some degree of uncertainty. Estimates are prepared based on management’s assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Significant Accounting Policies, to the Notes to the UDR, Inc. Consolidated Financial Statements included in this Report.
Cost Capitalization
In conformity with GAAP, we capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
In addition to construction costs, we capitalize 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. As each home in a capital project is completed and becomes available for lease-up, the Company ceases capitalization on the related portion. The costs capitalized are reported on the Consolidated Balance Sheets as Total Real Estate Owned, Net of Accumulated Depreciation. Amounts capitalized during the years ended December 31, 2019, 2018, and 2017 were $13.5 million, $18.1 million, and $27.4 million, respectively.
Investment in Unconsolidated Entities
We may enter into various joint venture agreements and/or partnerships with unrelated third parties to hold or develop real estate assets. We must determine for each of these ventures whether to consolidate the entity or account for our investment under the equity method of accounting. We determine whether to consolidate a joint venture or partnership based on our rights and obligations under the venture agreement, applying the applicable accounting guidance. The application of the rules in evaluating the accounting treatment for each joint venture or partnership is complex and requires substantial management judgment. We evaluate our accounting for investments on a regular basis including when a significant change in the design of an entity occurs. Throughout our financial statements, and in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we use the term “joint venture” or “partnership” when referring to investments in entities in which we do not have a 100% ownership interest.
We continually evaluate our investments in unconsolidated joint ventures 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. 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. The amount of loss recognized is the excess of the investment’s carrying amount over its estimated fair value. If we believe that the decline in fair value is temporary, no impairment is recorded. The aforementioned factors are taken as a whole by management in determining the valuation of our investment property. Should the actual results differ from management’s judgment, the valuation could be negatively affected and may result in a negative impact to our Consolidated Financial Statements.
Impairment of Long-Lived Assets
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 market value. Our estimates of fair market
37
value represent our best estimate based primarily upon unobservable inputs (defined as Level 3 inputs in the fair value hierarchy) related to rental rates, operating costs, growth rates, discount rates, capitalization rates, industry trends and reference to market rates and transactions.
Real Estate Investment Properties
We purchase real estate investment properties from time to time and record the fair value to various components, such as land, buildings, and intangibles related to in-place leases, based on the fair value of each component. In making estimates of fair values for purposes of allocating purchase price, we utilize various sources, including independent appraisals, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining average contractual lease period.
REIT Status
We are a Maryland corporation that has elected to be treated for federal income tax purposes as a REIT. A REIT is a legal entity that holds interests in real estate and is required by the Code to meet a number of organizational and operational requirements, including a requirement that a REIT must distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. If we were to fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at the regular corporate rates and may not be able to qualify as a REIT for four years. Based on the net earnings reported for the year ended December 31, 2019 in our Consolidated Statements of Operations, we would have incurred federal and state GAAP income taxes if we had failed to qualify as a REIT.
38
Summary of Real Estate Portfolio by Geographic Market
The following table summarizes our market information by major geographic markets as of and for the year ended December 31, 2019:
December 31, 2019
Year Ended December 31, 2019
Monthly
Net
Income per
Operating
Value (in
Occupied
Income
Same-Store Communities
thousands)
Home (a)
West Region
4,434
9.1
1,136,843
2,354
93,659
877,780
3,749
91,310
2,837
7.9
995,474
2,536
61,596
458,190
2,903
30,433
1.4
1,893
26,938
654
109,360
1,998
11,408
1,605
6,546
Mid-Atlantic Region
7,799
16.2
2,044,663
2,094
133,309
151,727
1,392
16,571
720
153,951
1,727
9,785
Southeast Region
1,409
28,766
220,568
1,333
25,707
2,287
2.1
265,646
1,453
26,017
1,652
7,977
Northeast Region
1,452
8.2
1,034,350
97.9
4,550
48,435
1,388
466,247
2,945
35,397
Southwest Region
2,345
288,923
1,365
23,261
1,524
13,328
Total/Average Same-Store Communities
122
37,959
70.8
8,924,580
2,180
690,443
Non-Mature, Commercial Properties & Other
9,051
28.6
3,607,744
117,866
Total Real Estate Held for Investment
99.4
12,532,324
808,309
Real Estate Under Development (b)
(6)
808,303
Total Accumulated Depreciation
(4,131,353)
Total Real Estate Owned, Net of Accumulated Depreciation
Our Same-Store Communities segment represents those communities acquired, developed, and stabilized prior to January 1, 2018 and held as of December 31, 2019. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the communities are not classified as held for disposition at year end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.
Our Non-Mature Communities/Other segment represents 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.
39
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, sales of properties, borrowings under our credit agreements, and/or the issuance of debt and/or equity securities. Our primary source of liquidity is our cash flow from operations, as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes, and borrowings under our credit agreements. We routinely use our working capital credit facility and commercial paper program, and may use our unsecured revolving credit facility, to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we continue to execute on maintaining a diversified portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through net cash provided by property operations, secured and unsecured borrowings, the issuance of debt or equity securities, and/or the disposition of properties. We believe that our net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings under credit agreements, the issuance of debt or equity securities, and/or dispositions of properties.
We have a shelf registration statement filed with the Securities and Exchange Commission, or “SEC,” which provides for the issuance of common stock, preferred stock, depositary shares, debt securities, guarantees of debt securities, warrants, subscription rights, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of issuance.
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 year ended December 31, 2019, the Company sold 7.0 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $316.5 million at a weighted average price per share of $45.29. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $4.0 million, were approximately $312.3 million, which were primarily used to fund the Company’s recent acquisitions. As of December 31, 2019, we had 11.7 million shares of common stock available for future issuance under the ATM program.
In July 2019, the Company issued $300.0 million of 3.20% senior unsecured medium-term notes due January 15, 2030. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The notes were priced at 99.66% of the principal amount at issuance. The Company 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%. The Company used the net proceeds for the repayment of debt, including amounts outstanding under the Company’s commercial paper program and Working Capital Credit Facility, and for other general corporate purposes. The Operating Partnership is the guarantor of this debt.
In August 2019, the Company issued $400.0 million of 3.00% senior unsecured medium-term notes due August 15, 2031. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020. The notes were priced at 99.71% of the principal amount at issuance. In combination with the issuance, the Company entered into a treasury lock agreement to hedge against interest rate risk of this debt. The all-in weighted average interest rate, inclusive of the impact of the treasury lock, was 3.01%. The Company used the net proceeds for the repayment of debt, including the repayment of all $300.0 million aggregate principal amount (plus the make whole amount of approximately $5.4 million) of its 3.70% senior unsecured medium-term notes due October 1, 2020, and to fund potential acquisitions or for other general corporate purposes. The Operating Partnership is the guarantor of this debt.
40
In August 2019, the Company sold 7.5 million shares of its common stock for aggregate gross proceeds of approximately $349.9 million at a price per share of $46.65. Aggregate net proceeds from the sale, after offering-related expenses, were approximately $349.8 million, which were used for planned acquisitions of assets, working capital and general corporate purposes.
In September 2019, the Company entered into a forward sales agreement under its ATM program for 1.3 million shares of common stock at an initial forward price per share of $47.68. The initial forward price per share received by the Company upon settlement was 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.
In December 2019, the Company settled all 1.3 million shares sold under the forward sales agreement at a forward price per share of $47.41, which is inclusive of adjustments made to reflect the then-current federal funds rate, the amount of dividends paid to holders of UDR common stock and commissions paid to sales agents of approximately $0.6 million, for net proceeds of $63.5 million. Aggregate net proceeds from such sales, after deducting related expenses, were $63.2 million. As of December 31, 2019, we had 11.7 million shares of common stock available for future issuance under the ATM program.
In October 2019, the Company issued $100.0 million of 3.20% senior unsecured medium-term notes due 2030 and $300.0 million of 3.10% senior unsecured medium-term notes due 2034. Interest is payable semi-annually in arrears on January 15 and July 15 for the 2030 notes, and May 1 and November 1 for the 2034 notes. The 2030 notes were priced at 103.32% of the principal amount at issuance, and the 2034 notes were priced at 99.56% of the principal amount at issuance. In combination with the issuance, 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 and 3.13% for the 2034 notes. The Company used the net proceeds for the repayment of all $400.0 million aggregate principal amount (plus the make-whole amount of approximately $22.0 million and accrued and unpaid interest) of its 4.63% senior unsecured medium-term notes due January 2022. The 2034 notes were issued as “green” bonds and, as a result, the Company allocated the net proceeds from the sale of the 2034 notes to fund eligible green projects, including previously incurred development costs related to properties that have received at least a LEED Silver certification. The Operating Partnership is the guarantor of each of the 2030 notes and the 2034 notes.
The 2030 notes were a further issuance of, and form a single series with, the $300.0 million aggregate principal amount of the Company’s 3.20% notes due 2030 that were issued on July 2, 2019. As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was $400.0 million.
Future Capital Needs
Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, unsecured commercial paper, proceeds from the issuance of equity or debt securities, sales of properties, joint ventures, and, to a lesser extent, from cash flows provided by property operations. Acquisition activity in strategic markets may be funded through joint ventures, by the reinvestment of proceeds from the sale of properties, through the issuance of equity or debt securities, the issuance of operating partnership units and the assumption or placement of secured and/or unsecured debt.
During 2020, we have approximately $110.6 million of secured debt maturing, inclusive of principal amortization, and $300.0 million of unsecured debt maturing, comprised solely of unsecured commercial paper. During 2019, we prepaid $300.0 million of unsecured debt previously due in October 2020 with proceeds from the senior unsecured medium-term notes issued in August 2019, prepaid $400.0 million of unsecured debt previously due in January 2022 with proceeds from the senior unsecured medium-term notes issued in October 2019, and anticipate repaying the remaining debt due in 2020 with cash flow from our operations, proceeds from debt or equity offerings, proceeds from dispositions of properties, or from borrowings under our credit agreements and our unsecured commercial paper program.
Statements of Cash Flows
The following discussion explains the changes in Net cash provided by/(used in) operating activities, Net cash provided by/(used in) investing activities, and Net cash provided by/(used in) financing activities that are presented in our Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018.
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Operating Activities
For the year ended December 31, 2019, our Net cash provided by/(used in) operating activities was $630.7 million compared to $560.7 million for 2018. The increase in cash flow from operating activities was primarily due to improved net operating income, primarily driven by revenue growth at communities, net operating income from communities acquired in 2019, and changes in operating assets and liabilities.
Investing Activities
For the year ended December 31, 2019, Net cash provided by/(used in) investing activities was $(1.7) billion compared to $(113.5) million for 2018. The increase in cash used in investing activities was primarily due to the acquisitions made during the year, a decrease in proceeds from the sales of real estate investments and an increase in the issuance of notes receivable and capital expenditures and other major improvements, partially offset by a decrease in spend for development of real estate assets and investment in unconsolidated joint ventures and an increase in distributions received from unconsolidated joint ventures.
Acquisitions
In January 2019, the Company increased its ownership interest from 49% to 100% in a 386 apartment home operating community located in Anaheim, California, for a cash purchase price of approximately $33.5 million. In connection with the acquisition, the Company repaid approximately $59.8 million of joint venture construction financing. As a result, 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. The Company accounted for the consolidation as an asset acquisition resulting in no gain upon consolidation and increased its real estate assets owned by approximately $115.7 million and recorded approximately $2.4 million of in-place lease intangibles.
In January 2019, the Company increased its ownership interest from 49% to 100% in a 155 apartment home operating community located in Seattle, Washington, for a cash purchase price of approximately $20.0 million. In connection with the acquisition, the Company repaid approximately $26.0 million of joint venture construction financing. As a result, 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. The Company accounted for the consolidation as an asset acquisition resulting in no gain upon consolidation and increased its real estate assets owned by approximately $58.1 million and recorded approximately $2.4 million of real estate intangibles and approximately $0.6 million of in-place lease intangibles.
In January 2019, the Company acquired a to-be-developed parcel of land located in Washington, D.C. for approximately $27.1 million.
In February 2019, the Company acquired a to-be-developed parcel of land located in Denver, Colorado for approximately $13.7 million.
In February 2019, the Company acquired a 188 apartment home operating community located in Brooklyn, New York for approximately $132.1 million. The Company increased its real estate assets owned by approximately $97.5 million and recorded approximately $33.6 million of real estate intangibles and approximately $1.0 million of in-place lease intangibles.
In February 2019, the Company acquired a 381 apartment home operating community located in St. Petersburg, Florida for approximately $98.3 million. The Company increased its real estate assets owned by approximately $96.0 million and recorded approximately $2.3 million of in-place lease intangibles.
In April 2019, the Company acquired a 498 apartment home operating community located in Towson, Maryland for approximately $86.4 million. The Company increased its real estate assets owned by approximately $82.5 million and recorded approximately $3.9 million of in-place lease intangibles.
In May 2019, the Company acquired a 313 apartment home operating community located in King of Prussia, Pennsylvania for approximately $107.3 million. The Company increased its real estate assets owned by approximately $106.4 million and recorded approximately $0.9 million of in-place lease intangibles.
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In May 2019, the Company acquired a 240 apartment home operating community located in St. Petersburg, Florida for approximately $49.4 million. The Company increased its real estate assets owned by approximately $48.2 million and recorded approximately $1.2 million of in-place lease intangibles.
In June 2019, the Company acquired a 200 apartment home operating community located in Waltham, Massachusetts for approximately $84.6 million. The Company increased its real estate assets owned by approximately $82.6 million and recorded approximately $2.0 million of in-place lease intangibles.
In August 2019, the Company acquired a 914 apartment home operating community located in Norwood, Massachusetts for approximately $270.2 million. The Company increased its real estate assets owned by approximately $260.1 million and recorded approximately $10.1 million of in-place lease intangibles.
In August 2019, the Company acquired a 185 apartment home operating community located in Englewood, New Jersey for approximately $83.6 million. The Company increased its real estate assets owned by approximately $77.5 million and recorded approximately $4.6 million of real estate intangibles and approximately $1.5 million of in-place lease intangibles.
In August 2019, the Company purchased a 292 apartment home operating community in Washington, D.C., directly from the UDR/KFH joint venture, thereby increasing its ownership interest from 30% to 100%, for a purchase price at 100% of approximately $184.0 million, before $2.8 million of closing costs incurred by UDR at acquisition. The Company accounted for the consolidation as an asset acquisition, resulting in no gain upon consolidation, and increased its real estate assets owned by approximately $156.0 million and recorded approximately $5.9 million of in-place lease intangibles.
In November 2019, the Company acquired the approximately 50% ownership interest not previously owned in 10 UDR/MetLife operating communities, one development community and four land parcels valued at $1.1 billion, or $564.2 million at UDR’s share, and sold its approximately 50% ownership interest in five UDR/MetLife operating communities valued at $645.8 million, or $322.9 million at UDR’s share, to MetLife. The Company paid $109.2 million directly to MetLife to complete the transaction. As a result, the Company consolidated the 10 operating communities, one development community and four land parcels, and they are no longer accounted for as equity method investments 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 upon consolidation and increased its real estate assets owned by approximately $977.8 million and recorded approximately $30.0 million of in-place lease intangibles. In connection with the acquisition, the Company assumed six secured fixed rate mortgage notes payable and one credit facility secured by four communities with a combined outstanding balance of $518.4 million and estimated fair value of $551.8 million. The Company recorded the debt at its fair value in Secured debt, net on the Consolidated Balance Sheets.
The following table is a summary of the 10 communities, one development community and four land parcels acquired from the UDR/MetLife joint venture:
Property
Type
Number of Homes
Location
Strata
Operating Community
163
San Diego, CA
Crescent Falls Church
214
Washington, D.C.
Charles River Landing
350
Lodge at Ames Pond
364
Lenox Farms
338
Towson Promenade
379
Savoye
394
Addison, TX
Savoye2
351
Fiori on Vitruvian Park ®
391
Vitruvian West
383
Vitruvian West Phase 2 (a)
Development Community
366
Vitruvian Park ®
4 Land Parcels
N/A
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During the year ended December 31, 2018, the Company did not have any acquisitions of real estate.
Dispositions
In June 2019, the Company sold a parcel of land located in Los Angeles, California for $38.0 million, resulting in a gain of approximately $5.3 million. Prior to the sale, the parcel of land was subject to a ground lease, under which UDR was the lessor, scheduled to expire in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. During the second quarter, the lessee exercised the purchase option resulting in the sale by the Company and the ground lease being terminated.
In February 2018, the Company sold an operating community in Orange County, California with a total of 264 apartment homes for gross proceeds of $90.5 million, resulting in a gain of $70.3 million. The proceeds were designated for a tax-deferred Section 1031 exchange that were used to pay a portion of the purchase price for an acquisition in October 2017.
In December 2018, the Company sold an operating community in Fairfax, Virginia with a total of 604 apartment homes for gross proceeds of $160.0 million, resulting in a gain of $65.9 million.
We plan to continue to pursue our strategy of exiting markets where long-term growth prospects are limited and redeploying capital to primary locations in markets we believe will provide the best investment returns.
Capital Expenditures
We capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
For the year ended December 31, 2019, total capital expenditures of $158.0 million or $3,710 per stabilized home, which in aggregate include recurring capital expenditures and major renovations, were spent across our portfolio, excluding development, as compared to $112.6 million or $2,857 per stabilized home for the prior year.
The increase in total capital expenditures was primarily due to:
The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, for the years ended December 31, 2019 and 2018 (dollars in thousands):
Per Home
% Change
Turnover capital expenditures
11,192
11,009
1.7
263
279
(5.7)
Asset preservation expenditures
40,054
35,906
11.6
941
911
Total recurring capital expenditures
51,246
46,915
9.2
1,204
1,190
NOI enhancing improvements (a)
43,689
42,905
1,026
1,089
(5.8)
Major renovations (b)
35,569
22,774
56.2
835
578
44.5
Operations platform
27,445
645
Total capital expenditures
157,949
112,594
40.3
3,710
2,857
29.8
Repair and maintenance expense
43,525
35,273
23.4
1,022
895
14.2
Average home count (c)
8.1
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The above table includes amounts capitalized during the year. Actual capital spending is impacted by the net change in capital expenditure accruals.
We intend to continue to selectively add NOI enhancing improvements, which we believe will provide a return on investment in excess of our cost of capital. Our objective in redeveloping a community is twofold: we aim to meaningfully grow rental rates while also achieving cap rate compression through asset quality improvement.
Consolidated Real Estate Under Development and Redevelopment
At December 31, 2019, our development pipeline consisted of three wholly-owned communities located in Denver, Colorado, Dublin, California, and Addison, Texas, totaling 878 homes, none of which have been completed, with a budget of $278.5 million, in which we have a carrying value of $69.8 million. The communities are estimated to be completed between the first quarter of 2021 and the second quarter of 2022. During 2019, we incurred $26.4 million for development costs, a decrease of $123.8 million as compared to costs incurred in 2018 of $150.2 million.
During the year ended December 31, 2019, we incurred $35.6 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings, an increase of $12.8 million as compared to $22.8 million incurred in 2018.
Unconsolidated Joint Ventures and Partnerships
The Company recognizes income or losses from our investments in unconsolidated joint ventures and partnerships consisting of our proportionate share of the net income or losses of the joint ventures and partnerships. In addition, we may earn fees for providing management services to the communities held by the unconsolidated joint ventures and partnerships.
The Company’s Investment in and advances to unconsolidated joint ventures and partnerships, net, are accounted for under the equity method of accounting. For the year ended December 31, 2019:
We evaluate our investments in unconsolidated joint ventures and partnerships when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. The Company did not recognize any other-than-temporary impairments in the value of its investments in unconsolidated joint ventures or partnerships during the years ended December 31, 2019 and 2018.
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Notes Receivable, net
Notes receivable relate to financing arrangements that are typically secured by real estate or real estate related
projects.
The following significant activities occurred during the year ended December 31, 2019:
For the years ended December 31, 2019 and 2018, Net cash provided by/(used in) financing activities was $880.4 million and $(260.1) million, respectively.
The following significant financing activities occurred during the year ended December 31, 2019:
The following significant financing activities occurred during the year ended December 31, 2018:
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Credit Facilities and Commercial Paper Program
During the year ended December 31, 2019, the Company prepaid the $90.0 million outstanding balance under its secured credit facility with Fannie Mae from proceeds received from the refinancing of the debt. This transaction was accounted for as a debt modification.
In November 2019, the Company assumed a secured credit facility with New York Life with an outstanding balance of $205.0 million and a fair value of $219.3 million in connection with the acquisition of the approximately 50% ownership not previously owned in four operating communities from the UDR/MetLife joint venture. The credit facility is a pooled facility and secured by those four properties. The credit facility is due in January 2023 and has an interest rate of 4.90% (see Note 3, Real Estate Owned).
The Company has a $1.1 billion unsecured revolving credit facility and a $350.0 million unsecured term loan. The Credit Agreement for these facilities allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2023, with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date of September 30, 2023.
Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points and a facility fee of 15 basis points, and the Term Loan has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 75 to 145 basis points, the facility fee ranges from 10 to 30 basis points, and the margin under the Term Loan ranges from 80 to 165 basis points.
As of December 31, 2019, we had no outstanding borrowings under the Revolving Credit Facility, leaving $1.1 billion of unused capacity (excluding $2.9 million of letters of credit at December 31, 2019), and $350.0 million of outstanding borrowings under the Term Loan.
We have a working capital credit facility, which provides for a $75 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.
As of December 31, 2019, we had $16.6 million of outstanding borrowings under the Working Capital Credit Facility, leaving $58.4 million of unused capacity.
The bank revolving credit facilities and the term loan are subject to customary financial covenants and limitations, all of which we were in compliance with at December 31, 2019.
We have an unsecured commercial paper program. Under the terms of the program, we may issue unsecured commercial paper up to a maximum aggregate amount outstanding of $500 million. The notes are sold under customary terms in the United States commercial paper market and rank pari passu with all of our other unsecured indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership. As of December 31, 2019, we had issued $300.0 million of commercial paper, for one month terms, at a weighted average annualized rate of 1.99%, leaving $200.0 million of unused capacity.
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Interest Rate Risk
We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had $378.6 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2019. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $3.5 million based on the average balance outstanding during the year.
These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. This analysis does not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.
The Company also utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges. See Note 14, Derivatives and Hedging Activities, in the Notes to the UDR Consolidated Financial Statements included in this Report for additional discussion of derivate instruments.
A presentation of cash flow metrics based on GAAP is as follows (dollars in thousands):
Net cash provided by/(used in) operating activities
Net cash provided by/(used in) investing activities
Net cash provided by/(used in) financing activities
Results of Operations
The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the years ended December 31, 2019 and 2018.
Net Income/(Loss) Attributable to Common Stockholders
Net income/(loss) attributable to common stockholders was $180.9 million ($0.63 per diluted share) for the year ended December 31, 2019, as compared to $199.2 million ($0.74 per diluted share) for the comparable period in the prior year. The decrease resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
This was partially offset by:
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Apartment Community Operations
Our net income results are primarily from NOI generated from the operation of our apartment communities. The Company defines NOI, which is a non-GAAP financial measure, as rental income less direct property rental expenses. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. 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.
Management considers NOI a useful metric for investors as it is a more meaningful representation of a community’s continuing operating performance than net income as it is prior to corporate-level expense allocations, general and administrative costs, capital structure and depreciation and amortization.
Although the Company considers NOI a useful measure of operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities as determined in accordance with GAAP. NOI excludes several income and expense categories as detailed in the reconciliation of NOI to Net income/(loss) attributable to UDR, Inc. below.
The following table summarizes the operating performance of our total property NOI for each of the periods presented (dollars in thousands):
Year Ended
December 31, (a)
December 31, (b)
Same-Store Communities:
Same-Store rental income
962,269
928,849
939,726
908,361
3.5
Same-Store operating expense (c)
(271,826)
(265,087)
2.5
(267,332)
(257,919)
Same-Store NOI
663,762
4.0
672,394
650,442
3.4
Non-Mature Communities/Other NOI:
Stabilized, non-mature communities NOI (d)
79,007
11,968
560.2
18,427
13,767
33.8
Acquired communities NOI
5,830
Redevelopment communities NOI
18,571
21,875
(15.1)
Development communities NOI
(8)
4,374
(100.2)
11,221
(295)
NM
*
Non-residential/other NOI
13,174
18,609
(29.2)
20,530
16,640
Sold and held for disposition communities NOI
1,286
11,527
(88.8)
9,543
17,949
(46.8)
Total Non-Mature Communities/Other NOI
117,860
68,353
72.4
59,721
48,061
24.3
Total property NOI
732,115
10.4
698,503
4.8
Not meaningful
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The following table is our reconciliation of Net income/(loss) attributable to UDR, Inc. to total property NOI for the periods presented (dollars in thousands):
Net income/(loss) attributable to UDR, Inc.
184,965
203,106
121,558
Joint venture management and other fees
(14,055)
(11,754)
(11,482)
Property management
32,721
28,465
27,068
Other operating expenses
13,932
12,100
9,060
Real estate depreciation and amortization
501,257
429,006
430,054
General and administrative
51,533
46,983
48,566
Casualty-related charges/(recoveries), net
474
2,121
4,335
Other depreciation and amortization
6,666
6,673
6,408
(Gain)/loss on sale of real estate owned
(5,282)
(136,197)
(43,404)
(Income)/loss from unconsolidated entities
(137,873)
5,055
(31,257)
Interest expense
170,917
134,168
128,711
Interest income and other (income)/expense, net
(15,404)
(6,735)
(1,971)
Tax provision/(benefit), net
3,838
688
(240)
Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
14,426
18,215
10,933
Net income/(loss) attributable to noncontrolling interests
188
221
164
Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2018 and held on December 31, 2019) consisted of 37,959 apartment homes and provided 85.4% of our total NOI for the year ended December 31, 2019.
NOI for our Same-Store Community properties increased 4.0%, or $26.7 million, for the year ended December 31, 2019 compared to the same period in 2018. The increase in property NOI was attributable to a 3.6%, or $33.4 million, increase in property rental income, which was partially offset by a 2.5%, or $6.7 million, increase in operating expenses. The increase in property income was primarily driven by a 2.8%, or $24.3 million, increase in rental rates and a 10.8%, or $10.1 million, increase in reimbursement, ancillary and fee income. Physical occupancy stayed the same at 96.9% and total monthly income per occupied home increased 3.5% to $2,180.
The increase in operating expenses was primarily driven by a 15.4%, or $5.1 million, increase in repair and maintenance expense due to the increased use of third party vendors, partially offset by a 8.3%, or $4.9 million, decrease in personnel expense as a result of fewer employees, and a 4.5%, or $4.8 million, increase in real estate taxes, which was primarily due to higher assessed valuations.
The operating margin (property net operating income divided by property rental income) was 71.8% and 71.5% for the years ended December 31, 2019 and 2018, respectively.
Non-Mature Communities/Other
UDR’s Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, which include communities recently developed or acquired, redevelopment properties, sold or held for disposition properties, and non-apartment components of mixed use properties.
The remaining 14.6%, or $117.9 million, of our total NOI during the year ended December 31, 2019 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 72.4%, or $49.5 million, for the year ended December 31, 2019 as compared to the same period in 2018. The increase was primarily attributable to a $67.0 million increase in NOI from stabilized, non-mature communities, primarily due to communities acquired in 2019 and recently developed communities, partially offset by a $10.2 million decrease in NOI from sold and held for disposition communities in 2018 and a $5.4 million decrease in non-residential/other NOI.
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For the years ended December 31, 2019 and 2018, the Company recognized real estate depreciation and amortization of $501.3 million and $429.0 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to communities acquired in 2019 and homes delivered from our development communities in 2018, partially offset by a decrease from sold communities and fully depreciated assets.
Gain/(Loss) on Sale of Real Estate Owned
During the year ended December 31, 2019, the Company recognized a gain of $5.3 million on the sale of a parcel of land in Los Angeles, California.
During the year ended December 31, 2018, the Company recognized gains of $136.2 million on the sale of two operating communities in Huntington Beach, California, and Fairfax, Virginia.
Income/(Loss) from Unconsolidated Entities
For the years ended December 31, 2019 and 2018, we recognized income/(loss) from unconsolidated entities of $137.9 million and $(5.1) million, respectively. The increase of $143.0 million was primarily due to:
As compared to:
For the years ended December 31, 2019 and 2018, the Company recognized interest expense of $170.9 million and $134.2 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to higher average debt balances, lower capitalized interest, and the early pay off of debt during 2019, resulting in prepayment costs of $27.4 million.
Interest income and other income/(expense), net
For the years ended December 31, 2019 and 2018, the Company recognized interest income and other income/(expense), net of $15.4 million and $6.7 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to an $8.5 million promoted interest on the prepayment of a note to a multifamily technology company.
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and material costs, the majority of our apartment leases have initial terms of 12 months or less, which generally enables us to compensate for any inflationary effects by increasing rental rates on our apartment homes. Although an extreme escalation in costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the year ended December 31, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2019 (dollars in thousands):
Payments Due by Period
2020
2021-2022
2023-2024
Thereafter
Long-term debt obligations
410,645
24,325
1,071,797
3,191,919
4,698,686
Interest on debt obligations (a)
152,654
296,955
254,358
436,894
1,140,861
Letters of credit
2,894
Operating lease obligations:
Ground leases (b)
12,584
25,168
466,436
529,356
578,777
346,448
1,351,323
4,095,249
6,371,797
During 2019, we incurred gross interest costs of $176.0 million, of which $5.1 million was capitalized.
Funds from Operations, Funds from Operations as Adjusted, and Adjusted Funds from Operations
Funds from Operations
Funds from operations (“FFO”) attributable to common stockholders and unitholders is defined as Net income/(loss) attributable to common stockholders (computed in accordance with GAAP), excluding impairment write-downs of depreciable real estate related to the main business of the Company or of investments in non-consolidated investees that are directly attributable to decreases in the fair value of depreciable real estate held by the investee, gains and losses from sales of depreciable real estate related to the main business of the Company and income taxes directly associated with those gains and losses, plus real estate depreciation and amortization, and after adjustments for noncontrolling interests, and the Company’s share of unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s (“Nareit”) definition issued in April 2002 and restated in November 2018. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, Nareit created FFO as a supplemental measure of a REIT’s operating performance. In the computation of diluted FFO, if OP Units, DownREIT Units, unvested restricted stock, unvested LTIP Units, stock options, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive, they are included in the diluted share count.
Funds from Operations as Adjusted
FFO as Adjusted (“FFOA”) attributable to common stockholders and unitholders is defined as FFO excluding the impact of non-comparable items including, but not limited to, acquisition related costs, prepayment costs/benefits associated with early debt retirement, impairment write downs or gains and losses on sales of real estate or other assets incidental to the main business of the Company and income taxes directly associated with those gains and losses, casualty-related expenses and recoveries, severance costs and legal and other costs.
Management believes that FFOA is useful supplemental information regarding our operating performance as it provides a consistent comparison of our operating performance across time periods and allows investors to more easily
compare our operating results with other REITs. FFOA is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to FFOA. However, other REITs may use different methodologies for calculating FFOA or similar FFO measures and, accordingly, our FFOA may not always be comparable to FFOA or similar FFO measures calculated by other REITs. FFOA should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity.
Adjusted Funds from Operations
Adjusted FFO (“AFFO”) attributable to common stockholders and unitholders is defined as FFOA less recurring capital expenditures on consolidated communities that are necessary to help preserve the value of and maintain functionality at our communities. Therefore, management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO or FFOA.
AFFO is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to AFFO. Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs. However, other REITs may use different methodologies for calculating AFFO and, accordingly, our AFFO may not always be comparable to AFFO calculated by other REITs. AFFO should not be considered as an alternative to net income/(loss) (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
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The following table outlines our reconciliation of Net income/(loss) attributable to common stockholders to FFO, FFOA, and AFFO for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
Noncontrolling interests
14,614
18,436
11,097
Real estate depreciation and amortization on unconsolidated joint ventures
57,954
61,871
57,102
Cumulative effect of change in accounting principle
(2,100)
Net gain on the sale of unconsolidated depreciable property
(125,407)
(35,363)
Net gain on the sale of depreciable real estate owned
(41,824)
FFO attributable to common stockholders and unitholders, basic
Distribution to preferred stockholders — Series E (Convertible)
FFO attributable to common stockholders and unitholders, diluted
Income/(loss) per weighted average common share, diluted
FFO per weighted average common share and unit, basic
2.04
1.95
1.85
FFO per weighted average common share and unit, diluted
2.03
1.93
1.83
Weighted average number of common shares and OP/DownREIT Units outstanding — basic
308,020
292,727
291,845
Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted
Impact of adjustments to FFO:
Costs/(benefit) associated with debt extinguishment and other
29,594
3,476
9,212
Promoted interest on settlement of note receivable, net of tax
(6,482)
Acquisition-related costs/(fees)
371
Legal and other costs
3,660
1,622
Net gain on the sale of non-depreciable real estate owned
(1,580)
Unrealized gain on unconsolidated investments, net of tax
(3,300)
Joint venture development success fee
(3,750)
Severance costs and other restructuring expense
390
114
624
2,364
4,504
Casualty-related charges/(recoveries) on unconsolidated joint ventures, net
(374)
(881)
15,092
7,576
12,250
FFOA attributable to common stockholders and unitholders, diluted
648,475
581,698
554,874
FFOA per weighted average common share and unit, diluted
2.08
1.96
1.87
Recurring capital expenditures
(51,246)
(46,915)
(46,034)
AFFO attributable to common stockholders and unitholders, diluted
597,229
534,783
508,840
AFFO per weighted average common share and unit, diluted
1.92
1.80
1.72
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The following table is our reconciliation of FFO share information to weighted average common shares outstanding, basic and diluted, reflected on the UDR Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 (shares in thousands):
Weighted average number of OP/DownREIT Units outstanding
(22,773)
(24,548)
(24,821)
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations
Weighted average number of Series E Cumulative Convertible Preferred shares outstanding
(3,011)
(3,021)
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations
United Dominion Realty, L.P. (the “Operating Partnership” or “UDR, L.P.”) is a Delaware limited partnership formed in February 2004 and organized pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act. The Operating Partnership is the successor-in-interest to United Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations on November 4, 1995. Our sole general partner is UDR, Inc., a Maryland corporation (“UDR” or the “General Partner”), which conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership. At December 31, 2019, the Operating Partnership’s real estate portfolio included 52 communities located in nine states and the District of Columbia with a total of 16,434 apartment homes.
As of December 31, 2019, UDR owned 0.1 million units of our general partnership interests and 176.1 million units of our limited partnership interests (the “OP Units”), or approximately 95.7% of our outstanding OP Units. By virtue of its ownership of our OP Units and being our sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this section of this Report to the Operating Partnership or “we,” “us” or “our” refer to UDR, L.P. together with its consolidated subsidiaries, and all references in this section to “UDR” or the “General Partner” refer solely to UDR, Inc.
UDR is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities. The General Partner was formed in 1972 as a Virginia corporation and changed its state of incorporation from Virginia to Maryland in June 2003. At December 31, 2019, the General Partner’s consolidated real estate portfolio included 148 communities located in 13 states and the District of Columbia with a total of 47,010 apartment homes. In addition, the General Partner had an ownership interest in 5,268 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships, including 2,138 apartment homes owned by entities in which we hold preferred equity investments.
The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations as well as involves some degree of uncertainty. Estimates are prepared based on management’s assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found
55
in Note 2, Significant Accounting Policies, to the Notes to the Operating Partnership’s Consolidated Financial Statements included in this Report.
In addition to construction costs, we capitalize 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. As each home in a capital project is completed and becomes available for lease-up, the Operating Partnership ceases capitalization on the related portion. The costs capitalized are reported on the Consolidated Balance Sheets as Total real estate owned, net of accumulated depreciation. Amounts capitalized during the years ended December 31, 2019, 2018, and 2017 were $1.0 million, less than $0.1 million, and $0.5 million, respectively.
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 market value. Our estimates of fair market value represent our best estimate based primarily upon unobservable inputs related to rental rates, operating costs, growth rates, discount rates, capitalization rates, industry trends and reference to market rates and transactions.
We purchase real estate investment properties from time to time and record the fair value to various components, such as land, buildings, and intangibles related to in-place leases, based on the fair value of each component. In making estimates of fair values for purposes of allocating purchase price, we utilize various sources, including independent appraisals, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The fair value of buildings is determined as if the buildings were vacant upon
56
acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining average contractual lease period.
746,563
2,294
64,202
611,297
3,380
66,392
228,999
2,145
16,450
2,830
8,165
1,894
2.0
75,165
2,112
7,609
14.5
563,044
2,153
35,765
2.7
1,551
6,648
155,209
1,312
18,009
110,064
1,531
11,354
503
8.6
333,946
97.8
3,976
17,419
2,123
6,684
15,723
88.8
3,442,406
2,215
300,158
711
11.2
432,754
22,848
323,006
(1,796,568)
Our Same-Store Communities segment represents those communities acquired, developed, and stabilized prior to January 1, 2018 and held as of December 31, 2019. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the communities are not held for disposition at year end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.
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Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. The Operating Partnership’s primary source of liquidity is cash flow from operations, as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes, and borrowings owed by us under the General Partner’s credit agreements. The General Partner will routinely use its working capital credit facility and commercial paper program, and may use its unsecured revolving credit facility, to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we continue to execute on maintaining a diversified portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings owed by us under the General Partner’s credit agreements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities and potential property acquisitions through net cash provided by property operations, borrowings and the disposition of properties. We believe that our net cash provided by property operations and borrowings will continue to be adequate to meet both operating requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings owed by us under the General Partner’s credit agreements, and the disposition of properties.
Future capital expenditures are expected to be funded with proceeds from the issuance of secured debt or unsecured debt, sales of properties, borrowings owed by us under our General Partner’s credit agreements, and to a lesser extent, from cash flows provided by operating activities.
As of December 31, 2019, the Operating Partnership did not have any debt maturing in 2020.
For the year ended December 31, 2019, Net cash provided by/(used in) operating activities was $255.1 million compared to $255.7 million for 2018. The decrease in cash flow from operating activities was primarily due to an increase in interest expense and changes in operating assets and liabilities, partially offset by an increase in net operating income, primarily driven by revenue growth at communities.
For the year ended December 31, 2019, Net cash provided by/(used in) investing activities was $(43.9) million compared to $71.7 million for 2018. The decrease in cash provided by investing activities was primarily due to proceeds received from the sale of an operating community and a commercial office building in 2018 and an increase in capital expenditures and other major improvements during the year ended December 31, 2019, compared to the same period in 2018.
During the years ended December 31, 2019 and 2018, the Operating Partnership did not have any acquisitions of real estate.
During the year ended December 31, 2019, the Operating Partnership did not have any dispositions of real estate.
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In December 2018, the Operating Partnership sold a commercial office building in Fairfax, Virginia for gross proceeds of $9.3 million, resulting in a gain of $5.2 million.
In February 2018, the Operating Partnership sold an operating community in Orange County, California with a total of 264 apartment homes for gross proceeds of $90.5 million, resulting in a gain of $70.3 million. The proceeds were designated for a tax-deferred Section 1031 exchange that were used to pay a portion of the purchase price for an acquisition in October 2017.
For the year ended December 31, 2019, Net cash provided by/(used in) financing activities was $(210.9) million compared to $(326.5) million for 2018. The decrease in cash used in financing activities was primarily due to an increase in proceeds from the issuance of secured debt, a decrease in payments on secured debt and a decrease in advances to the General Partner, partially offset by the repayment of notes payable to the General Partner.
Guarantor on Unsecured Debt
The Operating Partnership is the guarantor on the General Partner’s unsecured revolving credit facility with an aggregate borrowing capacity of $1.1 billion, an unsecured commercial paper program with an aggregate borrowing capacity of $500 million, a $350 million term loan due September 2023, $300 million of medium-term notes due July 2024, $300 million of medium-term notes due October 2025, $300 million of medium-term notes due September 2026, $300 million of medium-term notes due July 2027, $300 million of medium-term notes due January 2028, $300 million of medium-term notes due January 2029, $400 million of medium-term notes due January 2030, $400 million of medium-term notes due August 2031, and $300 million of medium-term notes due November 2034. As of December 31, 2019 and 2018, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $300.0 million and $101.1 million, respectively, outstanding under its unsecured commercial paper program.
The credit facilities are subject to customary financial covenants and limitations.
We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had $27.0 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2019. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $0.3 million based on the average balance at December 31, 2019.
These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.
The General Partner also utilizes derivative financial instruments owed by the Operating Partnership to manage interest rate risk and generally designates these financial instruments as cash flow hedges. See Note 9, Derivatives and Hedging Activities, in the Notes to the Operating Partnership’s Consolidated Financial Statements for additional discussion of derivative instruments.
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Net Income/(Loss) Attributable to OP Unitholders
Net income/(loss) attributable to OP unitholders was $102.2 million ($0.56 per diluted OP Unit) for the year ended December 31, 2019 as compared to net income of $229.8 million ($1.25 per diluted OP Unit) for the comparable period in the prior year. The decrease in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:
Our net income results primarily from NOI generated from the operation of our apartment communities. The Operating Partnership defines NOI, which is a non-GAAP financial measure, as rental income less direct property rental expenses. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI are property management costs, which are the Operating Partnership’s allocable share of costs incurred by the General Partner for shared services of corporate level property management employees and related support functions and costs.
Although we consider NOI a useful measure of operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities as determined in accordance with GAAP. NOI excludes several income and expense categories as detailed in the reconciliation of NOI to Net income/(loss) attributable to OP unitholders below.
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Change
404,442
390,647
413,081
398,144
3.8
(104,284)
(100,815)
(108,371)
(105,917)
289,832
304,710
292,227
4.3
5,621
5,125
9.7
1,180
334.3
12,773
14,878
(14.1)
4,454
6,634
(32.9)
4,665
42.2
(100.0)
8,769
(89.6)
27,548
(17.1)
12,670
(13.3)
317,380
306,841
The following table is our reconciliation of Net income/(loss) attributable to OP unitholders to total property NOI for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
12,701
11,878
11,533
9,488
8,864
6,833
139,975
143,481
152,473
18,014
16,889
17,875
853
951
1,922
(75,507)
(41,272)
8,313
(43,496)
19,256
29,667
22,835
30,366
1,832
1,722
1,548
Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2018 and held as of December 31, 2019) consisted of 15,723 apartment homes and provided 92.9% of our total NOI for the year ended December 31, 2019.
NOI for our Same-Store Community properties increased 3.6%, or $10.3 million, for the year ended December 31, 2019 compared to 2018. The increase in property NOI was primarily attributable to a 3.5%, or $13.8 million, increase in property rental income, which was partially offset by a 3.4%, or $3.5 million, increase in operating expenses. The increase in property income was primarily driven by a 2.8%, or $10.2 million, increase in rental rates and a 10.9%, or $4.5 million, increase in reimbursement, ancillary and fee income. Physical occupancy increased 0.1% to 96.8% and total monthly income per occupied home increased 3.5% to $2,215.
The increase in operating expenses was primarily driven by an 18.2%, or $2.5 million, increase in repair and maintenance expense due to the increased use of third party vendors, partially offset by an 8.1%, or $1.9 million,
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decrease in personnel expense as a result of fewer employees, and a 6.5%, or $2.4 million, increase in real estate taxes, which was primarily due to higher assessed valuations.
The operating margin (property net operating income divided by property rental income) was 74.2% for both of the years ended December 31, 2019 and 2018.
The Operating Partnership’s Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, which include communities recently developed or acquired, redevelopment properties, sold or held for disposition properties and the non-apartment components of mixed use properties.
The remaining 7.1%, or $22.8 million, of our total NOI during the year ended December 31, 2019 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 17.1%, or $4.7 million, for the year ended December 31, 2019 as compared to the same period in 2018. The decrease was primarily driven by a decrease in NOI of $2.2 million from non-residential/other communities, a decrease of $2.1 million from redevelopment communities, and a decrease of $0.9 million from sold and held for disposition communities, which was partially offset by an increase in NOI of $0.5 million from stabilized, non-mature communities.
Real Estate Depreciation and Amortization
For the year ended December 31, 2019, real estate depreciation and amortization decreased by 2.5%, or $3.5 million, as compared to the same period in 2018. The decrease was primarily due to the sale of an operating community and a commercial office building in 2018 and fully depreciated assets.
Real Estate Taxes and Insurance
For the year ended December 31, 2019, real estate taxes and insurance increased by 8.3%, or $3.9 million, as compare to 2018, which was primarily due to higher assessed valuations in 2019.
Income/(Loss) in Unconsolidated Entities
For the years ended December 31, 2019 and 2018, we recognized income/(loss) from unconsolidated entities of $(8.3) million and $43.5 million, respectively. The decrease from unconsolidated entities as compared to the prior year was primarily attributable to the sale of an operating community in 2018 held in the DownREIT Partnership.
During the year ended December 31, 2019, the Operating Partnership did not recognize any gains on the sale of real estate. During the year ended December 31, 2018, the Operating Partnership recognized total gains of $75.5 million on the sale of an operating community in Orange County, California with a total of 264 apartment homes and a commercial office building in Fairfax, Virginia.
Interest Expense
For the year ended December 31, 2019, interest expense increased by 29.9%, or $6.8 million, as compared to 2018, which was primarily due to the conversion in 2018 of the Advances (to)/from the General Partner capital balance into an unsecured revolving note payable with the General Partner.
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2,732
5,464
14,922
28,582
Operating lease obligations — ground leases (b)
Operating lease obligations — equipment leases
152
315
329
1,665
15,316
30,632
580,858
657,438
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in and incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial information required to be filed are attached to this Report. Reference is made to page F-1 of this Report for the Index to Consolidated Financial Statements and Schedules of UDR, Inc. and United Dominion Realty, L.P.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The disclosure controls and procedures of the Company and the Operating Partnership are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and disclosed within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. As a result, our disclosure controls and procedures are designed to provide reasonable assurance that such disclosure controls and procedures will meet their objectives.
As of December 31, 2019, we carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, which is the sole general partner of the Operating
Partnership, of the effectiveness of the design and operation of the disclosure controls and procedures of the Company and the Operating Partnership. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the disclosure controls and procedures of the Company and the Operating Partnership are effective at the reasonable assurance level described above.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934 for the Company and the Operating Partnership. Under the supervision and with the participation of the management, the Chief Executive Officer and Chief Financial Officer of the Company, which is the sole general partner of the Operating Partnership, conducted an assessment of the effectiveness of the internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (2013 Framework) (COSO). Based on such evaluation, management concluded that the Company’s and the Operating Partnership’s internal control over financial reporting was effective as of December 31, 2019.
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Report, has audited UDR, Inc.’s internal control over financial reporting as of December 31, 2019. The report of Ernst & Young LLP, which expresses an unqualified opinion on UDR, Inc.’s internal control over financial reporting as of December 31, 2019, is included under the heading “Report of Independent Registered Public Accounting Firm” of UDR, Inc. contained in this Report. Further, an attestation report of the registered public accounting firm of United Dominion Realty, L.P. will not be required as long as United Dominion Realty, L.P. is a non-accelerated filer.
Changes in Internal Control Over Financial Reporting
There have not been any changes in either the Company’s or the Operating Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fourth fiscal quarter to which this Report relates that materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of either the Company or the Operating Partnership.
Item 9B. OTHER INFORMATION
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information set forth under the headings “Proposal No. 1 Election of Directors,” “Corporate Governance Matters,” “Audit Committee Report,” “Corporate Governance Matters-Board Leadership Structure and Committees-Audit Committee Financial Expert,” “Corporate Governance Matters-Identification and Selection of Nominees for Directors,” “Corporate Governance Matters-Board of Directors and Committee Meetings” and “Executive Officers” in UDR, Inc.’s definitive proxy statement (our “definitive proxy statement”) for its 2020 Annual Meeting of Stockholders. UDR is the sole general partner of the Operating Partnership.
We have a code of ethics for senior financial officers that applies to our principal executive officer, all members of our finance staff, including the principal financial officer, the principal accounting officer, the treasurer and the controller, our director of investor relations, our corporate secretary, and all other Company officers. We also have a code of business conduct and ethics that applies to all of our employees. Information regarding our codes is available on our website, www.udr.com, and is incorporated by reference to the information set forth under the heading “Corporate Governance Matters” in our definitive proxy statement for UDR’s 2020 Annual Meeting of Stockholders. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, a provision of our codes by posting such amendment or waiver on our website.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management,” “Corporate Governance Matters-Board Leadership Structure and Committees-Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation of Directors” and “Executive Compensation-Compensation Committee Report” in the definitive proxy statement for UDR’s 2020 Annual Meeting of Stockholders. UDR is the sole general partner of the Operating Partnership.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management,” “Executive Compensation” and “Executive Compensation-Equity Compensation Plan Information” in the definitive proxy statement for UDR’s 2020 Annual Meeting of Stockholders. UDR is the sole general partner of the Operating Partnership.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information set forth under the heading “Security Ownership of Certain Beneficial Owners and Management,” “Corporate Governance Matters-Corporate Governance Overview,” “Corporate Governance Matters-Director Independence,” “Corporate Governance Matters-Board Leadership Structure and Committees-Independence of the Audit, Compensation, Governance and Nominating Committees,” and “Executive Compensation” in the definitive proxy statement for UDR’s 2020 Annual Meeting of Stockholders. UDR is the sole general partner of the Operating Partnership. Information regarding related party transactions between UDR and the Operating Partnership is presented in Note 7, Related Party Transactions, of the Consolidated Financial Statements of United Dominion Realty, L.P. referenced in Part IV, Item 15(a) of this Report.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information set forth under the headings “Audit Matters-Audit Fees” and “Audit Matters-Pre-Approval Policies and Procedures” in the definitive proxy statement for UDR’s 2020 Annual Meeting of Stockholders. UDR is the sole general partner of the Operating Partnership.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Report:
1. Financial Statements. See Index to Consolidated Financial Statements and Schedules of UDR, Inc. and United Dominion Realty, L.P. on page F-1 of this Report.
2. Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedules of UDR, Inc. and United Dominion Realty, L.P. on page S-1 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
3. Exhibits. The exhibits filed with this Report are set forth in the Exhibit Index appearing immediately below.
EXHIBIT INDEX
The exhibits listed below are filed as part of this Report. References under the caption “Location” to exhibits or other filings indicate that the exhibit or other filing has been filed, that the indexed exhibit and the exhibit referred to are the same and that the exhibit referred to is incorporated by reference. Management contracts and compensatory plans or arrangements filed as exhibits to this Report are identified by an asterisk. The Commission file number for UDR, Inc.’s Exchange Act filings referenced below is 1-10524. The Commission file number for United Dominion Realty, L.P.’s Exchange Act filings is 333-156002-01.
Exhibit
Description
2.01
Partnership Interest Purchase and Exchange Agreement dated as of September 10, 1998, by and between UDR, Inc., United Dominion Realty, L.P., American Apartment Communities Operating Partnership, L.P., AAC Management LLC, Schnitzer Investment Corp., Fox Point Ltd. and James D. Klingbeil including as an exhibit thereto the proposed form of the Third Amended and Restated Limited Partnership Agreement of United Dominion Realty, L.P.
Exhibit 2(d) to UDR, Inc.’s Form S-3 Registration Statement (Registration No. 333-64281) filed with the Commission on September 25, 1998.
2.02
Agreement of Purchase and Sale dated as of August 13, 2004, by and between United Dominion Realty, L.P., a Delaware limited partnership, as Buyer, and Essex The Crest, L.P., a California limited partnership, Essex El Encanto Apartments, L.P., a California limited partnership, Essex Hunt Club Apartments, L.P., a California limited partnership, and the other signatories named as Sellers therein.
Exhibit 2.1 to UDR, Inc.’s Current Report on Form 8-K dated September 28, 2004 and filed with the Commission on September 29, 2004.
First Amendment to Agreement of Purchase and Sale dated as of September 29, 2004, by and between United Dominion Realty, L.P., a Delaware limited partnership, as Buyer, and Essex The Crest, L.P., a California limited partnership, Essex El Encanto Apartments, L.P., a California limited partnership, Essex Hunt Club Apartments, L.P., a California limited partnership, and the other signatories named as Sellers therein.
Exhibit 2.2 to UDR, Inc.’s Current Report on Form 8-K dated September 29, 2004 and filed with the Commission on October 5, 2004.
Second Amendment to Agreement of Purchase and Sale dated as of October 26, 2004, by and between United Dominion Realty, L.P., a Delaware limited partnership, as Buyer, and Essex The Crest, L.P., a California limited partnership, Essex El Encanto Apartments, L.P., a California limited partnership, Essex Hunt Club Apartments, L.P., a California limited partnership, and the other signatories named as Sellers therein.
Exhibit 2.3 to UDR, Inc.’s Current Report on Form 8-K/A dated September 29, 2004 and filed with the Commission on November 1, 2004.
2.05
Agreement of Purchase and Sale dated as of January 23, 2008, by and between UDR, Inc., United Dominion Realty, L.P., UDR Texas Properties LLC, UDR Western Residential, Inc., UDR South Carolina Trust, UDR Ohio Properties, LLC, UDR of Tennessee, L.P., UDR of NC, Limited Partnership, Heritage Communities L.P., Governour’s Square of Columbus Co., Fountainhead Apartments Limited Partnership, AAC Vancouver I, L.P., AAC Funding Partnership III, AAC Funding Partnership II and DRA Fund VI LLC.
Exhibit 2.1 to UDR, Inc.’s Current Report on Form 8-K dated January 23, 2008 and filed with the Commission on January 29, 2008.
2.06
First Amendment to Agreement of Purchase and Sale dated as of February 14, 2008, by and between UDR, Inc., United Dominion Realty, L.P., UDR Texas Properties LLC, UDR Western Residential, Inc., UDR South Carolina Trust, UDR Ohio Properties, LLC, UDR of Tennessee, L.P., UDR of NC, Limited Partnership, Heritage Communities L.P., Governour’s Square of Columbus Co., Fountainhead Apartments Limited Partnership, AAC Vancouver I, L.P., AAC Funding Partnership III, AAC Funding Partnership II and DRA Fund VI LLC.
Exhibit 2.2 to UDR, Inc.’s Current Report on Form 8-K/A dated March 3, 2008 and filed with the Commission on May 2, 2008.
2.07
Contribution Agreement by and among Home Properties, L.P., UDR, Inc., United Dominion Realty, L.P. and LSREF 4 Lighthouse Acquisitions, LLC, dated June 22, 2015 (UDR, Inc. and United Dominion Realty, L.P. have omitted certain schedules and exhibits pursuant to Item 601(b)(2) of Regulation S-K and shall furnish supplementally to the Commission copies of any of the omitted schedules and exhibits upon request by the Commission.)
Exhibit 2.1 to UDR, Inc.’s Current Report on Form 8-K dated and filed with the Commission on June 22, 2015.
Amendment Agreement, dated as of August 27, 2015, by and among UDR, Inc., United Dominion Realty, L.P., Home Properties, Inc., Home Properties, L.P., LSREF4 Lighthouse Acquisitions, LLC LSREF4 Lighthouse Corporate Acquisitions, LLC and LSREF4 Lighthouse Operating Acquisitions, LLC.
Exhibit 2.1 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015.
3.01
Articles of Restatement of UDR, Inc.
Exhibit 3.09 to UDR, Inc.’s Current Report on Form 8-K dated July 27, 2005 and filed with the Commission on August 1, 2005.
67
3.02
Articles of Amendment to the Articles of Restatement of UDR, Inc. dated and filed with the State Department of Assessments and Taxation of the State of Maryland on March 14, 2007.
Exhibit 3.2 to UDR, Inc.’s Current Report on Form 8-K dated March 14, 2007 and filed with the Commission on March 15, 2007.
3.03
Articles of Amendment to the Articles of Restatement of UDR, Inc. dated August 30, 2011 and filed with the State Department of Assessments and Taxation of the State of Maryland on August 31, 2011.
Exhibit 3.1 to UDR, Inc.’s Current Report on Form 8-K dated August 29, 2011 and filed with the Commission on September 1, 2011.
3.04
Articles of Amendment to the Articles of Restatement of UDR, Inc. dated and filed with the State Department of Assessments and Taxation of the State of Maryland on May 24, 2018.
Exhibit 3.1 to UDR, Inc.’s Current Report on Form 8-K dated May 24, 2018 and filed with the SEC on May 29, 2018.
3.05
Articles Supplementary relating to UDR, Inc.’s 6.75% Series G Cumulative Redeemable Preferred Stock dated and filed with the State Department of Assessments and Taxation of the State of Maryland on May 30, 2007.
Exhibit 3.4 to UDR, Inc.’s Form 8-A Registration Statement dated and filed with the Commission on May 30, 2007.
3.06
Amended and Restated Bylaws of UDR, Inc. (as amended through May 24, 2018).
Exhibit 3.6 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
3.07
Certificate of Limited Partnership of United Dominion Realty, L.P. dated as of February 19, 2004.
Exhibit 3.4 to United Dominion Realty, L.P.’s Post-Effective Amendment No. 1 to Registration Statement on Form S-3 dated and filed with the Commission on October 15, 2010.
3.08
Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of February 23, 2004.
Exhibit 10.23 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003.
3.09
First Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of June 24, 2005.
Exhibit 10.06 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
3.10
Second Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of February 23, 2006.
Exhibit 10.6 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.
3.11
Third Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of February 2, 2007.
Exhibit 99.1 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
3.12
Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of December 27, 2007.
Exhibit 10.25 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007.
3.13
Fifth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of March 7, 2008.
Exhibit 10.53 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008.
68
3.14
Sixth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of December 9, 2008.
Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated December 9, 2008 and filed with the Commission on December 10, 2008.
3.15
Seventh Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of March 13, 2009.
Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated March 18, 2009 and filed with the Commission on March 19, 2009.
3.16
Eighth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of November 17, 2010.
Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated and filed with the Commission on November 18, 2010.
3.17
Ninth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of December 4, 2015.
Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated December 4, 2015 and filed with the Commission on December 10, 2015.
3.18
Tenth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of October 29, 2018.
Exhibit 3.18 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018.
4.01
Form of UDR, Inc. Common Stock Certificate.
Exhibit 4.1 to UDR, Inc.’s Current Report on Form 8-K dated March 14, 2007 and filed with the Commission on March 15, 2007.
4.02
Senior Indenture dated as of November 1, 1995, by and between UDR, Inc. and First Union National Bank of Virginia, N.A., as trustee.
Exhibit 4(ii)(h)(1) to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
4.03
Supplemental Indenture dated as of June 11, 2003, by and between UDR, Inc. and Wachovia Bank, National Association, as trustee.
Exhibit 4.03 to UDR, Inc.’s Current Report on Form 8-K dated June 17, 2004 and filed with the Commission on June 18, 2004.
4.04
Subordinated Indenture dated as of August 1, 1994 by and between UDR, Inc. and Crestar Bank, as trustee.
Exhibit 4(i)(m) to UDR, Inc.’s Form S-3 Registration Statement (Registration No. 33-64725) filed with the Commission on November 15, 1995.
4.05
Form of UDR, Inc. Senior Debt Security.
Exhibit 4(i)(n) to UDR, Inc.’s Form S-3 Registration Statement (Registration No. 33-64725) filed with the Commission on November 15, 1995.
4.06
Form of UDR, Inc. Subordinated Debt Security.
Exhibit 4(i)(p) to UDR, Inc.’s Form S-3 Registration Statement (Registration No. 33-55159) filed with the Commission on August 19, 1994.
4.07
Form of UDR, Inc. Fixed Rate Medium-Term Note, Series A.
Exhibit 4.01 to UDR, Inc.’s Current Report on Form 8-K dated March 20, 2007 and filed with the Commission on March 22, 2007.
4.08
Form of UDR, Inc. Floating Rate Medium-Term Note, Series A.
Exhibit 4.02 to UDR, Inc.’s Current Report on Form 8-K dated March 20, 2007 and filed with the Commission on March 22, 2007.
69
4.09
Indenture dated as of April 1, 1994, by and between UDR, Inc. and Nationsbank of Virginia, N.A., as trustee.
Exhibit 4(ii)(f)(1) to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
4.10
Supplemental Indenture dated as of August 20, 2009, by and between UDR, Inc. and U.S. Bank National Association, as trustee, to UDR, Inc.’s Indenture dated as of April 1, 1994.
Exhibit 4.1 to UDR, Inc.’s Current Report on Form 8-K dated August 20, 2009 and filed with the Commission on August 21, 2009.
4.11
Guaranty of United Dominion Realty, L.P. with respect to UDR, Inc.’s Indenture dated as of November 1, 1995.
Exhibit 99.1 to UDR, Inc.’s Current Report on Form 8-K dated and filed with the Commission on September 30, 2010.
4.12
Guaranty of United Dominion Realty, L.P. with respect to UDR, Inc.’s Indenture dated as of October 12, 2006.
Exhibit 99.2 to UDR, Inc.’s Current Report on Form 8-K dated and filed with the Commission on September 30, 2010.
4.13
First Supplemental Indenture among UDR, Inc., United Dominion Realty, L.P. and U.S. Bank National Association, as Trustee, dated as of May 3, 2011, relating to UDR, Inc.’s Medium-Term Notes, Series A, due Nine Months or More from Date of Issue.
Exhibit 4.1 to UDR, Inc.’s Current Report on Form 8-K filed with the Commission on May 4, 2011.
4.14
UDR, Inc. 3.75% Medium-Term Note, Series A due October 2024, issued June 26, 2014.
Exhibit 4.1 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
4.15
UDR, Inc. 4.00% Medium-Term Note, Series A due October 2025, issued September 22, 2015.
Exhibit 4.23 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015.
4.16
UDR, Inc. 2.950% Medium-Term Note, Series A due September 2026, issued August 23, 2016.
Exhibit 4.1 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016.
4.17
UDR, Inc. 3.500% Medium-Term Note, Series A due July 2027, issued June 16, 2017.
Exhibit 10.2 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.
4.18
UDR, Inc. 3.500% Medium-Term Note, Series A due January 2028, issued December 13, 2017.
Exhibit 4.21 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017.
4.19
UDR, Inc. 4.400% Medium-Term Note, Series A due January 2029, issued October 26, 2018.
Exhibit 4.21 to UDR, Inc’s Annual Report on Form 10-K for the year ended December 31, 2018.
4.20
UDR, Inc. 3.200% Medium-Term Note, Series A due January 2030, issued July 2, 2019.
Exhibit 4.1 to UDR, Inc’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.
4.21
UDR, Inc. 3.000% Medium-Term Note, Series A due August 2031, issued August 15, 2019.
Exhibit 4.2 to UDR, Inc’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019.
4.22
UDR, Inc. 3.100% Medium-Term Note, Series A due November 2034, issued October 11, 2019.
Filed herewith.
70
4.23
UDR, Inc. 3.200% Medium-Term Note, Series A due January 2030, issued October 11, 2019.
4.24
Description of UDR, Inc’s Securities.
10.01*
UDR, Inc. 1999 Long-Term Incentive Plan (as amended and restated February 2, 2017).
Exhibit 10.1 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016.
10.02*
Form of UDR, Inc. Restricted Stock Award Agreement under the 1999 Long-Term Incentive Plan.
10.03*
Form of UDR, Inc. Restricted Stock Award Agreement for awards outside of the 1999 Long-Term Incentive Plan.
Exhibit 99.3 to UDR, Inc.’s Current Report on Form 8-K dated March 19, 2007 and filed with the Commission on March 19, 2007.
10.04*
Description of UDR, Inc. Shareholder Value Plan.
Exhibit 10(x) to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1999.
10.05*
Description of UDR, Inc. Executive Deferral Plan.
Exhibit 10(xi) to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1999.
10.06*
Indemnification Agreement by and between UDR, Inc. and each of its directors and officers listed on Schedule A thereto.
Exhibit 10.7 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016.
10.07
Subordination Agreement dated as of April 16, 1998, by and between UDR, Inc. and United Dominion Realty, L.P.
Exhibit 10(vi)(a) to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
10.08
Third Amended and Restated Distribution Agreement among UDR, Inc., United Dominion Realty, L.P., as Guarantor, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Wells Fargo Securities, LLC, as Agents, dated September 1, 2011, with respect to the issue and sale by UDR, Inc. of its Medium-Term Notes, Series A Due Nine Months or More From Date of Issue.
Exhibit 1.2 to UDR, Inc.’s Current Report on Form 8-K dated and filed with the Commission on September 1, 2011.
10.09
First Amended and Restated Credit Agreement, dated as of September 27, 2018, by and among UDR, Inc., as borrower, and the lenders and agents party thereto.
Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated September 27, 2018 and filed with the Commission on October 1, 2018.
10.10
Guaranty of United Dominion Realty, L.P., dated as of September 27, 2018, with respect to the Credit Agreement, dated as of September 27, 2018.
Exhibit 10.2 to UDR, Inc.’s Current Report on Form 8-K dated September 27, 2018 and filed with the Commission on October 1, 2018.
10.11
Amended and Restated Aircraft Time Sharing Agreement dated as of February 18, 2019, by and between UDR, Inc. and Thomas W. Toomey.
Exhibit 10.15 to UDR, Inc’s Annual Report on Form 10-K for the year ended December 31, 2018.
71
10.12
Amended and Restated Aircraft Time Sharing Agreement dated as of February 18, 2019, by and between UDR, Inc. and Warren L. Troupe.
Exhibit 10.16 to UDR, Inc’s Annual Report on Form 10-K for the year ended December 31, 2018.
10.13
Amendment No. 1, dated July 29, 2014, to the Third Amended and Restated Distribution Agreement among UDR, Inc., United Dominion Realty, L.P., as Guarantor, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated and Wells Fargo Securities, LLC, as Agents, dated September 1, 2011, with respect to the issue and sale by UDR, Inc. of its Medium-Term Notes, Series A Due Nine Months or More From Date of Issue.
Exhibit 1.2 to UDR, Inc.’s Current Report on Form 8-K dated July 29, 2014 and filed with the Commission on July 31, 2014.
10.14
Agreement of Limited Partnership of UDR Lighthouse DownREIT L.P., dated as of October 5, 2015, as amended.
Exhibit 10.21 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015.
10.15*
Class 1 LTIP Unit Award Agreement.
Exhibit 10.22 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015.
10.16*
Notice of Class 2 LTIP Unit Award.
10.17*
Notice of Restricted Stock Unit Award.
10.18
Amendment No. 2, dated April 27, 2017, to the Third Amended and Restated Distribution Agreement, dated September 1, 2011 and as amended July 29, 2014, among the Company and Citigroup Global Markets Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC, and Wells Fargo Securities, LLC, as Agents, with respect to the issue and sale by UDR, Inc. of its Medium Term Notes, Series A Due Nine Months or More From Date of Issue.
Exhibit 1.2 to UDR, Inc.’s Current Report on Form 8-K dated April 27, 2017 and filed with the commission on April 27, 2017.
10.19
Letter Agreement, between UDR, Inc. and Warren L. Troupe (including the related release agreement and consulting agreement as exhibits thereto), dated December 31, 2019.
Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated December 31, 2019 and filed with the commission on January 3, 2020.
Subsidiaries of UDR, Inc. and United Dominion Realty, L.P.
23.1
Consent of Independent Registered Public Accounting Firm for UDR, Inc.
23.2
Consent of Independent Registered Public Accounting Firm for United Dominion Realty, L.P.
31.1
Rule 13a-14(a) Certification of the Chief Executive Officer of UDR, Inc.
72
31.2
Rule 13a-14(a) Certification of the Chief Financial Officer of UDR, Inc.
31.3
Rule 13a-14(a) Certification of the Chief Executive Officer of United Dominion Realty, L.P.
31.4
Rule 13a-14(a) Certification of the Chief Financial Officer of United Dominion Realty, L.P.
32.1
Section 1350 Certification of the Chief Executive Officer of UDR, Inc.
32.2
Section 1350 Certification of the Chief Financial Officer of UDR, Inc.
32.3
Section 1350 Certification of the Chief Executive Officer of United Dominion Realty, L.P.
32.4
Section 1350 Certification of the Chief Financial Officer of United Dominion Realty, L.P.
101
Inline XBRL (Extensible Business Reporting Language). The following materials from this Annual Report on Form 10-K for the period ended December 31, 2019, formatted in Inline XBRL: (i) consolidated balance sheets of UDR, Inc., (ii) consolidated statements of operations of UDR, Inc., (iii) consolidated statements of comprehensive income/(loss) of UDR, Inc., (iv) consolidated statements of changes in equity of UDR, Inc., (v) consolidated statements of cash flows of UDR, Inc., (vi) notes to consolidated financial statements of UDR, Inc., (vii) consolidated balance sheets of United Dominion Realty, L.P., (viii) consolidated statements of operations of United Dominion Realty, L.P., (ix) consolidated statements of comprehensive income/(loss) of United Dominion Realty, L.P.; (x) consolidated statements of changes in capital of United Dominion Realty, L.P., (xi) consolidated statements of cash flows of United Dominion Realty, L.P. and (xii) notes to consolidated financial statements of United Dominion Realty, L.P. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
104
Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.
Management Contract or Compensatory Plan or Arrangement
Item 16. FORM 10-K SUMMARY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 18, 2020
By:
/s/ Thomas W. Toomey
Thomas W. Toomey
Chairman of the Board and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on February 18, 2020 by the following persons on behalf of the registrant and in the capacities indicated.
/s/ Katherine A. Cattanach
Katherine A. Cattanach
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Director
/s/ Joseph D. Fisher
/s/ Mary Ann King
Joseph D. Fisher
Mary Ann King
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Tracy L. Hofmeister
/s/ Jon A. Grove
Tracy L. Hofmeister
Jon A. Grove
Vice President – Chief Accounting Officer
(Principal Accounting Officer)
/s/ James D. Klingbeil
/s/ Clint D. McDonnough
James D. Klingbeil
Clint D. McDonnough
Lead Independent Director
/s/ Robert A. McNamara
Robert A. McNamara
/s/ Mark R. Patterson
Mark R. Patterson
74
UDR, Inc., its sole general partner
of the General Partner
Director of the General Partner
of the General Partner (Principal Financial Officer)
Lead Independent Director of the General Partner
75
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
UDR, INC.:
Reports of Independent Registered Public Accounting Firm
F-2
Consolidated Balance Sheets at December 31, 2019 and 2018
F-5
Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017
F-6
Consolidated Statements of Comprehensive Income/(Loss) for the years ended December 31, 2019, 2018, and 2017
F-7
Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018, and 2017
F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
F-9
Notes to Consolidated Financial Statements
F-11
UNITED DOMINION REALTY, L.P.:
Report of Independent Registered Public Accounting Firm
F-61
F-62
F-63
F-64
Consolidated Statements of Changes in Capital for the years ended December 31, 2019, 2018, and 2017
F-65
F-66
F-67
SCHEDULES FILED AS PART OF THIS REPORT
Schedule III- Summary of Real Estate Owned
S-1
S-6
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
To the Stockholders and Board of Directors of UDR, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of UDR, Inc. (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income/(loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule listed in the accompanying Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 18, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for acquisitions of real estate investment properties
Description of the Matter
During 2019, the Company acquired multiple real estate investment properties, including certain real estate investment properties for which the Company held a previous unconsolidated equity interest. These transactions were accounted for as asset acquisitions. The aggregate increase in real estate due to these acquisitions was approximately $2.2 billion. As more fully described in Note 3 to the consolidated financial statements, the total consideration was allocated to land, land improvements, buildings and improvements, and real estate intangible assets based on their relative fair value.
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Auditing the Company’s acquisition of real estate investment properties is complex and requires a higher degree of auditor judgment due to the significant assumptions that are utilized in the determination of the relative fair values of the assets acquired. The significant assumptions used in management’s analysis to estimate the fair value of these components includes capitalization rates, market comparable prices for similar land parcels, market rental rates, leasing commission rates as well as the time it would take to lease any acquired buildings if it were vacant at acquisition.
How We Addressed the Matter in Our Audit
We tested the Company’s internal controls over the acquisition of real estate investment properties and the resulting purchase price allocations. This included testing controls over management’s identification of the assets acquired and liabilities assumed and evaluating the methods and significant assumptions used by the Company to develop such estimates.
Our testing of the fair values of the assets acquired included, among others, evaluating the selection of the Company's valuation model and testing the significant assumptions discussed above as well as the completeness and accuracy of the underlying data. For example, we compared management’s assumptions to observable market transactions and replacement costs associated with the fair value of the land and buildings and improvements. For in-place leases, we compared management’s assumptions to published market data for comparable leases, related leasing commissions and the amount of time it would take to lease up the space to stabilization assuming the space was vacant at acquisition. We involved our real estate valuation specialists to assist in evaluating the significant assumptions listed above. In addition, we performed sensitivity tests on the significant assumptions to evaluate the change in the fair value resulting from changes in the assumptions.
/s/ Ernst & Young LLP
We have served as the Company's auditor since at least 1984, but we are unable to determine the specific year.
Denver, Colorado
February 18, 2020
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To the Stockholders and the Board of Directors of UDR, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited UDR, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, UDR, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income/(loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated February 18, 2020 expressed an unqualified opinion thereon.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
ASSETS
Real estate owned:
Real estate held for investment
Less: accumulated depreciation
(4,131,330)
(3,654,160)
Real estate held for investment, net
8,400,994
Real estate under development (net of accumulated depreciation of $23 and $0, respectively)
69,754
Total real estate owned, net of accumulated depreciation
Cash and cash equivalents
8,106
185,216
Restricted cash
25,185
23,675
Notes receivable, net
153,650
42,259
Investment in and advances to unconsolidated joint ventures, net
588,262
780,869
Operating lease right-of-use assets
204,225
Other assets
186,296
137,710
LIABILITIES AND EQUITY
Liabilities:
Secured debt, net
Operating lease liabilities
198,558
Real estate taxes payable
29,445
20,608
Accrued interest payable
45,199
38,747
Security deposits and prepaid rent
48,353
35,060
Distributions payable
109,382
97,666
Accounts payable, accrued expenses, and other liabilities
90,032
76,343
Commitments and contingencies (Note 15)
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
1,018,665
972,740
Equity:
Preferred stock, no par value; 50,000,000 shares authorized:
8.00% Series E Cumulative Convertible; 2,780,994 shares issued and outstanding at December 31, 2019 and December 31, 2018
46,200
Series F; 14,691,274 and 15,802,393 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
Common stock, $0.01 par value; 350,000,000 shares authorized:
294,588,305 and 275,545,900 shares issued and outstanding at December 31, 2019 and December 31, 2018, respectively
2,946
2,755
Additional paid-in capital
5,781,975
4,920,732
Distributions in excess of net income
(2,462,132)
(2,063,996)
Accumulated other comprehensive income/(loss), net
(10,448)
(67)
30,772
17,152
Total equity
3,389,314
2,922,777
Total liabilities and equity
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
REVENUES:
14,055
11,754
11,482
Total revenues
1,152,193
1,046,859
995,791
OPERATING EXPENSES:
Property operating and maintenance
178,947
169,078
164,660
Real estate taxes and insurance
150,888
133,912
121,146
Total operating expenses
936,418
828,338
811,297
Gain/(loss) on sale of real estate owned
5,282
136,197
43,404
Operating income
221,057
354,718
227,898
Income/(loss) from unconsolidated entities
137,873
(5,055)
31,257
(170,917)
(134,168)
(128,711)
15,404
6,735
1,971
Income/(loss) before income taxes
203,417
222,230
132,415
Tax (provision)/benefit, net
(3,838)
(688)
240
Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
(14,426)
(18,215)
(10,933)
Net (income)/loss attributable to noncontrolling interests
(188)
(221)
(164)
Distributions to preferred stockholders — Series E (Convertible)
(4,104)
(3,868)
(3,708)
Income/(loss) per weighted average common share:
Basic
Diluted
Weighted average number of common shares outstanding:
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
Other comprehensive income/(loss), including portion attributable to noncontrolling interests:
Other comprehensive income/(loss) - derivative instruments:
Unrealized holding gain/(loss)
(8,437)
4,806
1,802
(Gain)/loss reclassified into earnings from other comprehensive income/(loss)
(2,770)
(1,948)
1,407
Other comprehensive income/(loss), including portion attributable to noncontrolling interests
(11,207)
2,858
3,209
Comprehensive income/(loss)
188,372
224,400
135,864
Comprehensive (income)/loss attributable to noncontrolling interests
(13,788)
(18,680)
(11,378)
Comprehensive income/(loss) attributable to UDR, Inc.
174,584
205,720
124,486
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Distributions
Accumulated Other Comprehensive
Preferred
Common
Paid-in
in Excess of
Income/(Loss),
Noncontrolling
Stock
Capital
Net Income
net
Interests
Balance at December 31, 2016
46,458
2,673
4,635,413
(1,585,825)
(5,609)
3,860
3,096,970
147
Contribution of noncontrolling interests in consolidated real estate
125
Long Term Incentive Plan Unit grants/(vestings), net
5,432
Other comprehensive income/(loss)
2,928
Issuance/(forfeiture) of common and restricted shares, net
437
438
Cumulative effect upon adoption of ASU 2016-09
558
(558)
Conversion of Series E Cumulative Convertible Shares
(257)
257
Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership and DownREIT Partnership
14,540
14,544
Common stock distributions declared ($1.24 per share)
(331,974)
Preferred stock distributions declared-Series E ($1.3288 per share)
Adjustment to reflect redemption value of redeemable noncontrolling interests
(71,096)
Balance at December 31, 2017
46,201
2,678
4,651,205
(1,871,603)
(2,681)
9,564
2,835,364
175
108
Repurchase of common shares
(19,982)
(19,988)
7,305
2,614
Exercise of stock options, net
(23,061)
(23,053)
(1)
(507)
(508)
Issuance of common shares through public offering, net
299,753
299,825
13,324
Common stock distributions declared ($1.29 per share)
(348,079)
Preferred stock distributions declared-Series E ($1.3968 per share)
(43,552)
Balance at December 31, 2018
13,370
(10,381)
2,088
158
725,157
725,315
133,998
134,031
Common stock distributions declared ($1.37 per share)
(395,113)
Preferred stock distributions declared-Series E ($1.4832 per share)
(183,884)
Balance at December 31, 2019
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
Depreciation and amortization
507,923
435,679
436,462
Return on investment in unconsolidated joint ventures
5,179
4,248
4,416
Amortization of share-based compensation
24,330
14,244
12,862
39,958
4,998
20,467
Changes in operating assets and liabilities:
(Increase)/decrease in operating assets
(10,956)
(13,880)
(9,008)
Increase/(decrease) in operating liabilities
7,846
24,987
(4,278)
Acquisition of real estate assets
(1,370,770)
(96,791)
Proceeds from sales of real estate investments, net
38,000
247,031
71,235
Development of real estate assets
(25,401)
(150,238)
(248,546)
Capital expenditures and other major improvements — real estate assets
(167,188)
(112,359)
(124,728)
Capital expenditures — non-real estate assets
(17,159)
(4,850)
(1,384)
Investment in unconsolidated joint ventures
(93,059)
(112,025)
(123,842)
Distributions received from unconsolidated joint ventures
72,441
42,683
116,329
Purchase deposits on pending acquisitions
(12,160)
(1,000)
Repayment/(issuance) of notes receivable, net
(111,391)
(22,790)
321
Payments on secured debt
(162,253)
(279,243)
(326,346)
Proceeds from the issuance of secured debt
162,500
80,000
Payments on unsecured debt
(700,000)
(300,000)
Net proceeds from the issuance of unsecured debt
1,099,816
299,994
598,095
Net proceeds/(repayment) of commercial paper
198,885
(198,885)
300,000
Net proceeds/(repayment) of revolving bank debt
16,567
(21,751)
417
Proceeds from the issuance of common shares through public offering, net
Distributions paid to redeemable noncontrolling interests
(31,580)
(32,457)
(31,089)
Distributions paid to preferred stockholders
(4,063)
(3,836)
Distributions paid to common stockholders
(383,079)
(342,241)
(327,793)
(41,725)
(41,485)
(21,361)
Net increase/(decrease) in cash, cash equivalents, and restricted cash
(175,600)
187,061
(276)
Cash, cash equivalents, and restricted cash, beginning of year
208,891
21,830
22,106
Cash, cash equivalents, and restricted cash, end of year
33,291
Supplemental Information:
Interest paid during the period, net of amounts capitalized
169,558
132,466
126,348
Cash paid/(refunds received) for income taxes
1,519
625
1,660
Non-cash transactions:
Transfer of investment in and advances to unconsolidated joint ventures to real estate owned
288,108
140,549
Transfer of investment in and advances to unconsolidated joint ventures to joint venture member
60,625
Secured debt assumed in the consolidation of unconsolidated joint ventures
551,800
Recognition of operating lease right-of-use assets
94,349
Recognition of operating lease liabilities
88,336
Right-of-use assets obtained in exchange for operating lease liabilities remeasurement
111,055
Vesting of LTIP Units
14,742
4,397
2,317
Development costs and capital expenditures incurred but not yet paid
16,635
10,304
43,930
Conversion of Operating Partnership and DownREIT Partnership noncontrolling interests to common stock (3,165,780 shares in 2019; 348,057 shares in 2018; and 389,033 shares in 2017)
Dividends declared but not yet paid
91,455
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DECEMBER 31, 2019
The following reconciles cash, cash equivalents, and restricted cash to amounts as shown above:
Cash, cash equivalents, and restricted cash, beginning of year:
2,038
19,792
19,994
Total cash, cash equivalents, and restricted cash as shown above
Cash, cash equivalents, and restricted cash, end of year:
F - 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATION AND BASIS OF PRESENTATION
Organization and Formation
UDR, Inc. (“UDR,” the “Company,” “we,” or “our”) is a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, and manages apartment communities generally 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. At December 31, 2019, our consolidated apartment portfolio consisted of 148 consolidated communities located in 20 markets consisting of 47,010 apartment homes. In addition, the Company has an ownership interest in 5,268 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships, including 2,138 apartment homes owned by entities in which we hold preferred equity investments.
Basis of Presentation
The accompanying consolidated financial statements of UDR include its wholly-owned and/or controlled subsidiaries (see the “Consolidated Joint Ventures” section of Note 5, Joint Ventures and Partnerships, for further discussion). All significant intercompany accounts and transactions have been eliminated in consolidation.
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 December 31, 2019 and 2018, there were 184.1 million and 183.6 million units, respectively, in the Operating Partnership (“OP Units”) outstanding, of which 176.2 million, or 95.7% and 174.2 million, or 94.9%, respectively, were owned by UDR and 7.9 million, or 4.3% and 9.4 million, or 5.1%, respectively, were owned by outside limited partners. As of December 31, 2019 and 2018, there were 32.4 million units in the DownREIT Partnership (“DownREIT Units”) outstanding, of which 18.4 million, or 56.8% and 17.2 million, or 53.2%, respectively, were owned by UDR (including 13.5 million DownREIT Units, or 41.7% and 13.5 million, or 41.6%, that were held by the Operating Partnership as of December 31, 2019 and 2018, respectively) and 14.0 million, or 43.2% and 15.2 million, or 46.8%, respectively, 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 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 in Note 2, Significant Accounting Policies, Note 3, Real Estate Owned and Note 5, Joint Ventures and Partnerships.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amends the transition requirements and scope of ASU 2016-13 and clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. The updated standard became effective for the Company on January 1, 2020 and is to be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings on that date. While we are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and related disclosures, we expect that the adoption will result in recording an allowance for credit losses for our notes receivable. However, we do not expect the updated standard to have a material impact on the consolidated financial statements.
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In February 2016, the FASB issued ASU 2016-02, Leases. The standard amended the existing lease accounting guidance and required lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases continued to recognize lease expense in a manner similar to previous accounting. For lessors, accounting for leases under the new guidance was substantially the same as in prior periods, but eliminated current real estate-specific provisions and changed the treatment of initial direct costs. The standard was effective for the Company on January 1, 2019.
The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year.
Upon adoption of the standard on January 1, 2019, the Company recognized right-of-use assets of $94.3 million and lease liabilities of $88.3 million. The right-of-use assets included $6.0 million of prepaid rent and intangible assets that was included within Other assets on our Consolidated Balance Sheets as of December 31, 2018.
The lease liabilities represent the present value of the remaining minimum lease payments as of January 1, 2019 and primarily relate to ground leases for communities where we are the lessee. The right-of-use assets represent our right to use an underlying asset for the lease term, which are calculated utilizing the lease liabilities plus any prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. Our right-of-use assets and related lease liabilities recognized as of January 1, 2019 may change as a result of updates to the projected future minimum lease payments. Certain of our ground lease agreements where we are the lessee have future minimum lease payments that reset in the future based upon a percentage of the fair market value of the land at the time of the reset. The Company will continue to recognize lease expense for these leases in a manner similar to previous accounting based on our election of the package of practical expedients. However, in the event we modify existing ground leases and/or enter into new ground leases subsequent to the adoption of the standard, such leases would likely be classified as finance leases under the standard and require expense recognition based on the effective interest method. Under the standard, initial direct costs for both lessees and lessors will include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, subsequent to the adoption of the standard, we are expensing non-incremental leasing costs as incurred.
In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which provided entities with relief from the costs of implementing certain aspects of ASU 2016-02, Leases. The ASU provided a practical expedient which allowed lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where we are the lessor. The ASU also provided a transition option that permitted entities to not recast the comparative periods presented when transitioning to the standard, which the Company also elected.
Real Estate
Real estate assets held for investment are carried at historical cost and consist of land, land improvements, buildings and improvements, furniture, fixtures and equipment and other costs incurred during their development, acquisition and redevelopment.
Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to the acquisition and/or improvement of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as a betterment or the life of the related asset will be substantially extended beyond the original life expectancy.
UDR purchases real estate investment properties and records the tangible and identifiable intangible assets and liabilities acquired based on their estimated fair value. The primary, although not only, identifiable intangible asset
F - 12
associated with our portfolio is the value of existing lease agreements. When recording the acquisition of a community, we first assign fair value to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the community is vacant. The Company estimates the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. Depreciation on the building is based on the expected useful life of the asset and the in-place leases are amortized over their remaining average contractual life. Property acquisition costs are capitalized as incurred if the acquisition does not meet the definition of a business.
Quarterly or when changes in circumstances warrant, UDR will assess our real estate properties for indicators of impairment. In determining whether the Company has indicators of impairment in our real estate assets, we assess whether the long-lived asset’s carrying value exceeds the community’s undiscounted future cash flows, which is representative of projected net operating income (“NOI”) plus the residual value of the community. Our future 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. If such indicators of impairment are present and the carrying value exceeds the undiscounted cash flows of the community, an impairment loss is recognized equal to the excess of the carrying amount of the asset over its estimated fair value. Our estimates of fair market value represent our best estimate based primarily upon unobservable inputs related to rental rates, operating costs, growth rates, discount rates, capitalization rates, industry trends and reference to market rates and transactions.
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the asset less estimated cost to sell is less than the carrying value of the asset. Properties classified as real estate held for disposition generally represent properties that are actively marketed or contracted for sale with the closing expected to occur within the next twelve months. Real estate held for disposition is carried at the lower of cost, net of accumulated depreciation, or fair value, less the cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held for disposition properties are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to held for disposition properties are capitalized at cost. Depreciation is not recorded on real estate held for disposition.
Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which are 30 to 55 years for buildings, 10 to 35 years for major improvements, and 3 to 10 years for furniture, fixtures, equipment, and other assets.
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 years ended December 31, 2019, 2018, and 2017 were $8.4 million, $7.5 million and $8.8 million, respectively. During the years ended December 31, 2019, 2018, and 2017, total interest capitalized was $5.1 million, $10.6 million and $18.6 million, respectively. As each home in a capital project is completed and becomes available for lease-up, the Company ceases capitalization on the related portion and depreciation commences over the estimated useful life.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The majority of the Company’s cash and cash equivalents are held at major commercial banks.
F - 13
Restricted Cash
Restricted cash primarily consists of escrow deposits held by lenders for real estate taxes, insurance and replacement reserves, and security deposits.
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 on consolidation of a property.
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Notes Receivable
Notes receivable relate to financing arrangements which are typically secured by real estate or real estate related projects. 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 variable interest entity (“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 for consideration of 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 December 31, 2019 and 2018 (dollars in thousands):
Interest rate at
Balance Outstanding
Note due February 2020 (a)
10.00
16,400
14,659
Note due March 2020 (b)
12.00
20,000
Note due October 2020 (c)
8.00
2,250
2,000
Note due August 2022 (d)
5,600
Note due October 2022 (e)
4.75
115,000
Total notes receivable, net
In January 2020, the terms of this secured note were amended to increase the aggregate commitment from $16.4 million to $19.4 million and to extend the maturity date of the note from the eighth anniversary of the note (February 2020) to January 2023.
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(e)
In November 2019, the Company entered into a secured note with an unaffiliated third party with an aggregate commitment of $115.0 million, all of which was funded during the year ended December 31, 2019. Interest payments are due when the loan matures. The note is secured by a first priority deed of trust on a 259 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 will give 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 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 will be based on a 30 year amortization schedule.
The Company recognized $5.5 million, $4.1 million, and $1.8 million of interest income and $8.5 million, zero, and zero of promoted interest from notes receivable during the years ended December 31, 2019, 2018, and 2017, respectively, none of which was related party interest. Interest income and promoted interest are included in Interest income and other income/(expense), net on the Consolidated Statements of Operations.
Investment in Joint Ventures and Partnerships
We use the equity method to account for investments in joint ventures and partnerships that qualify as VIEs where we are not the primary beneficiary and other entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operating and financial policies of the investee. Throughout these financial statements we use the term “joint venture” or “partnership” when referring to investments in entities in which we do not have a 100% ownership interest. The Company also uses the equity method when we function as the managing partner and our venture partner has substantive participating rights or where we can be replaced by our venture partner as managing partner without cause. For a joint venture or partnership accounted for under the equity method, our share of net earnings or losses is reflected as income/loss when earned/incurred and distributions are credited against our investment in the joint venture or partnership as received.
In determining whether a joint venture or partnership is a VIE, the Company considers: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including necessity of subordinated debt; estimates of future cash flows; ours and our partner’s ability to participate in the decision making related to acquisitions, disposition, budgeting and financing of the entity; obligation to absorb losses and preferential returns; nature of our partner’s primary operations; and the degree, if any, of disproportionality between the economic and voting interests of the entity. As of December 31, 2019, the Company did not determine any of our joint ventures or partnerships to be VIEs.
We evaluate our investments in unconsolidated joint ventures for events or changes in circumstances that indicate 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. 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, the fair value of the property of the joint venture, and the relationships with the other joint venture partners and its lenders. The amount of loss recognized is the excess of the investment’s carrying amount over its estimated fair value. If we believe that the decline in fair value is temporary, no impairment is recorded. The aforementioned factors are taken into consideration as a whole by management in determining the valuation of our equity method investments. Should the actual results differ from management’s judgment, the valuation could be negatively affected and may result in a negative impact to our Consolidated Financial Statements.
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Derivative Financial Instruments
The Company utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges. Derivative financial instruments are recorded on our Consolidated Balance Sheets as either an asset or liability and measured quarterly at their fair value. The changes in fair value for cash flow hedges that are deemed effective are reflected in other comprehensive income/(loss) and for non-designated derivative financial instruments in earnings. The ineffective component of cash flow hedges, if any, is recorded in earnings.
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 available 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.
Income Taxes
Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, no provision for federal income taxes has been provided for at UDR. Historically, the Company has generally incurred only state and local excise and franchise taxes. UDR has elected for certain consolidated subsidiaries to be treated as taxable REIT subsidiaries (“TRS”).
Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date. The Company’s deferred tax assets are generally the result of differing depreciable lives on capitalized assets, unrealized gains on other investment ventures and timing of expense recognition for certain accrued liabilities. As of December 31, 2019 and 2018, UDR’s net deferred tax assets/(liabilities) was $(1.6) million and less than $(0.1) million, respectively. The net deferred tax assets/(liabilities) are recorded in Accounts payable, accrued expenses and other liabilities on the Consolidated Balance Sheets.
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.
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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 no material unrecognized tax benefit, accrued interest or penalties at December 31, 2019. UDR and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The tax years 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.
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 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.
Discontinued Operations
In accordance with GAAP, a discontinued operation represents (1) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on an entity’s financial results, or (2) an acquired business that is classified as held for sale on the date of acquisition. A strategic shift could include a disposal of (1) a separate major line of business, (2) a separate major geographic area of operations, (3) a major equity method investment, or (4) other major parts of an entity.
We record sales of real estate that do not meet the definition of a discontinued operation in Gain/(loss) on sale of real estate owned on the Consolidated Statements of Operations.
Stock-Based Employee Compensation Plans
The Company measures the cost of employee services received in exchange for an award of an equity instrument based on the award’s fair value on the grant date and recognizes the cost over the period during which the employee is required to provide service in exchange for the award, which is generally the vesting period. The fair value for stock options issued by the Company is calculated utilizing the Black-Scholes-Merton formula. For performance based awards, the Company remeasures the fair value each balance sheet date with adjustments made on a cumulative basis until the award is settled and the final compensation is known. The fair value for market based awards issued by the Company is calculated utilizing a Monte Carlo simulation. For further discussion, see Note 10, Employee Benefit Plans.
Advertising Costs
All advertising costs are expensed as incurred and reported on the Consolidated Statements of Operations within the line item Property operating and maintenance. During the years ended December 31, 2019, 2018, and 2017, total advertising expense was $6.5 million, $6.7 million, and $6.2 million, respectively.
Cost of Raising Capital
Costs incurred in connection with the issuance of equity securities are deducted from stockholders’ equity. Costs incurred in connection with the issuance or renewal of debt are recorded based on the terms of the debt issuance or renewal. Accordingly, if the terms of the renewed or modified debt instrument are deemed to be substantially different (i.e. a 10 percent or greater difference in the cash flows between instruments), all unamortized financing costs associated
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with the extinguished debt are charged to earnings in the current period and certain costs of new debt issuances are capitalized and amortized over the term of the debt. When the cash flows are not substantially different, the lender costs associated with the renewal or modification are capitalized and amortized into interest expense over the remaining term of the related debt instrument and other related costs are expensed. The balance of any unamortized financing costs associated with retired debt is expensed upon retirement. Deferred financing costs for new debt instruments include fees and costs incurred by the Company to obtain financing. Deferred financing costs are generally amortized on a straight-line basis, which approximates the effective interest method, over a period not to exceed the term of the related debt.
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 years ended December 31, 2019, 2018, and 2017, the Company’s other comprehensive income/(loss) consisted of the gain/(loss) (effective portion) 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 14, Derivatives and Hedging Activity, for further discussion. The allocation of other comprehensive income/(loss) to redeemable noncontrolling interests during the years ended December 31, 2019, 2018, and 2017 was $(0.8) million, $0.2 million, and $0.3 million, respectively.
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 determine 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 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.)
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Use of Estimates
The preparation of these financial statements in accordance with 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 financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates.
Market Concentration Risk
The Company is subject to increased exposure from economic and other competitive factors specific to markets where the Company holds a significant percentage of the carrying value of its real estate portfolio. At December 31, 2019, the Company held greater than 10% of the carrying value of its real estate portfolio in each of the Orange County, California; Metropolitan D.C., New York, New York and Boston, Massachusetts markets.
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 December 31, 2019, the Company owned and consolidated 148 communities in 13 states plus the District of Columbia totaling 47,010 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of December 31, 2019 and 2018 (dollars in thousands):
2,164,032
1,849,799
Depreciable property — held and used:
Land improvements
224,964
213,224
Building, improvements, and furniture, fixtures and equipment
10,102,758
8,133,136
Real estate intangible assets
40,570
Under development:
Land and land improvements
29,226
40,551
Real estate owned
Accumulated depreciation
Real estate owned, net
In January 2019, the Company increased its ownership interest from 49% to 100% in a 386 apartment home operating community located in Anaheim, California, for a cash purchase price of approximately $33.5 million. In connection with the acquisition, the Company repaid approximately $59.8 million of joint venture construction financing. As a result, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as an 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 upon consolidation and increased its real estate assets owned by approximately $115.7 million and recorded approximately $2.4 million of in-place lease intangibles.
In January 2019, the Company increased its ownership interest from 49% to 100% in a 155 apartment home operating community located in Seattle, Washington, for a cash purchase price of approximately $20.0 million. In connection with the acquisition, the Company repaid approximately $26.0 million of joint venture construction financing. As a result, 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 upon consolidation and increased its real estate assets owned by approximately $58.1 million and recorded approximately $2.4 million of real estate intangibles and approximately $0.6 million of in-place lease intangibles.
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In January 2019, the Company acquired a to-be-developed parcel of land located in Washington D.C. for approximately $27.1 million.
In August 2019, the Company purchased a 292 apartment home operating community in Washington, D.C., directly from the UDR/KFH joint venture, thereby increasing its ownership interest from 30% to 100%, for a purchase price at 100% of approximately $184.0 million, before $2.8 million of closing costs incurred by UDR at acquisition (see Note 5, Joint Ventures and Partnerships). The Company accounted for the consolidation as an asset acquisition, resulting in no gain upon consolidation, and increased its real estate assets owned by approximately $156.0 million and recorded approximately $5.9 million of in-place lease intangibles.
In November 2019, the Company acquired the approximately 50% ownership interest not previously owned in 10 UDR/MetLife operating communities, one development community and four land parcels valued at $1.1 billion, or $564.2 million at UDR’s share, and sold its approximately 50% ownership interest in five UDR/MetLife operating communities valued at $645.8 million, or $322.9 million at UDR’s share, to MetLife, and recognized a net gain on sale of $114.9 million at our share. The Company paid $109.2 million directly to MetLife to complete the transaction. As a result, the Company consolidated the 10 operating communities, one development community and four land parcels, and they are no longer accounted for as equity method investments 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
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upon consolidation and increased its real estate assets owned by approximately $977.8 million and recorded approximately $30.0 million of in-place lease intangibles. In connection with the acquisition, the Company assumed six secured fixed rate mortgage notes payable and one credit facility secured by four communities with a combined outstanding balance of $518.4 million and estimated fair value of $551.8 million. The Company recorded the debt at its fair value in Secured debt, net on the Consolidated Balance Sheets.
The following table summarizes the 10 communities, one development community and four land parcels acquired from the UDR/MetLife II and the UDR/MetLife Vitruvian Park® joint ventures:
In January 2020, the Company acquired a 294 home operating community located in Tampa, Florida for approximately $85.2 million.
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, in January 2020, 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).
In June 2019, the Company sold a parcel of land located in Los Angeles, California for $38.0 million, resulting in a gain of approximately $5.3 million. Prior to the sale, the parcel of land was subject to a ground lease, under which UDR was the lessor, scheduled to expire in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. During the second quarter, the lessee exercised the purchase option resulting in this sale by the Company and the ground lease being terminated.
Prior to the sale, the purchase option was not deemed to be a bargain purchase option. This ground lease existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As a result, this ground lease continued to be classified as an operating lease and the land parcel subject to the ground lease continued to be recognized in Real estate held for investment on our Consolidated Balance Sheets until the sale in June 2019.
In February 2018, the Company sold an operating community in Orange County, California with a total of 264 apartment homes for gross proceeds of $90.5 million, resulting in a gain of $70.3 million. The proceeds were designated
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for a tax-deferred Section 1031 exchange that were used to pay a portion of the purchase price for an acquisition in October 2017.
In February 2017, the Company sold a parcel of land in Richmond, Virginia for gross proceeds of $3.5 million, resulting in a gain of $2.1 million.
In December 2017, the Company sold two operating communities with a total of 218 apartment homes in Orange County, California and Carlsbad, California for gross proceeds of $69.0 million, resulting in a gain of $41.3 million.
Developments
At December 31, 2019, the Company was developing three wholly-owned communities totaling 878 homes, none of which have been completed, with a budget of $278.5 million, in which we have a carrying value of $69.8 million. The communities are estimated to be completed between the first quarter of 2021 and the second quarter of 2022.
Other Activity
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.
Amortization of Intangible Assets
The following table provides a summary of the aggregate amortization for the intangible assets acquired in the acquisition of real estate for each of the next five years and thereafter (in thousands):
Unamortized Balance as of December 31, 2019
2021
2022
2023
2024
Real estate intangible assets, net (a)
37,844
3,062
2,840
2,740
2,643
2,525
24,034
In-place lease intangible assets, net (b)
43,614
41,179
501
470
386
358
81,458
44,241
3,341
3,210
3,029
2,883
24,754
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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 condensed summarized financial information of the DownREIT Partnership.
5. JOINT VENTURES AND PARTNERSHIPS
UDR has entered into joint ventures and partnerships with unrelated third parties to own, operate, acquire, renovate, develop, redevelop, dispose of, and manage real estate assets that are either consolidated and included in Real estate owned on the Consolidated Balance Sheets or are accounted for under the equity method of accounting, and are included in Investment in and advances to unconsolidated joint ventures, net, on the Consolidated Balance Sheets. The Company consolidates the entities that we control as well as any variable interest entity where we are the primary beneficiary. Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.
UDR’s joint ventures and partnerships are funded with a combination of debt and equity. Our losses are 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.
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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 December 31, 2019 and 2018 (dollars in thousands):
Properties
Investment at
UDR’s Ownership Interest
Location of
Joint Venture
Operating and development:
UDR/MetLife I
operating community
150
28,812
30,839
50.0
UDR/MetLife II (a)
Various
operating communities
1,250
150,893
296,807
Other UDR/MetLife Joint Ventures
1,437
98,441
115,668
50.6
UDR/MetLife Vitruvian Park® (a)
71,730
UDR/KFH (b)
5,507
30.0
West Coast Development Joint Ventures
293
34,907
36,143
47.0
Investment in and advances to unconsolidated joint ventures, net, before preferred equity investments and other investments
313,053
556,694
Income from investments
Developer Capital Program
Years To
and Other Investments (c)
Rate
Maturity
Commitment (d)
Preferred equity investments:
West Coast Development Joint Ventures (e)
Hillsboro, OR
6.5
17,064
65,417
(447)
865
23,230
1532 Harrison
11.0
24,645
30,585
24,986
3,147
2,228
511
1200 Broadway (f)
8.0
55,558
63,958
58,982
4,888
2,970
370
Junction (g)
Santa Monica, CA
12.0
8,800
10,379
9,211
1,169
406
1300 Fairmount (h)
Variable
51,393
51,215
8,318
3,098
159
Essex (i)
12.5
12,886
14,804
9,940
1,639
258
Modera Lake Merritt (j)
Oakland, CA
9.0
27,250
22,653
1,067
Other investments:
The Portals
38,559
48,181
43,167
5,012
3,692
839
Other investment ventures
18,000
13,598
4,154
4,053
(267)
(30)
Total Developer Capital Program and Other Investments
272,437
224,175
Total investment in and advances to unconsolidated joint ventures, net (k)
585,490
During 2019, the joint venture sold two communities with 368 homes, located in Arlington, Virginia, and Silver Spring, Maryland, for a combined sales price of approximately $118.3 million. As a result, the Company recorded total gains on the sales of approximately $10.6 million, which are included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.
In August 2019, the joint venture sold the third community, a 292 home operating community located in Washington, D.C., directly to the Company for a sales price at 100% of approximately $184.0 million, before $2.8 million of closing costs incurred by UDR at acquisition. The Company deferred its share of the gain on sale of approximately $23.8 million and recorded it as a reduction of the carrying amount of real estate assets owned (see Note 3, Real Estate Owned).
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In January 2019, the Company increased its ownership interest from 49% to 100% in a 155 apartment home operating community located in Seattle, Washington, for a cash purchase price of approximately $20.0 million. As a result, the Company consolidated the operating community and it is no longer accounted for as a preferred equity investment in an unconsolidated joint venture (see Note 3, Real Estate Owned). In connection with the purchase, the construction loan on the community was paid in full.
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. As a result, in January 2020, 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).
As of December 31, 2019 and 2018, the Company had deferred fees of $9.0 million and $11.0 million, respectively, which will be recognized through earnings over the weighted average life of the related properties, upon the disposition of the properties to a third party, or upon completion of certain development obligations.
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The Company recognized management fees of $14.0 million, $11.6 million, and $11.4 million during the years ended December 31, 2019, 2018, and 2017, 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 years ended December 31, 2019, 2018, and 2017.
Condensed summary financial information relating to the unconsolidated joint ventures’ and partnerships’ operations (not just our proportionate share), is presented below for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
UDR/
MetLife
West Coast
As of and For the
UDR/MetLife
Vitruvian
Development
MetLife I
MetLife II
Joint Ventures
Park®
UDR/KFH
Condensed Statements of Operations:
9,834
151,226
64,273
26,398
12,217
14,058
278,006
Property operating expenses
4,533
54,445
22,019
12,541
4,982
6,829
105,349
5,787
44,077
35,001
9,832
5,746
5,440
105,883
Gain/(loss) on sale of real estate (a)
115,516
Operating income/(loss)
(486)
52,704
7,253
4,025
117,005
1,789
182,290
(3,070)
(44,825)
(17,399)
(5,948)
(4,300)
(4,656)
(80,198)
Net gain/(loss) on revaluation of assets and liabilities (b)
458,195
25,711
483,906
Other income/(loss)
(3,556)
466,074
(10,146)
23,788
112,705
(2,708)
586,157
Condensed Balance Sheets:
Total real estate, net
120,055
663,492
621,335
140,224
1,545,106
4,208
7,973
5,692
20,190
1,053
9,777
5,400
1,305
17,535
123,425
677,477
634,708
147,221
1,582,831
Third party debt, net
70,890
425,303
454,972
90,498
1,041,663
Accounts payable and accrued liabilities
4,037
9,303
9,757
3,440
26,537
74,927
434,606
464,729
93,938
1,068,200
48,498
242,871
169,979
53,283
514,631
Represent the gains on the sale of three operating communities at the UDR/KFH joint venture level, as described in note (b) to the table above summarizing the Company’s investment in and advances to unconsolidated joint ventures and partnerships, net.
(b)
Represent the net gains on the revaluation of the assets and liabilities to fair value of 15 operating communities at the UDR/MetLife II joint venture level and one development community and four land parcels at the UDR/MetLife Vitruvian Park® joint venture level prior to their distribution to the Company or MetLife in November 2019, as described in note (a) to the table above summarizing the Company’s investment in and advances to unconsolidated joint ventures and partnerships, net. The net gain on revaluation of assets and liabilities to fair value was recognized at the joint venture level as the respective joint ventures distributed their equity interests in the real estate to the Company or MetLife at fair value.
For the approximately 50% ownership interest acquired in the 10 operating communities, one development community and four land parcels described above, the Company deferred its share of the net gain on revaluation of approximately $131.5 million and recorded it as a reduction of the carrying amount of real estate owned. (see Note 3, Real Estate Owned). For the 50% ownership interest acquired in the five communities by MetLife, the Company recognized a net gain on sale of $114.9 million at our share, when the communities were disposed of by the UDR/MetLife II joint venture.
F - 27
Year Ended December 31, 2018
3,187
158,738
61,967
26,096
20,703
16,392
287,083
3,066
56,403
21,998
13,732
8,830
112,347
3,392
44,721
35,437
9,495
14,487
7,679
115,211
(3,271)
57,614
4,532
2,869
(2,102)
(117)
59,525
(1,872)
(49,118)
(17,408)
(6,051)
(6,739)
(6,175)
(87,363)
(5,143)
8,496
(12,876)
(3,182)
(8,841)
(6,144)
(27,690)
124,112
1,609,903
653,729
315,541
182,970
281,729
3,167,984
698
8,242
8,865
1,794
8,614
39,405
1,074
18,670
4,904
2,241
1,320
1,610
29,819
125,884
1,639,765
666,875
326,647
186,084
291,953
3,237,208
70,833
1,089,231
454,647
162,131
165,699
171,879
2,114,420
1,935
21,258
9,753
14,968
1,860
9,943
59,717
72,768
1,110,489
464,400
177,099
167,559
181,822
2,174,137
53,116
529,276
202,475
149,548
18,525
110,131
1,063,071
For the
Year Ended December 31, 2017
156,920
48,032
23,025
20,327
18,812
267,116
93
52,450
21,908
11,839
8,159
9,520
103,969
45,144
32,625
7,169
14,480
7,387
106,805
(17)
(609)
72,216
71,590
(110)
58,717
(6,501)
4,017
(2,312)
74,121
127,932
(50,603)
(13,894)
(5,030)
(5,264)
(4,038)
(78,829)
439
8,114
(20,395)
(1,013)
(7,576)
69,644
48,664
Other than the West Coast Development Joint Ventures, the condensed summary financial information relating to the entities in which we have an interest through the Developer Capital Program is not included in the tables above. As of and for the year ended December 31, 2019, combined total assets, liabilities, equity, revenues, expenses, and other income/(loss), for such entities were $521.0 million, $135.0 million, $386.0 million, $11.2 million, $3.5 million, and $26.4 million, respectively. As of and for the year ended December 31, 2018, combined total assets, liabilities, equity, revenues, and expenses for such entities were $248.1 million, $22.5 million, $225.6 million, $6.0 million, and $1.8 million, respectively. For the year ended December 31, 2017, combined total revenues and expenses for such entities were $7.8 million, and $9.5 million, respectively.
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6. LEASES
Lessee - Ground and Office Leases
UDR owns six communities that are subject to ground leases, under which UDR is the lessee, expiring between 2043 and 2103, inclusive of extension options we are reasonably certain will be exercised. All of these leases existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As such, these leases will continue to be classified as operating leases through the lease term expiration. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the remaining lease term. We currently do not hold any finance leases.
As of December 31, 2019, the Operating lease right-of-use assets was $204.2 million and the Operating lease liabilities was $198.6 million on our Consolidated Balance Sheets 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 44.7 years at December 31, 2019 and the weighted average discount rate was 5.0% at December 31, 2019.
Future minimum lease payments and total operating lease liabilities from our ground leases as of December 31, 2019 are as follows (dollars in thousands):
Ground Leases
12,442
455,221
Total future minimum lease payments (undiscounted)
517,431
Difference between future undiscounted cash flows and discounted cash flows
(318,873)
Total operating lease liabilities (discounted)
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. For the year ended December 31, 2019, Operating lease right-of-use assets and Operating lease liabilities increased by $111.1 million due to future minimum payments on two of our ground leases becoming fixed for the remainder of their terms.
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The components of operating lease expenses from our ground leases and office space were as follows (dollars in thousands):
Ground lease expense:
Contractual ground lease rent expense
8,272
Variable ground lease expense (a)
664
Total ground lease expense (b)
8,936
Contractual office space lease expense (b)
Total operating lease expense (c) (d)
9,006
As of December 31, 2018, in accordance with previously applicable lease accounting guidance, ASC 840, Leases, the future minimum lease payments from our ground leases and office space were as follows (dollars in thousands):
Ground
Leases
Office Space
4,901
76
313,918
338,423
184
UDR incurred $7.3 million and $6.2 million of ground rent expense for the years ended December 31, 2018 and 2017, respectively. These costs are reported within the line item Other Operating Expenses on the Consolidated Statements of Operations. The Company incurred $0.2 million and $0.2 million of rent expense related to office space for the years ended December 31, 2018 and 2017, respectively. These costs are included in General and Administrative on the Consolidated Statements of Operations.
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 December 31, 2019, our apartment home leases generally have initial terms of 12 months or less and represent approximately 98.1% of our total lease revenue. As of December 31, 2019, our retail and commercial space leases generally have initial terms of between 5 and 15 years and represent approximately 1.9% 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 16, Reportable Segments for further discussion around our major revenue streams and disaggregation of our revenue.)
We previously owned a parcel of land subject to a ground lease under which UDR was the lessor, expiring in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the
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ground lease term. In June 2019, the lessee exercised the purchase option and acquired the parcel of land for $38.0 million. (See Note 3, Real Estate Owned for further discussion.)
Future minimum lease payments from our retail and commercial leases as of December 31, 2019 are as follows (dollars in thousands):
Retail and Commercial Leases
22,568
22,055
20,443
19,057
17,304
78,818
Total future minimum lease payments (a)
180,245
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 $0.4 million during the year ended December 31, 2019.
F - 31
7. SECURED AND UNSECURED DEBT, NET
The following is a summary of our secured and unsecured debt at December 31, 2019 and 2018 (dollars in thousands):
Principal Outstanding
As of December 31, 2019
Weighted
Interest
Years to
Encumbered
Secured Debt:
Fixed Rate Debt
Mortgage notes payable (a)
884,869
417,989
3.61
6.2
Credit facilities (b)
204,590
90,000
4.90
Deferred financing costs and other non-cash adjustments
33,046
(1,343)
Total fixed rate secured debt, net
1,122,505
506,646
3.85
5.6
Variable Rate Debt
Tax-exempt secured notes payable (c)
94,700
1.79
12.2
Deferred financing costs
(64)
(119)
Total variable rate secured debt, net
26,936
94,581
Total Secured Debt, net
3.80
5.7
Unsecured Debt:
Borrowings outstanding under unsecured credit facility due January 2023 (d) (m)
3.1
Borrowings outstanding under unsecured commercial paper program due January 2020 (e) (m)
101,115
1.99
0.1
Borrowings outstanding under unsecured working capital credit facility due January 2021 (f)
16,583
2.59
1.0
Term Loan due September 2023 (d) (m)
35,000
3.70% Medium-Term Notes due October 2020 (net of discounts of $0 and $14, respectively) (k) (m)
299,986
4.63% Medium-Term Notes due January 2022 (net of discounts of $0 and $1,087, respectively) (l) (m)
398,913
1.93% Term Loan due September 2023 (d) (m)
315,000
3.75% Medium-Term Notes due July 2024 (net of discounts of $470 and $574, respectively) (g) (m)
299,530
299,426
3.75
8.50% Debentures due September 2024
15,644
8.50
4.00% Medium-Term Notes due October 2025 (net of discounts of $396 and $465, respectively) (h) (m)
299,604
299,535
4.00
5.8
2.95% Medium-Term Notes due September 2026 (m)
2.95
6.7
3.50% Medium-Term Notes due July 2027 (net of discounts of $529 and $600, respectively) (l)
299,471
299,400
3.50
7.5
3.50% Medium-Term Notes due January 2028 (net of discounts of $954 and $1,072, respectively) (m)
299,046
298,928
4.40% Medium-Term Notes due January 2029 (net of discounts of $5 and $6, respectively) (i) (m)
299,995
4.40
3.20% Medium-Term Notes due January 2030 (net of premiums of $2,281 and $0, respectively) (j) (l) (m)
402,281
3.20
10.0
3.00% Medium-Term Notes due August 2031 (net of discounts of $1,123 and $0, respectively) (k) (m)
398,877
3.00
3.10% Medium-Term Notes due November 2034 (net of discounts of $1,309 and $0, respectively) (l) (m)
298,691
14.8
(21,652)
(16,413)
Total Unsecured Debt, net
3.27
Total Debt, net
4,707,524
3,547,787
3.43
7.1
F - 32
For purposes of classification of the above table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively established a fixed interest rate for the underlying debt instrument.
Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. As of December 31, 2019, secured debt encumbered $2.1 billion or 16.8% of UDR’s total real estate owned based upon gross book value ($10.5 billion or 83.2% of UDR’s real estate owned based on gross book value is unencumbered).
(a) At December 31, 2019, fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2020 through February 2030 and carry interest rates ranging from 2.70% to 4.35%.
During the year ended December 31, 2019, the Company refinanced a $90.0 million credit facility with Fannie Mae to a fixed rate mortgage due in October 2029 and took out a new mortgage of $72.5 million due in February 2030. Interest payments are due monthly at interest rates of 2.70% and 3.10%, respectively. The refinancing was accounted for as a debt modification.
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.
In November 2019, the Company assumed secured fixed rate mortgage notes payable with an outstanding balance of $313.4 million and a fair value of $332.5 million in connection with the acquisition of approximately 50% ownership interest not previously owned in six operating communities from the UDR/MetLife joint venture. The six mortgages had outstanding balances ranging from $32.6 million to $94.1 million and carry interest rates from 3.25% to 4.12% (see Note 3, Real Estate Owned).
(b) During the year ended December 31, 2019, the Company prepaid the $90.0 million outstanding balance under its secured credit facility with Fannie Mae from proceeds received from the refinancing of the debt.
Further information related to the credit facility is as follows (dollars in thousands):
Borrowings outstanding
Weighted average borrowings during the period ended
94,098
253,813
Maximum daily borrowings during the period ended
314,869
Weighted average interest rate during the period ended
Weighted average interest rate at the end of the period
4.9
During the years ended December 31, 2019, 2018, and 2017, the Company had $3.0 million, $3.0 million, and $3.0 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 $35.3 million and $5.0 million at December 31, 2019 and 2018, 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 December 31, 2019, the variable interest rate
F - 33
on the mortgage note was 1.79%. During the year ended December 31, 2019, the Company paid off a $67.7 million variable rate mortgage note due on August 1, 2019.
(d) The Company has a $1.1 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $350.0 million unsecured term loan (the “Term Loan”). The credit agreement for these facilities (the “Credit Agreement”) allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2023, with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date of September 30, 2023.
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.
The following is a summary of short-term bank borrowings under the Revolving Credit Facility at December 31, 2019 and 2018 (dollars in thousands):
Total revolving credit facility
1,100,000
Borrowings outstanding at end of period (1)
Weighted average daily borrowings during the period ended
Interest rate at end of the period
(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 December 31, 2019 and 2018 (dollars in thousands):
Total unsecured commercial paper program
500,000
Borrowings outstanding at end of period
173,353
344,235
435,000
440,000
2.4
2.9
(f) The Company has a working capital credit facility, which provides for a $75.0 million unsecured revolving credit facility (the “Working Capital Credit Facility”) with a scheduled maturity date of January 15, 2021. Based on the
F - 34
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 December 31, 2019 and 2018 (dollars in thousands):
Total working capital credit facility
75,000
23,487
26,101
66,170
64,633
(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%.
(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) In July 2019, the Company issued $300.0 million of 3.20% senior unsecured medium-term notes due January 15, 2030. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The notes were priced at 99.66% of the principal amount at issuance. The Company 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%. The Company used the net proceeds for the repayment of debt, including amounts outstanding under the Company’s commercial paper program and Working Capital Credit Facility, and for other general corporate purposes. The Operating Partnership is the guarantor of this debt.
(k) In August 2019, the Company issued $400.0 million of 3.00% senior unsecured medium-term notes due August 15, 2031. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020. The notes were priced at 99.71% of the principal amount at issuance. In combination with the issuance, 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%. The Company used the net proceeds for the repayment of debt, including the repayment of all $300.0 million aggregate principal amount (plus the make-whole amount of approximately $5.4 million) of its 3.70% senior unsecured medium-term notes due October 1, 2020, and to fund acquisitions and for other general corporate purposes.
(l) In October 2019, the Company issued $100.0 million of 3.20% senior unsecured medium-term notes due 2030 and $300.0 million of 3.10% senior unsecured medium-term notes due 2034. Interest is payable semi-annually in arrears on January 15 and July 15 for the 2030 notes, and May 1 and November 1 for the 2034 notes. The 2030 notes were priced at 103.32% of the principal amount at issuance, and the 2034 notes were priced at 99.56% of the principal amount at issuance. In combination with the issuance, 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 and 3.13% for the 2034 notes. The Company used the net proceeds for the repayment of all $400.0 million aggregate principal amount (plus the make-whole amount of approximately $22.0 million and accrued and unpaid interest) of its 4.63% senior unsecured medium-term notes due January 2022. The 2034 notes were issued as “green” bonds and, as a result, the Company allocated the net proceeds from the sale of the 2034
F - 35
notes to fund eligible green projects, including previously incurred development costs related to properties that have received at least a LEED Silver certification. The Operating Partnership is the guarantor of both the 2030 notes and the 2034 notes.
The 2030 notes are a further issuance of, and form 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. As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was $400.0 million.
(m) The Operating Partnership is a guarantor of this debt.
The aggregate maturities, including amortizing principal payments on secured and unsecured debt, of total debt for the next ten years subsequent to December 31, 2019 are as follows (dollars in thousands):
Total Fixed
Total Variable
Year
Secured Debt
Unsecured Debt
Debt
110,645
3,797
20,380
3,945
310,873
350,000
660,873
95,280
315,644
410,924
2025
173,189
473,189
2026
51,070
351,070
2027
1,111
301,111
2028
122,465
422,465
2029
144,584
444,584
1,199,500
Subtotal
1,089,459
3,582,227
Non-cash (a)
(24,144)
8,838
We were in compliance with the covenants of our debt instruments at December 31, 2019.
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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):
Numerator for income/(loss) per share:
Income/(loss) attributable to common stockholders - basic and diluted
Denominator for income/(loss) per share:
Weighted average common shares outstanding
285,509
268,513
267,567
Non-vested restricted stock awards
(262)
(334)
(543)
Denominator for basic income/(loss) per share
Incremental shares issuable from assumed conversion of stock options, unvested LTIP Units, and unvested restricted stock
768
1,304
1,806
Denominator for diluted income/(loss) per share
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 years ended December 31, 2019, 2018, and 2017, the effect of the conversion of the OP Units, DownREIT Units, LTIP Units and the Company’s Series E preferred stock was not dilutive and therefore not included in the above calculation.
In July 2017, the Company entered into an ATM sales agreement under which the Company may offer and sell up to 20.0 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 year ended December 31, 2019, the Company sold 7.0 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $316.5 million at a weighted average price per share of $45.29. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $4.0 million, were approximately $312.3 million, which were primarily used to fund the Company’s recent acquisitions.
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.
In September 2019, the Company entered into a forward sales agreement under its ATM program for 1.3 million shares of common stock at an initial forward price per share of $47.68. The initial forward price per share received by the Company upon settlement was determined on the applicable settlement date based on adjustments made
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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.
In December 2019, the Company settled all 1.3 million shares sold under the forward sales agreement at a forward price per share of $47.41, which is inclusive of adjustments made to reflect the then-current federal funds rate, the amount of dividends paid to holders of UDR common stock and commissions paid to sales agents of approximately $0.6 million, for net proceeds of $63.5 million. Aggregate net proceeds from such sales, after deducting related expenses, was $63.2 million.
As of December 31, 2019, we had 11.7 million shares of common stock available for future issuance under the ATM program.
The following table sets forth the additional shares of common stock outstanding by equity instrument if converted to common stock for each of the years ended December 31, 2019, 2018, and 2017 (in thousands):
OP/DownREIT Units
22,773
24,548
24,821
Convertible preferred stock
3,011
3,021
Stock options, unvested LTIP Units, and unvested restricted stock
9. STOCKHOLDERS’ EQUITY
UDR has an effective registration statement that allows the Company to sell an undetermined number of debt and equity securities as defined in the prospectus. The Company had the ability to issue 350.0 million shares of common stock and 50.0 million shares of preferred shares as of December 31, 2019.
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The following table presents the changes in the Company’s issued and outstanding shares of common and preferred stock for the years ended December 31, 2019, 2018 and 2017 (shares in thousands)
Preferred Stock
Series E
Series F
2,797
16,196
Issuance of common shares through public offering
87
Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership
Conversion of Series E Cumulative Convertible shares
(16)
Adjustment for conversion of noncontrolling interest of unitholders in the DownREIT Partnership
381
Forfeiture of Series F shares
(344)
2,781
15,852
Issuance of common shares upon exercise of stock options
772
7,150
(593)
337
(50)
15,802
7,500
Issuance of common shares though ATM program
6,988
Issuance of common shares through forward sales agreement
1,339
1,969
1,196
(1,111)
14,691
The Company has an equity distribution agreement which allows it from time to time, through its sales agents, to offer and sell up to 20.0 million shares of its common stock. Sales of such shares will be made by means of ordinary brokers’ transactions on the NYSE at market prices. In July 2017, the Company updated its equity distribution agreement to also permit the entry into separate forward sales agreements to or through its forward purchasers. As of December 31, 2019, 11.7 million shares were available for sale under the continuous equity program.
During the year ended December 31, 2019, the Company entered into the following equity transactions for our common stock:
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Distributions are subject to the approval of the Board of Directors and are dependent upon our strategy, financial condition and operating results. UDR’s common distributions for the years ended December 31, 2019, 2018, and 2017 totaled $1.37, $1.29, and $1.24 per share, respectively.
The Series E Cumulative Convertible Preferred Stock (“Series E”) has no stated par value and a liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each share of the Series E is convertible at any time at the holder’s option into one share of our common stock prior to a “Special Dividend” declared in 2008 (1.083 shares after the Special Dividend). The holders of the Series E are entitled to vote on an as-converted basis as a single class in combination with the holders of common stock at any meeting of our stockholders for the election of directors or for any other purpose on which the holders of common stock are entitled to vote. The Series E has no stated maturity and is not subject to any sinking fund or any mandatory redemption.
Distributions declared on the Series E for the years ended December 31, 2019, 2018, and 2017 were $1.48, $1.40, and $1.33 per share, respectively. The Series E is not listed on any exchange. At December 31, 2019 and 2018, a total of 2,780,994 shares of the Series E were outstanding.
UDR is authorized to issue up to 20.0 million shares of the Series F Preferred Stock (“Series F”). The Series F may be purchased by holders of OP Units and DownREIT Units, at a purchase price of $0.0001 per share. OP/DownREIT Unitholders are entitled to subscribe for and purchase one share of UDR’s Series F for each OP/DownREIT Unit held. During the years ended December 31, 2019 and 2018, 1.1 million and less than 0.1 million of the Series F shares were forfeited upon the conversion of OP Units and DownREIT Units into Company common stock, respectively.
At December 31, 2019 and 2018, a total of 14.7 million and 15.8 million shares, respectively, of the Series F were outstanding with an aggregate purchase value of $1,469 and $1,580, respectively. Holders of the Series F are entitled to one vote for each share of the Series F they hold, voting together with the holders of our common stock, on each matter submitted to a vote of security holders at a meeting of our stockholders. The Series F does not entitle its holders to dividends or any other rights, privileges or preferences.
UDR’s Distribution Reinvestment and Stock Purchase Plan (the “Stock Purchase Plan”) allows common and preferred stockholders the opportunity to purchase, through the reinvestment of cash dividends and by making additional cash payments, additional shares of UDR’s common stock. From inception through December 31, 2008, shareholders have elected to utilize the Stock Purchase Plan to reinvest their distribution for the equivalent of 10.0 million shares of Company common stock. Shares in the amount of 11.0 million were reserved for issuance under the Stock Purchase Plan as of December 31, 2019. During the year ended December 31, 2019, UDR acquired all shares issued through the open market.
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10. EMPLOYEE BENEFIT PLANS
In May 2001, the stockholders of UDR approved the long term incentive plan (“LTIP”), which supersedes the 1985 Stock Option Plan. The LTIP authorizes the granting of awards which may take the form of options to purchase shares of common stock, stock appreciation rights, restricted stock, dividend equivalents, other stock-based awards, and any other right or interest relating to common stock or cash incentive awards to Company directors, employees and outside trustees to promote the success of the Company by linking individual’s compensation via grants of share based payment.
During the year ended December 31, 2015, the LTIP was amended to set forth the terms of new classes of partnership interests in the Operating Partnership designated as LTIP Units. LTIP Units are designed to qualify as “profits interests” in the Operating Partnership for federal income tax purposes, meaning that initially they are not economically equivalent in value to a share of our common stock, but over time can increase in value to one-for-one parity with common stock by operation of special tax rules applicable to profits interests. Until and unless such parity is reached, the value that an executive will realize for a given number of vested LTIP units is less than the value of an equal number of shares of our common stock.
As of December 31, 2019, 19.0 million shares were reserved on an unadjusted basis for issuance upon the grant or exercise of awards under the LTIP. As of December 31, 2019, there were 6.3 million common shares available for issuance under the LTIP.
The LTIP contains change of control provisions allowing for the immediate vesting of an award upon certain events such as a merger where UDR is not the surviving entity. Upon the death or disability of an award recipient all outstanding instruments will vest and all restrictions will lapse. The LTIP specifies that in the event of a capital transaction, which includes but is not limited to stock dividends, stock splits, extraordinary cash dividends and spin-offs, the number of shares available for grant in totality or to a single individual is to be adjusted proportionately. The LTIP specifies that when a capital transaction occurs that would dilute the holder of the stock award, prior grants are to be adjusted such that the recipient is no worse as a result of the capital transaction.
A summary of UDR’s LTIP Units and restricted stock activities during the year ended December 31, 2019 is as follows (shares in thousands):
LTIP Units
Restricted Stock
Average Fair
Value Per
Number
Restricted
LTIP Unit
of shares
Balance, December 31, 2018
611
37.00
307
36.58
Granted
674
39.74
124
38.35
Vested
(427)
39.33
(176)
36.61
Forfeited
37.69
(7)
37.73
Balance, December 31, 2019
858
37.77
248
37.29
As of December 31, 2019, the Company had granted 6.3 million shares of restricted stock and 2.9 million LTIP Units under the LTIP.
Stock Option Plan
The Company has no unexercised stock options outstanding and no remaining compensation expense related to unvested stock options as of December 31, 2019.
During the years ended December 31, 2019, 2018, and 2017, respectively, we did not recognize any net compensation expense related to outstanding stock options.
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Restricted Stock Awards
Restricted stock awards are granted to Company employees, officers, and directors. The restricted stock awards are valued based upon the closing sales price of UDR common stock on the date of grant. Compensation expense is recorded under the straight-line method over the vesting period, which is generally three to four years. Restricted stock awards earn dividends payable in cash. Some of the restricted stock grants are based on the Company’s performance and are subject to adjustment during the initial one year performance period. For the years ended December 31, 2019, 2018, and 2017, we recognized $4.8 million, $4.3 million, and $4.0 million of compensation expense, net of capitalization, related to the amortization of restricted stock awards, respectively. The total remaining compensation cost on unvested restricted stock awards was $3.9 million and had a weighted average remaining contractual life of 1.6 years as of December 31, 2019.
Short-Term Incentive Compensation
In January 2019, certain officers of the Company were awarded a STI Unit grant under the 2019 Long-Term Incentive Program (“2019 LTI”). The STI Unit awards represent short-term incentive compensation for the officers and were valued for compensation expense purposes based upon the closing sales price of UDR common stock on the date of grant in accordance with ASC 718, Compensation - Stock Compensation, or $33.40 per unit, inclusive of a discount due to uncertainty associated with the STI Unit reaching parity with the value of a share of UDR common stock. Compensation expense is recorded under the straight-line method over the vesting period, which is one year. The STI Unit awards are primarily based on the Company’s performance and are subject to adjustment based on performance against predefined metrics during the one-year performance period. For the year ended December 31, 2019, we recognized $7.2 million of compensation expense, net of capitalization, related to the amortization of STI Unit awards. For the years ended December 31, 2018 and 2017, no expense was recognized for STI Unit awards. As the STI Unit awards vest over a one-year period, there was no remaining unrecognized compensation expense as of December 31, 2019.
Long-Term Incentive Compensation
In January 2019, certain officers of the Company were awarded either a restricted stock grant or an LTIP Unit grant, or a combination of both, under the 2019 LTI. For both restricted stock grants and LTIP Unit grants, thirty percent of the 2019 LTI award is based upon FFO as Adjusted over a one-year period and will vest fifty percent on the one-year anniversary and fifty percent on the two-year anniversary. Fifteen percent of the 2019 LTI award is based upon relative FFO as Adjusted over a three-year period and will vest 100% at the end of the three-year performance period. The remaining fifty-five percent of the 2019 LTI award is based on Total Shareholder Return (“TSR”) as measured relative to comparable apartment REITs over a three-year period and as measured relative to the Nareit Equity REITs Total Return Index over a three-year period whereby both will vest 100% at the end of the three-year performance periods. The portion of the restricted stock grant based upon FFO as Adjusted was valued for compensation expense purposes based upon the closing sales price of UDR common stock on the date of grant or $38.39 per share. Because LTIP Units are granted at the maximum potential payout and there is uncertainty associated with an LTIP Unit reaching parity with the value of a share of UDR common stock, the portion of the LTIP Unit grant based upon the one-year FFO as Adjusted was valued for compensation expense purposes at $17.47 per unit on the grant date, inclusive of a 9% discount, and the portion of the LTIP Unit grant based upon the three-year FFO as Adjusted was valued for compensation expense purposes at $18.24 per unit on the grant date, inclusive of a 5% discount. The portion of the restricted stock grant based upon relative TSR was valued for compensation expense purposes at $43.63 per share for the comparable apartment REITs component and $43.42 per share for the Nareit Equity REITs Total Return Index component on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 21.0%. The portion of the LTIP Unit grant based upon relative TSR was valued for compensation expense purposes at $20.89 per unit, inclusive of a 5% discount, for the comparable apartment REITs component and $20.79 per unit, inclusive of a 5% discount, for the Nareit Equity REITs Total Return Index component on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 21.0%.
In January 2018, certain officers of the Company were awarded either a restricted stock grant or an LTIP Unit grant, or a combination of both, under the 2018 Long-Term Incentive Program (“2018 LTI”). For both restricted stock grants and LTIP Unit grants, thirty percent of the 2018 LTI award is based upon FFO as Adjusted over a one-year period and will vest fifty percent on the one-year anniversary and fifty percent on the two-year anniversary. Fifteen percent of
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the 2018 LTI award is based upon relative FFO as Adjusted over a three-year period and will vest 100% at the end of the three-year performance period. The remaining fifty-five percent of the 2018 LTI award is based on Total Shareholder Return (“TSR”) as measured relative to comparable apartment REITs over a three-year period and as measured relative to the Nareit Equity REITs Total Return Index over a three-year period whereby both will vest 100% at the end of the three-year performance periods. The portion of the restricted stock grant based upon FFO as Adjusted was valued for compensation expense purposes based upon the closing sales price of UDR common stock on the date of grant or $38.06 per share. Because LTIP Units are granted at the maximum potential payout and there is uncertainty associated with an LTIP Unit reaching parity with the value of a share of UDR common stock, the portion of the LTIP Unit grant based upon the one-year FFO as Adjusted was valued for compensation expense purposes at $17.13 per unit on the grant date, inclusive of a 10% discount, and the portion of the LTIP Unit grant based upon the three-year FFO as Adjusted was valued for compensation expense purposes at $18.08 per unit on the grant date, inclusive of a 5% discount. The portion of the restricted stock grant based upon relative TSR was valued for compensation expense purposes at $42.18 per share for the comparable apartment REITs component and $40.49 per share for the Nareit Equity REITs Total Return Index component on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 17.0%. The portion of the LTIP Unit grant based upon relative TSR was valued for compensation expense purposes at $20.12 per unit, inclusive of a 5% discount, for the comparable apartment REITs component and $19.35 per unit, inclusive of a 5% discount, for the Nareit Equity REITs Total Return Index component on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 17.0%.
In January 2017, certain officers of the Company were awarded either a restricted stock grant or an LTIP Unit grant, or a combination of both, under the 2017 Long-Term Incentive Program (“2017 LTI”). For both restricted stock grants and LTIP Unit grants, thirty percent of the 2017 LTI award is based upon FFO as Adjusted over a one-year period and will vest fifty percent on the one-year anniversary and fifty percent on the two-year anniversary. Ten percent of the 2017 LTI award is based upon FFO as Adjusted over a three-year period and will vest 100% at the end of the three-year performance period. The remaining sixty percent of the 2017 LTI award is based on Total Shareholder Return (“TSR”) as measured relative to comparable apartment REITs over a three-year period and on an absolute basis over a three-year period whereby both will vest 100% at the end of the three-year performance periods. The portion of the restricted stock grant based upon FFO as Adjusted was valued for compensation expense purposes based upon the closing sales price of UDR common stock on the date of grant or $35.95 per share. Because LTIP Units are granted at the maximum potential payout and there is uncertainty associated with an LTIP Unit reaching parity with the value of a share of UDR common stock, the portion of the LTIP Unit grant based upon the one-year FFO as Adjusted was valued for compensation expense purposes at $16.18 per unit on the grant date, inclusive of a 10% discount, and the portion of the LTIP Unit grant based upon the three-year FFO as Adjusted was valued for compensation expense purposes at $16.63 per unit on the grant date, inclusive of a 7.5% discount. The portion of the restricted stock grant based upon TSR was valued for compensation expense purposes at $44.26 per share for the relative component and $31.40 per share for the absolute component on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 23.0%. The portion of the LTIP Unit grant based upon TSR was valued for compensation expense purposes at $20.54 per unit, inclusive of a 7.5% discount, for the relative component and $14.71 per unit, inclusive of a 7.5% discount, for the absolute component on the grant date as determined by a lattice-binomial option-pricing model based on a Monte Carlo simulation using a volatility factor of 23.0%.
For the years ended December 31, 2019, 2018, and 2017, we recognized $12.4 million, $9.9 million and $8.9 million, respectively, of compensation expense, net of capitalization, related to the amortization of the awards. The total remaining compensation cost on unvested LTI awards was $9.8 million and had a weighted average remaining contractual life of 1.4 years as of December 31, 2019.
Profit Sharing Plan
Our profit sharing plan (the “Plan”) is a defined contribution plan covering all eligible full-time employees. Under the Plan, UDR makes discretionary profit sharing and matching contributions to the Plan as determined by the Compensation Committee of the Board of Directors. Aggregate provisions for contributions, both matching and discretionary, which are included in UDR’s Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017, was $1.2 million, $1.3 million, and $1.3 million, respectively.
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11. INCOME TAXES
For 2019, 2018, and 2017, UDR believes that we have complied with the REIT requirements specified in the Code. As such, the REIT would generally not be subject to federal income taxes.
For income tax purposes, distributions paid to common stockholders may consist of ordinary income, qualified dividends, capital gains, unrecaptured section 1250 gains, return of capital, or a combination thereof. Distributions that exceed our current and accumulated earnings and profits constitute a return of capital rather than taxable income and reduce the stockholder’s basis in their common shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the stockholder’s basis in the common shares, it generally will be treated as a gain from the sale or exchange of that stockholder’s common shares. Taxable distributions paid per common share were taxable as follows for the years ended December 31, 2019, 2018 and 2017 (unaudited):
Ordinary income
0.981
0.774
1.018
Qualified ordinary income
0.004
0.006
0.011
Long-term capital gain
0.021
0.058
0.133
Unrecaptured section 1250 gain
0.063
0.233
Nondividend distributions
0.281
0.207
1.350
1.278
1.225
We have a TRS that is subject to federal and state income taxes. A TRS is a C-corporation which has not elected REIT status and as such is subject to United States federal and state income tax. The components of the provision for income taxes are as follows for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
Income tax (benefit)/provision
Current
Federal
1,466
220
(1,205)
State
735
396
407
Total current
2,201
616
(798)
Deferred
1,266
568
(10)
Total deferred
1,637
Total income tax (benefit)/provision
Classification of income tax (benefit)/provision:
Continuing operations
Deferred income taxes are provided for the change in temporary differences between the basis of certain assets and liabilities for financial reporting purposes and income tax reporting purposes. The expected future tax rates are based
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upon enacted tax laws. The components of our TRS deferred tax assets and liabilities are as follows for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
Deferred tax assets:
Federal and state tax attributes
139
Total deferred tax assets
109
98
Valuation allowance
(19)
(9)
Net deferred tax assets
90
82
138
Deferred tax liabilities:
Book/tax depreciation and basis
(367)
(1,291)
Total deferred tax liabilities
(1,725)
(84)
Net deferred tax assets/(liabilities)
(1,635)
(2)
Income tax provision/(benefit), net from our TRS differed from the amounts computed by applying the U.S. statutory rate of 21% to pretax income/(loss) for the years ended December 31, 2019, and 2018 and 35% for the year ended 2017 as follows (dollars in thousands):
Income tax provision/(benefit)
U.S. federal income tax provision/(benefit)
2,905
581
State income tax provision
1,013
527
493
Other items
(139)
(167)
New tax law benefit
(1,129)
ITC basis adjustment
Total income tax provision/(benefit)
As of December 31, 2019, the Company had federal net operating loss carryovers (“NOL”) of $27.1 million expiring in 2032 through 2035 and state NOLs of $68.1 million expiring in 2020 through 2032. A portion of these attributes are still available to the subsidiary REITs, but are carried at a zero effective tax rate.
The Company’s Tax benefit/(provision), net was $(3.8) million and $(0.7) million for the years ended December 31, 2019 and 2018, respectively. The increase of $3.1 million was primarily attributable to a $2.0 million tax on a promoted interest and by $1.3 million on unrealized gains related to other investment ventures. 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. The financial statements reflect expected future tax consequences of income tax positions presuming the taxing authorities’ full knowledge of the tax position and all relevant facts, but without considering time values. GAAP also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.
The Company evaluates our tax position using a two-step process. First, we determine 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. The Company will then determine the amount of benefit to recognize and record the amount of the benefit that is more likely than not to be realized upon ultimate settlement. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in Tax benefit/(provision), net. As of December 31, 2019 and 2018, UDR has no material unrecognized income tax benefits/(provisions).
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The Company files income tax returns in federal and various state and local jurisdictions. With few exceptions, the Company is no longer subject to federal, state and local income tax examination by tax authorities for years prior to 2014. The tax years 2016 through 2018 remain open to examination by the major taxing jurisdictions to which the Company is subject.
12. NONCONTROLLING INTERESTS
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.
The following table sets forth redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership for the years ended December 31, 2019 and 2018 (dollars in thousands):
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, December 31, 2018
948,138
Mark-to-market adjustment to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
183,884
43,552
Conversion of OP Units/DownREIT Units to Common Stock
(134,031)
(13,328)
Distributions to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
(32,270)
(32,798)
OP Units Issued
4,320
Vesting of Long-Term Incentive Plan Units
Allocation of other comprehensive income/(loss)
(826)
244
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, December 31, 2019
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 $(0.2) million, $(0.2) million, and $(0.2) million during the years ended December 31, 2019, 2018, and 2017, respectively.
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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.
13. 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:
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The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of December 31, 2019 and 2018 are summarized as follows (dollars in thousands):
Fair Value at December 31, 2019, Using
Quoted
Prices in
Amount in
Active
Statement of
Markets
Significant
Financial
Fair Value
for Identical
Position at
Estimate at
Assets or
Observable
Unobservable
Liabilities
Inputs
(Level 1)
(Level 2)
(Level 3)
Description:
Notes receivable (a)
160,197
Derivatives - Interest rate contracts (b)
153,656
160,203
142
Secured debt instruments - fixed rate: (c)
Mortgage notes payable
906,228
898,329
Credit facilities
218,490
213,661
Secured debt instruments - variable rate: (c)
Tax-exempt secured notes payable
Unsecured debt instruments: (c)
Working capital credit facility
Commercial paper program
Unsecured notes
3,263,152
3,397,622
4,731,595
4,853,337
4,853,195
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership (d)
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Fair Value at December 31, 2018, Using
45,026
4,757
47,016
49,783
356
416,314
Fannie Mae credit facility
90,213
2,861,842
2,829,390
3,566,018
3,532,104
3,531,748
There were no transfers into or out of any of the levels of the fair value hierarchy during the year ended December 31, 2019.
Financial Instruments Carried at Fair Value
The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
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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 December 31, 2019 and 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. In conjunction with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership have a redemption feature and are marked to their redemption value. The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership are classified as Level 2.
Financial Instruments Not Carried at Fair Value
At 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 years ended December 31, 2019, 2018, and 2017.
After determining an other-than-temporary decrease in the value of an equity method investment has occurred, we estimate the fair value of our investment by estimating the proceeds we would receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs reflect management’s best estimate of what market participants would use in pricing the investment giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture assets. The inputs and assumptions utilized to estimate the future cash flows of the underlying assets are based upon the Company’s evaluation of the economy, market trends, operating results, and other factors, including judgments regarding costs to complete any construction activities, lease up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate the projected cash flows at the disposition, and discount rates.
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14. 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 years ended December 31, 2019, 2018, and 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
During the year ended December 31, 2017, the Company recognized a loss of $0.1 million, reclassified from Accumulated other comprehensive income/(loss), net to Interest expense due to the de-designation of a cash flow hedge. No amounts were de-designated during the years ended December 31, 2019 and 2018.
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 December 31, 2020, the Company estimates that an additional $1.7 million will be reclassified as a decrease to Interest expense.
As of December 31, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
Product
Instruments
Notional
Interest rate swaps (a)
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
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resulted in no gain or loss for the years ended December 31, 2019 and 2018, and a loss of less than $0.1 million for the year ended December 31, 2017.
As of December 31, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
Interest rate caps
19,880
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 December 31, 2019 and 2018 (dollars in thousands):
Asset Derivatives
Liability Derivatives
(included in Other assets)
(included in Other liabilities)
Fair Value at:
Derivatives designated as hedging instruments:
Interest rate products
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 years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
Gain/(Loss) Recognized in
Gain/(Loss) Reclassified
from Accumulated OCI into
(Amount Excluded from
Recognized in OCI
Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships
2,770
1,948
(1,271)
(136)
Total amount of Interest expense presented on the Consolidated Statements of Operations
Derivatives Not Designated as Hedging Instruments
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
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give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity’s creditworthiness is materially weaker than the original party to the derivative agreement.
As of December 31, 2019, the fair value of derivatives was in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, of less than $0.1 million.
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 December 31, 2019 and 2018 (dollars in thousands):
Gross
Net Amounts of
Gross Amounts Not Offset
Amounts
Assets
in the Consolidated
Offset in the
Presented in the
Balance Sheet
Amounts of
Consolidated
Cash
Recognized
Balance
Balance Sheets
Collateral
Offsetting of Derivative Assets
Sheets
Received
Net Amount
(3)
December 31, 2018
Offsetting of Derivative Liabilities
Posted
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15. COMMITMENTS AND CONTINGENCIES
Commitments
Real Estate Commitments
The following summarizes the Company’s real estate commitments at December 31, 2019 (dollars in thousands):
UDR's
UDR's Remaining
Investment (a)
Commitment
Wholly-owned — under development
208,723
Wholly-owned — redevelopment
15,744
19,756
Joint ventures:
Preferred equity investments
73,868
9,121
(c)
Other investments
-
8,100
(d)
172,964
245,700
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 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.
16. 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
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property revenue to cover the regional supervision and accounting costs related to consolidated property operations, and land rent. UDR’s Chief Operating Decision Maker utilizes NOI as the key measure of segment profit or loss.
UDR’s two reportable segments are Same-Store Communities and Non-Mature Communities/Other:
Management evaluates the performance of each of our apartment communities on a Same-Store Community and Non-Mature Community/Other basis, as well as individually and geographically. This is consistent with the aggregation criteria under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Company’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the Chief Operating Decision Maker.
Revenue is measured based on consideration specified in contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by providing the services specified in a contract to the customer. All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of UDR’s total revenues during the years ended December 31, 2019, 2018, and 2017.
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.
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
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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 years ended December 31, 2019, 2018, and 2017, and reconciles NOI to Net income/(loss) attributable to UDR, Inc. on the Consolidated Statements of Operations (dollars in thousands):
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Reportable apartment home segment lease revenue
Same-Store Communities (a)
392,456
377,259
361,277
210,391
204,733
199,206
113,175
109,189
104,106
119,910
117,572
115,713
54,516
52,970
51,949
162,969
94,176
77,524
Total segment and consolidated lease revenue
1,053,417
955,899
909,775
Reportable apartment home segment other revenue
31,045
28,493
27,493
17,049
15,717
14,951
13,557
13,045
12,361
4,858
4,590
4,307
5,312
5,281
5,152
12,900
12,080
10,270
Total segment and consolidated other revenue
84,721
79,206
74,534
Total reportable apartment home segment rental income
423,501
405,752
388,770
227,440
220,450
214,157
126,732
122,234
116,467
124,768
122,162
120,020
59,828
58,251
57,101
175,869
106,256
87,794
Total segment and consolidated rental income
Reportable apartment home segment NOI
321,890
306,307
291,265
159,665
153,670
150,126
88,467
85,220
80,726
83,832
84,059
83,569
36,589
34,506
34,439
58,378
Total segment and consolidated NOI
Reconciling items:
(32,721)
(28,465)
(27,068)
(13,932)
(12,100)
(9,060)
(501,257)
(429,006)
(430,054)
(51,533)
(46,983)
(48,566)
Casualty-related (charges)/recoveries, net
(474)
(2,121)
(4,335)
(6,666)
(6,673)
(6,408)
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The following table details the assets of UDR’s reportable segments as of December 31, 2019 and 2018 (dollars in thousands):
Reportable apartment home segment assets:
Same-Store Communities (a):
3,810,672
3,763,366
2,350,341
2,317,369
806,830
779,310
1,500,597
1,491,994
456,140
447,305
3,677,521
1,396,815
Total segment assets
Total segment assets — net book value
Total consolidated assets
Markets included in the above geographic segments are as follows:
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17. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY FINANCIAL DATA
Selected consolidated quarterly financial data for the years ended December 31, 2019 and 2018 is summarized in the table below (dollars in thousands, except per share amounts):
Three Months Ended
March 31,
June 30,
September 30,
267,922
278,463
289,008
302,745
26,602
38,318
29,422
105,237
Net income/(loss) attributable to common stockholders (a)
23,492
34,588
26,173
96,928
Income/(loss) attributable to common stockholders per weighted average common share (a):
0.08
0.12
0.09
0.33
277,002
281,960
288,706
293,107
277,557
282,575
289,529
294,073
250,483
256,634
263,256
264,732
89,225
22,444
20,258
89,615
80,801
19,630
17,639
81,168
0.30
0.07
267,546
267,727
270,107
269,208
268,890
268,861
270,755
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The PartnersUnited Dominion Realty, L.P.
We have audited the accompanying consolidated balance sheets of United Dominion Realty, L.P. (the “Partnership”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income/loss, changes in capital, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Partnership at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Partnership’s auditor since 2010.
Denver, Colorado
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(In thousands, except for unit data)
(1,658,161)
13,998
13,563
Investment in unconsolidated entities
76,222
103,026
205,668
24,241
34,052
LIABILITIES AND CAPITAL
Notes payable due to the General Partner
637,233
700,115
200,001
2,801
2,699
217
17,946
15,250
63,364
59,461
12,226
14,215
Commitments and contingencies (Note 11)
Capital:
Partners’ capital:
General partner:
110,883 OP Units outstanding at December 31, 2019 and December 31, 2018
859
950
Limited partners:
183,952,659 and 183,525,660 OP Units outstanding at December 31, 2019 and December 31, 2018, respectively
1,347,622
1,471,120
17,405
13,819
Total capital
1,365,886
1,485,889
Total liabilities and capital
See accompanying notes to the consolidated financial statements.
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(In thousands, except per unit data)
67,710
67,400
67,493
51,057
47,140
45,043
299,798
296,603
303,172
75,507
41,272
141,975
210,824
157,477
(8,313)
43,496
(19,256)
(1,639)
(8,733)
(18,156)
Interest expense on notes payable due to the General Partner
(28,028)
(14,102)
(12,210)
(1,832)
(1,722)
(1,548)
Net income/(loss) per weighted average OP Unit - basic and diluted
Weighted average OP Units outstanding - basic and diluted
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106
107,961
Comprehensive income/(loss) attributable to OP unitholders
106,413
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CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
Limited
Accumulated
Advances
Class A
Partners
(to)/from
and LTIP
Comprehensive
Partners’
Partner
Units
Income/(Loss), net
63,901
269,928
1,243,460
(113)
20,638
1,618,499
1,015
4,270
100,957
(2,328)
(9,704)
(215,922)
(228,090)
OP Unit redemptions for common shares of UDR
(288)
288
Adjustment to reflect limited partners’ capital at redemption value
4,886
11,599
(16,485)
Long-Term Incentive Plan Unit grants
7,763
Unrealized gain/(loss) on derivative financial investments
113
107
Net change in advances (to)/from the General Partner
378,240
(9,244)
368,996
67,474
283,568
1,112,298
12,936
1,875,130
2,221
9,977
217,426
(10,718)
(224,637)
(144)
(237,827)
(416)
416
2,034
4,295
(6,329)
15,839
Conversion of Advances (to)/from the General Partner to notes payable
(257,204)
(140,695)
(839)
(141,534)
69,401
302,545
1,099,174
971
3,404
97,727
(2,396)
(9,063)
(241,207)
(152)
(252,818)
(79,010)
79,010
13,827
39,638
(53,465)
27,066
Net contributions/(distributions) to/(from) noncontrolling interests
1,754
81,803
284,580
981,239
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3,534
1,771
5,642
1,084
(3,260)
(3,992)
(1,808)
1,194
(4,705)
(137,332)
98,533
67,985
(62,397)
(44,227)
(53,346)
Distributions received from unconsolidated entities
18,491
17,377
16,704
Advances (to)/from the General Partner, net
(348,381)
163,196
(133,205)
(275,345)
Issuance/(repayment) of notes payable to the General Partner
(272,913)
169,577
Distributions paid to partnership unitholders
(10,064)
(12,705)
(11,694)
(376)
(1,821)
(5,003)
334
816
422
13,688
12,872
12,450
14,022
38,400
17,173
24,331
2,913
2,056
2,032
94,174
88,161
Right-of-use assets obtained in exchange for operating lease liabilities remeasurements
112,498
LTIP Unit grants
Distributions declared but not yet paid
57,025
257,204
The following reconciles cash, cash equivalents, and restricted cash to the total of the same amounts as shown above:
756
12,579
11,694
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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 years ended December 31, 2019, 2018, and 2017, rental revenues of the Operating Partnership represented 39%, 42%, and 43%, respectively, of the General Partner’s consolidated rental revenues. As of December 31, 2019, 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 December 31, 2019, there were 184.1 million OP Units outstanding, 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 outside limited partners. There were 183.6 million OP Units outstanding as of December 31, 2018, of which 174.2 million, or 94.9%, were owned by UDR and affiliated entities and 9.4 million, or 5.1%, were owned by outside limited partners. See Note 10, Capital Structure.
As sole general partner of the Operating Partnership, UDR owned all 0.1 million general partner OP units, or 0.1%, of the total OP Units outstanding as of December 31, 2019 and 2018. At December 31, 2019 and 2018, there were 184.0 million and 183.5 million, respectively, of limited partner OP Units outstanding, of which 1.9 million were Class A Limited Partnership Units as of both periods. Of the limited partner OP Units outstanding, UDR owned 176.1 million, or 95.7%, and 174.1 million, or 94.8%, at December 31, 2019 and 2018, respectively. The remaining 7.9 million, or 4.3%, and 9.4 million, or 5.1%, of the limited partner OP Units outstanding were held by outside limited partners at December 31, 2019 and 2018, respectively, of which 1.8 million were Class A Limited Partnership units as of both periods. See Note 10, Capital Structure.
The Operating Partnership evaluated subsequent events through the date its financial statements were issued. No significant recognized or non-recognized subsequent events were noted.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amends the transition requirements and scope of ASU 2016-13 and clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. The updated standard became effective for the Operating Partnership on January 1, 2020 and is to be adopted on a modified retrospective basis through a cumulative-effect adjustment to retained earnings on that date. While we are currently evaluating the impact ASU 2016-13 will have on our consolidated financial statements and related disclosures, we do not expect the updated standard to have a material impact on the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In February 2016, the FASB issued ASU 2016-02, Leases. The standard amended the existing lease accounting guidance and required lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases continued to recognize lease expense in a manner similar to previous accounting. For lessors, accounting for leases under the new guidance was substantially the same as in prior periods, but eliminated current real estate-specific provisions and changed the treatment of initial direct costs. The standard was effective for the Operating Partnership on January 1, 2019.
The Operating Partnership elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Operating Partnership also elected the short-term lease exception provided for in the standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year.
Upon adoption of the standard on January 1, 2019, the Operating Partnership recognized right-of-use assets of $94.2 million and lease liabilities of $88.2 million. The right-of-use assets included $6.0 million of prepaid rent and intangible assets that was included within Other assets on our Consolidated Balance Sheets as of December 31, 2018.
The lease liabilities represent the present value of the remaining minimum lease payments as of January 1, 2019 related to ground leases for communities where we are the lessee. The right-of-use assets represent our right to use an underlying asset for the lease term, which are calculated utilizing the lease liabilities plus any prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. Our right-of-use assets and related lease liabilities recognized as of January 1, 2019 may change as a result of updates to the projected future minimum lease payments. Certain of our ground lease agreements where we are the lessee have future minimum lease payments that reset in the future based upon a percentage of the fair market value of the land at the time of the reset. The Operating Partnership will continue to recognize lease expense for these leases in a manner similar to previous accounting based on our election of the package of practical expedients. However, in the event we modify existing ground leases and/or enter into new ground leases subsequent to the adoption of the standard, such leases would likely be classified as finance leases under the standard and require expense recognition based on the effective interest method. Under the standard, initial direct costs for both lessees and lessors will include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, subsequent to the adoption of the standard, we are expensing non-incremental leasing costs as incurred.
In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which provided entities with relief from the costs of implementing certain aspects of ASU 2016-02, Leases. The ASU provided a practical expedient which allowed lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Operating Partnership elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where we are the lessor. The ASU also provided a transition option that permitted entities to not recast the comparative periods presented when transitioning to the standard, which the Operating Partnership also elected.
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The Operating Partnership purchases real estate investment properties and records the tangible and identifiable intangible assets and liabilities acquired based on their estimated fair value. The primary, although not only, identifiable intangible asset associated with our portfolio is the value of existing lease agreements. When recording the acquisition of a community, we first assign fair value to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the community is vacant. The Operating Partnership estimates the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. Depreciation on the building is based on the expected useful life of the asset and the in-place leases are amortized over their remaining average contractual life. Property acquisition costs are capitalized as incurred if the acquisition does not meet the definition of a business.
Quarterly or when changes in circumstances warrant, the Operating Partnership will assess our real estate properties for indicators of impairment. In determining whether the Operating Partnership has indicators of impairment in our real estate assets, we assess whether the long-lived asset’s carrying value exceeds the community’s undiscounted future cash flows, which is representative of projected net operating income (“NOI”) plus the residual value of the community. Our future 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. If such indicators of impairment are present and the carrying value exceeds the undiscounted cash flows of the community, an impairment loss is recognized equal to the excess of the carrying amount of the asset over its estimated fair value. Our estimates of fair market value represent our best estimate based primarily upon unobservable inputs related to rental rates, operating costs, growth rates, discount rates and capitalization rates, industry trends and reference to market rates and transactions.
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, for the years ended December 31, 2019, 2018, and 2017 were $0.8 million, less than $0.1 million, and $0.5 million, respectively. During the years ended December 31, 2019, 2018, and 2017, total interest capitalized was $0.2 million, less than $0.1 million, and less than $0.1 million, respectively. As each home in a capital project is completed and becomes available for lease-up, the Operating Partnership ceases capitalization on the related portion and depreciation commences over the estimated useful life.
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The majority of the Operating Partnership’s cash and cash equivalents are held at major commercial banks.
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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 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 on consolidation of a property.
The General Partner utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges. Derivative financial instruments associated with the Operating Partnership’s allocation of the General Partner’s debt are recorded on our Consolidated Balance Sheets as either an asset or liability and measured quarterly at their fair value. The changes in fair value for the General Partner’s cash flow hedges allocated to the Operating Partnership that are deemed effective are reflected in other comprehensive income/(loss) and for non-designated derivative financial instruments in earnings. The ineffective component of cash flow hedges, if any, is recorded in earnings.
The noncontrolling interests represent the General Partner’s interests in certain consolidated subsidiaries and are presented in the capital section of the Consolidated Balance Sheets since these interests are not convertible or redeemable into any other ownership interests of the Operating Partnership.
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.
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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 no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken in future tax returns.
Allocation of General and Administrative Expenses
The Operating Partnership is charged directly for general and administrative expenses it incurs. The Operating Partnership is also charged with other general and administrative expenses that have been allocated by the General Partner to each of its subsidiaries, including the Operating Partnership, based on reasonably anticipated benefits to the parties. (See Note 7, Related Party Transactions.)
All advertising costs are expensed as incurred and reported on the Consolidated Statements of Operations within the line item Property operating and maintenance. During the years ended December 31, 2019, 2018, and 2017, total advertising expense was $1.9 million, $1.9 million, and $2.1 million, respectively.
Comprehensive income/(loss), which is defined as the change in capital during each period from transactions and other events and circumstances from nonowner sources, including all changes in capital during a period except for those resulting from investments by or distributions to unitholders, is displayed in the accompanying Consolidated Statements of Comprehensive Income/(Loss). For the years ended December 31, 2019, 2018, and 2017, the Operating Partnership’s other comprehensive income/(loss) consisted of the gain/(loss) (effective portion) on derivative instruments that are designated as and qualify as cash flow hedges and (gain)/loss reclassified from other comprehensive income/(loss) into earnings. The (gain)/loss reclassified from other comprehensive income/(loss) is included in Interest expense on the Consolidated Statements of Operations. See Note 9, Derivatives and Hedging Activity, for further discussion.
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The Operating Partnership is subject to increased exposure from economic and other competitive factors specific to those markets where it holds a significant percentage of the carrying value of its real estate portfolio at December 31, 2019, the Operating Partnership held greater than 10% of the carrying value of its real estate portfolio in each of the Orange County, California, San Francisco, California; Metropolitan D.C. and New York, New York markets.
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 December 31, 2019, the Operating Partnership owned and consolidated 52 communities in nine 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 December 31, 2019 and 2018 (dollars in thousands):
711,256
96,864
92,000
Buildings, improvements, and furniture, fixtures and equipment
3,067,040
3,008,729
The Operating Partnership did not have any acquisitions of real estate during the years ended December 31, 2019 and 2018.
The Operating Partnership did not have any dispositions of real estate during the year ended December 31, 2019.
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.
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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.
As of December 31, 2019, the DownREIT Partnership owned 12 communities with 5,657 apartment homes. The Operating Partnership’s investment in the DownREIT Partnership was $76.2 million and $103.0 million as of December 31, 2019 and 2018, respectively.
In December 2018, the DownREIT Partnership sold an operating community in Fairfax, Virginia with a total of 604 apartment homes for gross proceeds of $150.7 million. As a result, the Operating Partnership recorded a gain of $51.1 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statement of Operations.
Condensed summary financial information relating to the DownREIT Partnership (not just our proportionate share), is presented below for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
1,106,703
1,167,720
Note receivable from the General Partner
222,853
221,022
4,829
5,561
1,334,405
1,394,342
427,592
431,735
Other liabilities
28,087
26,597
455,679
458,332
878,726
936,010
Total revenue
128,621
138,121
134,669
(51,747)
(56,998)
(55,487)
(82,283)
(85,872)
(84,000)
Gain/(loss) on sale of real estate
24,053
(5,409)
19,304
(4,818)
(15,648)
(14,456)
(14,483)
8,061
4,884
4,718
(12,996)
9,732
(14,583)
5. LEASES
Lessee - Ground and Equipment Leases
The Operating Partnership owns six communities that are subject to ground leases, under which the Operating Partnership is the lessee, expiring between 2043 and 2103, inclusive of extension options we are reasonably certain will be exercised. All of these leases existed as of the adoption of the new lease accounting guidance on January 1, 2019 and
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we did not reassess lease classification per the practical expedient provided by the standard. As such, these leases will continue to be classified as operating leases through the lease term expiration. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the remaining lease term. In addition, the Operating Partnership leases equipment at six communities from the General Partner, which expire in 2029. We currently do not hold any finance leases.
As of December 31, 2019, the Operating lease right-of-use assets was $205.7 million and the Operating lease liabilities was $200.0 million on our Consolidated Balance Sheets related to our ground and equipment 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 Operating Partnership’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 44.4 years at December 31, 2019 and the weighted average discount rate was 5.0% at December 31, 2019.
Future minimum lease payments and total operating lease liabilities from our ground and equipment leases as of December 31, 2019 are as follows (dollars in thousands):
Equipment Leases
12,594
156
12,598
12,601
12,605
166
12,608
456,090
519,096
(222)
(319,095)
1,443
For purposes of recognizing our ground lease contracts, the Operating Partnership 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 Operating Partnership 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 Operating Partnership will remeasure the right-of-use asset and lease liability on the reset date. For the year ended December 31, 2019, Operating lease right-of-use assets and Operating lease liabilities increased by $111.1 million due to future minimum payments on two of our ground leases becoming fixed for the remainder of their terms. For the year ended December 31, 2019, Operating lease right-of-use assets and Operating lease liabilities increased by $1.4 million due to the Operating Partnership entering into new equipment leases.
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The components of operating lease expenses from our ground and equipment leases were as follows (dollars in thousands):
Contractual equipment lease expense (b)
8,955
As of December 31, 2018, in accordance with previously applicable lease accounting guidance, ASC 840, Leases, the future minimum lease payments from our ground leases were as follows;
Future minimum lease payments as of December 31, 2018 were $4.9 million for each of the years ending December 31, 2019 to 2023 and a total of $313.9 million for years thereafter.
The Operating Partnership incurred $7.3 million and $6.2 million of ground rent expense for the years ended December 31, 2018 and 2017, respectively. These costs are reported within the line item Other Operating Expenses on the Consolidated Statements of Operations.
Lessor - Apartment Home, Retail and Commercial Leases
The Operating Partnership’s communities and retail and commercial space are leased to tenants under operating leases. As of December 31, 2019, our apartment home leases generally have initial terms of 12 months or less and represent 98.4% of our total lease revenue. As of December 31, 2019, our retail and commercial space leases generally have initial terms 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 12, Reportable Segments for further discussion around our major revenue streams and disaggregation of our revenue.)
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7,733
7,395
6,791
6,466
5,801
13,826
48,012
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 Operating Partnership recorded variable percentage rents of $0.1 million during the year ended December 31, 2019.
6. DEBT, NET
Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. For purposes of classification in the following table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Operating Partnership having effectively established the fixed interest rate for the underlying debt instrument. Secured debt consists of the following as of December 31, 2019 and 2018 (dollars in thousands):
Interest Rate
Mortgage note payable
10.1
(365)
72,135
Tax-exempt secured note payable
(71)
Total Secured Debt, Net
2.78
10.7
The Operating Partnership may from time to time acquire properties subject to fixed rate debt instruments. In those situations, management will record the secured debt at its estimated fair value and amortize any difference between the fair value and par to interest expense over the life of the underlying debt instrument. The Operating Partnership did not have any unamortized fair value adjustments associated with the secured debt instruments on the Operating Partnership’s properties.
Mortgage notes payable. During the year ended December 31, 2019, the Operating Partnership entered into a fixed rate mortgage note payable for $72.5 million with an interest rate of 3.10%. Interest payments are due monthly and the note matures in February 2030.
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Tax-exempt secured note payable. The variable rate mortgage note payable that secures a tax-exempt housing bond issue that matures in March 2032. Interest on this note is payable in monthly installments. The mortgage note payable has an interest rate of 1.79% as of December 31, 2019.
7. RELATED PARTY TRANSACTIONS
Shared Services Agreement
The Operating Partnership self-manages its own properties and is party to an Inter-Company Employee and Cost Sharing Agreement with the General Partner. This agreement provides for reimbursements to the General Partner for the Operating Partnership’s allocable share of costs incurred by the General Partner for (a) general and administrative costs, and (b) shared services of corporate level property management employees and related support functions and costs.
The General Partner shares various general and administrative costs with the Operating Partnership including legal assistance, acquisitions analysis, marketing, human resources, IT, accounting, rent, supplies and advertising, and allocates these costs to the Operating Partnership first on the basis of direct usage when identifiable, with the remainder allocated based on the reasonably anticipated benefits to the parties. The general and administrative expenses allocated to the Operating Partnership by UDR were $13.8 million, $13.5 million, and $14.0 million during the years ended December 31, 2019, 2018 and 2017, respectively, and are included in General and administrative on the Consolidated Statements of Operations. In the opinion of management, this method of allocation reflects the level of services received by the Operating Partnership from the General Partner.
During the years ended December 31, 2019, 2018 and 2017, the Operating Partnership also reimbursed the General Partner $16.9 million, $15.2 million, and $15.4 million, respectively, for shared services related to corporate level property management costs incurred by the General Partner. These shared cost reimbursements are initially recorded within the line item General and administrative on the Consolidated Statements of Operations, and a portion related to property management costs is reclassified to Property management on the Consolidated Statements of Operations.
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Notes Payable to the General Partner
The following table summarizes the Operating Partnership’s Notes payable due to General Partner as of December 31, 2019 and 2018 (dollars in thousands):
Note due August 2021
5.34
5,500
Note due December 2023
5.18
83,196
Note due April 2026
184,638
Note due November 2028
4.69
133,205
Note due December 2028 (a)
230,694
293,576
Total notes payable due to the General Partner
Certain limited partners of the Operating Partnership have provided guarantees or reimbursement agreements related to these notes payable. The guarantees were provided by the limited partners in conjunction with their contribution of properties to the Operating Partnership. The Operating Partnership recognized interest expense on the notes payable of $28.0 million, $14.1 million and $12.2 million for the years ended December 31, 2019, 2018, and 2017, respectively.
8. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
●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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The estimated fair values of the Operating Partnership’s financial instruments either recorded or disclosed on a recurring basis as of December 31, 2019 and 2018 are summarized as follows (dollars in thousands):
Secured debt instrument - fixed rate: (a)
71,976
Secured debt instrument - variable rate: (a)
98,976
or
See Note 6, Debt, Net.
There were no transfers into or out of each of the levels of the fair value hierarchy during the year ended December 31, 2019.
The General Partner, on behalf of the Operating Partnership, 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 Operating Partnership has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
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Although the General Partner, on behalf of the Operating Partnership, 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 December 31, 2019 and 2018, the Operating Partnership 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 Operating Partnership 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 Operating Partnership 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.
As of 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 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.
The Operating Partnership records 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. Cash flow estimates are based upon historical results adjusted to reflect management’s 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. The General Partner’s estimates of fair value represent management’s estimates based upon Level 3 inputs such as industry trends and reference to market rates and transactions. The Operating Partnership did not incur any other-than-temporary impairments in the value of its investments in unconsolidated entities during the years ended December 31, 2019 and 2018.
9. DERIVATIVES AND HEDGING ACTIVITY
The Operating Partnership is exposed to certain risks arising from both its business operations and economic conditions. The General Partner principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The General Partner 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 General Partner enters 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 General Partner’s and the Operating Partnership’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the General Partner’s known or expected cash payments principally related to the General Partner’s borrowings.
The General Partner’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 General Partner 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 General Partner 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 is recorded in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended
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December 31, 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. As of and during the years ended December 31, 2019 and 2018, no derivatives designated as cash flow hedges were held by the Operating Partnership.
During the year ended December 31, 2017, the Operating Partnership recognized a loss of $0.1 million reclassified from Accumulated other comprehensive income/(loss), net to Interest expense due to the de-designation of a cash flow hedge. No amounts were de-designated during the years ended December 31, 2019 and 2018.
Amounts reported in Accumulated other comprehensive income/(loss), net related to derivatives will be reclassified to interest expense as interest payments are made on the General Partner’s variable-rate debt that is owed by the Operating Partnership. As of December 31, 2019, no derivatives designated as cash flow hedges were held by the Operating Partnership and, as a result, no amounts are anticipated to be reclassified as an increase to interest expense through December 31, 2020.
Derivatives not designated as hedges are not speculative and are used to manage the Operating Partnership’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in no gain or loss for the years ended December 31, 2019 and 2018 and a loss of less than $0.1 million for the year ended December 31, 2017.
As of December 31, 2019, we had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets
As of December 31, 2019 and December 31, 2018, the fair value of the Operating Partnership’s derivative financial instruments was zero.
The tables below present the effect of the derivative financial instruments on the Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 (dollars in thousands):
(106)
Total amount of Interest expense presented on the Consolidated Statements of Operations (a)
8,733
18,156
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Interest income and other
income/(expense), net
The General Partner has agreements with its derivative counterparties that contain a provision where the General Partner could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the General Partner’s default on the indebtedness.
The General Partner has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the General Partner 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.
10. CAPITAL STRUCTURE
General Partnership Units
The General Partner has complete discretion to manage and control the operations and business of the Operating Partnership, which includes but is not limited to the acquisition and disposition of real property, construction of buildings and making capital improvements, and the borrowing of funds from outside lenders or UDR and its subsidiaries to finance such activities. The General Partner can generally authorize, issue, sell, redeem or purchase any OP Unit or securities of the Operating Partnership without the approval of the limited partners. The General Partner can also approve, with regard to the issuances of OP Units, the class or one or more series of classes, with designations, preferences, participating, optional or other special rights, powers and duties including rights, powers and duties senior to limited partnership interests without approval of any limited partners except holders of Class A Limited Partnership Units. There were 0.1 million General Partnership units outstanding at December 31, 2019 and 2018, all of which were held by UDR.
Limited Partnership Units
As of December 31, 2019 and 2018, there were 184.0 million and 183.5 million, respectively, of limited partnership units outstanding, of which 1.9 million were Class A Limited Partnership Units for both periods. UDR owned 176.1 million, or 95.7%, and 174.1 million, or 94.9%, of OP Units outstanding at December 31, 2019 and 2018, respectively, of which 0.1 million were Class A Limited Partnership Units for both periods. The remaining 7.9 million, or 4.3%, and 9.4 million, or 5.1%, of OP Units outstanding were held by outside limited partners at December 31, 2019 and 2018, respectively, of which 1.8 million were Class A Limited Partnership Units for both periods.
Subject to the terms of the Operating Partnership Agreement, the limited partners have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the Operating Partnership Agreement), provided that such OP Units have been outstanding for at least one year. UDR, as general partner of the Operating Partnership, may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of UDR for each OP Unit), as defined in the Operating Partnership Agreement.
The outside limited partners’ capital is adjusted to redemption value at the end of each reporting period with the corresponding offset against UDR’s limited partner capital account based on the redemption rights noted above. The aggregate value upon redemption of the then-outstanding OP Units held by outside limited partners was $366.4 million and $371.9 million as of December 31, 2019 and 2018, respectively, based on the value of UDR’s common stock at each
F - 82
period end. A limited partner has no right to receive any distributions from the Operating Partnership on or after the date of redemption of its OP Units.
Class A Limited Partnership Units
Class A Limited Partnership Units have a cumulative, annual, non-compounded preferred return, which is equal to 8% based on a value of $16.61 per Class A Limited Partnership Unit.
Holders of the Class A Limited Partnership Units exclusively possess certain voting rights. The Operating Partnership may not do the following without approval of the holders of the Class A Limited Partnership Units: (i) increase the authorized or issued amount of Class A Limited Partnership Units, (ii) reclassify any other partnership interest into Class A Limited Partnership Units, (iii) create, authorize or issue any obligations or security convertible into or the right to purchase Class A Limited Partnership Units, (iv) enter into a merger or acquisition, or (v) amend or modify the Operating Partnership Agreement in a manner that adversely affects the relative rights, preferences or privileges of the Class A Limited Partnership Units.
The following table shows OP Units outstanding and OP Unit activity as of and for the years ended December 31, 2019, 2018, and 2017 (units in thousands):
Ending balance at December 31, 2016
1,752
7,297
173,998
121
111
OP redemptions for UDR stock
Ending balance at December 31, 2017
7,361
174,006
286
(11)
Ending balance at December 31, 2018
7,636
174,017
427
(1,969)
Ending balance at December 31, 2019
6,094
175,986
UDR grants short-term and long-term incentive plan units (“LTIP Units”) to certain employees and non-employee directors. The LTIP Units represent an ownership interest in the Operating Partnership and have voting and distribution rights consistent with OP Units. The LTIP Units are subject to the terms of UDR’s long-term incentive plan.
Two classes of LTIP Units are granted, Class 1 LTIP Units and Class 2 LTIP Units. Class 1 LTIP Units are granted to certain employees and non-employee directors and vest over a period of up to four years. Class 2 LTIP Units are granted to certain employees and vest over a period from one to three years subject to certain performance and market conditions being achieved. Vested LTIP Units may be converted into OP Units provided that such LTIP Units have been outstanding for at least two years from the date of grant.
Allocation of Profits and Losses
Profit of the Operating Partnership is allocated in the following order: (i) to the General Partner and the Limited Partners in proportion to and up to the amount of cash distributions made during the year, and (ii) to the General Partner and Limited Partners in accordance with their percentage interests. Losses and depreciation and amortization expenses, non-recourse liabilities are allocated to the General Partner and Limited Partners in accordance with their percentage interests. Losses allocated to the Limited Partners are capped to the extent that such an allocation would not cause a deficit in the Limited Partners’ capital account. Such losses are, therefore, allocated to the General Partner. If any Partner’s capital balance were to fall into a deficit, any income and gains are allocated to each Partner sufficient to eliminate its negative capital balance.
F - 83
11. COMMITMENTS AND CONTINGENCIES
The following summarizes the Operating Partnership’s real estate commitments at December 31, 2019 (dollars in thousands):
Operating Partnership's
Investment
Remaining Commitment
Real estate communities - redevelopment
8,073
16,927
The Operating Partnership is subject to various legal proceedings and claims arising in the ordinary course of business. The Operating Partnership cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. The General Partner believes that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the Operating Partnership’s financial condition, results of operations or cash flows.
12. 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. The Operating Partnership has the same Chief Operating Decision Maker as that of its parent, the General Partner. The Chief Operating Decision Maker consists of several members of UDR’s executive management team who use several generally accepted industry financial measures to assess the performance of the business for our reportable operating segments.
The Operating Partnership owns and operates multifamily apartment communities throughout the United States that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The primary financial measures of the Operating Partnership’s apartment communities are rental income and net operating income (“NOI”), and are included in the Chief Operating Decision Maker’s assessment of the Operating Partnership’s performance on a consolidated basis. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. NOI is defined as total revenues less direct property operating expenses. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI are property management costs, which are the Operating Partnership’s allocable share of costs incurred by the General Partner for shared services of corporate level property management employees and related support functions and costs. The Chief Operating Decision Maker of the General Partner utilizes NOI as the key measure of segment profit or loss.
The Operating Partnership’s two reportable segments are Same-Store Communities and Non-Mature Communities/Other:
●Same-Store Communities represent those communities acquired, developed, and stabilized prior to January 1, 2018 and held as of December 31, 2019. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, 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.
F - 84
Management of the General Partner evaluates the performance of each of the Operating Partnership’s apartment communities on a Same-Store Community and Non-Mature Community/Other basis, as well as individually and geographically. This is consistent with the aggregation criteria under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Operating Partnership’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the Chief Operating Decision Maker.
All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of the Operating Partnership’s total revenues during the years ended December 31, 2019, 2018, and 2017.
The following is a description of the principal streams from which the Operating Partnership generates its revenue:
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 Operating Partnership transfers a service to the lessee other than the right to use the underlying asset. The Operating Partnership 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 is generated by services provided by the Operating Partnership to its retail and residential tenants and other unrelated third parties. These fees are generally recognized as earned.
F - 85
The following table details rental income and NOI for the Operating Partnership’s reportable segments for the years ended December 31, 2019, 2018, and 2017, and reconciles NOI to Net income/(loss) attributable to OP unitholders on the Consolidated Statements of Operations (dollars in thousands):
248,474
238,886
228,027
59,530
58,624
57,275
50,795
49,132
46,946
32,224
31,693
31,387
36,735
40,547
43,127
427,758
418,882
406,762
7,873
7,161
6,996
1,975
1,765
1,730
2,925
2,764
2,640
646
622
589
596
726
660
14,015
13,038
12,615
256,347
246,047
235,023
61,505
60,389
59,005
53,720
51,896
49,586
32,870
32,315
31,976
37,331
41,273
43,787
196,302
187,664
177,228
42,413
41,642
40,292
37,340
35,948
34,182
24,103
24,578
24,510
30,629
(12,701)
(11,878)
(11,533)
(9,488)
(8,864)
(6,833)
(139,975)
(143,481)
(152,473)
(18,014)
(16,889)
(17,875)
(853)
(951)
(1,922)
(29,667)
(22,835)
(30,366)
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The following table details the assets of the Operating Partnership’s reportable segments as of December 31, 2019 and 2018 (dollars in thousands):
Reportable apartment home segment assets
2,011,495
1,981,007
669,417
663,083
352,790
340,722
408,703
406,149
432,755
421,024
Total segment assets - net book value
F - 87
13. UNAUDITED SUMMARIZED CONSOLIDATED QUARTERLY FINANCIAL DATA
Selected consolidated quarterly financial data for the years ended December 31, 2019 and 2018 is summarized in the table below (dollars in thousands, except per unit amounts):
108,334
110,350
111,700
111,389
Income/(loss)
24,334
27,810
27,283
24,568
Income/(loss) attributable to OP unitholders
23,946
27,394
26,835
23,988
Income/(loss) attributable to OP unitholders per weighted average OP Unit — basic and diluted (a)
0.13
0.15
106,592
107,266
109,539
108,523
91,845
25,181
28,135
86,324
91,427
24,761
27,695
85,880
0.50
0.47
Quarterly net income/(loss) per weighted average OP Unit amounts may not total to the annual amounts.
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SCHEDULE III — REAL ESTATE OWNED
Gross Amount at Which
Initial Costs
Carried at Close of Period
Costs of
Improvements
Capitalized
Land and
Buildings
Total Initial
Subsequent
Buildings &
and
Acquisition
to Acquisition
Date of
Date
Costs
Depreciation
Construction(a)
Acquired
Harbor at Mesa Verde
20,476
28,538
49,014
22,350
22,175
49,189
71,364
35,561
1965/2003
Jun-03
27 Seventy Five Mesa Verde
99,329
110,644
209,973
104,036
114,820
199,189
314,009
137,814
1979/2013
Oct-04
Huntington Vista
8,055
22,486
30,541
14,117
9,277
35,381
44,658
25,545
1970
Missions at Back Bay
229
14,129
14,358
3,822
10,990
7,190
18,180
5,486
1969
Dec-03
Eight 80 Newport Beach - North
62,516
46,082
108,598
45,252
69,131
84,719
153,850
60,216
1968/2000/2016
Eight 80 Newport Beach - South
58,785
50,067
108,852
35,651
60,953
83,550
144,503
56,092
Mar-05
Foxborough
12,071
6,187
18,258
4,701
12,528
10,431
22,959
7,409
Sep-04
1818 Platinum Triangle
16,663
51,905
68,568
4,031
17,074
55,525
72,599
30,618
2009
Aug-10
Beach & Ocean
12,878
39,374
13,114
39,138
52,252
12,871
2014
Aug-11
The Residences at Bella Terra
25,000
129,030
25,476
128,554
154,030
50,709
2013
Oct-11
Los Alisos at Mission Viejo
17,298
71,351
16,674
71,975
88,649
26,850
Jun-04
The Residences at Pacific City
78,085
276,247
78,143
276,189
354,332
37,475
Jan-14
Parallel
15,181
100,595
115,776
705
15,184
101,297
116,481
7,003
Jan-19
ORANGE COUNTY, CA
426,566
430,633
857,199
750,667
465,539
1,142,327
493,649
2000 Post Street
9,861
44,578
54,439
36,423
14,406
76,456
90,862
43,622
1987/2016
Dec-98
Birch Creek
4,365
16,696
21,061
9,895
1,376
29,580
30,956
17,725
1968
Highlands Of Marin
5,996
24,868
30,864
28,751
7,995
51,620
59,615
37,583
1991/2010
Marina Playa
6,224
23,916
30,140
13,977
1,242
42,875
44,117
24,745
1971
River Terrace
22,161
40,137
62,298
7,850
22,911
47,237
70,148
32,060
2005
Aug-05
CitySouth
14,031
30,537
44,568
38,610
16,545
66,633
83,178
48,737
1972/2012
Nov-05
Bay Terrace
8,545
14,458
23,003
7,231
11,637
18,597
30,234
12,278
1962
Oct-05
Highlands of Marin Phase II
5,353
18,559
23,912
11,287
5,777
35,199
20,313
1968/2010
Oct-07
Edgewater
30,657
83,872
114,529
12,736
30,804
96,461
127,265
57,547
2007
Mar-08
Almaden Lake Village
594
42,515
43,109
9,265
963
51,411
52,374
31,947
1999
Jul-08
388 Beale
14,253
74,104
88,357
13,993
14,643
87,707
102,350
42,629
Apr-11
Channel @ Mission Bay
23,625
131,471
23,983
131,113
155,096
48,635
Sep-10
SAN FRANCISCO, CA
145,665
414,240
559,905
321,489
152,282
729,112
417,821
Crowne Pointe
2,486
6,437
8,923
9,323
3,177
15,069
18,246
10,776
1987
Hilltop
2,174
7,408
9,582
6,365
3,030
12,917
15,947
9,216
1985
The Hawthorne
6,474
30,226
36,700
8,473
7,101
38,072
45,173
26,389
2003
Jul-05
The Kennedy
6,179
22,307
28,486
3,261
6,300
25,447
31,747
17,028
Hearthstone at Merrill Creek
6,848
30,922
37,770
7,368
7,302
37,836
45,138
23,317
2000
May-08
Island Square
21,284
89,389
110,673
7,672
21,667
96,678
118,345
58,376
Borgata
6,379
24,569
30,948
5,542
6,452
30,038
36,490
18,943
2001/2016
May-07
elements too
27,468
72,036
99,504
19,466
30,331
88,639
118,970
64,466
2010
Feb-10
989elements
8,541
45,990
54,531
5,009
8,679
50,861
59,540
28,277
2006
Dec-09
Lightbox
6,449
38,884
45,333
1,235
40,094
46,568
13,689
Aug-14
Waterscape
9,693
65,176
74,869
3,222
9,784
68,307
78,091
20,951
Sep-14
Ashton Bellevue
44,594
8,287
124,939
133,226
2,631
8,368
127,489
135,857
23,100
Oct-16
TEN20
26,337
5,247
76,587
81,834
3,635
5,292
80,177
85,469
14,496
Milehouse
5,976
63,041
69,017
741
5,995
63,763
69,758
12,863
Nov-16
CityLine
11,220
85,787
97,007
348
11,228
86,127
97,355
16,232
Jan-17
CityLine II
3,723
56,843
60,566
435
57,278
61,001
3,947
SEATTLE, WA
138,428
840,541
978,969
84,726
144,903
918,792
362,066
Rosebeach
8,414
17,449
25,863
5,903
8,855
31,766
16,642
Tierra Del Rey
39,586
36,679
76,265
8,415
39,857
44,823
84,680
27,165
1998
Dec-07
The Westerly
48,182
102,364
150,546
41,493
50,887
141,152
192,039
83,909
1993/2013
Jefferson at Marina del Rey
55,651
94,053
61,580
88,124
149,704
52,782
2008
Sep-07
LOS ANGELES, CA
151,833
156,492
308,325
149,864
161,179
297,010
180,498
Boronda Manor
1,946
8,982
10,928
11,332
3,330
18,930
22,260
11,809
1979
Garden Court
888
4,188
5,076
1,613
10,009
11,622
6,382
1973
Cambridge Court
3,039
12,883
15,922
18,449
5,695
28,676
34,371
18,243
1974
Laurel Tree
5,115
6,419
7,657
2,449
11,627
14,076
7,337
1977
The Pointe At Harden Ranch
6,388
23,854
30,242
33,268
10,345
53,165
63,510
32,804
1986
The Pointe At Northridge
2,044
8,028
10,072
12,096
3,623
18,545
22,168
11,851
The Pointe At Westlake
1,329
5,334
6,663
7,960
2,361
12,262
14,623
7,544
1975
S - 1
SCHEDULE III — REAL ESTATE OWNED - (Continued)
MONTEREY PENINSULA, CA
16,938
68,384
85,322
97,308
29,416
153,214
95,970
Verano at Rancho Cucamonga Town Square
3,645
17,202
57,985
23,633
51,554
42,170
Oct-02
Windemere at Sycamore Highland
5,810
23,450
29,260
4,934
6,271
27,923
34,194
21,136
2001
Nov-02
14,278
84,242
98,520
85
84,327
98,605
468
Nov-19
OTHER SOUTHERN CA
33,645
111,337
144,982
63,004
44,182
163,804
63,774
Tualatin Heights
3,273
9,134
12,407
9,090
4,141
17,356
21,497
12,657
1989
Hunt Club
6,014
14,870
20,884
8,014
6,516
22,382
28,898
17,520
PORTLAND, OR
9,287
24,004
17,104
10,657
39,738
30,177
TOTAL WEST REGION
140,629
922,362
2,045,631
2,967,993
1,484,162
1,008,158
3,443,997
4,452,155
1,643,955
Dominion Middle Ridge
3,311
13,283
16,594
11,745
4,054
24,285
28,339
16,308
1990
Jun-96
Dominion Lake Ridge
2,366
8,387
10,753
9,611
3,163
17,201
20,364
12,846
Feb-96
Presidential Greens
11,238
18,790
30,028
13,019
11,826
31,221
43,047
24,563
1938
May-02
The Whitmore
6,418
13,411
19,829
24,170
7,564
36,435
43,999
28,764
1962/2008
Apr-02
Ridgewood -apts side
5,612
20,086
25,698
10,801
6,362
30,137
36,499
24,033
1988
Aug-02
DelRay Tower
297
12,786
13,083
116,038
9,652
119,469
129,121
40,394
Jan-08
Waterside Towers
13,001
49,657
62,658
31,372
50,603
43,427
94,030
29,028
Wellington Place at Olde Town
13,753
36,059
49,812
20,955
14,885
55,882
70,767
41,845
1987/2008
Sep-05
Andover House
183
59,948
60,131
6,813
317
66,627
66,944
39,795
2004
Mar-07
Sullivan Place
1,137
103,676
104,813
12,102
1,775
115,140
116,915
72,629
Delancey at Shirlington
21,606
66,765
88,371
5,930
21,713
72,588
94,301
43,905
2006/2007
View 14
5,710
97,941
103,651
5,174
5,780
103,045
108,825
49,727
Jun-11
Signal Hill Apartments
13,290
72,169
25,576
59,883
85,459
41,319
Capitol View on 14th
31,393
96,501
31,471
96,423
127,894
40,878
Domain College Park
7,300
60,095
7,508
59,887
67,395
22,856
1200 East West
9,748
68,022
77,770
3,289
9,888
71,171
81,059
16,873
Oct-15
Courts at Huntington Station
27,749
111,878
139,627
4,526
28,085
116,068
144,153
31,845
2011
Eleven55 Ripley
15,566
107,539
123,105
4,111
15,838
111,378
127,216
26,234
Arbor Park of Alexandria
80,664
50,881
159,728
210,609
5,571
51,347
164,833
216,180
44,595
1969/2015
Courts at Dulles
14,697
83,834
98,531
10,035
14,767
93,799
108,566
26,917
Newport Village
127,600
55,283
177,454
232,737
20,485
55,708
197,514
253,222
54,930
1301 Thomas Circle
27,836
128,191
156,027
144
128,335
156,171
2,892
Aug-19
43,803
13,687
88,692
102,379
88,719
102,406
577
METROPOLITAN, D.C.
352,062
1,426,127
1,778,189
544,683
419,405
1,903,467
733,753
Gayton Pointe Townhomes
826
5,148
5,974
31,396
3,598
33,772
37,370
30,959
1973/2007
Sep-95
Waterside At Ironbridge
1,844
13,239
15,083
9,922
2,575
22,430
25,005
16,763
Sep-97
Carriage Homes at Wyndham
30,997
10,475
4,056
37,890
41,946
28,644
Nov-03
Legacy at Mayland
1,979
11,524
13,503
33,902
5,451
41,954
47,405
37,420
Dec-91
RICHMOND, VA
5,123
60,908
66,031
85,695
15,680
136,046
113,786
Calvert's Walk
4,408
24,692
29,100
9,266
4,996
33,370
38,366
25,052
Mar-04
20 Lambourne
11,750
45,590
57,340
10,667
12,428
55,579
68,007
34,852
Domain Brewers Hill
4,669
40,630
45,299
2,279
4,808
42,770
47,578
22,704
Rodgers Forge
15,392
67,958
83,350
3,001
70,959
86,351
3,367
1945
Apr-19
12,599
78,847
91,446
78,876
91,475
BALTIMORE, MD
48,818
257,717
306,535
25,242
50,223
281,554
86,476
TOTAL MID-ATLANTIC REGION
310,667
406,003
1,744,752
2,150,755
655,620
485,308
2,321,067
2,806,375
934,015
Seabrook
1,846
4,155
6,001
10,276
3,018
13,259
16,277
11,396
1984/2004
Altamira Place
1,533
11,076
12,609
22,790
3,887
31,512
35,399
28,929
1984/2007
Apr-94
Regatta Shore
757
6,608
7,365
18,177
2,301
23,241
25,542
20,424
1988/2007
Jun-94
Alafaya Woods
1,653
9,042
10,695
12,841
2,860
20,676
23,536
16,273
1989/2006
Oct-94
Los Altos
2,804
12,349
15,153
13,797
4,710
24,240
28,950
19,347
1990/2004
Oct-96
Lotus Landing
8,639
10,824
12,182
3,050
19,956
23,006
15,091
1985/2006
Jul-97
Seville On The Green
1,282
6,498
7,780
8,635
1,872
14,543
16,415
11,259
1986/2004
Oct-97
Ashton @ Waterford
3,872
17,538
21,410
6,886
4,406
23,890
28,296
16,848
May-98
S - 2
Arbors at Lee Vista
6,692
12,860
19,552
16,125
7,669
28,008
35,677
21,670
1992/2007
Aug-06
ORLANDO, FL
22,624
88,765
121,709
33,773
199,325
161,237
Legacy Hill
1,148
5,867
7,015
11,083
2,026
16,072
18,098
13,203
Nov-95
Hickory Run
1,469
11,584
13,053
14,126
2,592
24,587
27,179
16,915
Dec-95
Carrington Hills
2,117
39,283
4,925
36,475
41,400
26,945
Brookridge
708
5,461
6,169
7,396
1,492
12,073
13,565
Mar-96
Breckenridge
766
7,714
8,480
6,998
1,539
13,939
15,478
10,241
Mar-97
Colonnade
1,460
16,015
17,475
24,023
26,340
16,356
Jan-99
The Preserve at Brentwood
3,182
24,674
27,856
11,163
4,145
34,874
39,019
26,346
Polo Park
4,583
16,293
20,876
18,611
6,140
33,347
39,487
27,026
May-06
NASHVILLE, TN
15,433
87,608
103,041
117,525
25,176
195,390
146,243
Summit West
2,176
12,423
3,688
15,621
19,309
13,431
1972
Dec-92
The Breyley
1,780
2,458
4,238
18,948
3,811
19,375
23,186
19,088
1977/2007
Sep-93
Lakewood Place
1,395
10,647
12,042
13,457
3,257
22,242
25,499
17,883
Mar-94
Cambridge Woods
1,791
7,166
8,957
12,591
3,514
18,034
21,548
14,194
Jun-97
Inlet Bay
7,702
23,150
30,852
19,716
10,421
40,147
50,568
32,988
1988/1989
MacAlpine Place
10,869
36,858
47,727
11,770
12,194
47,303
59,497
35,105
Dec-04
The Vintage Lofts at West End
6,611
37,663
44,274
21,768
15,826
50,216
66,042
33,876
Jul-09
Peridot Palms
6,293
89,752
96,045
1,002
6,301
90,746
97,047
5,481
Feb-19
The Preserve at Gateway
4,467
43,723
48,190
961
44,684
49,151
1,828
May-19
TAMPA, FL
43,084
256,127
299,211
112,636
63,479
348,368
173,874
The Reserve and Park at Riverbridge
15,968
56,401
72,369
15,149
16,840
70,678
50,001
1999/2001
OTHER FLORIDA
TOTAL SOUTHEAST REGION
97,109
488,901
586,010
367,019
139,268
813,761
953,029
531,355
10 Hanover Square
41,432
218,983
260,415
24,465
41,765
243,115
284,880
103,344
21 Chelsea
36,399
107,154
143,553
14,695
36,529
121,719
158,248
55,758
View 34
114,410
324,920
439,330
112,238
116,021
435,547
551,568
203,215
1985/2013
Jul-11
95 Wall Street
57,637
266,255
323,892
10,474
58,063
276,303
334,366
139,677
Leonard Pointe
38,010
93,204
131,214
38,014
94,369
132,383
5,661
One William
6,422
75,527
81,949
151
75,678
82,100
2,029
NEW YORK, NY
294,310
1,086,043
1,380,353
163,192
296,814
1,246,731
509,684
Garrison Square
6,475
91,027
97,502
23,062
6,613
113,951
120,564
54,270
1887/1990
Ridge at Blue Hills
6,039
34,869
40,908
6,420
39,372
45,792
20,913
Inwood West
20,778
88,096
108,874
13,326
19,799
102,401
122,200
52,250
14 North
10,961
51,175
62,136
12,621
11,404
63,353
33,733
100 Pier 4
24,584
202,433
24,689
202,328
227,017
51,639
Dec-15
345 Harrison
32,938
326,016
44,889
314,065
358,954
25,913
Nov-11
Currents on the Charles
12,580
70,149
82,729
285
70,434
83,014
2,431
Jun-19
The Commons at Windsor Gardens
34,609
225,515
260,124
1,126
34,611
226,639
261,250
7,205
69,315
17,068
112,777
129,845
112,828
129,896
722
94,050
17,692
115,898
133,590
115,968
133,660
48,774
12,645
70,653
83,298
70,729
83,374
466
BOSTON, MA
196,369
860,159
1,056,528
583,950
208,410
1,432,068
250,296
Park Square
10,365
96,050
106,415
935
10,416
96,934
4,483
PHILADELPHIA, PA
TOTAL NORTHEAST REGION
501,044
2,042,252
2,543,296
748,077
515,640
2,775,733
3,291,373
764,463
Thirty377
24,036
32,951
56,987
20,627
26,207
51,407
77,614
33,450
1999/2007
Legacy Village
16,882
100,102
116,984
22,641
21,394
118,231
139,625
74,746
2005/06/07
Addison Apts at The Park
22,041
33,269
11,058
30,969
13,358
44,327
10,768
1977/78/79
Addison Apts at The Park II
7,903
554
8,457
3,718
8,442
3,733
12,175
2,664
Addison Apts at The Park I
10,440
634
11,074
4,158
11,055
4,177
15,232
3,270
32,575
8,432
50,482
58,914
50,529
58,961
331
Savoye 2
36,023
6,451
56,616
63,067
56,627
63,078
365
S - 3
Fiori on Vitruvian Park
50,609
7,934
78,574
86,508
78,633
86,567
519
Vitruvian West 1
41,317
6,273
61,418
67,691
86
61,504
67,777
DALLAS, TX
110,392
392,559
502,951
62,405
127,157
438,199
126,540
Barton Creek Landing
3,151
14,269
17,420
24,444
5,358
36,506
41,864
29,696
1986/2012
Mar-02
Residences at the Domain
4,034
55,256
59,290
14,140
4,524
68,906
73,430
41,561
Aug-08
Red Stone Ranch
5,084
17,646
22,730
4,740
5,656
21,814
27,470
11,697
Apr-12
Lakeline Villas
4,148
16,869
21,017
3,436
4,625
19,828
24,453
10,429
2002
AUSTIN, TX
16,417
104,040
120,457
46,760
20,163
147,054
93,383
Steele Creek
8,586
130,402
138,988
5,264
135,638
17,097
Oct-17
DENVER, CO
TOTAL SOUTHWEST REGION
135,395
627,001
762,396
114,429
155,934
720,891
876,825
237,020
TOTAL OPERATING COMMUNITIES
2,061,913
6,948,537
9,010,450
3,369,307
2,304,308
10,075,449
4,110,808
REAL ESTATE UNDER DEVELOPMENT
Vitruvian West Phase 2
15,798
22,249
2,558
18,356
24,807
Cirrus
13,853
12,759
26,612
Dublin
8,922
9,436
18,358
TOTAL REAL ESTATE UNDER DEVELOPMENT
45,024
24,753
LAND
Vitruvian Park®
39,609
4,997
44,606
46,666
7,483
54,149
2,489
500 Penn
27,135
6,331
33,466
TOTAL LAND
66,744
71,741
15,874
73,801
13,814
COMMERCIAL
Brookhaven Shopping Center
29,808
7,793
22,015
14,297
TOTAL COMMERCIAL
Other (b)
9,581
1745 Shea Center I
3,034
20,534
23,568
1,995
3,094
22,469
25,563
3,736
TOTAL CORPORATE
11,576
32,050
35,144
TOTAL COMMERCIAL & CORPORATE
41,384
10,887
54,065
18,033
Deferred Financing Costs and Other Non-Cash Adjustments
TOTAL REAL ESTATE OWNED
2,160,917
6,989,866
9,150,783
3,451,318
2,418,222
10,183,879
Date of original construction/date of last major renovation, if applicable.
Includes unallocated accruals and capital expenditures.
The aggregate cost for federal income tax purposes was approximately $11.7 billion at December 31, 2019 (unaudited).
The estimated depreciable lives for all buildings in the latest Consolidated Statements of Operations are 30 to 55 years.
S - 4
3-YEAR ROLLFORWARD OF REAL ESTATE OWNED AND ACCUMULATED DEPRECIATION
The following is a reconciliation of the carrying amount of total real estate owned at December 31, (in thousands):
Balance at beginning of the year
Real estate acquired
2,241,163
235,993
Capital expenditures and development
195,981
214,898
369,029
Real estate sold
(31,202)
(195,945)
(43,569)
Balance at end of the year
The following is a reconciliation of total accumulated depreciation for real estate owned at December 31, (in thousands):
Depreciation expense for the year
477,193
426,006
424,772
Accumulated depreciation on sales
(102,012)
(18,231)
Balance at end of year
S - 5
Cost of
Subsequent to
Land and Land
Building and
Total Carrying
Construction
Date Acquired
249,390
271,946
521,336
225,228
287,346
459,218
320,714
23,836
11,115
67,160
78,275
36,216
107,787
340,136
447,923
163,438
110,365
500,996
319,151
38,971
156,463
195,434
33,989
41,476
187,947
118,713
48,000
54,128
102,128
14,318
48,712
67,734
43,807
483,930
918,706
1,402,636
609,370
551,605
1,460,401
2,012,006
970,702
12,037
115,075
116,850
72,564
METROPOLITAN D.C.
48,731
344,433
393,164
171,170
61,076
503,258
250,476
16,158
70,282
86,440
19,933
17,424
88,949
59,904
64,889
414,715
479,604
191,103
78,500
592,207
670,707
310,380
S - 6
10,791
46,919
57,710
97,497
18,714
136,493
103,541
60,008
78,579
31,486
22,615
87,450
68,093
45,330
163,328
208,658
144,132
58,169
294,621
221,635
99,069
485,238
584,307
34,939
99,828
519,418
243,021
110,030
536,413
646,443
47,560
111,232
582,771
694,003
276,754
130,400
138,986
5,266
712,765
2,163,562
2,876,327
997,431
808,120
3,065,638
Deferred Financing Costs
998,833
The aggregate cost for federal income tax purpose was approximately $3.2 billion at December 31, 2019 (unaudited).
S - 7
63,175
44,353
45,211
(49,324)
(41,945)
138,407
141,683
153,068
(27,174)
S - 8