UDR, Inc. - FORM 10-Q - April 25, 2017

Attached files

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EX-32.1 - EXHIBIT 32.1 - UDR, Inc.exhibit321-3x31x2017.htm
EX-32.4 - EXHIBIT 32.4 - UDR, Inc.exhibit324-3x31x2017.htm
EX-32.3 - EXHIBIT 32.3 - UDR, Inc.exhibit323-3x31x2017.htm
EX-32.2 - EXHIBIT 32.2 - UDR, Inc.exhibit322-3x31x2017.htm
EX-31.4 - EXHIBIT 31.4 - UDR, Inc.exhibit314-3x31x2017.htm
EX-31.3 - EXHIBIT 31.3 - UDR, Inc.exhibit313-3x31x2017.htm
EX-31.2 - EXHIBIT 31.2 - UDR, Inc.exhibit312-3x31x2017.htm
EX-31.1 - EXHIBIT 31.1 - UDR, Inc.exhibit311-3x31x2017.htm
EX-12.2 - EXHIBIT 12.2 - UDR, Inc.exhibit122-3x31x2017.htm
EX-12.1 - EXHIBIT 12.1 - UDR, Inc.exhibit121-3x31x2017.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number
1-10524 (UDR, Inc.)
333-156002-01 (United Dominion Realty, L.P.)
UDR, Inc.
United Dominion Realty, L.P.
(Exact name of registrant as specified in its charter)
Maryland (UDR, Inc.)
 
54-0857512
Delaware (United Dominion Realty, L.P.)
 
54-1776887
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation of organization)
 
Identification No.)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
(720) 283-6120
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
UDR, Inc.
 
Yes x No o
United Dominion Realty, L.P.
 
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
UDR, Inc.
 
Yes x No o
United Dominion Realty, L.P.
 
Yes x No o
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. (Check one):
UDR, Inc.:
 
 
 
 
 
 
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company o
United Dominion Realty, L.P.:
 
 
 
 
 
 
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
UDR, Inc.
 
o 
United Dominion Realty, L.P.
 
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
UDR, Inc.
 
Yes o No x
United Dominion Realty, L.P.
 
Yes o No x
The number of shares of UDR, Inc.’s common stock, $0.01 par value, outstanding as of April 21, 2017 was 267,391,715.


UDR, INC.
UNITED DOMINION REALTY, L.P.
INDEX
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 
Exhibit 4.1
 
Exhibit 12.1
 
Exhibit 12.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 31.3
 
Exhibit 31.4
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 32.3
 
Exhibit 32.4
 


EXPLANATORY NOTE
This Report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2017 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”), both Delaware limited partnerships of which UDR is the sole general partner. Unless the context otherwise requires, the references in this Report to the “Operating Partnership” or the “OP” refer to United Dominion Realty, L.P., together with its consolidated subsidiaries. “Common stock” refers to the common stock of UDR and “stockholders” means the holders of shares of UDR’s common stock and preferred stock. The limited partnership interests of the Operating Partnership and the DownREIT Partnership are referred to as “OP Units” and “DownREIT Units,” respectively, and the holders of the OP Units and DownREIT Units are referred to as “unitholders.” This combined Form 10-Q is being filed separately by UDR and the Operating Partnership.
There are a number of differences between our Company and our Operating Partnership, which are reflected in our disclosure 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 subsidiaries (“TRS”). UDR acts as the sole general partner of the Operating Partnership, holds interests in subsidiaries and joint ventures, owns and operates properties, issues securities from time to time and guarantees debt of certain of our subsidiaries. The Operating Partnership conducts the operations of a substantial portion of the business and is structured as a partnership with no publicly traded equity securities. The Operating Partnership has guaranteed certain outstanding debt of UDR.
As of March 31, 2017, UDR owned 110,883 units (100%) of the general partnership interests of the Operating Partnership and 174,122,808 OP Units, representing approximately 95.0% of total outstanding OP Units in the Operating Partnership. UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and UDR's role as the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are presented in this report for each of UDR and the Operating Partnership.




UDR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 
March 31,
2017
 
December 31,
2016
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Real estate owned:
 
 
 
Real estate held for investment
$
9,393,732

 
$
9,271,847

Less: accumulated depreciation
(3,026,660
)
 
(2,923,072
)
Real estate held for investment, net
6,367,072

 
6,348,775

Real estate under development (net of accumulated depreciation of $0 and $0, respectively)
393,837

 
342,282

Real estate held for disposition (net of accumulated depreciation of $0 and $553, respectively)
—

 
1,071

Total real estate owned, net of accumulated depreciation
6,760,909

 
6,692,128

Cash and cash equivalents
2,460

 
2,112

Restricted cash
19,757

 
19,994

Notes receivable, net
19,790

 
19,790

Investment in and advances to unconsolidated joint ventures, net
818,990

 
827,025

Other assets
114,005

 
118,535

Total assets
$
7,735,911

 
$
7,679,584

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Secured debt, net
$
1,031,507

 
$
1,130,858

Unsecured debt, net
2,505,785

 
2,270,620

Real estate taxes payable
23,105

 
17,388

Accrued interest payable
27,887

 
29,257

Security deposits and prepaid rent
36,894

 
34,238

Distributions payable
91,436

 
86,936

Accounts payable, accrued expenses, and other liabilities
74,608

 
103,835

Total liabilities
3,791,222

 
3,673,132

 
 
 
 
Commitments and contingencies (Note 12)
 
 
 
 
 
 
 
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
904,778

 
909,482

 
 
 
 
Equity:
 
 
 
Preferred stock, no par value; 50,000,000 shares authorized:
 
 
 
8.00% Series E Cumulative Convertible; 2,796,903 shares issued and outstanding at March 31, 2017 and December 31, 2016
46,457

 
46,457

Series F; 16,155,807 and 16,196,889 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
1

 
1

Common stock, $0.01 par value; 350,000,000 shares authorized:
 
 
 
267,398,819 and 267,259,469 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
2,674

 
2,673

Additional paid-in capital
4,635,942

 
4,635,413

Distributions in excess of net income
(1,644,621
)
 
(1,585,825
)
Accumulated other comprehensive income/(loss), net
(4,288
)
 
(5,609
)
Total stockholders’ equity
3,036,165

 
3,093,110

Noncontrolling interests
3,746

 
3,860

Total equity
3,039,911

 
3,096,970

Total liabilities and equity
$
7,735,911

 
$
7,679,584

See accompanying notes to consolidated financial statements.

4
UDR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2017
 
2016
REVENUES:
 
 
 
Rental income
$
241,271

 
$
231,957

Joint venture management and other fees
2,570

 
2,858

Total revenues
243,841

 
234,815

OPERATING EXPENSES:
 
 
 
Property operating and maintenance
39,600

 
39,446

Real estate taxes and insurance
30,188

 
28,377

Property management
6,635

 
6,379

Other operating expenses
1,691

 
1,752

Real estate depreciation and amortization
105,032

 
105,339

General and administrative
13,075

 
13,844

Casualty-related (recoveries)/charges, net
502

 
—

Other depreciation and amortization
1,608

 
1,553

Total operating expenses
198,331

 
196,690

Operating income
45,510

 
38,125

Income/(loss) from unconsolidated entities
11,198

 
679

Interest expense
(30,539
)
 
(31,104
)
Interest income and other income/(expense), net
427

 
431

Income/(loss) before income taxes and gain/(loss) on sale of real estate owned
26,596

 
8,131

Tax (provision)/benefit, net
(332
)
 
403

Income/(loss) from continuing operations
26,264

 
8,534

Gain/(loss) on sale of real estate owned, net of tax
2,132

 
3,070

Net income/(loss)
28,396

 
11,604

Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
(2,338
)
 
(905
)
Net (income)/loss attributable to noncontrolling interests
(91
)
 
(306
)
Net income/(loss) attributable to UDR, Inc.
25,967

 
10,393

Distributions to preferred stockholders — Series E (Convertible)
(929
)
 
(929
)
Net income/(loss) attributable to common stockholders
$
25,038

 
$
9,464

 
 
 
 
Common distributions declared per share
$
0.310

 
$
0.295

 
 
 
 
Income/(loss) per weighted average common share:
 
 
 
Basic
$
0.09

 
$
0.04

Diluted
$
0.09

 
$
0.04

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
266,790

 
262,456

Diluted
268,688

 
264,285

See accompanying notes to consolidated financial statements.

5
UDR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income/(loss)
$
28,396

 
$
11,604

Other comprehensive income/(loss), including portion attributable to noncontrolling interests:
 
 
 
Other comprehensive income/(loss) - derivative instruments:
 
 
 
Unrealized holding gain/(loss)
632

 
(811
)
(Gain)/loss reclassified into earnings from other comprehensive income/(loss)
818

 
935

Other comprehensive income/(loss), including portion attributable to noncontrolling interests
1,450

 
124

Comprehensive income/(loss)
29,846

 
11,728

Comprehensive (income)/loss attributable to noncontrolling interests
(2,558
)
 
(692
)
Comprehensive income/(loss) attributable to UDR, Inc.
$
27,288

 
$
11,036


See accompanying notes to consolidated financial statements.
 

6
UDR, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands, except per share data)
(Unaudited)


 
Preferred Stock
 
Common Stock
 
Paid-in Capital
 
Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Income/(Loss), net
 
Noncontrolling Interests
 
Total
Balance at December 31, 2016
$
46,458

 
$
2,673

 
$
4,635,413

 
$
(1,585,825
)
 
$
(5,609
)
 
$
3,860

 
$
3,096,970

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

 
—

 
—

 
25,967

 
—

 
—

 
25,967

Net income/(loss) attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
101

 
101

Contribution of noncontrolling interests in consolidated real estate
—

 
—

 
—

 
—

 
—

 
125

 
125

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

 
—

 
—

 
—

 
—

 
(340
)
 
(340
)
Other comprehensive income/(loss)
—

 
—

 
—

 
—

 
1,321

 
—

 
1,321

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

 
1

 
(1,879
)
 
—

 
—

 
—

 
(1,878
)
Cumulative effect upon adoption of ASU 2016-09
—

 
—

 
558

 
(558
)
 
—

 
—

 
—

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

 
—

 
1,850

 
—

 
—

 
—

 
1,850

Common stock distributions declared ($0.310 per share)
—

 
—

 
—

 
(82,995
)
 
—

 
—

 
(82,995
)
Preferred stock distributions declared-Series E ($0.3322 per share)
—

 
—

 
—

 
(929
)
 
—

 
—

 
(929
)
Adjustment to reflect redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
(281
)
 
—

 
—

 
(281
)
Balance at March 31, 2017
$
46,458

 
$
2,674

 
$
4,635,942

 
$
(1,644,621
)
 
$
(4,288
)
 
$
3,746

 
$
3,039,911

See accompanying notes to consolidated financial statements.

7
UDR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income/(loss)
$
28,396

 
$
11,604

Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
Depreciation and amortization
106,640

 
106,892

(Gain)/loss on sale of real estate owned, net of tax
(2,132
)
 
(3,070
)
Tax provision/(benefit), net
332

 
(403
)
(Income)/loss from unconsolidated entities
(11,198
)
 
(679
)
Return on investment in unconsolidated joint ventures
1,455

 
272

Amortization of share-based compensation
3,379

 
3,879

Other
4,264

 
2,497

Changes in operating assets and liabilities:
 
 
 
(Increase)/decrease in operating assets
3,856

 
(1,853
)
Increase/(decrease) in operating liabilities
(14,528
)
 
(6,378
)
Net cash provided by/(used in) operating activities
120,464

 
112,761

 
 
 
 
Investing Activities
 
 
 
Acquisition of real estate assets
(65,381
)
 
—

Proceeds from sales of real estate investments, net
3,250

 
21,951

Development of real estate assets
(63,022
)
 
(36,045
)
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
(21,921
)
 
(24,917
)
Capital expenditures — non-real estate assets
(1,233
)
 
(664
)
Investment in unconsolidated joint ventures
(24,193
)
 
(13,262
)
Distributions received from unconsolidated joint ventures
9,711

 
7,711

Net cash provided by/(used in) investing activities
(162,789
)
 
(45,226
)
 
 
 
 
Financing Activities
 
 
 
Payments on secured debt
(99,463
)
 
(2,205
)
Payments on unsecured debt
—

 
(83,373
)
Proceeds from the issuance of unsecured debt
220,000

 
—

Net proceeds/(repayment) of revolving bank debt
14,790

 
(73,652
)
Proceeds from the issuance of common shares through public offering, net
—

 
173,300

Distributions paid to redeemable noncontrolling interests
(7,476
)
 
(7,085
)
Distributions paid to preferred stockholders
(925
)
 
(924
)
Distributions paid to common stockholders
(78,942
)
 
(72,704
)
Other
(5,311
)
 
(3,966
)
Net cash provided by/(used in) financing activities
42,673

 
(70,609
)
Net increase/(decrease) in cash and cash equivalents
348

 
(3,074
)
Cash and cash equivalents, beginning of period
2,112

 
6,742

Cash and cash equivalents, end of period
$
2,460

 
$
3,668

 
 
 
 
 
Three Months Ended
 
March 31,
 
2017
 
2016
Supplemental Information:
 
 
 
Interest paid during the period, net of amounts capitalized
$
32,463

 
$
31,918

Cash paid/(refunds received) for income taxes
171

 
267

 
 
 
 
Non-cash transactions:
 
 
 
Transfer of investment in and advances to unconsolidated joint ventures to real estate owned
$
32,260

 
$
—

Vesting of LTIP Units
2,317

 
—

Development costs and capital expenditures incurred but not yet paid
34,336

 
21,220

Conversion of Operating Partnership and DownREIT Partnership noncontrolling interests to common stock (50,689 shares in 2017 and 0 shares in 2016)
1,850

 
—

Dividends declared but not yet paid
91,436

 
86,963

See accompanying notes to consolidated financial statements.

8
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017





1. BASIS OF PRESENTATION
Basis of Presentation
UDR, Inc., collectively with our consolidated subsidiaries (“UDR,” the “Company,” “we,” “our,” or “us”), is a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, and manages apartment communities. The accompanying consolidated financial statements include the accounts of UDR and its subsidiaries, including United Dominion Realty, L.P. (the “Operating Partnership” or the “OP”) and UDR Lighthouse DownREIT L.P. (the “DownREIT Partnership”). As of March 31, 2017, there were 183,350,924 units in the Operating Partnership ("OP Units") outstanding, of which 174,233,691 OP Units, or 95.0%, were owned by UDR and 9,117,233 OP Units, or 5.0%, were owned by outside limited partners. As of March 31, 2017, there were 32,367,380 units in the DownREIT Partnership (“DownREIT Units”) outstanding, of which 16,532,096, or 51.1%, were owned by UDR (including 13,470,651 DownREIT Units, or 41.6%, that were held by the Operating Partnership) and 15,835,284, or 48.9%, were owned by outside limited partners. The consolidated financial statements of UDR include the noncontrolling interests of the unitholders in the Operating Partnership and DownREIT Partnership.
The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of March 31, 2017, and results of operations for the three months ended March 31, 2017 and 2016 have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2016 appearing in UDR’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 21, 2017.
The accompanying interim unaudited consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation.

The Company evaluated subsequent events through the date its financial statements were issued. No significant recognized or non-recognized subsequent events were noted.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The ASU changes the definition of a business to assist entities with evaluating whether a set of transferred assets is a business. As a result, the accounting for acquisitions of real estate could be impacted. The updated standard will be effective for the Company on January 1, 2018; early adoption is permitted. The ASU will be applied prospectively to any transactions occurring within the period of adoption. The Company expects that the updated standard will result in fewer acquisitions of real estate meeting the definition of a business and fewer acquisition-related costs being expensed in the period incurred.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The ASU addresses the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The updated standard will be effective for the Company on January 1, 2018 and must be applied retrospectively to all periods presented; early

9
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



adoption is permitted. The Company does not expect the updated standard to have a material impact on the consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The ASU addresses specific cash flow items with the objective of reducing existing diversity in practice, including the treatment of distributions received from equity method investees. The updated standard will be effective for the Company on January 1, 2018 and must be applied retrospectively to all periods presented; early adoption is permitted.
    
The Company elected to early adopt ASU 2016-15 in 2016 and elected to classify distributions received from equity method investees using the cumulative earnings approach. As a result, for the three months ended March 31, 2016, the following amounts classified under the adopted ASU as returns on investment in unconsolidated joint ventures were reclassified on the Consolidated Statements of Cash Flow (in thousands):
 
Three Months Ended
 
March 31, 2016
Return on investment in unconsolidated joint ventures - as previously presented
$
—

Return on investment in unconsolidated joint ventures
272

Return on investment in unconsolidated joint ventures - as presented herein
$
272

 
 
Distributions received from unconsolidated joint ventures - as previously presented
$
7,983

Return on investment in unconsolidated joint ventures
(272
)
Distributions received from unconsolidated joint ventures - as presented herein
$
7,711


In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Company on January 1, 2020; early adoption is permitted on January 1, 2019. The Company is currently evaluating the effect that the updated standard will have on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. The ASU aims to simplify the accounting for share-based payments by amending the accounting for forfeitures, statutory tax withholding requirements, classification in the statements of cash flow and income taxes. The updated standard was effective for the Company on January 1, 2017, at which time the Company prospectively began accounting for forfeitures as incurred and began applying the updated rules for statutory withholdings. As a result of adopting the ASU, the Company recorded a one-time adjustment for existing estimated forfeitures of $0.6 million as of January 1, 2017 to Distributions in Excess of Net Income on January 1, 2017.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard will be effective for the Company on January 1, 2019, with early adoption permitted. While the Company is currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures, we expect to recognize right-of-use assets and related lease liabilities on our consolidated balance sheets related to ground leases on any communities where we are the lessee.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, including industry-specific revenue guidance. The standard specifically excludes lease contracts. The ASU allows for the use of either the full or modified retrospective

10
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



transition method and will be effective for the Company on January 1, 2018, at which time the Company expects to adopt the updated standard using the modified retrospective approach. However, as the majority of the Company’s revenue is from rental income related to leases, the Company does not expect the ASU to have a material impact on the consolidated financial statements and related disclosures.
Principles of Consolidation
The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the consolidation guidance. The Company first evaluates whether each entity is a variable interest entity ("VIE"). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.
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, net of tax on the Consolidated Statements of Operations.
Revenue and Real Estate Sales Gain Recognition
Rental income related to leases is recognized on an accrual basis when due from residents and tenants in accordance with GAAP. Rental payments are generally due on a monthly basis and recognized when earned. The Company recognizes interest income, management and other fees and incentives when earned, and the amounts are fixed and determinable.
For sale transactions meeting the requirements for full accrual profit recognition, we remove the related assets and liabilities from our Consolidated Balance Sheets and record the gain or loss in the period the transaction closes. For sale transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting. Unless certain limited criteria are met, non-monetary transactions, including property exchanges, are accounted for at fair value.
Sales to entities in which we retain or otherwise own an interest are accounted for as partial sales. If all other requirements for recognizing profit under the full accrual method have been satisfied and no other forms of continuing involvement are present, we recognize profit proportionate to the outside interest of the buyer and defer the gain on the interest we retain. The Company recognizes any deferred gain when the property is sold to a third party. In transactions accounted for by us as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, we recognize profit only to the extent that proceeds from the sale of the majority equity interest exceed costs related to the entire property.

11
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



Notes Receivable

The following table summarizes our notes receivable, net as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
Interest rate at
 
Balance outstanding
 
March 31,
2017
 
March 31,
2017
 
December 31, 2016
Note due February 2020 (a)
10.00
%
 
$
12,994

 
$
12,994

Note due July 2017 (b)
8.00
%
 
2,500

 
2,500

Note due October 2020 (c)
8.00
%
 
1,296

 
1,296

Note due April 2021 (d)
10.00
%
 
3,000

 
3,000

Total notes receivable, net
 
 
$
19,790

 
$
19,790

(a) The Company has a secured note receivable with an unaffiliated third party with an aggregate commitment of $13.0 million. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $5.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the eighth anniversary of the date of the note (February 2020).
(b) The Company has a secured note receivable with an unaffiliated third party with an aggregate commitment of $2.5 million. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $5.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (July 2017).
(c)
The Company has a secured note receivable with an unaffiliated third party with an aggregate commitment of $2.0 million, of which, $1.3 million has been funded. Interest payments are due when the loan matures. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $10.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (October 2020).
(d) The Company has a secured note receivable with an unaffiliated third party with an aggregate commitment of $15.0 million, of which, $3.0 million has been funded. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $25.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (April 2021).
The Company recognized $0.5 million and $0.4 million of interest income from notes receivable during the three months ended March 31, 2017 and 2016, respectively, none of which was related party interest income. Interest income is included in Interest income and other income/(expense), net on the Consolidated Statements of Operations.
Comprehensive Income/(Loss)
Comprehensive income/(loss), which is defined as the change in equity during each period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Consolidated Statements of Comprehensive Income/(Loss). For the three months ended March 31, 2017 and 2016, 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 10, Derivatives and Hedging Activity, for further discussion. The allocation of other comprehensive income/(loss) to redeemable noncontrolling interests during the three months ended March 31, 2017 and 2016 was $0.1 million and $(0.5) million, respectively.

12
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



Income Taxes
Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, no provision for federal income taxes has been provided for at UDR. Historically, the Company has generally incurred only state and local excise and franchise taxes. UDR has elected for certain consolidated subsidiaries to be treated as taxable REIT subsidiaries (“TRS”).
Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date. The Company’s deferred tax assets are generally the result of differing depreciable lives on capitalized assets and timing of expense recognition for certain accrued liabilities. As of March 31, 2017 and December 31, 2016, UDR’s net deferred tax asset was $0.4 million and $0.6 million, respectively.
GAAP defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. GAAP also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.
The Company recognizes its tax positions and evaluates them using a two-step process. First, UDR determines whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.
UDR had no material unrecognized tax benefit, accrued interest or penalties at March 31, 2017. UDR and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The tax years 2013 through 2016 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.

13
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



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 sold or held for disposition properties. As of March 31, 2017, the Company owned and consolidated 128 communities in 10 states plus the District of Columbia totaling 39,698 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Land
$
1,812,797

 
$
1,801,576

Depreciable property — held and used:
 
 
 
Land improvements
180,837

 
178,701

Building, improvements, and furniture, fixtures and equipment
7,400,098

 
7,291,570

Under development:
 
 
 
Land and land improvements
111,028

 
111,028

Building, improvements, and furniture, fixtures and equipment
282,809

 
231,254

Real estate held for disposition:
 
 
 
Land and land improvements
—

 
1,104

Building, improvements, and furniture, fixtures and equipment
—

 
520

Real estate owned
9,787,569

 
9,615,753

Accumulated depreciation
(3,026,660
)
 
(2,923,625
)
Real estate owned, net
$
6,760,909

 
$
6,692,128


Acquisitions
    
During the three months ended March 31, 2017, the Company exercised its fixed-price option to purchase its joint venture partner's ownership interest in a 244 home operating community in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $66.0 million. 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). As a result of the consolidation, the Company increased its real estate owned by approximately $97.0 million, recorded approximately $1.7 million of in-place lease intangibles and recorded a gain on consolidation of $12.2 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.

Dispositions
    
During the three months ended March 31, 2017, the Company sold a parcel of land in Richmond, Virginia for gross proceeds of $3.5 million, resulting in net proceeds of $3.3 million and a gain of $2.1 million.

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, were $2.8 million and $2.0 million for the three months ended March 31, 2017 and 2016, respectively. Total interest capitalized was $4.7 million and $4.2 million for the three months ended March 31, 2017 and 2016, 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.

14
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



4. VARIABLE INTEREST ENTITIES

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

See the consolidated financial statements of the Operating Partnership presented within this Report and Note 4, Unconsolidated Entities, to the Operating Partnership's consolidated financial statements for the results of operations of the Operating Partnership and DownREIT Partnership, respectively.
5. JOINT VENTURES AND PARTNERSHIPS
UDR has entered into joint ventures and partnerships with unrelated third parties to acquire 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. In addition, the Company consolidates any joint venture or partnership in which we are the general partner or managing member and the third party does not have the ability to substantively participate in the decision-making process nor the ability to remove us as general partner or managing member without cause.

UDR’s joint ventures and partnerships are funded with a combination of debt and equity. Our losses are limited to our investment and except as noted below, the Company does not guarantee any debt, capital payout or other obligations associated with our joint ventures and partnerships.
The Company recognizes earnings or losses from our investments in unconsolidated joint ventures and partnerships consisting of our proportionate share of the net earnings or losses of the joint ventures and partnerships. In addition, we may earn fees for providing management services to the unconsolidated joint ventures and partnerships.

15
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



The following table summarizes the Company’s investment in and advances to unconsolidated joint ventures and partnerships, net, which are accounted for under the equity method of accounting as of March 31, 2017 and December 31, 2016 (dollars in thousands):
Joint Venture
 
Location of Properties
 
Number of Properties
 
Number of Apartment Homes
 
Investment at
 
UDR’s Ownership Interest
 
 
March 31,
2017
 
March 31,
2017
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
Operating and development:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UDR/MetLife I
 
Los Angeles, CA
 
1 development community (a)
 
150
 
$
29,182

 
$
25,209

 
50.0
%
 
50.0
%
UDR/MetLife II (b)
 
Various
 
18 operating communities
 
4,059
 
309,409

 
311,282

 
50.0
%
 
50.0
%
Other UDR/MetLife Development Joint Ventures
 
 
 
1 operating community;
 
 
 
 
 
 
 
 
 
 
 
Various
 
4 development communities (a)
 
1,437
 
156,096

 
160,979

 
50.6
%
 
50.6
%
UDR/MetLife Vitruvian Park®
 
Addison, TX
 
3 operating communities;
 
 
 
 
 
 
 
 
 
 
 
 
1 development community (a);
 
 
 
 
 
 
 
 
 
 
 
 
5 land parcels
 
1,513
 
73,154

 
72,414

 
50.0
%
 
50.0
%
UDR/KFH
 
Washington, D.C.
 
3 operating communities
 
660
 
11,801

 
12,835

 
30.0
%
 
30.0
%
Investment in and advances to unconsolidated joint ventures, net, before participating loan investment and preferred equity investment
 
 
 
$
579,642

 
$
582,719

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income from investments for the three months ending March 31,
 
 
 
 
 
 
 
 
Investment at
 
 
 
Location
 
Rate
 
Years To Maturity
 
March 31,
2017
 
December 31,
2016
 
2017
 
2016
Participating loan investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Steele Creek
 
Denver, CO
 
6.5%
 
0.3
 
$
94,002

 
$
94,003

 
$
1,533
 
 
$
1,519
 
Preferred equity investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
West Coast Development Joint Ventures (c)
 
Various
 
6.5% (c)
 
N/A
 
145,346

 
150,303

 
$
12,766
 
 
$
1,427
 
Total investment in and advances to unconsolidated joint ventures, net
 
$
818,990

 
$
827,025

 
 
 
 
 
 
(a)
The number of apartment homes for the communities under development presented in the table above is based on the projected number of total homes upon completion of development. As of March 31, 2017, 1,018 apartment homes had been completed in Other UDR/MetLife Development Joint Ventures, and no apartment homes had been completed in UDR/MetLife I or in UDR/MetLife Vitruvian Park®.
(b)
In September 2015, the 717 Olympic community, which is owned by the UDR/MetLife II joint venture, experienced extensive water damage due to a ruptured water pipe. For the three months ended March 31, 2017 and 2016, the Company recorded casualty-related charges/(recoveries) of $0.9 million and $(1.1) million, respectively, representing its proportionate share of the total charges/(recoveries) recognized.

16
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



(c)
In May 2015, the Company entered into a joint venture agreement with an unaffiliated joint venture partner and agreed to pay $136.3 million for a 48% ownership interest in a portfolio of five communities that were under construction. The communities are located in three of the Company’s core, coastal markets: Seattle, Washington, Los Angeles and Orange County, California. UDR earns a 6.5% preferred return on its investment through each individual community’s date of stabilization, defined as when a community reaches 80% occupancy for 90 consecutive days, while the joint venture partner is allocated all operating income and expense during the pre-stabilization period. Upon stabilization, income and expense are shared based on each partner’s ownership percentage and the Company no longer receives a 6.5% preferred return on its investment in the stabilized community. The Company serves as property manager and earns a management fee during the lease-up phase and subsequent operation of each of the communities. The unaffiliated joint venture partner is the general partner of the joint venture and the developer of the communities.
At inception of the agreement, the Company had a fixed-price option to acquire the remaining interest in each community beginning one year after completion. If the options are exercised for all five communities, the Company’s total purchase price will be $597.4 million. In the event the Company does not exercise its options to purchase at least two communities, the unaffiliated joint venture partner will be entitled to earn a contingent disposition fee equal to a 6.5% return on its implied equity in the communities not acquired. The unaffiliated joint venture partner is providing certain guaranties and there are construction loans on all five communities.
During the three months ended March 31, 2017, the Company exercised its fixed-price option to purchase the joint venture partner’s ownership interest in one of the five communities, a 244 home operating community in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $66.0 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 4, Real Estate Owned). As a result of the consolidation, the Company recorded a gain on consolidation of $12.2 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.
As of March 31, 2017, construction was completed on three of the four remaining communities. Two of the four remaining communities had achieved stabilization. The other two remaining communities have not achieved stabilization and the Company continues to receive a 6.5% preferred return on its investment in those communities.
In March 2017, the Company entered into an additional joint venture agreement with the unaffiliated joint venture partner and agreed to pay $15.5 million for a 49% ownership interest in a 155 home community that is currently under construction in Seattle, Washington (together with the May 2015 joint venture described above, the “West Coast Development Joint Ventures”). Consistent with the terms of the May 2015 joint venture agreement, UDR earns a 6.5% preferred return on its investment through the community’s date of stabilization, as defined above, while our joint venture partner is allocated all operating income and expense during the pre-stabilization period. Upon stabilization, income and expense will be shared based on each partner’s ownership percentage and the Company will no longer receive a 6.5% preferred return on its investment in the stabilized community. The Company will serve as property manager and will earn a management fee during the lease-up phase and subsequent operation of the community. The unaffiliated joint venture partner is the general partner and the developer of the community. The Company has concluded it does not control the joint venture and accounts for it under the equity method of accounting.
The Company has a fixed-price option to acquire the remaining interest in the community beginning one year after completion for a total price of $61.3 million. The unaffiliated joint venture partner is providing certain guaranties and there is a construction loan on the community.
The Company's recorded equity investment in the West Coast Development Joint Ventures at March 31, 2017 and December 31, 2016 of $145.3 million and $150.3 million, respectively, is inclusive of outside basis costs and our accrued but unpaid preferred return.
As of March 31, 2017 and December 31, 2016, the Company had deferred fees and deferred profit of $9.7 million and $9.5 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.

17
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



The Company recognized management fees of $2.6 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively, for our 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 decreases in the value of its investments in unconsolidated joint ventures or partnerships during the three months ended March 31, 2017 and 2016.

Combined summary balance sheets relating to the unconsolidated joint ventures and partnerships (not just our proportionate share) are presented below as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Total real estate, net
$
2,904,183

 
$
2,901,067

Cash and cash equivalents
28,676

 
32,503

Other assets
17,288

 
19,047

Total assets
$
2,950,147

 
$
2,952,617

Amount due to/(from) UDR
$
2,746

 
$
521

Third party debt, net
1,811,490

 
1,794,379

Accounts payable and accrued liabilities
55,471

 
66,391

Total liabilities
$
1,869,707

 
$
1,861,291

Total equity
$
1,080,440

 
$
1,091,326

Combined summary financial information relating to the unconsolidated joint ventures’ and partnerships’ operations (not just our proportionate share) is presented below for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Total revenues
$
58,524

 
$
55,037

Property operating expenses
(21,834
)
 
(23,413
)
Real estate depreciation and amortization
(23,333
)
 
(18,943
)
Operating income/(loss)
13,357

 
12,681

Interest expense
(17,690
)
 
(16,181
)
Net income/(loss)
$
(4,333
)
 
$
(3,500
)


18
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



6. SECURED AND UNSECURED DEBT, NET
The following is a summary of our secured and unsecured debt at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
 
 
 
 
Three Months Ended
 
Principal Outstanding
 
March 31, 2017
 
March 31,
2017
 
December 31, 2016
 
Weighted Average
Interest Rate
 
Weighted Average
Years to Maturity
 
Number of Communities
Encumbered
Secured Debt:
 
 
 
 
 
 
 
 
 
Fixed Rate Debt
 
 
 
 
 
 
 
 
 
Mortgage notes payable (a)
$
401,135

 
$
402,996

 
4.04
%
 
6.1
 
7

Fannie Mae credit facilities (b)
355,836

 
355,836

 
5.06
%
 
2.6
 
10

Deferred financing costs
(2,482
)
 
(2,681
)
 
 
 
 
 
 
Total fixed rate secured debt, net
754,489

 
756,151

 
4.53
%
 
4.4
 
17

Variable Rate Debt
 
 
 
 
 
 
 
 
 
Tax-exempt secured notes payable (c)
94,700

 
94,700

 
1.42
%
 
5.9
 
2

Fannie Mae credit facilities (b)
182,606

 
280,946

 
2.05
%
 
1.3
 
5

Deferred financing costs
(288
)
 
(939
)
 
 
 
 
 
 
Total variable rate secured debt, net
277,018

 
374,707

 
1.84
%
 
2.9
 
7

Total Secured Debt, net
1,031,507

 
1,130,858

 
3.80
%
 
4.0
 
24

 
 
 
 
 
 
 
 
 
 
Unsecured Debt:
 
 
 
 
 
 
 
 
 
Variable Rate Debt
 
 
 
 
 
 
 
 
 
Borrowings outstanding under unsecured credit facility due January 2020 (d) (h)
—

 
—

 
—
%
 
2.8
 
 
Borrowings outstanding under unsecured commercial paper program due April 2017 (e) (h)
220,000

 
—

 
1.24
%
 
0.0
 
 
Borrowings outstanding under unsecured working capital credit facility due January 2019 (f)
36,140

 
21,350

 
1.88
%
 
1.8
 
 
Term Loan Facility due January 2021 (d) (h)
35,000

 
35,000

 
1.73
%
 
3.8
 
 
Fixed Rate Debt
 
 
 
 
 
 
 
 
 
4.25% Medium-Term Notes due June 2018 (net of discounts of $501 and $608, respectively) (h)
299,499

 
299,392

 
4.25
%
 
1.2
 
 
3.70% Medium-Term Notes due October 2020 (net of discounts of $28 and $30, respectively) (h)
299,972

 
299,970

 
3.70
%
 
3.5
 
 
2.34% Term Loan Facility due January 2021 (d) (h)
315,000

 
315,000

 
2.34
%
 
3.8
 
 
4.63% Medium-Term Notes due January 2022 (net of discounts of $1,715 and $1,805 respectively) (h)
398,285

 
398,195

 
4.63
%
 
4.8
 
 
3.75% Medium-Term Notes due July 2024 (net of discounts of $756 and $782, respectively) (h)
299,244

 
299,218

 
3.75
%
 
7.3
 
 
8.50% Debentures due September 2024
15,644

 
15,644

 
8.50
%
 
7.5
 
 
4.00% Medium-Term Notes due October 2025 (net of discounts of $585 and $602, respectively) (g) (h)
299,415

 
299,398

 
4.00
%
 
8.5
 
 
2.95% Medium-Term Notes due September 2026 (h)
300,000

 
300,000

 
2.95
%
 
9.4
 
 
Other
21

 
21

 
 
 
 
 
 
Deferred financing costs
(12,435
)
 
(12,568
)
 
 
 
 
 
 
Total Unsecured Debt, net
2,505,785

 
2,270,620

 
3.52
%
 
4.9
 
 
Total Debt, net
$
3,537,292

 
$
3,401,478

 
3.67
%
 
4.6
 
 

19
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



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 March 31, 2017, secured debt encumbered $1.9 billion or 19.7% of UDR’s total real estate owned based upon gross book value ($7.9 billion or 80.3% of UDR’s real estate owned based on gross book value is unencumbered).
(a) At March 31, 2017, fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from May 2019 through November 2026 and carry interest rates ranging from 3.15% to 5.86%.
The Company will from time to time acquire properties subject to fixed rate debt instruments. In those situations, the Company records the debt at its estimated fair value and amortizes any difference between the fair value and par value to interest expense over the life of the underlying debt instrument.
During the three months ended March 31, 2017 and 2016, the Company had $0.7 million and $0.8 million, respectively, of amortization of the fair market adjustment of debt assumed in the acquisition of properties, which was included in Interest expense on the Consolidated Statements of Operations. The unamortized fair market adjustment was a net premium of $10.4 million and $11.2 million at March 31, 2017 and December 31, 2016, respectively.
(b) UDR had three secured credit facilities with Fannie Mae with an aggregate commitment of $538.4 million at March 31, 2017. The Fannie Mae credit facilities mature at various dates from May 2017 through July 2020 and bear interest at floating and fixed rates. At March 31, 2017, $355.8 million of the outstanding balance was fixed and had a weighted average interest rate of 5.06% and the remaining balance of $182.6 million had a weighted average variable interest rate of 2.05%. During the three months ended March 31, 2017, the Company prepaid $98.3 million of its secured credit facilities with borrowings under the Company's unsecured commercial paper program.
Further information related to these credit facilities is as follows (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Borrowings outstanding
$
538,442

 
$
636,782

Weighted average borrowings during the period ended
604,002

 
737,802

Maximum daily borrowings during the period ended
636,782

 
813,544

Weighted average interest rate during the period ended
3.9
%
 
3.9
%
Weighted average interest rate at the end of the period
4.0
%
 
3.8
%
(c) The variable rate mortgage notes payable that secure tax-exempt housing bond issues mature in August 2019 and March 2032. Interest on these notes is payable in monthly installments. The variable rate mortgage notes have interest rates ranging from 1.39% to 1.44% as of March 31, 2017.

(d) The Company has a $1.1 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $350.0 million unsecured term loan facility (the “Term Loan Facility”). 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 Facility to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from any one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2020, with two six-month extension options, subject to certain conditions. The Term Loan Facility has a scheduled maturity date of January 29, 2021.     

Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 90 basis points and a facility fee of 15 basis points, and the Term Loan Facility has an interest rate equal to LIBOR plus a margin of 95 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 85 to 155 basis points, the facility fee ranges from 12.5 to 30 basis points, and the margin under the Term Loan Facility ranges from 90 to 175 basis points.

20
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017




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 March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Total revolving credit facility
$
1,100,000

 
$
1,100,000

Borrowings outstanding at end of period (1)
—

 
—

Weighted average daily borrowings during the period ended
9,222

 
161,505

Maximum daily borrowings during the period ended
120,000

 
340,000

Weighted average interest rate during the period ended
1.6
%
 
1.4
%
Interest rate at end of the period
—
%
 
—
%
(1) Excludes $2.9 million and $2.9 million of letters of credit at March 31, 2017 and December 31, 2016, respectively.

(e) On January 23, 2017, the Company entered into 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 million. The notes are sold under customary terms in the United States commercial paper market and rank pari passu with all of the Company’s other unsecured indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership.

The following is a summary of short-term bank borrowings under the unsecured commercial paper program at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Total unsecured commercial paper program
$
500,000

 
$
—

Borrowings outstanding at end of period
220,000

 
—

Weighted average daily borrowings during the period ended
80,228

 
—

Maximum daily borrowings during the period ended
220,000

 
—

Weighted average interest rate during the period ended
1.2
%
 
—
%
Interest rate at end of the period
1.2
%
 
—
%

(f) The Company has 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 1, 2019. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin ranges from 85 to 155 basis points.

21
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017




The following is a summary of short-term bank borrowings under the Working Capital Credit Facility at March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Total revolving working capital credit facility
$
75,000

 
$
75,000

Borrowings outstanding at end of period
36,140

 
21,350

Weighted average daily borrowings during the period ended
26,714

 
21,936

Maximum daily borrowings during the period ended
67,799

 
69,633

Weighted average interest rate during the period ended
1.7
%
 
1.4
%
Interest rate at end of the period
1.9
%
 
1.7
%

(g) The Company previously entered into forward starting interest rate swaps to hedge against interest rate risk on $200 million of this debt. The all-in weighted average interest rate, inclusive of the impact of these interest rate swaps, was 4.55%.
    
(h) The Operating Partnership is a guarantor of this debt.

The aggregate maturities, including amortizing principal payments of unsecured and secured debt, of total debt for the next ten calendar years subsequent to March 31, 2017 are as follows (dollars in thousands):
Year
 
Total Fixed Secured Debt
 
Total Variable Secured Debt
 
Total Secured Debt
 
Total Unsecured Debt
 
Total Debt
2017
 
$
3,310

 
$
46,568

 
$
49,878

 
$
220,000

 
$
269,878

2018
 
74,637

 
136,038

 
210,675

 
300,000

 
510,675

2019
 
249,395

 
67,700

 
317,095

 
36,140

 
353,235

2020
 
198,076

 
—

 
198,076

 
300,000

 
498,076

2021
 
1,117

 
—

 
1,117

 
350,000

 
351,117

2022
 
1,157

 
—

 
1,157

 
400,000

 
401,157

2023
 
41,245

 
—

 
41,245

 
—

 
41,245

2024
 
—

 
—

 
—

 
315,644

 
315,644

2025
 
127,600

 
—

 
127,600

 
300,000

 
427,600

2026
 
50,000

 
—

 
50,000

 
300,000

 
350,000

Thereafter
 
—

 
27,000

 
27,000

 
—

 
27,000

Subtotal
 
746,537

 
277,306

 
1,023,843

 
2,521,784

 
3,545,627

Non-cash (a)
 
7,952

 
(288
)
 
7,664

 
(15,999
)
 
(8,335
)
Total
 
$
754,489

 
$
277,018

 
$
1,031,507

 
$
2,505,785

 
$
3,537,292

(a) Includes the unamortized balance of fair market value adjustments, premiums/discounts and deferred financing costs. For the three months ended March 31, 2017 and 2016, the Company amortized $1.1 million and $1.3 million, respectively, of deferred financing costs into Interest expense.
We were in compliance with the covenants of our debt instruments at March 31, 2017.


22
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



7. INCOME/(LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income/(loss) per share for the periods presented (dollars and shares in thousands, except per share data):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Numerator for income/(loss) per share:
 
 
 
Income/(loss) from continuing operations
$
26,264

 
$
8,534

Gain/(loss) on sale of real estate owned, net of tax
2,132

 
3,070

Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
(2,338
)
 
(905
)
Net (income)/loss attributable to noncontrolling interests
(91
)
 
(306
)
Net income/(loss) attributable to UDR, Inc.
25,967

 
10,393

Distributions to preferred stockholders — Series E (Convertible)
(929
)
 
(929
)
Income/(loss) attributable to common stockholders - basic and diluted
$
25,038

 
$
9,464

 
 
 
 
Denominator for income/(loss) per share:
 
 
 
Weighted average common shares outstanding
267,402

 
263,355

Non-vested restricted stock awards
(612
)
 
(899
)
Denominator for basic income/(loss) per share
266,790

 
262,456

Incremental shares issuable from assumed conversion of stock options, unvested LTIP Units and unvested restricted stock
1,898

 
1,829

Denominator for diluted income/(loss) per share
268,688

 
264,285

 
 
 
 
Income/(loss) per weighted average common share:
 
 
 
Basic
$
0.09

 
$
0.04

Diluted
$
0.09

 
$
0.04

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") and unvested restricted stock. Only those instruments having a dilutive impact on our basic income/(loss) per share are included in diluted income/(loss) per share during the periods. For the three months ended March 31, 2017 and 2016, the effect of the conversion of the OP Units, DownREIT Units and convertible preferred stock was not dilutive and therefore not included in the above calculation.

The following table sets forth the additional shares of common stock outstanding by equity instrument if converted to common stock for each of the three months ended March 31, 2017 and 2016 (shares in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
OP/DownREIT Units
24,962

 
25,191

Convertible preferred stock
3,028

 
3,028

Stock options, unvested LTIP Units and unvested restricted stock
1,898

 
1,829


23
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



8. NONCONTROLLING INTERESTS
Redeemable Noncontrolling Interests in the Operating Partnership and DownREIT Partnership
Interests in the Operating Partnership and the DownREIT Partnership held by limited partners are represented by OP Units and DownREIT Units, respectively. The income is allocated to holders of OP Units/DownREIT Units based upon net income attributable to common stockholders and the weighted average number of OP Units/DownREIT Units outstanding to total common shares plus OP Units/DownREIT Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the partnership agreements of the Operating Partnership and the DownREIT Partnership.
Limited partners of the Operating Partnership and the DownREIT Partnership have the right to require such partnership to redeem all or a portion of the OP Units/DownREIT Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the Operating Partnership or the DownREIT Partnership, as applicable), provided that such OP Units/DownREIT Units have been outstanding for at least one year, subject to certain exceptions. UDR, as the general partner of the Operating Partnership and the DownREIT Partnership may, in its sole discretion, purchase the OP Units/DownREIT Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of the Company for each OP Unit/DownREIT Unit), as defined in the partnership agreement of the Operating Partnership or the DownREIT Partnership, as applicable. Accordingly, the Company records the OP Units/DownREIT Units outside of permanent equity and reports the OP Units/DownREIT Units at their redemption value using the Company’s stock price at each balance sheet date.
The following table sets forth redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership for the following period (dollars in thousands):
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, December 31, 2016
 
$
909,482

Mark-to-market adjustment to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
 
281

Conversion of OP Units/DownREIT Units to Common Stock
 
(1,850
)
Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
 
2,338

Distributions to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
 
(7,919
)
Vesting of Long-Term Incentive Plan Units
 
2,317

Allocation of other comprehensive income/(loss)
 
129

Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership, March 31, 2017
 
$
904,778

Noncontrolling Interests
Noncontrolling interests represent interests of unrelated partners and unvested LTIP Units in certain consolidated affiliates, and is presented as part of equity in the Consolidated Balance Sheets since these interests are not redeemable. During the three months ended March 31, 2017 and 2016, Net (income)/loss attributable to noncontrolling interests was $(0.1) million and $(0.3) million, respectively.
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.

24
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



9. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair value is based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of March 31, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
 
 
 
 
 
Fair Value at March 31, 2017, Using
 
Total Carrying Amount in Statement of Financial Position at March 31, 2017
 
Fair Value Estimate at March 31, 2017
 
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description:
 
 
 
 
 
 
 
 
 
Notes receivable (a)
$
19,790

 
$
19,735

 
$
—

 
$
—

 
$
19,735

Derivatives - Interest rate contracts (b)
5,067

 
5,067

 
—

 
5,067

 
—

Total assets
$
24,857

 
$
24,802

 
$
—

 
$
5,067

 
$
19,735

 
 
 
 
 
 
 
 
 
 
Derivatives - Interest rate contracts (b)
$
9

 
$
9

 
$
—

 
$
9

 
$
—

Secured debt instruments - fixed rate: (c)
 
 
 
 
 
 
 
 
 
Mortgage notes payable
401,135

 
395,504

 
—

 
—

 
395,504

Fannie Mae credit facilities
355,836

 
365,391

 
—

 
—

 
365,391

Secured debt instruments - variable rate: (c)
 
 
 
 
 
 
 
 
 
Tax-exempt secured notes payable
94,700

 
94,700

 
—

 
—

 
94,700

Fannie Mae credit facilities
182,606

 
182,606

 
—

 
—

 
182,606

Unsecured debt instruments: (c)
 
 
 
 
 
 
 
 
 
Working capital credit facility
36,140

 
36,140

 
—

 
—

 
36,140

Commercial paper program
220,000

 
220,000

 
—

 
—

 
220,000

Unsecured notes
2,262,059

 
2,302,863

 
—

 
—

 
2,302,863

Total liabilities
$
3,552,485

 
$
3,597,213

 
$
—

 
$
9

 
$
3,597,204

 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership (d)
$
904,778

 
$
904,778

 
$
—

 
$
904,778

 
$
—


25
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



 
 
 
 
 
Fair Value at December 31, 2016, Using
 
Total Carrying Amount in Statement of Financial Position at December 31, 2016
 
Fair Value Estimate at December 31, 2016
 
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description:
 
 
 
 
 
 
 
 
 
Notes receivable (a)
$
19,790

 
$
19,645

 
$
—

 
$
—

 
$
19,645

Derivatives - Interest rate contracts (b)
4,360

 
4,360

 
—

 
4,360

 
—

Total assets
$
24,150

 
$
24,005

 
$
—

 
$
4,360

 
$
19,645

 
 
 
 
 
 
 
 
 
 
Derivatives- Interest rate contracts (b)
$
413

 
$
413

 
$
—

 
$
413

 
$
—

Secured debt instruments - fixed rate: (c)
 
 
 
 
 
 
 
 
 
Mortgage notes payable
402,996

 
396,045

 
—

 
—

 
396,045

Fannie Mae credit facilities
355,836

 
365,693

 
—

 
—

 
365,693

Secured debt instruments - variable rate: (c)
 
 
 

 
 
 
 
 
 
Tax-exempt secured notes payable
94,700

 
94,700

 
—

 
—

 
94,700

Fannie Mae credit facilities
280,946

 
280,946

 
—

 
—

 
280,946

Unsecured debt instruments: (c)
 
 
 
 
 
 
 
 
 
Working capital credit facility
21,350

 
21,350

 
—

 
—

 
21,350

Unsecured notes
2,261,838

 
2,304,492

 
—

 
—

 
2,304,492

Total liabilities
$
3,418,079

 
$
3,463,639

 
$
—

 
$
413

 
$
3,463,226

 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership (d)
$
909,482

 
$
909,482

 
$
—

 
$
909,482

 
$
—


(a)See Note 2, Significant Accounting Policies.
(b)See Note 10, Derivatives and Hedging Activity.
(c)See Note 6, Secured Debt and Unsecured Debt, Net.
(d)See Note 8, Noncontrolling Interests.

There were no transfers into or out of any of the levels of the fair value hierarchy during the three months ended March 31, 2017.
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.

26
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2017 and December 31, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. In conjunction with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership have a redemption feature and are marked to their redemption value. The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership are classified as Level 2.
Financial Instruments Not Carried at Fair Value
At March 31, 2017 and December 31, 2016, 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 were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
We estimate the fair value of our notes receivable and debt instruments by discounting the remaining cash flows of the debt instrument at a discount rate equal to the replacement market credit spread plus the corresponding treasury yields. Factors considered in determining a replacement market credit spread include general market conditions, borrower specific credit spreads, time remaining to maturity, loan-to-value ratios and collateral quality, where applicable (Level 3).
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 decrease in the value of its investments in unconsolidated joint ventures during the three months ended March 31, 2017 and 2016.
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.

27
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



10. 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 effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income/(loss), net in the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2017 and 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017, the Company recognized a loss of less than $0.1 million reclassified from Accumulated OCI to Interest expense due to the de-designation of a cash flow hedge and recorded no other ineffectiveness to earnings. During the three months ended March 31, 2016, the Company recorded no ineffectiveness to earnings.
Amounts reported in Accumulated other comprehensive income/(loss), net in the Consolidated Balance Sheets related to derivatives that will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Through March 31, 2018, the Company estimates that an additional $0.5 million will be reclassified as an increase to interest expense.
As of March 31, 2017, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
Product
 
Number of Instruments
 
Notional
Interest rate swaps (a)
 
4
 
$
315,000

Interest rate caps
 
2
 
$
203,166


(a) Of the four interest rate swaps noted in the table above, two swaps with an aggregate notional value of $215.0 million mature in April 2017 and two swaps with an aggregate notional value of $100.0 million mature in January 2020. The Company has entered into two forward starting interest rate swaps with an aggregate notional value of $215.0 million and a maturity in January 2020, which are effective upon the expiration of the swaps maturing in April 2017.

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in a loss of less than $0.1 million for the three months ended March 31, 2017 and 2016.

28
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



As of March 31, 2017, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
Product
 
Number of Instruments
 
Notional
Interest rate caps
 
3
 
$
133,107


Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
Asset Derivatives
(included in Other assets)
 
Liability Derivatives
(included in Other liabilities)
 
Fair Value at:
 
Fair Value at:
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate products
$
5,067

 
$
4,359

 
$
9

 
$
413

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate products
$
—

 
$
1

 
$
—

 
$
—

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):
Derivatives in Cash Flow Hedging Relationships
 
Unrealized holding gain/(loss) Recognized in OCI
(Effective Portion)
 
Gain/(Loss) Reclassified from Accumulated OCI into Interest expense 
(Effective Portion)
 
Gain/(Loss) Recognized in Interest expense (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
$
632

 
$
(811
)
 
$
(764
)
 
$
(935
)
 
$
(54
)
 
$
—


 
 
Gain/(Loss) Recognized in Interest income and other income/(expense), net
Derivatives Not Designated as Hedging Instruments
2017
 
2016
Three Months Ended March 31,
 
 
 
 
Interest rate products
 
$
(1
)
 
$
—

Credit-risk-related Contingent Features
The Company has agreements with some of its derivative counterparties that contain a provision where (1) if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations; or (2) 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.
Certain of the Company’s agreements with its derivative counterparties contain provisions where, if there is a change in the Company’s financial condition that materially changes the Company’s creditworthiness in an adverse manner, the

29
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



Company may be required to fully collateralize its obligations under the derivative instrument. At March 31, 2017 and December 31, 2016, no cash collateral was posted or required to be posted by the Company or by a counterparty.
The Company also has an agreement with a derivative counterparty that incorporates the loan and financial covenant provisions of the Company’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with these covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the applicable agreement.
The Company has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the Company or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity's creditworthiness is materially weaker than the original party to the derivative agreement.
As of March 31, 2017, 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 $4.9 million. As of March 31, 2017, the Company has not posted any collateral related to these agreements.
Tabular Disclosure of Offsetting Derivatives

The Company has elected not to offset derivative positions in the consolidated financial statements. The tables below present the effect on its financial position had the Company made the election to offset its derivative positions as of March 31, 2017 and December 31, 2016 (dollars in thousands):
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Consolidated Balance Sheets (a)
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
 
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
March 31, 2017
$
5,067

 
$
—

 
$
5,067

 
$
(5
)
 
$
—

 
$
5,062

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
4,360

 
$
—

 
$
4,360

 
$
(221
)
 
$
—

 
$
4,139

(a) Amounts reconcile to the aggregate fair value of derivative assets in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.
Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets (a)
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Net Amount
March 31, 2017
$
9

 
$
—

 
$
9

 
$
(5
)
 
$
—

 
$
4

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
413

 
$
—

 
$
413

 
$
(221
)
 
$
—

 
$
192

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

30

11. STOCK BASED COMPENSATION
The Company recognized stock based compensation expense, inclusive of awards granted to our independent directors, net of capitalization, of $3.4 million and $3.9 million during the three months ended March 31, 2017 and 2016, respectively.
12. COMMITMENTS AND CONTINGENCIES
Commitments
Real Estate Under Development
The following summarizes the Company’s real estate commitments at March 31, 2017 (dollars in thousands):
 
Number of
Properties
 
Costs Incurred to Date (a)
 
Expected Costs
to Complete
 
 Average Ownership
Stake
Wholly-owned — under development
2
 
$
393,837

(b)
$
314,663

 
100
%
Wholly-owned — redevelopment
1
 
3,699

(b)
5,801

 
100
%
Joint ventures:
 
 
 
 
 
 
 
Unconsolidated joint ventures
6
 
721,462

 
66,525

(c)
50
%
Participating loan investments
1
 
94,002

(d)
—

(e)
0
%
Preferred equity investments
2
 
42,013

(f)
—

 
49
%
Total
 
 
$
1,255,013

 
$
386,989

 
 
(a)
Represents 100% of project costs incurred as of March 31, 2017.
(b)
Costs incurred as of March 31, 2017 include $25.3 million and $0.7 million of accrued fixed assets for development and redevelopment, respectively.
(c)
Represents UDR’s proportionate share of expected remaining costs to complete the developments.
(d)
Represents the participating loan balance funded as of March 31, 2017.
(e)
Represents UDR's remaining participating loan commitment for Steele Creek.
(f)
Represents UDR's investment in the West Coast Development Joint Ventures for the properties under development as of March 31, 2017.
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 flow.
13. 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

31
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



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 2.75% of property revenue to cover the regional supervision and accounting costs related to consolidated property operations, and land rent. UDR’s chief operating decision maker utilizes NOI as the key measure of segment profit or loss.
UDR’s two reportable segments are Same-Store Communities and Non-Mature Communities/Other:

•
Same-Store Communities represent those communities acquired, developed, and stabilized prior to January 1, 2016 and held as of March 31, 2017. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.

•
Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties.
Management evaluates the performance of each of our apartment communities on a Same-Store Community and Non-Mature Community/Other basis, as well as individually and geographically. This is consistent with the aggregation criteria under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Company’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the chief operating decision maker.
All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of UDR’s total revenues during the three months ended March 31, 2017 and 2016.

32
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



The following table details rental income and NOI for UDR’s reportable segments for the three months ended March 31, 2017 and 2016, and reconciles NOI to Net Income/(Loss) Attributable to UDR, Inc. in the Consolidated Statements of Operations (dollars in thousands):
 
Three Months Ended
 
March 31, (a)
 
2017
 
2016
Reportable apartment home segment rental income
 
 
 
Same-Store Communities
 
 
 
West Region
$
82,220

 
$
78,409

Mid-Atlantic Region
52,109

 
50,154

Northeast Region
37,921

 
36,460

Southeast Region
28,657

 
27,137

Southwest Region
10,679

 
10,125

Non-Mature Communities/Other
29,685

 
29,672

Total segment and consolidated rental income
$
241,271

 
$
231,957

 
 
 
 
Reportable apartment home segment NOI
 
 
 
Same-Store Communities
 
 
 
West Region
$
61,895

 
$
59,146

Mid-Atlantic Region
36,315

 
33,729

Northeast Region
26,901

 
26,360

Southeast Region
19,661

 
18,797

Southwest Region
6,678

 
6,331

Non-Mature Communities/Other
20,033

 
19,771

Total segment and consolidated NOI
171,483

 
164,134

Reconciling items:
 
 
 
Joint venture management and other fees
2,570

 
2,858

Property management
(6,635
)
 
(6,379
)
Other operating expenses
(1,691
)
 
(1,752
)
Real estate depreciation and amortization
(105,032
)
 
(105,339
)
General and administrative
(13,075
)
 
(13,844
)
Casualty-related (charges)/recoveries, net
(502
)
 
—

Other depreciation and amortization
(1,608
)
 
(1,553
)
Income/(loss) from unconsolidated entities
11,198

 
679

Interest expense
(30,539
)
 
(31,104
)
Interest income and other income/(expense), net
427

 
431

Tax (provision)/benefit, net
(332
)
 
403

Gain/(loss) on sale of real estate owned, net of tax
2,132

 
3,070

Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
(2,338
)
 
(905
)
Net (income)/loss attributable to noncontrolling interests
(91
)
 
(306
)
Net income/(loss) attributable to UDR, Inc.
$
25,967

 
$
10,393


(a) Same-Store Community population consisted of 35,689 apartment homes.


33
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 2017



The following table details the assets of UDR’s reportable segments as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31,
2016
Reportable apartment home segment assets:
 
 
 
Same-Store Communities:
 
 
 
West Region
$
2,944,437

 
$
2,938,073

Mid-Atlantic Region
2,221,312

 
2,216,067

Northeast Region
1,858,432

 
1,857,193

Southeast Region
750,147

 
746,762

Southwest Region
283,979

 
283,260

Non-Mature Communities/Other
1,729,262

 
1,574,398

Total segment assets
9,787,569

 
9,615,753

Accumulated depreciation
(3,026,660
)
 
(2,923,625
)
Total segment assets — net book value
6,760,909

 
6,692,128

Reconciling items:
 
 
 
Cash and cash equivalents
2,460

 
2,112

Restricted cash
19,757

 
19,994

Notes receivable, net
19,790

 
19,790

Investment in and advances to unconsolidated joint ventures, net
818,990

 
827,025

Other assets
114,005

 
118,535

Total consolidated assets
$
7,735,911

 
$
7,679,584

Capital expenditures related to our Same-Store Communities totaled $15.3 million and $12.9 million for the three months ended March 31, 2017 and 2016, respectively. Capital expenditures related to our Non-Mature Communities/Other totaled $0.8 million and $2.7 million for the three months ended March 31, 2017 and 2016, respectively.
Markets included in the above geographic segments are as follows:
i.
West Region — San Francisco, Orange County, Seattle, Los Angeles, Monterey Peninsula, Other Southern California and Portland
ii.
Mid-Atlantic Region — Metropolitan D.C., Richmond and Baltimore
iii.
Northeast Region — New York and Boston
iv.
Southeast Region — Orlando, Tampa, Nashville and Other Florida
v.
Southwest Region — Dallas and Austin

34


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UNITED DOMINION REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data)



 
March 31,
2017
 
December 31, 2016
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Real estate owned:
 
 
 
Real estate held for investment
$
3,686,334

 
$
3,674,704

Less: accumulated depreciation
(1,445,528
)
 
(1,408,815
)
Total real estate owned, net of accumulated depreciation
2,240,806

 
2,265,889

Cash and cash equivalents
864

 
756

Restricted cash
12,141

 
11,694

Investment in unconsolidated entities
103,267

 
112,867

Other assets
21,475

 
24,329

Total assets
$
2,378,553

 
$
2,415,535

 
 
 
 
LIABILITIES AND CAPITAL
 
 
 
Liabilities:
 
 
 
Secured debt, net
$
336,240

 
$
433,974

Notes payable due to the General Partner
273,334

 
273,334

Real estate taxes payable
8,409

 
2,104

Accrued interest payable
1,184

 
1,410

Security deposits and prepaid rent
15,874

 
14,593

Distributions payable
57,025

 
54,192

Accounts payable, accrued expenses, and other liabilities
14,239

 
17,429

Total liabilities
706,305

 
797,036

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
Capital:
 
 
 
Partners’ capital:
 
 
 
General partner:
 
 
 
110,883 OP Units outstanding at March 31, 2017 and December 31, 2016
1,000

 
1,026

Limited partners:
 
 
 
183,240,041 and 183,167,815 OP Units outstanding at March 31, 2017 and December 31, 2016, respectively
1,535,939

 
1,577,289

Accumulated other comprehensive income/(loss), net
(53
)
 
(113
)
Total partners’ capital
1,536,886

 
1,578,202

Advances (to)/from the General Partner
114,380

 
19,659

Noncontrolling interests
20,982

 
20,638

Total capital
1,672,248

 
1,618,499

Total liabilities and capital
$
2,378,553

 
$
2,415,535

See accompanying notes to the consolidated financial statements.

36
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2017
 
2016
REVENUES:
 
 
 
Rental income
$
102,605

 
$
98,786

 
 
 
 
OPERATING EXPENSES:
 
 
 
Property operating and maintenance
16,518

 
16,060

Real estate taxes and insurance
11,024

 
10,174

Property management
2,822

 
2,717

Other operating expenses
1,548

 
1,500

Real estate depreciation and amortization
36,879

 
36,791

General and administrative
5,219

 
5,421

Casualty-related (recoveries)/charges, net
553

 
—

Total operating expenses
74,563

 
72,663

 
 
 
 
Operating income
28,042

 
26,123

 
 
 
 
Income/(loss) from unconsolidated entities
(5,424
)
 
(13,387
)
Interest expense
(5,558
)
 
(4,552
)
Interest expense on note payable due to the General Partner
(3,053
)
 
(3,053
)
Net income/(loss)
14,007

 
5,131

Net (income)/loss attributable to noncontrolling interests
(350
)
 
(344
)
Net income/(loss) attributable to OP unitholders
$
13,657

 
$
4,787

 
 
 
 
Net income/(loss) per weighted average OP Unit - basic and diluted
$
0.07

 
$
0.03

 
 
 
 
Weighted average OP Units outstanding - basic and diluted
183,324

 
183,279

See accompanying notes to the consolidated financial statements.


37
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
(Unaudited)


 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income/(loss)
$
14,007

 
$
5,131

Other comprehensive income/(loss), including portion attributable to noncontrolling interests:
 
 
 
Other comprehensive income/(loss) - derivative instruments:
 
 
 
Unrealized holding gain/(loss)
—

 
(2
)
(Gain)/loss reclassified into earnings from other comprehensive income/(loss)
54

 
1

Other comprehensive income/(loss), including portion attributable to noncontrolling interests
54

 
(1
)
Comprehensive income/(loss)
14,061

 
5,130

Comprehensive (income)/loss attributable to noncontrolling interests
(350
)
 
(344
)
Comprehensive income/(loss) attributable to OP unitholders
$
13,711

 
$
4,786


See accompanying notes to consolidated financial statements.



38
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)


 
Class A Limited
Partners
 
Limited
Partners and LTIP Units
 
UDR, Inc.
 
Accumulated Other Comprehensive
Income/(Loss), net
 
Total Partners’
Capital
 
Advances (to)/from General Partner
 
Noncontrolling
Interests
 
 
 
 
 
Limited Partner
 
General
Partner
 
 
 
 
 
Total
Balance at December 31, 2016
$
63,901

 
$
269,928

 
$
1,243,460

 
$
1,026

 
$
(113
)
 
$
1,578,202

 
$
19,659

 
$
20,638

 
$
1,618,499

Net income/(loss)
130

 
549

 
12,970

 
8

 
—

 
13,657

 
—

 
350

 
14,007

Distributions
(582
)
 
(2,428
)
 
(53,980
)
 
(34
)
 
—

 
(57,024
)
 
—

 
—

 
(57,024
)
Adjustment to reflect limited partners’ capital at redemption value
67

 
(2,965
)
 
2,898

 
—

 
—

 
—

 
—

 
—

 
—

Long-Term Incentive Plan Unit grants
—

 
1,991

 
—

 
—

 
—

 
1,991

 
—

 
—

 
1,991

Unrealized gain/(loss) on derivative financial investments
—

 
—

 
—

 
—

 
60

 
60

 
—

 
(6
)
 
54

Net change in advances (to)/from the General Partner
—

 
—

 
—

 
—

 
—

 
—

 
94,721

 
—

 
94,721

Balance at March 31, 2017
$
63,516

 
$
267,075

 
$
1,205,348

 
$
1,000

 
$
(53
)
 
$
1,536,886

 
$
114,380

 
$
20,982

 
$
1,672,248

See accompanying notes to the consolidated financial statements.


39
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2017
 
2016
Operating Activities
 
 
 
Net income/(loss)
$
14,007

 
$
5,131

Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
 
 
 
Depreciation and amortization
36,879

 
36,791

(Income)/loss from unconsolidated entities
5,424

 
13,387

Other
1,491

 
684

Changes in operating assets and liabilities:
 
 
 
(Increase)/decrease in operating assets
1,977

 
(3,742
)
Increase/(decrease) in operating liabilities
4,122

 
8,274

Net cash provided by/(used in) operating activities
63,900

 
60,525

 
 
 
 
Investing Activities
 
 
 
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
(12,149
)
 
(10,744
)
Distributions received from unconsolidated entities
4,176

 
3,977

Net cash provided by/(used in) investing activities
(7,973
)
 
(6,767
)
 
 
 
 
Financing Activities
 
 
 
Advances (to)/from the General Partner, net
45,088

 
(53,157
)
Payments on secured debt
(98,340
)
 
(275
)
Distributions paid to partnership unitholders
(2,567
)
 
(2,327
)
Net cash provided by/(used in) financing activities
(55,819
)
 
(55,759
)
Net increase/(decrease) in cash and cash equivalents
108

 
(2,001
)
Cash and cash equivalents, beginning of period
756

 
3,103

Cash and cash equivalents, end of period
$
864

 
$
1,102

 
 
 
 
Supplemental Information:
 
 
 
Interest paid during the period, net of amounts capitalized
$
7,066

 
$
5,515

Non-cash transactions:
 
 
 
Development costs and capital expenditures incurred but not yet paid
$
4,816

 
$
4,505

LTIP Unit grants
1,991

 
663

Dividends declared but not yet paid
57,025

 
54,173

See accompanying notes to the consolidated financial statements.

40
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017



1. CONSOLIDATION AND BASIS OF PRESENTATION
Basis of Presentation
United Dominion Realty, L.P. (“UDR, L.P.,” the “Operating Partnership,” “we” or “our”) is a Delaware limited partnership, that owns, acquires, renovates, redevelops, manages, and disposes of multifamily apartment communities generally located in high barrier to entry markets located in the United States. The high barrier to entry markets are characterized by limited land for new construction, difficult and lengthy entitlement process, expensive single-family home prices and significant employment growth potential. UDR, L.P. is a subsidiary of UDR, Inc. (“UDR” or the “General Partner”), a self-administered real estate investment trust, or REIT, through which UDR conducts a significant portion of its business. During both the three months ended March 31, 2017 and 2016, rental revenues of the Operating Partnership represented 43% of the General Partner’s consolidated rental revenues. As of March 31, 2017, the Operating Partnership’s apartment portfolio consisted of 54 communities located in 14 markets consisting of 16,698 apartment homes.
Interests in UDR, L.P. are represented by operating partnership units (“OP Units”). The Operating Partnership’s net income is allocated to the partners, which is initially based on their respective distributions made during the year and secondly, their percentage interests. Distributions are made in accordance with the terms of the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. (the “Operating Partnership Agreement”), on a per unit basis that is generally equal to the dividend per share on UDR’s common stock, which is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “UDR.”
As of March 31, 2017, there were 183,350,924 OP Units outstanding, of which 174,233,691, or 95.0%, were owned by UDR and affiliated entities and 9,117,233, or 5.0%, were owned by non-affiliated limited partners. See Note 9, Capital Structure.
The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of March 31, 2017, and results of operations for the three months ended March 31, 2017 and 2016 have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2016 included in the Annual Report on Form 10-K filed by UDR and the Operating Partnership with the SEC on February 21, 2017.
The accompanying interim unaudited consolidated statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All intercompany accounts and transactions have been eliminated in consolidation.
The Operating Partnership evaluated subsequent events through the date its financial statements were issued. No recognized or non-recognized subsequent events were noted.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business. The ASU changes the definition of a business to assist entities with evaluating whether a set of transferred assets is a business. As a result, the accounting for acquisitions of real estate could be impacted. The updated standard will be effective for the Operating Partnership on January 1, 2018; early adoption is permitted. The ASU will be applied prospectively to any transactions occurring within the period of

41
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



adoption. The Operating Partnership expects that the updated standard will result in fewer acquisitions of real estate meeting the definition of a business and fewer acquisition-related costs being expensed in the period incurred.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The ASU addresses the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. The updated standard will be effective for the Operating Partnership on January 1, 2018 and must be applied retrospectively to all periods presented; early adoption is permitted. The Operating Partnership does not expect the updated standard to have a material impact on the consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The ASU addresses specific cash flow items with the objective of reducing existing diversity in practice, including the treatment of distributions received from equity method investees. The updated standard will be effective for the Operating Partnership on January 1, 2018 and must be applied retrospectively to all periods presented; early adoption is permitted. The Operating Partnership elected to early adopt ASU 2016-15 in 2016. The adoption did not have an impact on the Operating Partnership's consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Operating Partnership on January 1, 2020; early adoption is permitted on January 1, 2019. The Operating Partnership is currently evaluating the effect that the updated standard will have on the consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors, accounting for leases under the new guidance is substantially the same as in prior periods, but eliminates current real estate-specific provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition relief. Full retrospective application is prohibited. The standard will be effective for the Operating Partnership on January 1, 2019, with early adoption permitted. While the Operating Partnership is currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures, we expect to recognize right-of-use assets and related lease liabilities on our consolidated balance sheets related to ground leases on any communities where we are the lessee.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The standard provides companies with a single model for use in accounting for revenue arising from contracts with customers and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, including industry-specific revenue guidance. The standard specifically excludes lease contracts. The ASU allows for the use of either the full or modified retrospective transition method and will be effective for the Operating Partnership on January 1, 2018, at which time the Operating Partnership expects to adopt the updated standard using the modified retrospective approach. However, as the majority of the Operating Partnership's revenue is from rental income related to leases, the Operating Partnership does not expect the ASU to have a material impact on the consolidated financial statements and related disclosures.
Principles of Consolidation
The Operating Partnership accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the amended consolidation guidance. The Operating Partnership first evaluates whether each entity is a variable interest entity ("VIE"). Under the VIE model, the Operating Partnership consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Operating Partnership consolidates an entity when it controls the entity through ownership of a majority voting interest.

42
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



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, net of tax on the Consolidated Statements of Operations.

Income/(Loss) Per Operating Partnership Unit
Basic income/(loss) per OP Unit is computed by dividing net income/(loss) attributable to the general and limited partner unitholders by the weighted average number of general and limited partner units outstanding during the year. Diluted income/(loss) per OP Unit reflects the potential dilution that could occur if securities or other contracts to issue OP Units were exercised or converted into OP Units or resulted in the issuance of OP Units and then shared in the income/(loss) of the Operating Partnership.
Revenue and Real Estate Sales Gain Recognition
Rental income related to leases is recognized on an accrual basis when due from residents and tenants in accordance with GAAP. Rental payments are generally due on a monthly basis and recognized when earned. The Operating Partnership recognizes interest income, fees and incentives when earned, fixed and determinable.
For sale transactions meeting the requirements for full accrual profit recognition, we remove the related assets and liabilities from our Consolidated Balance Sheets and record the gain or loss in the period the transaction closes. For sale transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting. Unless certain limited criteria are met, non-monetary transactions, including property exchanges, are accounted for at fair value.
Sales to entities in which we or our General Partner retain or otherwise own an interest are accounted for as partial sales. If all other requirements for recognizing profit under the full accrual method have been satisfied and no other forms of continuing involvement are present, we recognize profit proportionate to the outside interest in the buyer and defer the gain on the interest we or our General Partner retain. The Operating Partnership recognizes any deferred gain when the property is sold to a third party. In transactions accounted by us as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, we recognize profit only to the extent that proceeds from the sale of the majority equity interest exceed costs related to the entire property.
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 unitholders, is displayed in the accompanying Consolidated Statements of Comprehensive Income/(Loss). For the three months ended March 31, 2017 and 2016, 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 8, Derivatives and Hedging Activity, for further discussion.

43
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



Income Taxes
The taxable income or loss of the Operating Partnership is reported on the tax returns of the partners. Accordingly, no provision has been made in the accompanying financial statements for federal or state income taxes on income that is passed through to the partners. However, any state or local revenue, excise or franchise taxes that result from the operating activities of the Operating Partnership are recorded at the entity level. The Operating Partnership’s tax returns are subject to examination by federal and state taxing authorities. Net income for financial reporting purposes differs from the net income for income tax reporting purposes primarily due to temporary differences, principally real estate depreciation and the tax deferral of certain gains on property sales. The differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.
The Operating Partnership evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Operating Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management of the Operating Partnership is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Operating Partnership has no examinations in progress and none are expected at this time.
Management of the Operating Partnership has reviewed all open tax years (2013 through 2016) 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.
3. REAL ESTATE OWNED
Real estate assets owned by the Operating Partnership consist of income producing operating properties, properties under development, land held for future development, and sold or held for disposition properties. At March 31, 2017, the Operating Partnership owned and consolidated 54 communities in eight states plus the District of Columbia totaling 16,698 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Land
$
837,945

 
$
836,644

Depreciable property — held and used:
 
 
 
Buildings, improvements, and furniture, fixtures and equipment
2,848,389

 
2,838,060

Real estate owned
3,686,334

 
3,674,704

Accumulated depreciation
(1,445,528
)
 
(1,408,815
)
Real estate owned, net
$
2,240,806

 
$
2,265,889

The Operating Partnership did not have any acquisitions or sales of real estate during the three months ended March 31, 2017.

Predevelopment, development, and redevelopment projects and related costs are capitalized and reported on the Consolidated Balance Sheets as Total real estate owned, net of accumulated depreciation. The Operating Partnership capitalizes costs directly related to the predevelopment, development, and redevelopment of a capital project, which include, but are not limited to, interest, real estate taxes, insurance, and allocated development and redevelopment overhead related to support costs for personnel working on the capital projects. We use our professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. These costs, excluding the direct costs of development and redevelopment and capitalized interest, were $0.3 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively. Total interest capitalized was less than $0.1 million and $0.1 million for the three months ended March 31, 2017 and 2016, 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.


44
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



4. UNCONSOLIDATED ENTITIES
The DownREIT Partnership is accounted for by the Operating Partnership under the equity method of accounting and is included in Investment in unconsolidated entities on the Consolidated Balance Sheets. The Operating Partnership recognizes earnings or losses from its investments in unconsolidated entities consisting of our proportionate share of the net earnings or losses of the partnership in accordance with the Partnership Agreement.
The DownREIT Partnership is a VIE as the limited partners lack substantive kick-out rights and substantive participating rights. The Operating Partnership is not the primary beneficiary of the DownREIT Partnership as it lacks the power to direct the activities that most significantly impact its economic performance and will continue to account for its interest as an equity method investment. See Note 2, Significant Accounting Policies.
As of March 31, 2017, the DownREIT Partnership owned 13 communities with 6,261 apartment homes. The Operating Partnership’s investment in the DownREIT Partnership was $103.3 million and $112.9 million as of March 31, 2017 and December 31, 2016, respectively.

Combined summary balance sheets relating to all of the DownREIT Partnership (not just our proportionate share) are presented below as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Total real estate, net
$
1,400,046

 
$
1,413,983

Cash and cash equivalents
35

 
66

Note receivable from the General Partner
126,500

 
126,500

Other assets
4,498

 
4,843

Total assets
$
1,531,079

 
$
1,545,392

 
 
 
 
Secured debt, net
442,172

 
443,607

Other liabilities
23,976

 
27,571

Total liabilities
466,148

 
471,178

Total capital
1,064,931

 
1,074,214

Total liabilities and capital
$
1,531,079

 
$
1,545,392

Combined summary financial information relating to all of the DownREIT Partnership (not just our proportionate share) is presented below for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Rental income
$
33,298

 
$
31,617

Property operating expenses
(13,976
)
 
(14,269
)
Real estate depreciation and amortization
(20,608
)
 
(30,053
)
Operating income/(loss)
(1,286
)
 
(12,705
)
Interest expense
(3,860
)
 
(3,741
)
Interest income on note receivable from the General Partner
1,166

 
1,180

Net income/(loss)
$
(3,980
)
 
$
(15,266
)

45
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



5. 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 March 31, 2017 and December 31, 2016 (dollars in thousands):
 
Principal Outstanding
 
For the Three Months Ended March 31, 2017
 
March 31,
2017
 
December 31, 2016
 
Weighted Average
Interest Rate
 
Weighted Average
Years to Maturity
 
Number of Communities
Encumbered
Fixed Rate Debt
 
 
 
 
 
 
 
 
 
Fannie Mae credit facilities
$
228,870

 
$
244,912

 
5.07
%
 
2.6
 
6

Deferred financing costs
(718
)
 
(1,070
)
 
 
 
 
 
 
Total fixed rate secured debt, net
228,152

 
243,842

 
5.07
%
 
2.6
 
6

Variable Rate Debt
 
 
 
 
 
 
 
 
 
Tax-exempt secured note payable
27,000

 
27,000

 
1.39
%
 
15.0
 
1

Fannie Mae credit facilities
81,339

 
163,637

 
2.34
%
 
1.7
 
2

Deferred financing costs
(251
)
 
(505
)
 
 
 
 
 
 
Total variable rate secured debt, net
108,088

 
190,132

 
2.10
%
 
5.0
 
3

Total Secured Debt, net
$
336,240

 
$
433,974

 
4.26
%
 
3.4
 
9

As of March 31, 2017, an aggregate commitment of $310.2 million of the General Partner's secured credit facilities with Fannie Mae was owed by the Operating Partnership based on the ownership of the assets securing the debt. The entire commitment was outstanding at March 31, 2017. The portions of the Fannie Mae credit facilities owed by the Operating Partnership mature at various dates from December 2018 through July 2020 and bear interest at floating and fixed rates. At March 31, 2017, $228.9 million of the outstanding balance was fixed and had a weighted average interest rate of 5.07% and the remaining balance of $81.3 million on these facilities had a weighted average variable interest rate of 2.34%.
The following information relates to the credit facilities owed by the Operating Partnership (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Borrowings outstanding
$
310,209

 
$
408,549

Weighted average borrowings during the period ended
375,770

 
414,759

Maximum daily borrowings during the period ended
408,549

 
421,001

Weighted average interest rate during the period ended
4.1
%
 
3.9
%
Interest rate at the end of the period
4.4
%
 
4.0
%
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 fixed rate debt instruments on the Operating Partnership’s properties.
Fixed Rate Debt
At March 31, 2017, the General Partner had borrowings against its fixed rate facilities of $355.8 million, of which $228.9 million was owed by the Operating Partnership based on the ownership of the assets securing the debt. As of March 31, 2017, the fixed rate Fannie Mae credit facilities owed by the Operating Partnership had a weighted average fixed interest rate of 5.07%.

46
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



Variable Rate Debt
Tax-exempt secured note payable. The variable rate mortgage note payable that secures tax-exempt housing bond issues matures March 2032. Interest on this note is payable in monthly installments. The mortgage note payable has an interest rate of 1.39% as of March 31, 2017.
Secured credit facilities. At March 31, 2017, the General Partner had borrowings against its variable rate facilities of $182.6 million, of which $81.3 million was owed by the Operating Partnership based on the ownership of the assets securing the debt. As of March 31, 2017, the variable rate borrowings under the Fannie Mae credit facilities owed by the Operating Partnership had a weighted average floating interest rate of 2.34%.
The aggregate maturities of the Operating Partnership’s secured debt due during each of the next ten calendar years subsequent to March 31, 2017 are as follows (dollars in thousands):
 
 
Fixed
 
Variable
 
 
Year
 
Secured Credit
Facilities
 
Tax-Exempt
Secured Notes Payable
 
Secured Credit
Facilities
 
Total
2017
 
$
—

 
$
—

 
$
—

 
$
—

2018
 
41,854

 
—

 
81,339

 
123,193

2019
 
133,204

 
—

 
—

 
133,204

2020
 
53,812

 
—

 
—

 
53,812

2021
 
—

 
—

 
—

 
—

2022
 
—

 
—

 
—

 
—

2023
 
—

 
—

 
—

 
—

2024
 
—

 
—

 
—

 
—

2025
 
—

 
—

 
—

 
—

2026
 
—

 
—

 
—

 
—

Thereafter
 
—

 
27,000

 
—

 
27,000

Subtotal
 
228,870

 
27,000

 
81,339

 
337,209

Non-cash (a)
 
(718
)
 
(84
)
 
(167
)
 
(969
)
Total
 
$
228,152

 
$
26,916

 
$
81,172

 
$
336,240

(a) Includes the unamortized balance of fair market value adjustments, premiums/discounts, deferred hedge gains, and deferred financing costs. For the three months ended March 31, 2017 and 2016, the Operating Partnership amortized $0.1 million and $0.2 million, respectively, of deferred financing costs into Interest expense.
Guarantor on Unsecured Debt
The Operating Partnership is a guarantor on the General Partner’s unsecured revolving credit facility with an aggregate borrowing capacity of $1.1 billion and unsecured commercial paper program with an aggregate borrowing capacity of $500 million, $300 million of medium-term notes due June 2018, $300 million of medium-term notes due October 2020, a $350 million term loan facility due January 2021, $400 million of medium-term notes due January 2022, $300 million of medium-term notes due July 2024, $300 million of medium-term notes due October 2025 and $300 million of medium-term notes due September 2026. As of March 31, 2017 and December 31, 2016, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $220.0 million and $0, respectively, of notes outstanding under its unsecured commercial paper program.

47
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



6. RELATED PARTY TRANSACTIONS
Advances (To)/From the General Partner
The Operating Partnership participates in the General Partner’s central cash management program, wherein all the Operating Partnership’s cash receipts are remitted to the General Partner and all cash disbursements are funded by the General Partner. In addition, other miscellaneous costs such as administrative expenses are incurred by the General Partner on behalf of the Operating Partnership. As a result of these various transactions between the Operating Partnership and the General Partner, the Operating Partnership had net Advances (to)/from the General Partner of $114.4 million and $19.7 million at March 31, 2017 and December 31, 2016, respectively, which are reflected as increases/(decreases) of capital on the Consolidated Balance Sheets.
Allocation of General and Administrative Expenses
The General Partner shares various general and administrative costs, employees and other overhead 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 $4.5 million and $4.6 million during the three months ended March 31, 2017 and 2016, 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 three months ended March 31, 2017 and 2016, the Operating Partnership reimbursed the General Partner $3.6 million and $3.6 million, respectively, for shared services related to corporate level property management costs incurred by the General Partner. These shared costs reimbursements and related party management fees are initially recorded within the line item General and administrative on the Consolidated Statements of Operations, and a portion related to management costs is reclassified to Property management on the Consolidated Statements of Operations. (See further discussion below.)
Shared Services/Management Fee
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) shared services of corporate level property management employees and related support functions and costs, and (b) general and administrative costs. As discussed above, the reimbursement for shared services is classified in Property management on the Consolidated Statements of Operations.
Notes Payable to the General Partner
As of both March 31, 2017 and December 31, 2016, the Operating Partnership had $273.3 million of unsecured notes payable to the General Partner at annual interest rates between 4.12% and 5.34%. 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 notes mature on August 31, 2021, December 31, 2023 and April 1, 2026, and interest payments are made monthly. The Operating Partnership recognized interest expense on the notes payable of $3.1 million and $3.1 million during the three months ended March 31, 2017 and 2016, respectively.

48
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017




7. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair value is based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The estimated fair values of the Operating Partnership’s financial instruments either recorded or disclosed on a recurring basis as of March 31, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):
 
 
 
 
 
Fair Value at March 31, 2017, Using
 
Total Carrying Amount in Statement of Financial Position at March 31, 2017
 
Fair Value Estimate at March 31, 2017
 
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description:
 
 
 
 
 
 
 
 
 
Secured debt instruments - fixed rate: (a)
 
 
 
 
 
 
 
 
 
Fannie Mae credit facilities
$
228,870

 
$
235,159

 
$
—

 
$
—

 
$
235,159

Secured debt instruments - variable rate: (a)
 
 
 
 
 
 
 
 
 
Tax-exempt secured notes payable
27,000

 
27,000

 
—

 
—

 
27,000

Fannie Mae credit facilities
81,339

 
81,339

 
—

 
—

 
81,339

Total liabilities
$
337,209

 
$
343,498

 
$
—

 
$
—

 
$
343,498



49
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



 
 
 
 
 
Fair Value at December 31, 2016, Using
 
Total Carrying Amount in Statement of Financial Position at December 31, 2016
 
Fair Value Estimate at December 31, 2016
 
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description:
 
 
 
 
 
 
 
 
 
Derivatives - Interest rate contracts (b)
$
1

 
$
1

 
$
—

 
$
1

 
$
—

Total assets
$
1

 
$
1

 
$
—

 
$
1

 
$
—

 
 
 
 
 
 
 
 
 
 
Secured debt instruments - fixed rate: (a)
 
 
 
 
 
 
 
 
 
Fannie Mae credit facilities
$
244,912

 
$
251,664

 
$
—

 
$
—

 
$
251,664

Secured debt instruments - variable rate: (a)
 
 
 
 
 
 
 
 
 
Tax-exempt secured notes payable
27,000

 
27,000

 
—

 
—

 
27,000

Fannie Mae credit facilities
163,637

 
163,637

 
—

 
—

 
163,637

Total liabilities
$
435,549

 
$
442,301

 
$
—

 
$
—

 
$
442,301


(a)See Note 5, Debt, Net.
(b)See Note 8, Derivatives and Hedging Activity.

There were no transfers into or out of any of the levels of the fair value hierarchy during the three months ended March 31, 2017.
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 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.
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 March 31, 2017 and December 31, 2016, 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.

50
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



Financial Instruments Not Carried at Fair Value
As of March 31, 2017, 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 were determined by the Operating Partnership using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Operating Partnership would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
The General Partner estimates the fair value of our debt instruments by discounting the remaining cash flows of the debt instrument at a discount rate equal to the replacement market credit spread plus the corresponding treasury yields. Factors considered in determining a replacement market credit spread include general market conditions, borrower specific credit spreads, time remaining to maturity, loan-to-value ratios and collateral quality (Level 3).
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.
8. DERIVATIVES AND HEDGING ACTIVITY
Risk Management Objective of Using Derivatives
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.
Cash Flow Hedges of Interest Rate Risk
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.
A portion of the General Partner’s interest rate derivatives are owed by the Operating Partnership based on the General Partner’s underlying debt instruments owed by the Operating Partnership. (See Note 5, Debt, Net.)
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income/(loss), net in the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2017 and 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2017, the Operating Partnership recognized a loss of less than $0.1 million reclassified from

51
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



Accumulated other comprehensive income/(loss), net to Interest expense due to the de-designation of a cash flow hedge and recorded no other ineffectiveness to earnings. During the three months ended March 31, 2016, the Operating Partnership recorded no gain or loss from ineffectiveness.
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. Through March 31, 2018, we estimate that less than $0.1 million will be reclassified as an increase to interest expense.
As of March 31, 2017, the Operating Partnership had the following outstanding interest rate derivatives designated as cash flow hedges of interest rate risk (dollars in thousands):
Product
 
Number of Instruments
 
Notional
Interest rate caps
 
1
 
$
82,494

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 an adjustment to earnings of less than $0.1 million for the three months ended March 31, 2017 and 2016.
As of March 31, 2017, we had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
Product
 
Number of Instruments
 
Notional
Interest rate caps
 
3
 
$
87,580

Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of the Operating Partnership’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
Asset Derivatives
(included in Other assets)
 
Liability Derivatives
(included in Other liabilities)
 
Fair Value at:
 
Fair Value at:
 
March 31,
2017
 
December 31,
2016
 
March 31,
2017
 
December 31,
2016
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate products
$
—

 
$
—

 
$
—

 
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate products
$
—

 
$
1

 
$
—

 
$
—


52
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations
The tables below present the effect of the derivative financial instruments on the Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
 
Unrealized holding gain/(loss) Recognized in OCI
(Effective Portion)
 
Gain/(Loss) Reclassified from Accumulated OCI into Interest expense 
(Effective Portion)
 
Gain/(Loss) Recognized in Interest expense (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
$
—

 
$
(2
)
 
$
—

 
$
(1
)
 
$
(54
)
 
$
—


 
 
Gain/(Loss) Recognized in Interest income and other income/(expense), net
Derivatives Not Designated as Hedging Instruments
2017
 
2016
Three Months Ended March 31,
 
 
 
 
Interest rate products
 
$
(1
)
 
$
—

Credit-risk-related Contingent Features
The General Partner has agreements with some of its derivative counterparties that contain a provision where (1) if the General Partner defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the General Partner could also be declared in default on its derivative obligations; or (2) 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.
Certain of the General Partner’s agreements with its derivative counterparties contain provisions where if there is a change in the General Partner’s financial condition that materially changes the General Partner’s creditworthiness in an adverse manner, the General Partner may be required to fully collateralize its obligations under the derivative instrument. At March 31, 2017 and December 31, 2016, no cash collateral was posted or required to be posted by the General Partner or by a counterparty.
The General Partner also has an agreement with a derivative counterparty that incorporates the loan and financial covenant provisions of the General Partner’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with these covenant provisions would result in the General Partner being in default on any derivative instrument obligations covered by the agreement.
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.
As of March 31, 2017, the fair value of derivatives in a net liability position that were owed by the Operating Partnership, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was zero.
    

53
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



The General Partner has elected not to offset derivative positions in the consolidated financial statements. The table below presents the effect on the Operating Partnership’s financial position had the General Partner made the election to offset its derivative positions as of March 31, 2017 and December 31, 2016:
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Consolidated Balance Sheets (a)
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
 
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
March 31, 2017
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
1

 
$
—

 
$
1

 
$
—

 
$
—

 
$
1

    
(a) Amounts reconcile to the aggregate fair value of derivative assets in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.
Offsetting of Derivative Liabilities
 
 
 
 
 
 
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets (a)
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
Net Amount
March 31, 2017
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—


(a) Amounts reconcile to the aggregate fair value of derivative liabilities in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote.
9. 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 110,883 General Partnership units outstanding at March 31, 2017 and December 31, 2016, all of which were held by UDR.
Limited Partnership Units
As of March 31, 2017 and December 31, 2016, there were 183,240,041 and 183,167,815, respectively, of limited partnership units outstanding, of which 1,873,332 were Class A Limited Partnership Units. UDR owned 174,122,808, or 95.0%, and 174,119,201, or 95.1%, of OP Units outstanding at March 31, 2017 and December 31, 2016, respectively, of which 121,661 were Class A Limited Partnership Units. The remaining 9,117,233, or 5.0%, and 9,048,614, or 4.9%, of OP Units outstanding were held by non-affiliated partners at March 31, 2017 and December 31, 2016, respectively, of which 1,751,671 were Class A Limited Partnership Units.

54
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



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 non-affiliated 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 limited partners was $330.6 million and $330.1 million as of March 31, 2017 and December 31, 2016, respectively, based on the value of UDR’s common stock at each 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 three months ended March 31, 2017:
 
Class A Limited
Partners
 
 
 
UDR, Inc.
 
 
 
 
Limited
Partners
 
Limited
Partner
 
Class A Limited Partner
 
General
Partner
 
Total
Ending balance at December 31, 2016
1,751,671

 
7,296,943

 
173,997,540

 
121,661

 
110,883

 
183,278,698

Vesting of LTIP Units
—

 
72,226

 
—

 


 
—

 
72,226

OP redemptions for UDR stock
—

 
(3,607
)
 
3,607

 
—

 
—

 
—

Ending balance at March 31, 2017
1,751,671

 
7,365,562

 
174,001,147

 
121,661

 
110,883

 
183,350,924

LTIP Units
UDR grants 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 non-employee directors and vest after one year. 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.

55
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



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.
10. COMMITMENTS AND CONTINGENCIES
Contingencies
Litigation and Legal Matters
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 flow.
11. 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, 2016 and held as of March 31, 2017. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least 3 consecutive months.

•
Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties.
Management 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

56
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



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 three months ended March 31, 2017 and 2016.
The following table details rental income and NOI for the Operating Partnership’s reportable segments for the three months ended March 31, 2017 and 2016, and reconciles NOI to Net income/(loss) attributable to OP unitholders in the Consolidated Statements of Operations (dollars in thousands):
 
Three Months Ended
 
March 31, (a)
 
2017
 
2016
Reportable apartment home segment rental income
 
 
 
Same-Store Communities
 
 
 
West Region
$
50,482

 
$
47,636

Mid-Atlantic Region
14,748

 
14,167

Northeast Region
13,559

 
13,006

Southeast Region
12,271

 
11,696

Non-Mature Communities/Other
11,545

 
12,281

Total segment and consolidated rental income
$
102,605

 
$
98,786

Reportable apartment home segment NOI
 
 
 
Same-Store Communities
 
 
 
West Region
$
38,445

 
$
36,159

Mid-Atlantic Region
10,095

 
9,362

Northeast Region
10,131

 
10,057

Southeast Region
8,283

 
8,043

Non-Mature Communities/Other
8,109

 
8,931

Total segment and consolidated NOI
75,063

 
72,552

Reconciling items:
 
 
 
Property management
(2,822
)
 
(2,717
)
Other operating expenses
(1,548
)
 
(1,500
)
Real estate depreciation and amortization
(36,879
)
 
(36,791
)
General and administrative
(5,219
)
 
(5,421
)
Casualty-related recoveries/(charges), net
(553
)
 
—

Income/(loss) from unconsolidated entities
(5,424
)
 
(13,387
)
Interest expense
(8,611
)
 
(7,605
)
Net (income)/loss attributable to noncontrolling interests
(350
)
 
(344
)
Net income/(loss) attributable to OP unitholders
$
13,657

 
$
4,787


(a)Same-Store Community population consisted of 15,058 apartment homes.

57
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
MARCH 31, 2017



The following table details the assets of the Operating Partnership’s reportable segments as of March 31, 2017 and December 31, 2016 (dollars in thousands):
 
March 31,
2017
 
December 31, 2016
Reportable apartment home segment assets
 
 
 
Same-Store Communities
 
 
 
West Region
$
1,601,136

 
$
1,596,815

Mid-Atlantic Region
656,850

 
655,693

Northeast Region
675,407

 
674,928

Southeast Region
330,214

 
328,729

Non-Mature Communities/Other
422,727

 
418,539

Total segment assets
3,686,334

 
3,674,704

Accumulated depreciation
(1,445,528
)
 
(1,408,815
)
Total segment assets - net book value
2,240,806

 
2,265,889

Reconciling items:
 
 
 
Cash and cash equivalents
864

 
756

Restricted cash
12,141

 
11,694

Investment in unconsolidated entities
103,267

 
112,867

Other assets
21,475

 
24,329

Total consolidated assets
$
2,378,553

 
$
2,415,535

Capital expenditures related to the Operating Partnership’s Same-Store Communities totaled $8.0 million and $5.3 million for the three months ended March 31, 2017 and 2016, respectively. Capital expenditures related to the Operating Partnership’s Non-Mature Communities/Other totaled $0.4 million and $0.3 million for the three months ended March 31, 2017 and 2016, respectively.
Markets included in the above geographic segments are as follows:
i.
West Region — San Francisco, Orange County, Seattle, Los Angeles, Monterey Peninsula, Other Southern California and Portland
ii.
Mid-Atlantic Region — Metropolitan, D.C. and Baltimore
iii.
Northeast Region — New York and Boston
iv.
Southeast Region — Tampa, Nashville and Other Florida



58


Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 availability of capital and the stabilization of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments, redevelopments and lease-ups on schedule, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, expectations on occupancy levels, expectations concerning the joint ventures 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 extraordinary losses for which we may not have insurance or adequate reserves;

•
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;

•
changing interest rates, which could increase interest costs and affect the market price of our securities;


59

•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 and other laws affecting our business.
A discussion of these and other factors affecting our business and prospects is set forth in Part II, 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.
UDR, Inc.:
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 March 31, 2017, our consolidated real estate portfolio included 128 communities in 10 states plus the District of Columbia totaling 39,698 apartment homes, and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 28 communities with 7,131 apartment homes. The Same-Store Community apartment home population for the three months ended March 31, 2017 was 35,689.


60

The following table summarizes our market information by major geographic markets as of and for the three months ended March 31, 2017.
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
March 31, 2017
 
March 31, 2017
 
 
Number of Apartment Communities
 
Number of Apartment Homes
 
Percentage
of Total
Carrying Value
 
Total Carrying Value (in thousands)
 
Average Physical Occupancy
 
Monthly Income per Occupied Home (a)
Same-Store Communities
 
 
 
 
 
 
West Region
 
 
 
 
 
 
 
 
 
 
 
 
San Francisco, CA
 
10

 
2,558

 
7.4
%
 
$
725,142

 
97.1
%
 
$
3,374

Orange County, CA
 
11

 
3,367

 
9.0
%
 
877,788

 
95.7
%
 
2,321

Seattle, WA
 
10

 
2,014

 
5.6
%
 
552,143

 
96.8
%
 
2,071

Los Angeles, CA
 
4

 
1,225

 
4.6
%
 
447,283

 
95.7
%
 
2,673

Monterey Peninsula, CA
 
7

 
1,565

 
1.7
%
 
169,221

 
96.5
%
 
1,580

Other Southern California
 
3

 
756

 
1.3
%
 
125,156

 
95.1
%
 
1,789

Portland, OR
 
2

 
476

 
0.5
%
 
47,704

 
96.7
%
 
1,529

Mid-Atlantic Region
 
 
 
 
 
 
 
 
 
 
 
 
Metropolitan D.C.
 
21

 
7,551

 
19.7
%
 
1,927,842

 
97.0
%
 
1,981

Richmond, VA
 
4

 
1,358

 
1.5
%
 
144,103

 
97.4
%
 
1,276

Baltimore, MD
 
3

 
720

 
1.5
%
 
149,367

 
96.0
%
 
1,697

Northeast Region
 
 
 
 
 
 
 
 
 
 
 
 
New York, NY
 
4

 
1,945

 
13.3
%
 
1,300,310

 
98.0
%
 
4,338

Boston, MA
 
5

 
1,548

 
5.7
%
 
558,122

 
96.1
%
 
2,939

Southeast Region
 
 
 
 
 
 
 
 
 
 
 
 
Orlando, FL
 
9

 
2,500

 
2.2
%
 
217,456

 
96.8
%
 
1,231

Tampa, FL
 
7

 
2,287

 
2.5
%
 
246,274

 
96.7
%
 
1,326

Nashville, TN
 
8

 
2,260

 
2.1
%
 
202,822

 
97.1
%
 
1,241

Other Florida
 
1

 
636

 
0.9
%
 
83,595

 
96.6
%
 
1,494

Southwest Region
 
 
 
 
 
 
 
 
 
 
 
 
Dallas, TX
 
6

 
2,040

 
2.0
%
 
195,053

 
97.4
%
 
1,202

Austin, TX
 
3

 
883

 
0.9
%
 
88,926

 
97.2
%
 
1,364

Total/Average Same-Store Communities
 
118

 
35,689

 
82.4
%
 
8,058,307

 
96.8
%
 
$
2,043

Non-Mature, Commercial Properties & Other
 
10

 
4,009

 
13.6
%
 
1,335,425

 
 
 
 
Total Real Estate Held for Investment
 
128

 
39,698

 
96.0
%
 
9,393,732

 
 
 
 
Real Estate Under Development (b)
 
—

 
—

 
4.0
%
 
393,837

 
 
 
 
Total Real Estate Owned
 
128

 
39,698

 
100.0
%
 
9,787,569

 
 
 
 
Total Accumulated Depreciation
 
 
 
 
 
 
 
(3,026,660
)
 
 
 
 
Total Real Estate Owned, Net of Accumulated Depreciation
 
 
 
 
 
 
 
$
6,760,909

 
 
 
 

(a)
Monthly Income per Occupied Home represents total monthly revenues divided by the average physical number of occupied apartment homes in our Same-Store portfolio.

(b)
As of March 31, 2017, the Company was developing two wholly-owned communities with 1,101 apartment homes, none of which have been completed.
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, 2016 and held as of March 31, 2017. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the communities are not classified as 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.

61

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.
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 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 repositioned our 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 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 April 2012, the Company entered into an equity distribution agreement, which was amended in July 2014, under which the Company may offer and sell up to 20 million shares of its common stock, from time to time, to or through its sales agents. During the three months ended March 31, 2017, the Company did not sell any shares of common stock through this program. As of March 31, 2017, we had 13.1 million shares of common stock available for future issuance under the April 2012 program.
On January 23, 2017, the Company entered into 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 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. As of March 31, 2017, we had issued $220.0 million of unsecured commercial paper, for one month terms, at a weighted average annualized rate of 1.24%.
Future Capital Needs
Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, 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 the remainder of 2017, we have approximately $49.9 million of secured debt maturing, inclusive of principal amortization, and $220.0 million of unsecured debt maturing, comprised solely of unsecured commercial paper. We anticipate repaying that debt 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.

62

Critical Accounting Policies and Estimates and New Accounting Pronouncements
Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, (3) real estate investment properties, and (4) revenue recognition.
Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in UDR’s Annual Report on Form 10-K, filed with the SEC on February 21, 2017. There have been no significant changes in our critical accounting policies from those reported in our Form 10-K filed with the SEC on February 21, 2017. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
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 three months ended March 31, 2017 and 2016.
We elected to early adopt Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments in 2016. See Note 2, Significant Accounting Policies, in the Notes to the UDR, Inc. Consolidated Financial Statements included in this Report for a complete description of the ASU and its impact.

Upon adopting the ASU, we elected to classify distributions received from equity method investees using the cumulative earnings approach. As a result, the following retrospective changes were made (in thousands):
 
Three Months Ended
 
March 31, 2016
Net cash provided by/(used in) operating activities - as previously presented
$
112,489

Return on investment in unconsolidated joint ventures
272

Net cash provided by/(used in) operating activities - as reported herein
$
112,761

 
 
Net cash provided by/(used in) investing activities - as previously presented
$
(44,954
)
Return on investment in unconsolidated joint ventures
(272
)
Net cash provided by/(used in) investing activities - as reported herein
$
(45,226
)
Operating Activities
For the three months ended March 31, 2017, our Net cash provided by/(used in) operating activities was $120.5 million compared to $112.8 million for the comparable period in 2016. The increase in cash flow from operating activities was primarily due to improved net operating income, primarily driven by revenue growth at communities and changes in operating assets and liabilities.
Investing Activities
For the three months ended March 31, 2017, Net cash provided by/(used in) investing activities was $(162.8) million compared to $(45.2) million for the comparable period in 2016. The increase in cash used in investing activities was primarily due to the acquisition of real estate assets, increased development of real estate assets, a decrease in proceeds from the sale of real estate assets and increased cash used for investments in unconsolidated joint ventures.
Acquisitions

During the three months ended March 31, 2017, the Company exercised its fixed-price option to purchase its joint venture partner's ownership interest in a 244 home operating community in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $66.0 million. 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. As a result of the consolidation, the Company increased its real estate owned by approximately $97.0 million, recorded approximately $1.7 million of in-place lease intangibles and recorded a gain on consolidation of $12.2 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.

63

Dispositions

During the three months ended March 31, 2017, the Company sold a parcel of land in Richmond, Virginia for gross proceeds of $3.5 million, resulting in net proceeds of $3.3 million and a gain of $2.1 million.

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 three months ended March 31, 2017, total capital expenditures of $18.4 million, or $464 per stabilized home, which in aggregate include recurring capital expenditures and major renovations, were spent across our portfolio, excluding development and commercial properties, as compared to $19.7 million, or $484 per stabilized home, for the comparable period in 2016.
The decrease in total capital expenditures was primarily due to:
•
a decrease of 52.6% or $2.9 million in major renovations, primarily due to lower redevelopment spend.
This decrease was partially offset by:
•
an increase of 25.3% or $1.8 million in revenue-enhancing improvements, such as kitchen and bath remodels and upgrades to common areas.
The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development and commercial properties, for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
 
 
Per Home
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Turnover capital expenditures
$
2,121

 
$
2,462

 
(13.9
)%
 
$
53

 
$
60

 
(11.7
)%
Asset preservation expenditures
4,670

 
4,499

 
3.8
 %
 
118

 
110

 
7.3
 %
Total recurring capital expenditures
6,791

 
6,961

 
(2.4
)%
 
171

 
171

 
—
 %
Revenue enhancing improvements
8,982

 
7,171

 
25.3
 %
 
226

 
176

 
28.4
 %
Major renovations (a)
2,638

 
5,570

 
(52.6
)%
 
67

 
137

 
(51.1
)%
Total capital expenditures
$
18,411

 
$
19,702

 
(6.6
)%
 
$
464

 
$
484

 
(4.1
)%
Repair and maintenance expense
$
7,803

 
$
8,121

 
(3.9
)%
 
$
197

 
$
199

 
(1.0
)%
Average number of homes (b)
39,698

 
40,728

 
(2.5
)%
 
 
 
 
 
 

(a)
Major renovations include major structural changes and/or architectural revisions to existing buildings.
(b)
Average number of homes is calculated based on the number of homes outstanding at the end of each month.
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 revenue 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.

64

Consolidated Real Estate Under Development and Redevelopment
At March 31, 2017, our development pipeline for two wholly-owned communities totaled 1,101 homes, none of which have been completed, with a budget of $708.5 million, in which we have a carrying value of $393.8 million. The communities are estimated to be completed during the first quarter of 2018 and the first quarter of 2019.
At March 31, 2017, the Company was redeveloping one community, located in Dallas, Texas, which is expected to be completed in the first quarter of 2018. The redevelopment includes the renovation of building exteriors, corridors, and common area amenities as well as individual apartment homes.
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 three months ended March 31, 2017:
•
our proportionate share of the net income/(loss) of the joint ventures and partnerships was $11.2 million;
•
our investment in unconsolidated joint ventures decreased by $32.3 million primarily due to the acquisition of 100% interest in an operating community previously held as an unconsolidated entity, partially offset by capital contributions; and
•
we received distributions of $11.2 million, of which $1.5 million were operating cash flows and $9.7 million were investing cash flows.
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 decreases in the value of its investments in unconsolidated joint ventures or partnerships during the three months ended March 31, 2017 and 2016.
Financing Activities
For the three months ended March 31, 2017, our Net cash provided by/(used in) financing activities was $42.7 million compared to $(70.6) million for the comparable period of 2016.
The following significant financing activities occurred during the three months ended March 31, 2017:
•
net proceeds of $220.0 million under our unsecured commercial paper program;
•
repaid $99.5 million of secured debt;
•
net proceeds of $14.8 million under the Company’s unsecured revolving credit facilities; and
•
paid distributions of $78.9 million to our common stockholders.

Credit Facilities and Commercial Paper Program
We have three secured credit facilities with Fannie Mae with an aggregate commitment of $538.4 million, all of which was outstanding as of March 31, 2017. The Fannie Mae credit facilities mature at various dates from May 2017 through July 2020 and bear interest at floating and fixed rates. At March 31, 2017, $355.8 million of the outstanding balance was fixed and had a weighted average interest rate of 5.06% and the remaining balance of $182.6 million had a weighted average variable interest rate of 2.05%. During the three months ended March 31, 2017, the Company prepaid $98.3 million of its secured credit facilities with borrowings under the Company's unsecured commercial paper program.

The Company has a $1.1 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $350.0 million unsecured term loan facility (the “Term Loan Facility”). The credit agreement for these facilities allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan Facility to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from any one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2020, with two six-month extension options, subject to certain conditions. The Term Loan Facility has a scheduled maturity date of January 29, 2021.

65


Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 90 basis points and a facility fee of 15 basis points, and the Term Loan Facility has an interest rate equal to LIBOR plus a margin of 95 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 85 to 155 basis points, the facility fee ranges from 12.5 to 30 basis points, and the margin under the Term Loan Facility ranges from 90 to 175 basis points.

As of March 31, 2017, 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 March 31, 2017), and $350.0 million of outstanding borrowings under the Term Loan Facility.
    
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 1, 2019. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin ranges from 85 to 155 basis points.

As of March 31, 2017, we had $36.1 million of outstanding borrowings under the Working Capital Credit Facility, leaving $38.9 million of unused capacity.
The Fannie Mae credit facilities and the bank revolving credit facilities are subject to customary financial covenants and limitations, all of which we were in compliance with at March 31, 2017.

On January 23, 2017, we entered into 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 March 31, 2017, we had issued $220.0 million of commercial paper, for one month terms, at a weighted average annualized rate of 1.24%, leaving $280.0 million of unused capacity.
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 $568.4 million in variable rate debt that is not subject to interest rate swap contracts as of March 31, 2017. If market interest rates for variable rate debt increased by 100 basis points, our interest expense for the three months ended March 31, 2017 would have increased by $1.4 million based on the average balance outstanding during the period.
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 10, 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):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net cash provided by/(used in) operating activities
$
120,464

 
$
112,761

Net cash provided by/(used in) investing activities
(162,789
)
 
(45,226
)
Net cash provided by/(used in) financing activities
42,673

 
(70,609
)

66

Results of Operations
The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016.
Net Income/(Loss) Attributable to Common Stockholders

Net income/(loss) attributable to common stockholders was $25.0 million ($0.09 per diluted share) for the three months ended March 31, 2017, as compared to $9.5 million ($0.04 per diluted share) for the comparable period in the prior year. The increase resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

•
an increase in total property NOI of $7.3 million primarily due to higher revenue per occupied home and NOI from communities acquired in 2017 and 2016, partially offset by a decrease from sold communities; and

•
an increase in income from unconsolidated entities of $10.5 million primarily due to a gain on consolidation of $12.2 million from the purchase of a previously unconsolidated operating community in Seattle, Washington from our West Coast Development Joint Ventures during the three months ended March 31, 2017.

This was partially offset by:

•
gains, net of tax, of $2.1 million on the sale of a parcel of land in Richmond, Virginia during the three months ended March 31, 2017, as compared to gains, net of tax, of $3.1 million from the sale of two parcels of land in Santa Monica, California during the three months ended March 31, 2016.
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 2.75% 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.

67

The following table summarizes the operating performance of our total property NOI for each of the periods presented (dollars in thousands):
 
Three Months Ended
 
 
 
March 31, (a)
 
 
 
2017
 
2016
 
% Change
Same-Store Communities:
 
 
 
 
 
Same-store rental income
$
211,586

 
$
202,285

 
4.6
 %
Same-store operating expense (b)
(60,136
)
 
(57,922
)
 
3.8
 %
Same-store NOI
151,450

 
144,363

 
4.9
 %
 
 
 
 
 
 
Non-Mature Communities/Other NOI:
 
 
 
 
 
Stabilized, non-mature communities NOI (c)
14,689

 
11,078

 
32.6
 %
Acquired communities NOI
857

 
—

 
—
 %
Redevelopment communities NOI
1,066

 
1,075

 
(0.8
)%
Development communities NOI
(153
)
 
(79
)
 
93.7
 %
Non-residential/other NOI
3,575

 
2,735

 
30.7
 %
Sold and held for disposition communities NOI
(1
)
 
4,962

 
(100.0
)%
Total non-mature communities/other NOI
20,033

 
19,771

 
1.3
 %
Total Property NOI
$
171,483

 
$
164,134

 
4.5
 %

(a)Same-Store consists of 35,689 apartment homes.
(b)Excludes depreciation, amortization, and property management expenses.
(c)
Represents non-mature communities that have achieved 90% occupancy for three consecutive months but do not meet the criteria to be included in Same-Store Communities.
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):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income/(loss) attributable to UDR, Inc.
$
25,967

 
$
10,393

Joint venture management and other fees
(2,570
)
 
(2,858
)
Property management
6,635

 
6,379

Other operating expenses
1,691

 
1,752

Real estate depreciation and amortization
105,032

 
105,339

General and administrative
13,075

 
13,844

Casualty-related charges/(recoveries), net
502

 
—

Other depreciation and amortization
1,608

 
1,553

(Income)/loss from unconsolidated entities
(11,198
)
 
(679
)
Interest expense
30,539

 
31,104

Interest income and other (income)/expense, net
(427
)
 
(431
)
Tax provision/(benefit), net
332

 
(403
)
(Gain)/loss on sale of real estate owned, net of tax
(2,132
)
 
(3,070
)
Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership
2,338

 
905

Net income/(loss) attributable to noncontrolling interests
91

 
306

Total property NOI
$
171,483

 
$
164,134


68

Same-Store Communities
Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2016 and held on March 31, 2017) consisted of 35,689 apartment homes, and provided 88.3% of our total NOI for the three months ended March 31, 2017.
Three Months Ended March 31, 2017 vs. Three Months Ended March 31, 2016
NOI for our Same-Store Community properties increased 4.9% or $7.1 million for the three months ended March 31, 2017 compared to the same period in 2016. The increase in property NOI was attributable to a 4.6%, or $9.3 million, increase in property rental income, which was partially offset by a 3.8%, or $2.2 million, increase in operating expenses. The increase in property income was primarily driven by a 3.4% or $6.5 million increase in rental rates and a 11.4%, or $2.0 million, increase in reimbursement and fee income. Physical occupancy increased 0.5% to 96.8% and total monthly income per occupied home increased 4.1% to $2,043.
The increase in operating expenses was primarily driven by a 9.6%, or $2.0 million, increase in real estate taxes, which was primarily due to higher assessed valuations and lower appeal refunds.
As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property net operating income divided by property rental income) increased to 71.6% for the three months ended March 31, 2017 as compared to 71.4% for the comparable period in 2016.
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 the non-apartment components of mixed use properties.
Three Months Ended March 31, 2017 vs. Three Months Ended March 31, 2016
The remaining 11.7% or $20.0 million of our total NOI during the three months ended March 31, 2017 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 1.3%, or $0.3 million, for the three months ended March 31, 2017 as compared to the same period in 2016. The increase was primarily attributable to a $3.6 million increase in NOI from stabilized, non-mature communities, a $0.9 million increase in NOI from acquired communities and a $0.8 million increase in non-residential/other NOI, partially offset by a $5.0 million decrease in NOI from sold communities in 2016.

Income/(Loss) from Unconsolidated Entities

For the three months ended ended March 31, 2017 and 2016, we recognized income/(loss) from unconsolidated entities of $11.2 million and $0.7 million, respectively. The increase in income for the three months ended March 31, 2017 as compared to 2016 of $10.5 million was primarily due to a gain on consolidation of $12.2 million from the purchase of a previously unconsolidated operating community in Seattle, Washington from our West Coast Development Joint Ventures.

Gain/(Loss) on Sale of Real Estate Owned, Net of Tax
    During the three months ended March 31, 2017, the Company recognized a gain, net of tax, of $2.1 million on the sale of a parcel on land in Richmond, Virginia. During the three months ended March 31, 2016, the Company recognized gains, net of tax, of $3.1 million on the sale of two parcels of land in Santa Monica, California.

69

Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results through wage pressures, utilities and material costs, the majority of our apartment leases have 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 three months ended March 31, 2017.
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.
Funds from Operations, Funds from Operations as Adjusted, and Adjusted Funds from Operations

Funds from Operations

Funds from operations (“FFO”) is defined as net income attributable to common stockholders (computed in accordance with GAAP), excluding impairment write-downs of depreciable real estate or of investments in non-consolidated investees that are driven by measurable decreases in the fair value of depreciable real estate held by the investee, gains or losses from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for noncontrolling interests, unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s (“NAREIT”) definition issued in April 2002. 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 FFO, diluted, if OP Units, DownREIT Units, unvested restricted stock, stock options, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive, they are included in the diluted share count.

Activities of our taxable REIT subsidiaries (“TRS”) include development and land entitlement. From time to time, we develop and subsequently sell a TRS property which results in a short-term use of funds that produces a profit that differs from the traditional long-term investment in real estate for REITs. We believe that the inclusion of these TRS gains in FFO is consistent with the standards established by NAREIT as the short-term investment is incidental to our main business. TRS gains on sales, net of taxes, are defined as net sales proceeds less a tax provision and the gross investment basis of the asset before accumulated depreciation.

We consider FFO a useful metric for investors as we use FFO in evaluating property acquisitions and our operating performance, and believe that FFO should be considered along with, but not as an alternative to, net income and cash flow as a measure of our 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.

Funds from Operations as Adjusted

FFO as Adjusted is defined as FFO excluding the impact of acquisition-related costs and other non-comparable items including, but not limited to, prepayment costs/benefits associated with early debt retirement, gains on sales of marketable securities and TRS property, deferred tax valuation allowance increases and decreases, casualty-related expenses and recoveries, severance costs and legal costs. Management believes that FFO as Adjusted 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.

FFO as Adjusted 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 FFO as Adjusted. However, other REITs may use different methodologies for calculating FFO as Adjusted or similar FFO measures and, accordingly, our FFO as Adjusted may not always be comparable

70

to FFO as Adjusted or similar FFO measures calculated by other REITs. FFO as Adjusted 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”) is a non-GAAP financial measure that management uses as a supplemental measure of our performance. AFFO is defined as FFO as Adjusted 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 FFO as Adjusted.

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 (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.

71

The following table outlines our reconciliation of Net income/(loss) attributable to common stockholders to FFO, FFO as Adjusted, and AFFO for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income/(loss) attributable to common stockholders
$
25,038

 
$
9,464

Real estate depreciation and amortization
105,032

 
105,339

Noncontrolling interests
2,429

 
1,211

Real estate depreciation and amortization on unconsolidated joint ventures
13,767

 
10,350

Net gain on the sale of unconsolidated depreciable property
(12,158
)
 
—

Net gain on the sale of depreciable real estate owned
(552
)
 
(1,385
)
Funds from operations (“FFO”) attributable to common stockholders and unitholders, basic
$
133,556

 
$
124,979

Distribution to preferred stockholders — Series E (Convertible)
929

 
929

FFO attributable to common stockholders and unitholders, diluted
$
134,485

 
$
125,908

Income/(loss) per weighted average common share - diluted
$
0.09

 
$
0.04

FFO per common share and unit, basic
$
0.46

 
$
0.43

FFO per common share and unit, diluted
$
0.45

 
$
0.43

Weighted average number of common shares and OP/DownREIT Units outstanding — basic
291,752

 
287,647

Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted
296,678

 
292,504

 
 
 
 
Impact of adjustments to FFO:
 
 
 
Cost/(benefit) associated with debt extinguishment and other
$
1,516

 
$
—

Long-term incentive plan transition costs
—

 
323

Net gain on the sale of non-depreciable real estate owned
(1,580
)
 
(1,685
)
Casualty-related (recoveries)/charges, net
502

 
—

Casualty-related (recoveries)/charges on unconsolidated joint ventures, net
(881
)
 
1,126

 
$
(443
)
 
$
(236
)
 
 
 
 
FFO as Adjusted attributable to common stockholders and unitholders, diluted
$
134,042

 
$
125,672

 
 
 
 
FFO as Adjusted per common share and unit, diluted
$
0.45

 
$
0.43

 
 
 
 
Recurring capital expenditures
(6,791
)
 
(6,961
)
AFFO attributable to common stockholders and unitholders
$
127,251

 
$
118,711

 
 
 
 
AFFO per common share and unit, diluted
$
0.43

 
$
0.41



72

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 three months ended March 31, 2017 and 2016 (shares in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Weighted average number of common shares and OP/DownREIT Units outstanding — basic
291,752

 
287,647

Weighted average number of OP/DownREIT Units outstanding
(24,962
)
 
(25,191
)
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations
266,790

 
262,456

 
 
 
 
Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted
296,678

 
292,504

Weighted average number of OP/DownREIT Units outstanding
(24,962
)
 
(25,191
)
Weighted average number of Series E preferred shares outstanding
(3,028
)
 
(3,028
)
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations
268,688

 
264,285

United Dominion Realty, L.P.:
Business Overview
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 March 31, 2017, the Operating Partnership’s real estate portfolio included 54 communities located in eight states and the District of Columbia with a total of 16,698 apartment homes.
As of March 31, 2017, UDR owned 110,883 units of our general partnership interests and 174,122,808 units of our limited partnership interests (the “OP Units”), or approximately 95.0% 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 March 31, 2017, the General Partner’s consolidated real estate portfolio included 128 communities located in 10 states and the District of Columbia with a total of 39,698 apartment homes. In addition, the General Partner had an ownership interest in 28 communities with 7,131 completed apartment homes through unconsolidated operating communities.
The Operating Partnership’s same-store community apartment home population for the three months ended March 31, 2017 was 15,058.

73


The following table summarizes our market information by major geographic markets as of March 31, 2017:
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
 
 
March 31, 2017
 
March 31, 2017
Same-Store Communities
 
Number of
Apartment Communities
 
Number of
Apartment Homes
 
Percentage of Total
Carrying Value
 
Total Carrying
Value (in thousands)
 
Average
Physical Occupancy
 
Monthly Income
per Occupied Home (a)
West Region
 
 
 
 
 
 
 
 
 
 
 
 
San Francisco, CA
 
8

 
1,992

 
12.7
%
 
$
465,508

 
97.1
%
 
$
3,011

Orange County, CA
 
6

 
2,052

 
13.4
%
 
494,598

 
95.7
%
 
2,266

Seattle, WA
 
5

 
932

 
6.0
%
 
220,571

 
96.9
%
 
1,885

Los Angeles, CA
 
2

 
344

 
3.0
%
 
111,072

 
95.9
%
 
2,537

Monterey Peninsula, CA
 
7

 
1,565

 
4.6
%
 
169,221

 
96.5
%
 
1,579

Other Southern California
 
2

 
516

 
2.5
%
 
92,462

 
94.9
%
 
1,889

Portland, OR
 
2

 
476

 
1.3
%
 
47,704

 
96.7
%
 
1,529

Mid-Atlantic Region
 
 
 
 
 
 
 
 
 
 
 
 
Metropolitan D.C.
 
6

 
2,068

 
15.0
%
 
554,444

 
97.3
%
 
2,057

Baltimore, MD
 
2

 
540

 
2.8
%
 
102,406

 
96.1
%
 
1,501

Northeast Region
 
 
 
 
 
 
 
 
 
 
 
 
New York, NY
 
2

 
996

 
16.4
%
 
605,300

 
97.3
%
 
3,921

Boston, MA
 
1

 
387

 
1.9
%
 
70,107

 
96.1
%
 
1,935

Southeast Region
 
 
 
 
 
 
 
 
 
 
 
 
Tampa, FL
 
2

 
942

 
2.8
%
 
104,257

 
97.1
%
 
1,383

Nashville, TN
 
6

 
1,612

 
3.8
%
 
142,362

 
97.3
%
 
1,216

Other Florida
 
1

 
636

 
2.3
%
 
83,595

 
96.6
%
 
1,493

Total/Average Same-Store Communities
 
52

 
15,058

 
88.5
%
 
3,263,607

 
96.7
%
 
$
2,085

Non-Mature, Commercial Properties & Other
 
2

 
1,640

 
11.5
%
 
422,727

 
 
 
 
Total Real Estate Owned
 
54

 
16,698

 
100.0
%
 
3,686,334

 
 
 
 
Total Accumulated Depreciation
 
 
 
 
 
 
 
(1,445,528
)
 
 
 
 
Total Real Estate Owned, Net of Accumulated Depreciation
 
 
 
 
 
 
 
$
2,240,806

 
 
 
 

(a)
Monthly Income per Occupied Home represents total monthly revenues divided by the average physical number of occupied apartment homes in our Same-Store portfolio.
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, 2016 and held as of March 31, 2017. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the communities are 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.
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.

74

Liquidity and Capital Resources
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 unsecured 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 repositioned our portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by 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 borrowings and the disposition of properties. We believe that our net cash provided by 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, and borrowings owed by us under the General Partner’s credit agreements.
Future Capital Needs
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 March 31, 2017, the Operating Partnership did not have any secured debt maturing during the remainder of 2017.
Critical Accounting Policies and Estimates and New Accounting Pronouncements
Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, (3) real estate investment properties, and (4) revenue recognition.
Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Operating Partnership’s current Report on Form 10-K, filed with the SEC on February 21, 2017. There have been no significant changes in our critical accounting policies from those reported. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
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 three months ended March 31, 2017 and 2016.
Operating Activities
For the three months ended March 31, 2017, Net cash provided by/(used in) operating activities was $63.9 million compared to $60.5 million for the comparable period in 2016. The increase in cash flow from operating activities was primarily due to improved operating income, primarily driven by revenue growth at communities.
Investing Activities
For the three months ended March 31, 2017, Net cash provided by/(used in) investing activities was $(8.0) million compared to $(6.8) million for the comparable period in 2016. The increase in cash used in investing activities was primarily due to increased capital expenditures.

75

Financing Activities
For the three months ended March 31, 2017, our Net cash provided by/(used in) financing activities was $(55.8) million compared to $(55.8) million for the comparable period of 2016. Net cash used in financing activities was unchanged primarily due to the early payoff of debt maturing in July 2023 being offset by an increase in advances from the General Partner.
Credit Facilities
As of March 31, 2017, an aggregate commitment of $310.2 million of the General Partner's secured credit facilities with Fannie Mae was owed by the Operating Partnership based on the ownership of the assets securing the debt. The entire commitment was outstanding at March 31, 2017. The portions of the Fannie Mae credit facilities owed by the Operating Partnership mature at various dates from December 2018 through July 2020 and bear interest at floating and fixed rates. At March 31, 2017, $228.9 million of the outstanding balance was fixed at a weighted average interest rate of 5.07% and the remaining balance of $81.3 million on these facilities had a weighted average variable interest rate of 2.34%.
The Operating Partnership is a guarantor on the General Partner’s unsecured revolving credit facility with an aggregate borrowing capacity of $1.1 billion and unsecured commercial paper program with an aggregate borrowing capacity of $500 million, $300 million of medium-term notes due June 2018, $300 million of medium-term notes due October 2020, a $350 million term loan facility due January 2021, $400 million of medium-term notes due January 2022, $300 million of medium-term notes due July 2024, $300 million of medium-term notes due October 2025 and $300 million of medium-term notes due September 2026. As of March 31, 2017 and December 31, 2016, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $220.0 million and $0, respectively, of notes outstanding under its unsecured commercial paper program.
The credit facilities are subject to customary financial covenants and limitations.
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 $108.3 million in variable rate debt that is not subject to interest rate swap contracts as of March 31, 2017. If market interest rates for variable rate debt increased by 100 basis points, our interest expense for the three months ended March 31, 2017 would increase by $0.3 million based on the average balance outstanding during the period.
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 8, Derivatives and Hedging Activities, in the Notes to the Operating Partnership’s Consolidated Financial Statements for additional discussion of derivative instruments.
A presentation of cash flow metrics based on GAAP is as follows (dollars in thousands):
 
Three Months Ended March 31,
 
 
2017
 
2016
Net cash provided by/(used in) operating activities
$
63,900

 
$
60,525

Net cash provided by/(used in) investing activities
(7,973
)
 
(6,767
)
Net cash provided by/(used in) financing activities
(55,819
)
 
(55,759
)


76

Results of Operations
The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016.
Net Income/(Loss) Attributable to OP Unitholders
Net income attributable to OP unitholders was $13.7 million ($0.07 per diluted OP Unit) for the three months ended March 31, 2017 as compared to net income of $4.8 million ($0.03 per diluted OP Unit) for the comparable period in the prior year. The increase in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:
•
an increase of $2.5 million in total property NOI primarily due to higher revenue per occupied home; and
•
losses from unconsolidated entities of $5.4 million for the three months ended March 31, 2017 as compared to $13.4 million for the three months ended March 31, 2016, primarily due to a reduction in depreciation and amortization at the DownREIT Partnership.

Apartment Community Operations
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.
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 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.
The following table summarizes the operating performance of our total portfolio for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
 
 
 
March 31, (a)
 
 
 
2017
 
2016
 
% Change
Same-Store Communities:
 
 
 
 
 
Same-store rental income
$
91,060

 
$
86,505

 
5.3
 %
Same-store operating expense (b)
(24,106
)
 
(22,884
)
 
5.3
 %
Same-store NOI
66,954

 
63,621

 
5.2
 %
 
 
 
 
 
 
Non-Mature Communities/Other NOI:
 
 
 
 
 
Stabilized, non-mature communities NOI (c)
7,122

 
7,092

 
0.4
 %
Non-residential/other NOI
987

 
1,073

 
(8.0
)%
Sold and held for disposition communities NOI
—

 
766

 
(100.0
)%
Total non-mature communities/other NOI
8,109

 
8,931

 
(9.2
)%
Total Property NOI
$
75,063

 
$
72,552

 
3.5
 %

(a)
Same-Store consists of 15,058 apartment homes.

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(b)
Excludes depreciation, amortization, and property management expenses.
(c)
Represents non-mature communities that have achieved 90% occupancy for three consecutive months but do not meet the criteria to be included in Same-Store Communities.

The following table is our reconciliation of Net income/(loss) attributable to OP unitholders to total property NOI for the three months ended March 31, 2017 and 2016 (dollars in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Net income/(loss) attributable to OP unitholders
$
13,657

 
$
4,787

Property management
2,822

 
2,717

Other operating expenses
1,548

 
1,500

Real estate depreciation and amortization
36,879

 
36,791

General and administrative
5,219

 
5,421

Casualty-related charges/(recoveries), net
553

 
—

(Income)/loss from unconsolidated entities
5,424

 
13,387

Interest expense
8,611

 
7,605

Net income/(loss) attributable to noncontrolling interests
350

 
344

Total property NOI
$
75,063

 
$
72,552

Same-Store Communities
Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2016 and held as of March 31, 2017) consisted of 15,058 apartment homes and provided 89.2% of our total NOI for the three months ended March 31, 2017.
Three Months Ended March 31, 2017 vs. Three Months Ended March 31, 2016
NOI for our Same-Store Community properties increased 5.2%, or $3.3 million, for the three months ended March 31, 2017 compared to the same period in 2016. The increase in property NOI was primarily attributable to a 5.3%, or $4.6 million, increase in property rental income, which was partially offset by a 5.3%, or $1.2, million increase in operating expenses. The increase in revenues was primarily driven by a 4.0%, or $3.3 million, increase in rental rates. Physical occupancy increased 0.4% to 96.7% and total income per occupied home increased 4.8% to $2,085 for the three months ended March 31, 2017 compared to the same period in 2016.
The increase in property operating expenses was primarily driven by a 11.4%, or $0.9 million, increase in real estate taxes, which was primarily due to higher assessed valuations and lower appeal refunds, and a 2.3%, or $0.1 million, increase in personnel costs compared to the same period in 2016.
The operating margin (property net operating income divided by property rental income) was 73.5% for both the three months ended March 31, 2017 and 2016.
Non-Mature Communities/Other
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.
Three Months Ended March 31, 2017 vs. Three Months Ended March 31, 2016
The remaining 10.8%, or $8.1 million, of our total NOI during the three months ended March 31, 2017 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 9.2%, or $0.8 million, for the three months ended March 31, 2017 compared to the same period in 2016. The decrease was primarily driven by a decrease in NOI of $0.8 million from sold communities.

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Income/(Loss) in Unconsolidated Entities
For the three months ended March 31, 2017, income/(loss) from unconsolidated entities of $(5.4) million was attributable to the Operating Partnership's ownership interest in the DownREIT Partnership as compared to $(13.4) million for the comparable period in 2016. The decrease in loss from unconsolidated entities was primarily attributable to a reduction in deprecation and amortization at the DownREIT Partnership.

Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results through wage pressures, utilities and material costs, the majority of our apartment leases have 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 three months ended March 31, 2017.
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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Item 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company and the Operating Partnership are exposed to interest rate changes associated with our unsecured credit facility and other variable rate debt as well as refinancing risk on our fixed rate debt. The Company’s and the Operating Partnership’s involvement with derivative financial instruments is limited and we do not expect to use them for trading or other speculative purposes. The Company and the Operating Partnership use derivative instruments solely to manage their exposure to interest rates.
See our Annual Report on Form 10-K for the year ended December 31, 2016 under the heading “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities. As of March 31, 2017, our market risk has not changed materially from the amounts reported in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4.        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 reported 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 March 31, 2017, we carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, 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.
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 third 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.

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PART II — OTHER INFORMATION


Item 1.    LEGAL PROCEEDINGS
The Company is a party to various claims and routine litigation arising in the ordinary course of business. We do not believe that the results of any such claims and litigation, individually or in the aggregate, will have a material adverse effect on our business, financial position or results of operations.

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 and unfavorable economic conditions generally may significantly affect our occupancy levels, our rental rates and collections, the value of the properties and our ability to strategically 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, personal debt levels, a downturn in the housing market, 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, rental revenues and/or the values of our apartment communities 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 and 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:
•
downturns in the global, national, regional and local economic conditions, particularly increases in unemployment;
•
declines in mortgage interest rates, making alternative housing more affordable;
•
government or builder incentives with respect to home ownership, making alternative housing options more attractive;
•
local real estate market conditions, including oversupply of, or reduced demand for, apartment homes;
•
declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
•
changes in market rental rates;
•
our ability to renew leases or re-lease space on favorable terms;
•
the timing and costs associated with property improvements, repairs or renovations;
•
declines in household formation; and
•
rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.

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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 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 significantly 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 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 if we do not accurately judge the potential increases in market rental rates. 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 expire, 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 materially 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 and general and administrative expenses increase at a rate faster than increases in our rental rates, which could materially adversely affect our results of operations, cash flow and ability to make distributions to UDR’s stockholders.
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 like the ones 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. These conditions may limit our ability to dispose of properties and to change our portfolio promptly in order to meet our strategic objectives, which may in turn have a material adverse effect on our financial condition and the market value of our securities. We are also subject to the following risks in connection with sales of our apartment communities, among others:      
•
a significant portion of the proceeds from our overall property sales may be held by intermediaries in order for some sales to qualify as like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended, or the “Code,” so that any related capital gain can be deferred for federal income tax purposes. As a result, we may not have immediate access to all of the cash proceeds generated from our property sales; and
•
federal tax laws limit our ability to profit on the sale of communities that we have owned for less than two years, and this limitation may prevent us from selling communities when market conditions are favorable.
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.
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:      

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•
we may be unable to obtain financing for acquisitions on favorable terms, including but not limited to interest rates, maturity dates and/or loan-to-value ratios, or at all, all of which could cause us to delay or even abandon potential acquisitions;
•
even if we are able to finance the acquisition, cash flow from the acquisition may be insufficient to meet our required principal and interest payments on the debt used to finance the acquisition;
•
even if we enter into an acquisition agreement for an apartment community, we may not complete the acquisition for a variety of reasons after incurring certain acquisition-related costs;
•
we may incur significant costs and divert management attention in connection with the evaluation and negotiation of potential acquisitions, including potential acquisitions that we are subsequently unable to complete;
•
when we acquire an apartment community, we may invest additional amounts in it with the intention of increasing profitability, and these additional investments may not produce the anticipated improvements in profitability;
•
the expected occupancy rates and rental rates may differ from actual results; and
•
we may be unable to quickly and efficiently integrate acquired apartment communities and new personnel into our existing operations, and the failure to successfully integrate such apartment communities or personnel will result in inefficiencies that could materially adversely affect our expected return on our investments and our overall profitability.
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 pursue attractive investment opportunities on favorable terms, which could materially 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:      
•
we may be unable to obtain construction financing for development activities on favorable terms, including but not limited to interest rates, maturity dates and/or loan to value ratios, or at all, which could cause us to delay or even abandon potential developments;
•
we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased development costs, could delay initial occupancy dates for all or a portion of a development community, and could require us to abandon our activities entirely with respect to a project for which we are unable to obtain permits or authorizations;
•
yields may be less than anticipated as a result of delays in completing projects, costs that exceed budget and/or higher than expected concessions for lease up and lower rents than expected;
•
if we are unable to find joint venture partners to help fund the development of a community or otherwise obtain acceptable financing for the developments, our development capacity may be limited;
•
we may abandon development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring such opportunities;
•
we may be unable to complete construction and lease-up of a community on schedule, or incur development or construction costs that exceed our original estimates, and we may be unable to charge rents that would compensate for any increase in such costs;

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•
occupancy rates and rents at a newly developed community may fluctuate depending on a number of factors, including market and economic conditions, preventing us from meeting our profitability goals for that community; and
•
when we sell to third parties communities or properties that we developed or renovated, we may be subject to warranty or construction defect claims that are uninsured or exceed the limits of our insurance.
In some cases in the past, the costs of upgrading acquired communities have exceeded our original estimates. We may experience similar cost increases in the future. Our inability to charge rents that will be sufficient to offset the effects of any increases in these costs may impair our profitability, which could have a material adverse effect on out results of operations and financial condition.
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. As a result, bankruptcies or defaults by these counterparties 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 materially adversely affect our business 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 with other persons or entities when we believe circumstances warrant the use of such structures. We currently have 17 active joint ventures and partnerships, including our participating loan investment and preferred equity investments, with a total equity investment of $819.0 million. We could become engaged in a dispute with one or more of our partners which might affect our ability to operate a jointly-owned property. 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 refuse to make capital contributions when due and 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 partners’ 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.
We are also subject to risk in cases where an institutional owner is our partner, including (i) a deadlock if we and our partner are unable to agree upon certain major and other decisions, (ii) the limitation of our ability to liquidate our position in the partnership or joint venture without the consent of the other partner, and (iii) the requirement 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, 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 property and operating activities with limits of liability 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 in excess of

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insurance proceeds may occur in the future. If one or more of our 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 cash flow and ability to make distributions.
As a result of our substantial real estate holdings, the cost of insuring our apartment communities is a significant component of expense. Insurance premiums are subject to significant increases and fluctuations, 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 of our 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 of one or more insurance companies may increase the costs to renew or replace our insurance policies or increase the cost of insuring additional properties and recently developed or redeveloped 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:
•
inability to accurately evaluate local apartment market conditions and local economies;
•
inability to hire and retain key personnel;
•
lack of familiarity with local governmental and permitting procedures; and
•
inability to achieve budgeted financial results.
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. 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 materially and adversely affect our cash flow 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.
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 issues will not affect our ability to make distributions to our stockholders, or that such costs or liabilities will not have a material adverse effect on 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

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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 if property damage or personal injury occurs.
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. From time to time, 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.
Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. 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 will affect our cash flow and results of operations.
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 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 or (ii) rent control or rent stabilization laws or other laws and regulations regulating housing, such as the Americans with Disabilities Act and the Fair Housing Amendments Act of 1988, may result in significant unanticipated expenditures, which would adversely affect our funds from operations and the ability to make distributions to stockholders.
Risk of Damage from Catastrophic Weather and Natural Events and Potential Climate Change. Certain of our communities are located in areas that may experience catastrophic weather and other natural events from time to time, including mudslides, fires, hurricanes, tornadoes, 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 materially and adversely affect our business, financial condition and results of operations.
To the extent that we experience any significant changes in the climate in areas where our communities are located, we may experience extreme weather conditions and prolonged 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. Should the impact of such climate change be material in nature, or occur for lengthy periods of time, our financial condition and results of operations may be adversely affected.
Risk of Earthquake Damage. Some of our communities are located in the general vicinity of active 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 materially and adversely affect our business, 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.

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Risk of Accidental Death Due to Fire, Natural Disasters or Other Hazards. The accidental death of persons living in our communities due to fire, natural disasters or other hazards could have a material 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 such any such events have occurred, which could have a material adverse effect on our business 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 a material 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 a material 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 may acquire mezzanine loans, which take the form of subordinated loans secured by second mortgages on the underlying property or 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 long-term senior mortgage lending secured by income-producing real property, because the loan may become unsecured 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 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 initial expenditure. In addition, mezzanine loans may 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 may 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. With preferred equity investments, our interest in a particular entity will be less than a majority of the outstanding voting interests of that entity. 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, the owner of the majority of the voting interests 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 the owner of the majority of the voting interests were to fail to invest capital in the entity, we may have to invest additional capital to protect our investment. The owner of the majority of the voting interests may fail to develop or operate 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.
We May Experience a Decline in the Fair Value of Our Assets and Be Forced to Recognize Impairment Charges, Which Could Materially and 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 to maturity or 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 materially and 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 identify one or more material weaknesses in our internal control over financial reporting, we

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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.
Our Business and Operations Would Suffer in the Event of System Failures or Breaches in Data Security. Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems and systems maintained by third party vendors are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war, and telecommunication failures. We rely on information technology networks and systems, including the Internet and networks and systems maintained and controlled by third party vendors, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and keeping of records, which may include personal identifying information of tenants and lease data. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential tenant information, such as individually identifiable information relating to financial accounts. Although we take steps, and generally require third party vendors to take steps, to protect the security of the data maintained in our and their information systems, it is possible that our or their security measures will not be able to prevent the systems’ improper functioning, or the improper disclosure of personally identifiable information, such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our or third party vendors’ information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect us.
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 and 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.
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 principal payments and still satisfy UDR’s distribution requirements to maintain its status as a REIT for federal income tax purposes. In addition, the full limits of 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, cash flow, increase our financing costs and impact our ability to make distributions to UDR’s stockholders.

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Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to Stockholders. If our apartment communities do not generate sufficient net rental income 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 will be adversely affected. The following factors, among others, may affect the net rental income generated by our apartment communities:
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the national and local economies;
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local real estate market conditions, such as an oversupply of apartment homes;
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tenants’ perceptions of the safety, convenience, and attractiveness of our communities and the neighborhoods where they are located;
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our ability to provide adequate management, maintenance and insurance;
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rental expenses, including real estate taxes and utilities;
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competition from other apartment communities;
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changes in interest rates and the availability of financing;
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changes in governmental regulations and the related costs of compliance; and
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changes in tax and housing laws, including the enactment of rent control laws or other laws regulating multifamily housing.
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 rental income 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 March 31, 2017, UDR had approximately $568.4 million of variable rate indebtedness outstanding, which constitutes approximately 16.1% of total outstanding indebtedness as of such date. As of March 31, 2017, the Operating Partnership had approximately $108.3 million of variable rate indebtedness outstanding, which constitutes approximately 32.1% of total outstanding indebtedness to third parties as of such date. In addition, borrowings under our unsecured commercial paper program bear interest at variable rates. 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.
Our Debt Level May Be Increased. Our current debt policy does not contain any limitations on the level of debt that we may incur, although 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 proceeds 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.

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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 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 suggested, including options 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 business and 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.

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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 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 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 distributions to individual stockholders generally are not eligible for the reduced rates.
UDR May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which are Subject to Certain Tax Risks. We have established several 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 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

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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 Proposed Tax Reform Measures, Could Have an Adverse Impact on Our Business and Financial Results. Changes to the U.S. federal income tax laws are proposed regularly. Legislative and regulatory changes may be more likely in the 115th Congress because the Presidency and such Congress will be controlled by the same political party and significant reform of the Code has been described publicly as a legislative priority.  Additionally, the REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the 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.  For example, certain proposals set forth in President Trump’s administration and House Republican tax plans could reduce the relative competitive advantage of operating as a REIT unless accompanied by responsive changes to the REIT rules.  These proposals include: the lowering of income tax rates on individuals and corporations, which could ease the burden of double taxation on corporate dividends and make the single level of taxation on REIT distributions relatively less attractive; allowing the expensing of capital expenditures, which could result in the bunching of taxable income and required distributions for REITs; and further limiting or eliminating the deductibility of interest expense, which could disrupt the real estate market and could increase the amount of REIT taxable income that must be distributed as dividends to shareholders. 
We cannot predict whether, when or to what extent new U.S. federal tax laws, regulations, interpretations or rulings will be issued, nor is the long-term impact of proposed tax reforms on the real estate investment industry or REITs clear.  Prospective investors are urged to consult their tax advisors regarding the effect of potential changes to the U.S. 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. As discussed in the risk factors above, 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 municipalities 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.
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 the Operating Partnership or the DownREIT Partnership were to be taxed as a corporation, they 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.

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,

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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 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:

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general market and economic conditions;
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actual or anticipated variations in UDR’s quarterly operating results or dividends or UDR’s payment of dividends in shares of UDR’s stock;
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changes in our funds from operations or earnings estimates;
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difficulties or inability to access capital or extend or refinance existing debt;
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decreasing (or uncertainty in) real estate valuations;
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changes in market valuations of similar companies;
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publication of research reports about us or the real estate industry;
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the general reputation of real estate investment trusts and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate companies);
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general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective purchasers of UDR’s stock to demand a higher annual yield from future dividends;
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a change in analyst ratings;
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additions or departures of key management personnel;
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adverse market reaction to any additional debt we incur in the future;
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speculation in the press or investment community;
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terrorist activity which may adversely affect the markets in which UDR’s securities trade, possibly increasing market volatility and causing the further erosion of business and consumer confidence and spending;
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failure to qualify as a REIT;
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strategic decisions by us or by our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;
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failure to satisfy listing requirements of the NYSE;
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governmental regulatory action and changes in tax laws; and

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the issuance of additional shares of UDR’s common stock, or the perception that such sales might occur, including under UDR’s at-the-market equity distribution program.
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 a material 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 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.


94


Item 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
From time to time the Company issues shares of the Company’s common stock in exchange for operating partnership units (“OP Units”) tendered to the Operating Partnership for redemption in accordance with the provisions 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 their OP Units 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 the Company’s common stock equal to the number of OP Units being redeemed.

During the three months ended March 31, 2017, we did not issue any shares of our common stock upon redemption of OP Units.
Repurchase of Equity Securities
In February 2006, UDR’s Board of Directors authorized a 10 million share repurchase program. In January 2008, our 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. As reflected in the table below, no shares of common stock were repurchased under these programs during the quarter ended March 31, 2017.
Period
 
Total Number of Shares Purchased
 
Weighted Average Price per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (a)
Beginning Balance
 
9,967,490

 
$
22.00

 
9,967,490

 
15,032,510

January 1, 2017 through January 31, 2017
 
—

 
—

 
—

 
15,032,510

February 1, 2017 through February 28, 2017
 
—

 
—

 
—

 
15,032,510

March 1, 2017 through March 31, 2017
 
—

 
—

 
—

 
15,032,510

Balance as of March 31, 2017
 
9,967,490

 
$
22.00

 
9,967,490

 
15,032,510


(a)
This number reflects the amount of shares that were available for purchase under our 10 million share repurchase program authorized in February 2006 and our 15 million share repurchase program authorized in January 2008.


95

During the three months ended March 31, 2017, certain of our employees surrendered shares of common stock owned by them to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted shares of common stock issued under our 1999 Long-Term Incentive Plan (the “LTIP”). The following table summarizes all of these repurchases during the three months ended March 31, 2017.

Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share (a)
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2017 through January 31, 2017
 
21,732

 
$
35.95

 
N/A
 
N/A
February 1, 2017 through February 28, 2017
 
94,145

 
34.84

 
N/A
 
N/A
March 1, 2017 through March 31, 2017
 
—

 
—

 
N/A
 
N/A
Total
 
115,877

 
$
35.05

 
 
 
 

(a)
The price paid per share is based on the closing price of our common stock as of the date of the determination of the statutory minimum for federal and state tax obligations.

Item 3.        DEFAULTS UPON SENIOR SECURITIES
None.

Item 4.        MINE SAFETY DISCLOSURES
Not applicable.

Item 5.        OTHER INFORMATION
None.

Item 6.        EXHIBITS
The exhibits filed or furnished with this Report are set forth in the Exhibit Index.

96


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the registrants has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
UDR, Inc.
Date:
April 25, 2017
/s/ Joseph D. Fisher
 
 
Joseph D. Fisher
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)
 
 
 
 
 
United Dominion Realty, L.P.
 
 
By:
UDR, Inc., its general partner  
Date:
April 25, 2017
/s/ Joseph D. Fisher
 
 
Joseph D. Fisher
 
 
Senior Vice President and Chief Financial Officer (Principal Financial Officer)


97

EXHIBIT INDEX
Exhibit No.
 
Description
3.1
 
Articles of Restatement of UDR, Inc. (incorporated by reference to Exhibit 3.09 to UDR, Inc.’s Current Report on Form 8-K dated July 27, 2005 and filed with the SEC on August 1, 2005).
 
 
 
3.2
 
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 (incorporated by reference to Exhibit 3.2 to UDR, Inc.’s Current Report on Form 8-K dated March 14, 2007 and filed with the SEC on March 15, 2007).
 
 
 
3.3
 
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 (incorporated by reference to Exhibit 3.1 to UDR, Inc.’s Current Report on Form 8-K dated August 29, 2011 and filed with the SEC on September 1, 2011).
 
 
 
3.4
 
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 (incorporated by reference to Exhibit 3.4 to UDR, Inc.’s Form 8-A Registration Statement dated and filed with the SEC on May 30, 2007).
 
 
 
3.5
 
Certificate of Limited Partnership of United Dominion Realty, L.P. dated February 19, 2004 (incorporated by reference to 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 SEC on October 15, 2010).
 
 
 
3.6
 
Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of February 23, 2004 (incorporated by reference to Exhibit 10.23 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003).
 
 
 
3.7
 
First Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated June 24, 2005 (incorporated by reference to Exhibit 10.06 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
 
 
 
3.8
 
Second Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated February 23, 2006 (incorporated by reference to Exhibit 10.6 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).
 
 
 
3.9
 
Third Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated February 2, 2007 (incorporated by reference to Exhibit 99.1 to UDR, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
 
 
 
3.1
 
Fourth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated December 27, 2007 (incorporated by reference to Exhibit 10.25 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007).
 
 
 
3.11
 
Fifth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated March 7, 2008 (incorporated by reference to Exhibit 10.53 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008).
 
 
 
3.12
 
Sixth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated December 9, 2008 (incorporated by reference to 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).
 
 
 

98

Exhibit No.
 
Description
3.13
 
Seventh Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of March 13, 2009 (incorporated by reference to Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated March 18, 2009 and filed with the SEC on March 19, 2009).
 
 
 
3.14
 
Eighth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of November 17, 2010 (incorporated by reference to Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated November 18, 2010 and filed with the SEC on November 18, 2010).
 
 
 
3.15
 
Ninth Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P., dated as of December 4, 2015 (incorporated by reference to Exhibit 10.1 to UDR, Inc.’s Current Report on Form 8-K dated December 4, 2015 and filed with the SEC on December 10, 2015).
 
 
 
3.16
 
Amended and Restated Bylaws of UDR, Inc. (as amended through May 12, 2016) (incorporated by reference to Exhibit 3.1 to UDR, Inc.’s Current Report on Form 8-K dated May 12, 2016 and filed with the SEC on May 18, 2016).
 
 
 
10.1*
 
UDR, Inc. 1999 Long-Term Incentive Plan (as amended and restated February 2, 2017) (incorporated by reference to Exhibit 10.1 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016).
 
 
 
10.2*
 
Form of UDR, Inc. Restricted Stock Award Agreement under the 1999 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.2 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016).
 
 
 
10.3*
 
Indemnification Agreement by and between UDR, Inc. and each of its directors and officers listed on Schedule A thereto (incorporated by reference to Exhibit 10.7 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016).
 
 
 
10.4
 
First Amendment, dated January 20, 2017, to the Credit Agreement, dated as of October 20, 2015, by and among UDR, Inc., as borrower, and the lenders and agents party thereto (incorporated by reference to Exhibit 10.24 to UDR, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2016).
 
 
 
12.1
 
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends of UDR, Inc.
 
 
 
12.2
 
Computation of Ratio of Earnings to Fixed Charges of United Dominion Realty, L.P.
 
 
 
31.1
 
Rule 13a-14(a) Certification of the Chief Executive Officer of UDR, Inc.
 
 
 
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 UDR Inc., general partner of United Dominion Realty, L.P.
 
 
 
31.4
 
Rule 13a-14(a) Certification of the Chief Financial Officer of UDR Inc., general partner 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.
 
 
 

99

Exhibit No.
 
Description
32.3
 
Section 1350 Certification of the Chief Executive Officer of UDR Inc., general partner of United Dominion Realty, L.P.
 
 
 
32.4
 
Section 1350 Certification of the Chief Financial Officer of UDR Inc., general partner of United Dominion Realty, L.P.
 
 
 
101
 
XBRL (Extensible Business Reporting Language). The following materials from this Quarterly Report on Form 10-Q for the periods ended March 31, 2017, formatted in 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.
 
 
 
* Management Contract or Compensatory Plan or Arrangement

100

UDR, Inc. Reports