UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
OR
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☐ |
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)
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Maryland (UDR, Inc.) |
54-0857512 |
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Delaware (United Dominion Realty, L.P.) |
54-1776887 |
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(State or other jurisdiction of |
(I.R.S. Employer |
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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)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common Stock, par value $0.01 |
UDR |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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UDR, Inc. |
Yes ⌧ No ◻ |
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United Dominion Realty, L.P. |
Yes ⌧ No ◻ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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UDR, Inc. |
Yes ⌧ No ◻ |
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United Dominion Realty, L.P. |
Yes ⌧ No ◻ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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⌧ |
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UDR, Inc.: |
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Large Accelerated Filer ⌧ |
Accelerated Filer ◻ |
Non-Accelerated Filer ◻ |
Smaller Reporting Company ☐ |
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Emerging Growth Company ☐ |
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⌧ |
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United Dominion Realty, L.P.: |
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Large Accelerated Filer ◻ |
Accelerated Filer ◻ |
Non-Accelerated Filer ⌧ |
Smaller Reporting Company ☐ |
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Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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UDR, Inc. |
☐ |
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United Dominion Realty, L.P. |
☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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UDR, Inc. |
Yes ☐ No ⌧ |
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United Dominion Realty, L.P. |
Yes ☐ No ⌧ |
The number of shares of UDR, Inc.’s common stock, $0.01 par value, outstanding as of October 28, 2019 was 293,053,423.
UDR, INC.
UNITED DOMINION REALTY, L.P.
INDEX
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PAGE |
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Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (audited) |
5 |
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6 |
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7 |
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8 |
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10 |
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12 |
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Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (audited) |
47 |
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48 |
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49 |
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50 |
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51 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
70 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
95 |
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95 |
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96 |
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96 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
110 |
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111 |
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111 |
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111 |
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112 |
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EXPLANATORY NOTE
This Report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2019 of UDR, Inc., a Maryland corporation, and United Dominion Realty, L.P., a Delaware limited partnership, of which UDR, Inc. is the parent company and sole general partner. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” the “Company,” “UDR” or “UDR, Inc.” refer collectively to UDR, Inc., together with its consolidated subsidiaries and joint ventures, including United Dominion Realty, L.P. and UDR Lighthouse DownREIT L.P. (the “DownREIT Partnership”), also a Delaware limited partnership of which UDR is the sole general partner. Unless the context otherwise requires, the references in this Report to the “Operating Partnership” or the “OP” refer to United Dominion Realty, L.P., together with its consolidated subsidiaries. “Common stock” refers to the common stock of UDR and “stockholders” means the holders of shares of UDR’s common stock and preferred stock. The limited partnership interests of the Operating Partnership and the DownREIT Partnership are referred to as “OP Units” and “DownREIT Units,” respectively, and the holders of the OP Units and DownREIT Units are referred to as “unitholders.” This combined Form 10-Q is being filed separately by UDR and the Operating Partnership.
There are a number of differences between the Company and the Operating Partnership, which are reflected in our disclosures in this Report. UDR is a real estate investment trust (“REIT”), whose most significant asset is its ownership interest in the Operating Partnership. UDR also conducts business through other subsidiaries, including its taxable REIT subsidiary (“TRS”). UDR acts as the sole general partner of the Operating Partnership, holds interests in subsidiaries and joint ventures, owns and operates properties, issues securities from time to time and guarantees debt of certain of our subsidiaries. The Operating Partnership conducts the operations of a substantial portion of the business and is structured as a partnership with no publicly traded equity securities. The Operating Partnership has guaranteed certain outstanding debt of UDR.
As of September 30, 2019, UDR owned 110,883 units (100%) of the general partnership interests of the Operating Partnership and 176,099,189 OP Units, representing approximately 95.7% of the total outstanding OP Units in the Operating Partnership. UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and UDR’s role as the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are presented in this report for each of UDR and the Operating Partnership.
UDR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
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September 30, |
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December 31, |
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2019 |
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2018 |
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(unaudited) |
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(audited) |
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ASSETS |
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Real estate owned: |
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Real estate held for investment |
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$ |
11,542,550 |
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$ |
10,196,159 |
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Less: accumulated depreciation |
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(4,000,608) |
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(3,654,160) |
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Real estate held for investment, net |
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7,541,942 |
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6,541,999 |
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Real estate under development (net of accumulated depreciation of $0 and $0, respectively) |
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21,845 |
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— |
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Total real estate owned, net of accumulated depreciation |
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7,563,787 |
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6,541,999 |
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Cash and cash equivalents |
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1,895 |
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185,216 |
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Restricted cash |
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21,646 |
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23,675 |
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Notes receivable, net |
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37,899 |
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42,259 |
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Investment in and advances to unconsolidated joint ventures, net |
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791,180 |
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780,869 |
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Operating lease right-of-use assets |
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135,889 |
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— |
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Other assets |
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145,301 |
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137,710 |
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Total assets |
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$ |
8,697,597 |
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$ |
7,711,728 |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Secured debt, net |
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$ |
600,624 |
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$ |
601,227 |
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Unsecured debt, net |
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3,335,273 |
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2,946,560 |
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Operating lease liabilities |
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130,135 |
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— |
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Real estate taxes payable |
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42,031 |
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20,608 |
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Accrued interest payable |
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27,577 |
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38,747 |
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Security deposits and prepaid rent |
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36,382 |
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35,060 |
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Distributions payable |
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108,939 |
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97,666 |
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Accounts payable, accrued expenses, and other liabilities |
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72,680 |
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76,343 |
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Total liabilities |
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4,353,641 |
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3,816,211 |
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Commitments and contingencies (Note 13) |
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Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership |
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1,072,181 |
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972,740 |
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Equity: |
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Preferred stock, no par value; 50,000,000 shares authorized: |
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8.00% Series E Cumulative Convertible; 2,780,994 shares issued and outstanding at September 30, 2019 and December 31, 2018 |
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46,200 |
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46,200 |
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Series F; 14,986,275 and 15,802,393 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively |
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1 |
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1 |
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Common stock, $0.01 par value; 350,000,000 shares authorized: |
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292,948,423 and 275,545,900 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively |
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2,929 |
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2,755 |
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Additional paid-in capital |
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5,702,782 |
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4,920,732 |
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Distributions in excess of net income |
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(2,496,328) |
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(2,063,996) |
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Accumulated other comprehensive income/(loss), net |
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(9,022) |
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(67) |
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Total stockholders’ equity |
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3,246,562 |
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2,905,625 |
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Noncontrolling interests |
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25,213 |
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17,152 |
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Total equity |
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3,271,775 |
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2,922,777 |
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Total liabilities and equity |
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$ |
8,697,597 |
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$ |
7,711,728 |
See accompanying notes to consolidated financial statements.
5
UDR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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REVENUES: |
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Rental income |
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$ |
289,008 |
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$ |
263,256 |
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$ |
835,393 |
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$ |
770,373 |
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Joint venture management and other fees |
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6,386 |
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2,888 |
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11,982 |
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8,819 |
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Total revenues |
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295,394 |
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266,144 |
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847,375 |
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779,192 |
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OPERATING EXPENSES: |
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Property operating and maintenance |
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46,869 |
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44,090 |
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131,702 |
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126,129 |
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Real estate taxes and insurance |
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38,490 |
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34,352 |
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110,624 |
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99,541 |
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Property management |
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8,309 |
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7,240 |
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24,018 |
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21,185 |
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Other operating expenses |
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2,751 |
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3,314 |
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11,132 |
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8,148 |
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Real estate depreciation and amortization |
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127,391 |
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107,881 |
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357,793 |
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322,537 |
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General and administrative |
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12,197 |
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11,896 |
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37,002 |
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36,028 |
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Casualty-related charges/(recoveries), net |
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(1,088) |
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678 |
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(842) |
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2,364 |
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Other depreciation and amortization |
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1,619 |
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1,682 |
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4,953 |
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5,057 |
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Total operating expenses |
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236,538 |
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211,133 |
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676,382 |
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620,989 |
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Gain/(loss) on sale of real estate owned |
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— |
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— |
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5,282 |
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70,300 |
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Operating income |
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58,856 |
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55,011 |
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176,275 |
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228,503 |
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Income/(loss) from unconsolidated entities |
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12,713 |
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(1,382) |
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19,387 |
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(5,091) |
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Interest expense |
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(42,523) |
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(34,401) |
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(110,482) |
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(95,942) |
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Interest income and other income/(expense), net |
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1,875 |
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1,188 |
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12,998 |
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5,075 |
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Income/(loss) before income taxes |
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30,921 |
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20,416 |
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98,178 |
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132,545 |
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Tax (provision)/benefit, net |
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(1,499) |
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(158) |
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(3,836) |
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(618) |
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Net income/(loss) |
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29,422 |
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20,258 |
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94,342 |
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131,927 |
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Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership |
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(2,162) |
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(1,616) |
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(6,871) |
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(10,819) |
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Net (income)/loss attributable to noncontrolling interests |
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(56) |
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(32) |
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(145) |
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(141) |
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Net income/(loss) attributable to UDR, Inc. |
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27,204 |
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18,610 |
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87,326 |
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120,967 |
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Distributions to preferred stockholders — Series E (Convertible) |
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(1,031) |
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(971) |
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(3,073) |
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(2,897) |
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Net income/(loss) attributable to common stockholders |
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$ |
26,173 |
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$ |
17,639 |
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$ |
84,253 |
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$ |
118,070 |
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Income/(loss) per weighted average common share: |
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Basic |
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$ |
0.09 |
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$ |
0.07 |
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$ |
0.30 |
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$ |
0.44 |
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Diluted |
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$ |
0.09 |
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$ |
0.07 |
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$ |
0.30 |
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$ |
0.44 |
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Weighted average number of common shares outstanding: |
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Basic |
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288,706 |
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267,727 |
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282,598 |
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267,529 |
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Diluted |
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289,529 |
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268,861 |
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|
283,292 |
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|
269,020 |
See accompanying notes to consolidated financial statements.
6
UDR, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In thousands)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Net income/(loss) |
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$ |
29,422 |
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$ |
20,258 |
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$ |
94,342 |
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$ |
131,927 |
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Other comprehensive income/(loss), including portion attributable to noncontrolling interests: |
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Other comprehensive income/(loss) - derivative instruments: |
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Unrealized holding gain/(loss) |
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(659) |
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2,320 |
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(7,181) |
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4,312 |
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(Gain)/loss reclassified into earnings from other comprehensive income/(loss) |
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(624) |
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(564) |
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(2,504) |
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(1,162) |
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Other comprehensive income/(loss), including portion attributable to noncontrolling interests |
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(1,283) |
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1,756 |
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(9,685) |
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|
3,150 |
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Comprehensive income/(loss) |
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28,139 |
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|
22,014 |
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|
84,657 |
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|
135,077 |
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Comprehensive (income)/loss attributable to noncontrolling interests |
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(2,119) |
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(1,798) |
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(6,286) |
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(11,230) |
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Comprehensive income/(loss) attributable to UDR, Inc. |
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$ |
26,020 |
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$ |
20,216 |
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$ |
78,371 |
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$ |
123,847 |
See accompanying notes to consolidated financial statements.
7
UDR, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share data)
(Unaudited)
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Distributions |
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Accumulated Other Comprehensive |
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Preferred |
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Common |
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Paid-in |
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in Excess of |
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Income/(Loss), |
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Noncontrolling |
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Stock |
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Stock |
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Capital |
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Net Income |
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net |
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Interests |
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Total |
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Balance at June 30, 2019 |
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$ |
46,201 |
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$ |
2,831 |
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$ |
5,244,819 |
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$ |
(2,336,609) |
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$ |
(7,838) |
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$ |
18,611 |
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$ |
2,968,015 |
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Net income/(loss) attributable to UDR, Inc. |
|
|
— |
|
|
— |
|
|
— |
|
|
27,204 |
|
|
— |
|
|
— |
|
|
27,204 |
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Net income/(loss) attributable to noncontrolling interests |
|
|
— |
|
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— |
|
|
— |
|
|
— |
|
|
— |
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|
40 |
|
|
40 |
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Long Term Incentive Plan Unit grants/(vestings), net |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
6,562 |
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|
6,562 |
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Other comprehensive income/(loss) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,184) |
|
|
— |
|
|
(1,184) |
|
Issuance/(forfeiture) of common and restricted shares, net |
|
|
— |
|
|
— |
|
|
1,175 |
|
|
— |
|
|
— |
|
|
— |
|
|
1,175 |
|
Issuance of common shares through public offering, net |
|
|
— |
|
|
96 |
|
|
449,041 |
|
|
— |
|
|
— |
|
|
— |
|
|
449,137 |
|
Adjustment for conversion of noncontrolling interest of unitholders in the Operating Partnership and DownREIT Partnership |
|
|
— |
|
|
2 |
|
|
7,747 |
|
|
— |
|
|
— |
|
|
— |
|
|
7,749 |
|
Common stock distributions declared ($0.3425 per share) |
|
|
— |
|
|
— |
|
|
— |
|
|
(100,657) |
|
|
— |
|
|
— |
|
|
(100,657) |
|
Preferred stock distributions declared-Series E ($0.3708 per share) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,031) |
|
|
— |
|
|
— |
|
|
(1,031) |
|
Adjustment to reflect redemption value of redeemable noncontrolling interests |
|
|
— |
|
|
— |
|
|
— |
|
|
(85,235) |
|
|
— |
|
|
— |
|
|
(85,235) |
|
Balance at September 30, 2019 |
|
$ |
46,201 |
|
$ |
2,929 |
|
$ |
5,702,782 |
|
$ |
(2,496,328) |
|
$ |
(9,022) |
|
$ |
25,213 |
|
$ |
3,271,775 |
8
See accompanying notes to consolidated financial statements.
9
UDR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
(Unaudited)
|
|
|
|
|
|
|
|
|---|---|---|---|---|---|---|
|
|
|
Nine Months Ended September 30, |
||||
|
|
|
2019 |
|
2018 |
||
|
Operating Activities |
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
94,342 |
|
$ |
131,927 |
|
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
362,746 |
|
|
327,594 |
|
(Gain)/loss on sale of real estate owned |
|
|
(5,282) |
|
|
(70,300) |
|
(Income)/loss from unconsolidated entities |
|
|
(19,387) |
|
|
5,091 |
|
Return on investment in unconsolidated joint ventures |
|
|
4,104 |
|
|
2,848 |
|
Amortization of share-based compensation |
|
|
13,020 |
|
|
10,694 |
|
Other |
|
|
14,098 |
|
|
2,108 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
(Increase)/decrease in operating assets |
|
|
49 |
|
|
(13,199) |
|
Increase/(decrease) in operating liabilities |
|
|
(6,814) |
|
|
9,961 |
|
Net cash provided by/(used in) operating activities |
|
|
456,876 |
|
|
406,724 |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
Acquisition of real estate assets |
|
|
(1,269,618) |
|
|
— |
|
Proceeds from sales of real estate investments, net |
|
|
38,000 |
|
|
89,433 |
|
Development of real estate assets |
|
|
(19,248) |
|
|
(136,170) |
|
Capital expenditures and other major improvements — real estate assets |
|
|
(113,572) |
|
|
(76,381) |
|
Capital expenditures — non-real estate assets |
|
|
(11,147) |
|
|
(2,963) |
|
Investment in unconsolidated joint ventures |
|
|
(72,079) |
|
|
(85,059) |
|
Distributions received from unconsolidated joint ventures |
|
|
61,412 |
|
|
30,574 |
|
Purchase deposits on pending acquisitions |
|
|
(910) |
|
|
(1,000) |
|
Repayment/(issuance) of notes receivable, net |
|
|
4,360 |
|
|
(21,540) |
|
Net cash provided by/(used in) investing activities |
|
|
(1,382,802) |
|
|
(203,106) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
Payments on secured debt |
|
|
(160,547) |
|
|
(82,472) |
|
Proceeds from the issuance of secured debt |
|
|
162,500 |
|
|
80,000 |
|
Payments on unsecured debt |
|
|
(300,000) |
|
|
— |
|
Net proceeds from the issuance of unsecured debt |
|
|
697,826 |
|
|
— |
|
Net proceeds/(repayment) of commercial paper |
|
|
(41,115) |
|
|
115,000 |
|
Net proceeds/(repayment) of revolving bank debt |
|
|
34,431 |
|
|
29,243 |
|
Proceeds from the issuance of common shares through public offering, net |
|
|
662,009 |
|
|
— |
|
Repurchase of common shares |
|
|
— |
|
|
(19,988) |
|
Distributions paid to redeemable noncontrolling interests |
|
|
(24,764) |
|
|
(24,297) |
|
Distributions paid to preferred stockholders |
|
|
(3,016) |
|
|
(2,854) |
|
Distributions paid to common stockholders |
|
|
(282,709) |
|
|
(255,683) |
|
Other |
|
|
(4,039) |
|
|
(36,317) |
|
Net cash provided by/(used in) financing activities |
|
|
740,576 |
|
|
(197,368) |
|
Net increase/(decrease) in cash, cash equivalents, and restricted cash |
|
|
(185,350) |
|
|
6,250 |
|
Cash, cash equivalents, and restricted cash, beginning of year |
|
|
208,891 |
|
|
21,830 |
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
23,541 |
|
$ |
28,080 |
|
|
|
|
|
|
|
|
10
See accompanying notes to consolidated financial statements.
11
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 September 30, 2019, there were 184,063,542 units in the Operating Partnership (“OP Units”) outstanding, of which 176,210,072 OP Units, or 95.7%, were owned by UDR and 7,853,470 OP Units, or 4.3%, were owned by outside limited partners. As of September 30, 2019, there were 32,367,380 units in the DownREIT Partnership (“DownREIT Units”) outstanding, of which 18,104,895, or 55.9%, were owned by UDR (including 13,470,651 DownREIT Units, or 41.6%, that were held by the Operating Partnership) and 14,262,485, or 44.1%, 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 September 30, 2019, and results of operations for the three and nine months ended September 30, 2019 and 2018, have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2018 appearing in UDR’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 19, 2019.
The accompanying interim unaudited consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company evaluated subsequent events through the date its financial statements were issued. No significant recognized or non-recognized subsequent events were noted other than those noted in Note 7, Secured and Unsecured Debt, Net and Note 13, Commitments and Contingencies.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Company on January 1, 2020. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amends the transition requirements and scope of ASU 2016-13 and clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. The Company is currently evaluating the effect that the updated standard will have on the consolidated financial statements and related disclosures. However, the Company does not expect the updated standard to have a material impact on the consolidated financial statements.
12
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
In February 2016, the FASB issued ASU 2016-02, Leases. The standard amended the existing lease accounting guidance and required lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases continued to recognize lease expense in a manner similar to previous accounting. For lessors, accounting for leases under the new guidance was substantially the same as in prior periods, but eliminated current real estate-specific provisions and changed the treatment of initial direct costs. The standard was effective for the Company on January 1, 2019.
The Company elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Company also elected the short-term lease exception provided for in the standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year.
The Company recognized right-of-use assets of $94.3 million and lease liabilities of $88.3 million as of January 1, 2019 upon adoption of the standard. The right-of-use assets included $6.0 million of prepaid rent and intangible assets that was included within Other assets on our Consolidated Balance Sheets as of December 31, 2018.
The lease liabilities represent the present value of the remaining minimum lease payments as of January 1, 2019 and primarily relate to ground leases for communities where we are the lessee. The right-of-use assets represent our right to use an underlying asset for the lease term, which are calculated utilizing the lease liabilities plus any prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. Our right-of-use assets and related lease liabilities recognized as of January 1, 2019 may change as a result of updates to the projected future minimum lease payments. Certain of our ground lease agreements where we are the lessee have future minimum lease payments that reset in the future based upon a percentage of the fair market value of the land at the time of the reset. The Company will continue to recognize lease expense for these leases in a manner similar to previous accounting based on our election of the package of practical expedients. However, in the event we modify existing ground leases and/or enter into new ground leases subsequent to the adoption of the standard, such leases would likely be classified as finance leases under the standard and require expense recognition based on the effective interest method. Under the standard, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, subsequent to the adoption of the standard, we are now expensing non-incremental leasing costs as incurred.
In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which provided entities with relief from the costs of implementing certain aspects of ASU 2016-02, Leases. The ASU provided a practical expedient which allowed lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Company elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where we are the lessor. The ASU also provided a transition option that permitted entities to not recast the comparative periods presented when transitioning to the standard, which the Company also elected.
Principles of Consolidation
The Company accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the consolidation guidance. The Company first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.
13
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Real Estate Sales Gain Recognition
For sale transactions resulting in a transfer of a controlling financial interest of a property, the Company generally derecognizes the related assets and liabilities from its Consolidated Balance Sheets and records the gain or loss in the period in which the transfer of control occurs. If control of the property has not transferred to the counterparty, the criteria for derecognition are not met and the Company will continue to recognize the related assets and liabilities on its Consolidated Balance Sheets.
Sale transactions to entities in which the Company sells a controlling financial interest in a property but retains a noncontrolling interest are accounted for as partial sales. Partial sales resulting in a change in control are accounted for at fair value and a full gain or loss is recognized. Therefore, the Company will record a gain or loss on the partial interest sold, and the initial measurement of our retained interest will be accounted for at fair value.
Sales of real estate to joint ventures or other noncontrolled investees are also accounted for at fair value and the Company will record a full gain or loss in the period the property is contributed.
To the extent that the Company acquires a controlling financial interest in a property that it previously accounted for as an equity method investment, the Company will not remeasure its previously held interest if the acquisition is treated as an asset acquisition. The Company will include the carrying amount of its previously held equity method interest along with the consideration paid and transaction costs incurred in determining the amounts to allocate to the related assets and liabilities acquired on its Consolidated Balance Sheets. When treated as an asset acquisition, the Company will not recognize a gain or loss on consolidation of a property.
Notes Receivable
The following table summarizes our Notes receivable, net as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate at |
|
Balance Outstanding |
||||
|
|
|
September 30, |
|
September 30, |
|
December 31, |
||
|
|
|
2019 |
|
2019 |
|
2018 |
||
|
Note due December 2019 (a) |
|
12.00 |
% |
$ |
20,000 |
|
$ |
20,000 |
|
Note due February 2020 (b) |
|
10.00 |
% |
|
15,649 |
|
|
14,659 |
|
Note due October 2020 (c) |
|
8.00 |
% |
|
2,250 |
|
|
2,000 |
|
Note due August 2022 (d) |
|
10.00 |
% |
|
— |
|
|
5,600 |
|
Total notes receivable, net |
|
|
|
$ |
37,899 |
|
$ |
42,259 |
| (a) | In March 2018, the Company entered into a secured note with an unaffiliated third party with an aggregate commitment of $20.0 million, of which $20.0 million has been funded. Interest payments are due when the loan matures. In March 2019, the note’s maturity was extended to December 27, 2019, and the note is secured by a parcel of land. |
| (b) | The Company has a secured note with an unaffiliated third party with an aggregate commitment of $16.4 million, of which $15.6 million has been funded, including $1.0 million funded during the nine months ended September 30, 2019. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $5.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the eighth anniversary of the date of the note (February 2020). |
| (c) | The Company has a secured note with an unaffiliated third party with an aggregate commitment of $2.3 million, of which $2.3 million has been funded, including $0.3 million funded during the nine months ended September 30, 2019. Interest payments are due when the loan matures. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $10.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (October 2020). |
| (d) | In January 2019, the $5.6 million secured note was repaid in full along with the contractually accrued interest of $0.2 million and an additional $8.5 million of promoted interest in conjunction with the unaffiliated third party being acquired. |
14
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
The Company recognized $1.2 million and $1.2 million of interest income from notes receivable during the three months ended September 30, 2019 and 2018, respectively, and $3.5 million and $2.9 million of interest income and $8.5 million and zero of promoted interest from notes receivable during the nine months ended September 30, 2019 and 2018, respectively, none of which was related party interest. Interest income and promoted interest are included in Interest income and other income/(expense), net on the Consolidated Statements of Operations.
Comprehensive Income/(Loss)
Comprehensive income/(loss), which is defined as the change in equity during each period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Consolidated Statements of Comprehensive Income/(Loss). For the three and nine months ended September 30, 2019 and 2018, the Company’s other comprehensive income/(loss) consisted of the gain/(loss) on derivative instruments that are designated as and qualify as cash flow hedges, (gain)/loss on derivative instruments reclassified from other comprehensive income/(loss) into earnings, and the allocation of other comprehensive income/(loss) to noncontrolling interests. The (gain)/loss on derivative instruments reclassified from other comprehensive income/(loss) is included in Interest expense on the Consolidated Statements of Operations. See Note 11, Derivatives and Hedging Activity, for further discussion. The allocation of other comprehensive income/(loss) to redeemable noncontrolling interests during the three months ended September 30, 2019 and 2018 was $(0.1) million and $0.2 million, respectively, and during the nine months ended September 30, 2019 and 2018 was $(0.7) million and $0.3 million, respectively.
Income Taxes
Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, 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 September 30, 2019 and December 31, 2018, UDR’s net deferred tax asset/(liability) was $(1.3) million and less than $(0.1) million, respectively.
GAAP defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. GAAP also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.
The Company recognizes its tax positions and evaluates them using a two-step process. First, UDR determines whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Second, the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.
UDR had no material unrecognized tax benefit, accrued interest or penalties at September 30, 2019. UDR and its subsidiaries are subject to federal income tax as well as income tax of various state and local jurisdictions. The tax years 2016 through 2018 remain open to examination by tax jurisdictions to which we are subject. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in Tax (provision)/benefit, net on the Consolidated Statements of Operations.
15
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Forward Sales Agreements
The Company utilizes forward sales agreements for the future issuance of its common stock. When the Company enters into a forward sales agreement, the contract requires the Company to sell its shares to a counterparty at a predetermined price at a future date. The net sales price and proceeds attained by the Company will be determined on the dates of settlement, with adjustments during the term of the contract for the Company’s anticipated dividends as well as for a daily interest factor that varies with changes in the federal funds rate. The Company generally has the ability to determine the dates and method of settlement (i.e., gross physical settlement, net share settlement or cash settlement), subject to certain conditions and the right of the counterparty to accelerate settlement under certain circumstances.
The Company accounts for the shares of common stock reserved for issuance upon settlement as equity in accordance with ASC 815-40, Contracts in Entity's Own Equity, which permits equity classification when a contract is considered indexed to its own stock and the contract requires or permits the issuing entity to settle the contract in shares (either physically or net in shares).
The guidance establishes a two-step process for evaluating whether an equity-linked financial instrument is considered indexed to its own stock by evaluating the instrument’s contingent exercise provisions and settlement provisions. We determined that (i) none of the agreements’ exercise contingencies were based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.
Based upon our determination that the forward sales agreements are considered indexed to our own stock as well as the agreements permitting us to share settle, we have determined that the forward sales agreements qualify for equity classification.
Before the issuance of shares of common stock, upon physical or net share settlement of the forward sales agreements, the Company expects that the shares issuable upon settlement of the forward sales agreements will be reflected in its diluted income/(loss) per share calculations using the treasury stock method. Under this method, the number of shares of common stock used in calculating diluted income/(loss) per share is deemed to be increased by the excess, if any, of the number of shares of common stock that would be issued upon full physical settlement of the forward sales agreements over the number of shares of common stock that could be purchased by the Company in the open market (based on the average market price during the period) using the proceeds receivable upon full physical settlement (based on the adjusted forward sale price at the end of the reporting period). When the Company physically or net share settles any forward sales agreement, the delivery of shares of common stock would result in an increase in the number of weighted average common shares outstanding and dilution to basic income/(loss) per share. (See Note 8, Income/(Loss) per Share for further discussion.)
16
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
3. REAL ESTATE OWNED
Real estate assets owned by the Company consist of income producing operating properties, properties under development, land held for future development, and held for disposition properties. As of September 30, 2019, the Company owned and consolidated 138 communities in 13 states plus the District of Columbia totaling 43,683 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of September 30, 2019 and December 31, 2018 (dollars in thousands):
Acquisitions
In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 386 apartment home operating community in Anaheim, California, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $33.5 million. In connection with the acquisition, the Company repaid approximately $59.8 million of joint venture construction financing. As a result, in January 2019, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture (see Note 5, Joint Ventures and Partnerships). The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately $115.7 million and recorded approximately $2.4 million of in-place lease intangibles.
In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 155 apartment home operating community located in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $20.0 million. In connection with the acquisition, the Company repaid approximately $26.0 million of joint venture construction financing. As a result, in January 2019, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture (see Note 5, Joint Ventures and Partnerships). The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately $58.1 million and recorded approximately $2.4 million of real estate intangibles and approximately $0.6 million of in-place lease intangibles.
In January 2019, the Company acquired a to-be-developed parcel of land located in Washington D.C. for approximately $27.1 million.
In February 2019, the Company acquired a to-be-developed parcel of land located in Denver, Colorado for approximately $13.7 million.
In February 2019, the Company acquired a 188 apartment home operating community located in Brooklyn, New York for approximately $132.1 million. The Company increased its real estate assets owned by approximately $97.5 million and recorded approximately $33.6 million of real estate intangibles and approximately $1.0 million of in-place lease intangibles.
17
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
In February 2019, the Company acquired a 381 apartment home operating community located in St. Petersburg, Florida for approximately $98.3 million. The Company increased its real estate assets owned by approximately $96.0 million and recorded approximately $2.3 million of in-place lease intangibles.
In April 2019, the Company acquired a 498 apartment home operating community located in Towson, Maryland for approximately $86.4 million. The Company increased its real estate assets owned by approximately $82.5 million and recorded approximately $3.9 million of in-place lease intangibles.
In May 2019, the Company acquired a 313 apartment home operating community located in King of Prussia, Pennsylvania for approximately $107.3 million. The Company increased its real estate assets owned by approximately $106.4 million and recorded approximately $0.9 million of in-place lease intangibles.
In May 2019, the Company acquired a 240 apartment home operating community located in St. Petersburg, Florida for approximately $49.4 million. The Company increased its real estate assets owned by approximately $48.2 million and recorded approximately $1.2 million of in-place lease intangibles.
In June 2019, the Company acquired a 200 apartment home operating community located in Waltham, Massachusetts for approximately $84.6 million. The Company increased its real estate assets owned by approximately $82.6 million and recorded approximately $2.0 million of in-place lease intangibles.
In August 2019, the Company acquired a 914 apartment home operating community located in Norwood, Massachusetts for approximately $270.2 million. The Company increased its real estate assets owned by approximately $260.1 million and recorded approximately $10.1 million of in-place lease intangibles.
In August 2019, the Company acquired a 185 apartment home operating community located in Englewood, New Jersey for approximately $83.6 million. The Company increased its real estate assets owned by approximately $77.5 million and recorded approximately $4.6 million of real estate intangibles and approximately $1.5 million of in-place lease intangibles.
In August 2019, the Company purchased a 292 apartment home operating community in Washington, D.C., directly from the UDR/KFH joint venture, thereby increasing its ownership interest from 30% to 100%, for a purchase price at 100% of approximately $184.0 million, before $2.8 million of closing costs incurred by UDR at acquisition (see Note 5, Joint Ventures and Partnerships).
Subsequent to the acquisition, the Company received a distribution from the UDR/KFH joint venture of $22.9 million related to the 30% interest it previously held in the community following the payment of closing costs and repayment of the joint venture mortgage debt. As a result of the acquisition, in August 2019, the Company consolidated the operating community. The Company had previously accounted for its 30% ownership interest as an unconsolidated joint venture. The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate owned by approximately $156.0 million and recorded approximately $5.9 million of in-place lease intangibles.
In August 2019, the Company entered into an agreement with the Metropolitan Life Insurance Company (“MetLife”), its joint venture partner, to acquire the approximately 50% ownership interest not previously owned in 10 UDR/MetLife operating communities, one development community and four land parcels valued at $1.1 billion, or $557 million at UDR’s share. The transaction is expected to close during the fourth quarter of 2019, subject to customary closing conditions and closing price adjustments (see Note 5, Joint Ventures and Partnerships).
Dispositions
In June 2019, the Company sold a parcel of land located in Los Angeles, California for $38.0 million, resulting in a gain of approximately $5.3 million. Prior to the sale, the parcel of land was subject to a ground lease, under which UDR was the lessor, scheduled to expire in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. During the second quarter, the lessee exercised the purchase option resulting in this sale by the Company and the ground lease being terminated.
18
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Prior to the sale, the purchase option was not deemed to be a bargain purchase option. This ground lease existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As a result, this ground lease continued to be classified as an operating lease and the land parcel subject to the ground lease continued to be recognized in Real estate held for investment on our Consolidated Balance Sheets until the sale in June 2019.
Other Activity
Predevelopment, development, and redevelopment projects and related costs are capitalized and reported on the Consolidated Balance Sheets as Total real estate owned, net of accumulated depreciation. The Company capitalizes costs directly related to the predevelopment, development, and redevelopment of a capital project, which include, but are not limited to, interest, real estate taxes, insurance, and allocated development and redevelopment overhead related to support costs for personnel working on the capital projects. We use our professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. These costs, excluding the direct costs of development and redevelopment and capitalized interest, for the three months ended September 30, 2019 and 2018, were $1.9 million and $1.6 million, respectively, and $6.9 million and $6.6 million for the nine months ended September 30, 2019 and 2018, respectively. Total interest capitalized was $1.4 million and $1.6 million for the three months ended September 30, 2019 and 2018, respectively, and $3.8 million and $9.8 million for the nine months ended September 30, 2019 and 2018, respectively. As each home in a capital project is completed and becomes available for lease-up, the Company ceases capitalization on the related portion of the costs and depreciation commences over the estimated useful life.
In connection with the acquisition of certain properties, the Company agreed to pay certain of the tax liabilities of certain contributors if the Company sells one or more of the properties contributed in a taxable transaction prior to the expiration of specified periods of time following the acquisition. The Company may, however, sell, without being required to pay any tax liabilities, any of such properties in a non-taxable transaction, including, but not limited to, a tax-deferred Section 1031 exchange.
Further, the Company has agreed to maintain certain debt that may be guaranteed by certain contributors for specified periods of time following the acquisition. The Company, however, has the ability to refinance or repay guaranteed debt or to substitute new debt if the debt and the guaranty continue to satisfy certain conditions.
4. VARIABLE INTEREST ENTITIES
The Company has determined that the Operating Partnership and DownREIT Partnership are VIEs as the limited partners lack substantive kick-out rights and substantive participating rights. The Company has concluded that it is the primary beneficiary of, and therefore consolidates, the Operating Partnership and DownREIT Partnership based on its role as the sole general partner of the Operating Partnership and DownREIT Partnership. The Company’s role as community manager and its equity interests give us the power to direct the activities that most significantly impact the economic performance and the obligation to absorb potentially significant losses or the right to receive potentially significant benefits of the Operating Partnership and DownREIT Partnership.
See the consolidated financial statements of the Operating Partnership presented within this Report and Note 4, Unconsolidated Entities, to the Operating Partnership’s consolidated financial statements for the results of operations of the DownREIT Partnership.
5. JOINT VENTURES AND PARTNERSHIPS
UDR has entered into joint ventures and partnerships with unrelated third parties to own, operate, acquire, renovate, develop, redevelop, dispose of, and manage real estate assets that are either consolidated and included in Real estate owned on the Consolidated Balance Sheets or are accounted for under the equity method of accounting, and are included in Investment in and advances to unconsolidated joint ventures, net, on the Consolidated Balance Sheets. The Company consolidates the entities that we control as well as any variable interest entity where we are the primary
19
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
beneficiary. Under the VIE model, the Company consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest.
UDR’s joint ventures and partnerships are funded with a combination of debt and equity. Our losses are limited to our investment and except as noted below, the Company does not guarantee any debt, capital payout or other obligations associated with our joint ventures and partnerships.
The Company recognizes earnings or losses from our investments in unconsolidated joint ventures and partnerships consisting of our proportionate share of the net earnings or losses of the joint ventures and partnerships. In addition, we may earn fees for providing management services to the unconsolidated joint ventures and partnerships.
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 September 30, 2019 and December 31, 2018 (dollars in thousands):
| (a) | In August 2019, the Company entered into an agreement with MetLife, its joint venture partner, to acquire the approximately 50% ownership interest not previously owned in 10 UDR/MetLife operating communities, one development community and four land parcels valued at $1.1 billion, or $557 million at UDR’s share, and to sell its approximately 50% ownership interest in five UDR/MetLife operating communities valued at $645 million, or $323 million at UDR’s share, to MetLife. The transaction is expected to close during the fourth quarter of 2019, subject to customary closing conditions and closing price adjustments. Upon closing of the transaction, the UDR/MetLife II joint venture will hold seven operating communities and the UDR/MetLife Vitruvian Park® joint venture will no longer hold any properties. |
| (b) | 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 September 30, 2019, no apartment |
20
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
| homes had been completed in the development community held by UDR/MetLife Vitruvian Park®. |
| (c) | As of January 1, 2019, the joint venture held three operating communities. |
In May 2019, the joint venture sold one community, a 217 home operating community in Arlington, Virginia, for a sales price of approximately $74.8 million. As a result, the Company recorded a gain on the sale of approximately $5.3 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.
In July 2019, the joint venture sold the second community, a 151 home operating community in Silver Spring, Maryland, for a sales price of approximately $43.5 million. As a result, the Company recorded a gain on the sale of approximately $5.3 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.
In August 2019, the joint venture sold the third community, a 292 home operating community in Washington, D.C., directly to the Company for a sales price at 100% of approximately $184.0 million, before $2.8 million of closing costs incurred by UDR at acquisition. The Company deferred its share of the gain on sale of approximately $23.8 million and recorded it as a reduction of the carrying amount of real estate assets owned (see Note 3, Real Estate Owned).
| (d) | In 2015, the Company entered into a joint venture agreement with an unaffiliated joint venture partner and paid $136.3 million for a 48% ownership interest in a portfolio of five communities that were under construction. The communities are located in three of the Company’s core, coastal markets: Seattle, Washington, Los Angeles, California and Orange County, California. UDR earns a 6.5% preferred return on its investment through each individual community’s date of stabilization, defined as when a community reaches 80% occupancy for 90 consecutive days, while the joint venture partner is allocated all operating income and expense during the pre-stabilization period. Upon stabilization, income and expense are shared based on each partner’s ownership percentage and the Company no longer receives a 6.5% preferred return on its investment in the stabilized community. The Company serves as property manager and earns a management fee during the lease-up phase and subsequent operation of each of the communities. The unaffiliated joint venture partner is the general partner of the joint venture and the developer of the communities. The Company has concluded it does not control the joint ventures and, therefore, accounts for them under the equity method of accounting. |
During 2017, the Company exercised its fixed-price option to purchase the joint venture partner’s ownership interest in one of the five communities, and the joint venture sold two of the four remaining communities.
In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in one of the two remaining communities, a 386 apartment home operating community in Orange County, California, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $33.5 million. As a result, the Company consolidated the operating community and it is no longer accounted for as a preferred equity investment in an unconsolidated joint venture (see Note 3, Real Estate Owned). In connection with the purchase, the construction loan on the community was paid in full.
The Company and its joint venture partner continue to operate the one remaining community.
In 2017, the Company entered into two additional joint venture agreements with the unaffiliated joint venture partner and paid $15.5 million for a 49% ownership interest in a 155 apartment home community in Seattle, Washington and $16.1 million for a 49% ownership interest in a 276 apartment home community in Hillsboro, Oregon (together with the 2015 joint venture described above, the “West Coast Development Joint Ventures”). UDR earns a 6.5% preferred return on its investments through the communities’ date of stabilization, as defined above, while our joint venture partner is allocated all operating income and expense during the pre-stabilization period. Upon stabilization of the communities, income and expense will be shared based on each partner’s ownership percentage and the Company will no longer receive a 6.5% preferred return on its investment. The Company serves as property manager and earns a management fee during the lease-up phase and subsequent operation of the stabilized communities. The unaffiliated joint venture partner is the general partner and the developer of the communities. The Company has concluded it does not control the joint ventures and, therefore, accounts for them under the equity method of accounting.
The Company has a fixed-price option to acquire the remaining interest in the communities beginning one year after completion. The unaffiliated joint venture partner is providing certain guaranties and there are construction loans on
21
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
the communities.
In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in the 155 apartment home operating community in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $20.0 million. As a result, the Company consolidated the operating community and it is no longer accounted for as a preferred equity investment in an unconsolidated joint venture (see Note 3, Real Estate Owned). In connection with the purchase, the construction loan on the community was paid in full.
The Company’s recorded equity investment in the West Coast Development Joint Ventures at September 30, 2019 and December 31, 2018, of $52.2 million and $101.6 million, respectively, is inclusive of outside basis costs and our accrued but unpaid preferred return.
| (e) | The Developer Capital Program is a program through which the Company makes investments, including preferred equity investments, mezzanine loans or other structured investments that may receive a fixed or variable yield on the investment and may include provisions pursuant to which the Company participates in the increase in value of the property upon monetization of the applicable property and/or holds fixed price purchase options. |
| (f) | Represents UDR’s maximum funding commitment only and therefore excludes other activity such as income from investments. |
| (g) | In June 2017, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 136 apartment home community in San Francisco, California. The Company’s preferred equity investment of up to $24.6 million earns a preferred return of 11.0% per annum. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
| (h) | In September 2017, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 313 apartment home community in Nashville, Tennessee. The Company’s preferred equity investment of up to $55.6 million earns a preferred return of 8.0% per annum and receives a variable percentage of the value created from the project upon a capital or liquidating event. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
| (i) | In August 2018, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 66 apartment home community in Santa Monica, CA. The Company’s preferred equity investment of $8.8 million earns a preferred return of 12.0% per annum. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
| (j) | In August 2018, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 471 apartment home community in Philadelphia, PA. The Company’s preferred equity investment of up to $51.4 million earns a preferred return between 8.5% and 12.0% per annum and receives a variable percentage of the value created from the project upon a capital or liquidating event. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
| (k) | In September 2018, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 330 apartment home community in Orlando, FL. The Company’s preferred equity investment of up to $12.9 million earns a preferred return of 12.5% per annum. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
| (l) | In April 2019, the Company entered into a joint venture agreement with an unaffiliated joint venture partner to develop and operate a 173 apartment home community in Oakland, CA. The Company’s preferred equity investment of up to $27.3 million earns a preferred return of 9.0% per annum and receives a variable percentage of the value created from the project upon a capital or liquidating event. The unaffiliated joint venture partner is the managing member of the joint venture and the developer of the community. The Company has concluded that it |
22
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
| does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
| (m) | In May 2017, the Company entered into a joint venture agreement with an unaffiliated joint venture partner. The joint venture has made a mezzanine loan to a third party developer of a 373 apartment home community in Washington, D.C. The unaffiliated joint venture partner is the managing member of the joint venture. The mezzanine loan is for up to $71.0 million at an interest rate of 13.5% per annum and carries a term of four years with one 12-month extension option. The Company’s commitment to the joint venture is approximately $38.6 million and earns a weighted average return of approximately 11.0% per annum. The Company has concluded that it does not control the joint venture and, therefore, accounts for it under the equity method of accounting. |
As of September 30, 2019 and December 31, 2018, the Company had deferred fees of $10.6 million and $11.0 million, respectively, which will be recognized through earnings over the weighted average life of the related properties, upon the disposition of the properties to a third party, or upon completion of certain development obligations.
The Company recognized management fees of $6.4 million and $2.9 million during the three months ended September 30, 2019 and 2018, respectively, and $12.0 million and $8.7 million for the nine months ended September 30, 2019 and 2018, respectively, for management of the communities held by the joint ventures and partnerships. The management fees are included in Joint venture management and other fees on the Consolidated Statements of Operations.
The Company may, in the future, make additional capital contributions to certain of our joint ventures and partnerships should additional capital contributions be necessary to fund acquisitions or operations.
We evaluate our investments in unconsolidated joint ventures and partnerships when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. The Company did not recognize any other-than-temporary impairments in the value of its investments in unconsolidated joint ventures or partnerships during the three and nine months ended September 30, 2019 and 2018.
Combined summary balance sheets relating to the unconsolidated joint ventures and partnerships (not just our proportionate share) are presented below as of September 30, 2019 and December 31, 2018 (dollars in thousands):
23
Combined summary financial information relating to the unconsolidated joint ventures’ and partnerships’ operations (not just our proportionate share) is presented below for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 30, |
|
September 30, |
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Total revenues |
|
$ |
75,378 |
|
$ |
76,203 |
|
$ |
233,836 |
|
$ |
215,140 |
|
Property operating expenses |
|
|
27,505 |
|
|
30,096 |
|
|
87,073 |
|
|
85,435 |
|
Real estate depreciation and amortization |
|
|
26,027 |
|
|
29,545 |
|
|
83,661 |
|
|
85,063 |
|
Operating income/(loss) |
|
|
21,846 |
|
|
16,562 |
|
|
63,102 |
|
|
44,642 |
|
Interest expense |
|
|
(20,779) |
|
|
(22,919) |
|
|
(64,309) |
|
|
(63,990) |
|
Gain/(loss) on sale of property (a) |
|
|
97,201 |
|
|
— |
|
|
115,558 |
|
|
— |
|
Net unrealized gain/(loss) on held investments |
|
|
25,669 |
|
|
— |
|
|
27,191 |
|
|
— |
|
Other income/(loss) |
|
|
82 |
|
|
40 |
|
|
194 |
|
|
141 |
|
Net income/(loss) |
|
$ |
124,019 |
|
$ |
(6,317) |
|
$ |
141,736 |
|
$ |
(19,207) |
| (a) | Represent the gains on the sale of three operating communities at the UDR/KFH joint venture level, as described in note (c) to the table above summarizing the Company’s investment in and advances to unconsolidated joint ventures and partnerships, net. |
6. LEASES
Lessee - Ground and Office Leases
UDR owns six communities that are subject to ground leases, under which UDR is the lessee, expiring between 2043 and 2103, inclusive of extension options we are reasonably certain will be exercised. In addition, UDR is a lessee to an operating lease related to office space rented by the Company with an expiration date in 2021. All of these leases existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As such, these leases will continue to be classified as operating leases through the lease term expiration. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the remaining lease term. We currently do not hold any finance leases.
As of September 30, 2019, the Operating lease right-of-use assets was $135.9 million and the Operating lease liabilities was $130.1 million on our Consolidated Balance Sheets related to our ground and office space leases. The value of the Operating lease right-of-use assets exceeds the value of the Operating lease liabilities due to prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. The calculation of these amounts includes minimum lease payments over the remaining lease term (described further in the table below). Variable lease payments are excluded from the right-of-use assets and lease liabilities and are recognized in earnings in the period in which the obligation for those payments is incurred.
As the discount rate implicit in the leases was not readily determinable, we determined the discount rate for these leases utilizing the Company’s incremental borrowing rate at a portfolio level, adjusted for the remaining lease term, and the form of underlying collateral.
The weighted average remaining lease term for these leases was 55.2 years at September 30, 2019 and the weighted average discount rate was 5.1% at September 30, 2019.
24
Future minimum lease payments and total operating lease liabilities from our ground leases and office space as of September 30, 2019 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground Leases |
|
Office Space |
|
Total |
|||
|
2019 |
|
$ |
1,953 |
|
$ |
19 |
|
$ |
1,972 |
|
2020 |
|
|
7,813 |
|
|
76 |
|
|
7,889 |
|
2021 |
|
|
7,813 |
|
|
32 |
|
|
7,845 |
|
2022 |
|
|
7,813 |
|
|
- |
|
|
7,813 |
|
2023 |
|
|
7,813 |
|
|
- |
|
|
7,813 |
|
Thereafter |
|
|
370,467 |
|
|
- |
|
|
370,467 |
|
Total future minimum lease payments (undiscounted) |
|
|
403,672 |
|
|
127 |
|
|
403,799 |
|
Difference between future undiscounted cash flows and discounted cash flows |
|
|
(273,659) |
|
|
(5) |
|
|
(273,664) |
|
Total operating lease liabilities (discounted) |
|
$ |
130,013 |
|
$ |
122 |
|
$ |
130,135 |
For purposes of recognizing our ground lease contracts, the Company uses the minimum lease payments, if stated in the agreement. For ground lease agreements where there is a rent reset provision based on a change in an index or a rate (i.e., changes in fair market rental rates or changes in the consumer price index) but that does not include a specified minimum lease payment, the Company uses the current rent over the remainder of the lease term. If there is a contingency upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based, which is resolved such that those payments now meet the definition of lease payments, the Company will remeasure the right-of-use asset and lease liability on the reset date. For the nine months ended September 30, 2019, Operating lease right-of-use assets and Operating lease liabilities increased by $42.1 million due to future minimum payments on one of our ground leases becoming fixed for the remainder of its term.
The components of operating lease expenses from our ground leases and office space were as follows (dollars in thousands):
| (a) | Variable ground lease expense includes adjustments such as changes in the consumer price index and payments based on a percentage of income of the lessee. |
| (b) | Ground lease expense is reported within the line item Other operating expenses and office space expense is recorded in General and administrative on the Consolidated Statements of Operations. |
| (c) | For the nine months ended September 30, 2019, Operating lease right-of-use assets and Operating lease liabilities amortized by $0.6 million and $0.3 million, respectively. The Company recorded $0.1 million and $0.3 million of total operating lease expense during the three and nine months ended September 30, 2019, respectively, due to the net impact of the amortization. |
Lessor - Apartment Home, Retail and Commercial Space Leases
UDR’s communities and retail and commercial space are leased to tenants under operating leases. As of September 30, 2019, our apartment home leases generally have initial terms of 12 months or less and represent approximately 98.1% of our total lease revenue. As of September 30, 2019, our retail and commercial space leases generally have initial terms of between 5 and 15 years and represent approximately 1.9% of our total lease revenue. Our apartment home leases are generally renewable at the end of the lease term, subject to potential increases in rental rates, and our retail and commercial space leases generally have renewal options, subject to associated increases in rental rates
25
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
and certain other conditions. (See Note 14, Reportable Segments for further discussion around our major revenue streams and disaggregation of our revenue.)
We previously owned a parcel of land subject to a ground lease under which UDR was the lessor, expiring in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. In June 2019, the lessee exercised the purchase option and acquired the parcel of land for $38.0 million. (See Note 3, Real Estate for further discussion.)
Future minimum lease payments from our retail and commercial leases as of September 30, 2019 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Retail and Commercial Leases |
|
|
2019 |
|
$ |
4,958 |
|
2020 |
|
|
20,565 |
|
2021 |
|
|
19,788 |
|
2022 |
|
|
18,094 |
|
2023 |
|
|
16,843 |
|
Thereafter |
|
|
92,719 |
|
Total future minimum lease payments (a) |
|
$ |
172,967 |
| (a) | We have excluded our apartment home leases from this table as our apartment home leases generally have initial terms of 12 months of less. |
Certain of our leases with retail and commercial tenants provide for the payment by the lessee of additional variable rent based on a percentage of the tenant’s revenue. The amounts shown in the table above do not include these variable percentage rents. The Company recorded variable percentage rents of $0.1 million and $0.3 million during the three and nine months ended September 30, 2019.
26
7. SECURED AND UNSECURED DEBT, NET
The following is a summary of our secured and unsecured debt at September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Outstanding |
|
As of September 30, 2019 |
||||||||
|
|
|
|
|
|
|
|
|
Weighted |
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Average |
|
Number of |
|
|
|
September 30, |
|
December 31, |
|
Interest |
|
Years to |
|
Communities |
||
|
|
|
2019 |
|
2018 |
|
Rate |
|
Maturity |
|
Encumbered |
||
|
Secured Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable (a) |
|
$ |
575,965 |
|
$ |
417,989 |
|
3.55 |
% |
6.6 |
|
9 |
|
Fannie Mae credit facilities (b) |
|
|
— |
|
|
90,000 |
|
— |
% |
— |
|
— |
|
Deferred financing costs |
|
|
(2,275) |
|
|
(1,343) |
|
|
|
|
|
|
|
Total fixed rate secured debt, net |
|
|
573,690 |
|
|
506,646 |
|
3.55 |
% |
6.6 |
|
9 |
|
Variable Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt secured notes payable (c) |
|
|
27,000 |
|
|
94,700 |
|
2.07 |
% |
12.5 |
|
1 |
|
Deferred financing costs |
|
|
(66) |
|
|
(119) |
|
|
|
|
|
|
|
Total variable rate secured debt, net |
|
|
26,934 |
|
|
94,581 |
|
2.07 |
% |
12.5 |
|
1 |
|
Total Secured Debt, net |
|
|
600,624 |
|
|
601,227 |
|
3.49 |
% |
6.8 |
|
10 |
|
Unsecured Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding under unsecured credit facility due January 2023 (d) (l) |
|
|
— |
|
|
— |
|
— |
% |
3.3 |
|
|
|
Borrowings outstanding under unsecured commercial paper program due October 2019 (e) (l) |
|
|
60,000 |
|
|
101,115 |
|
2.28 |
% |
0.1 |
|
|
|
Borrowings outstanding under unsecured working capital credit facility due January 2021 (f) |
|
|
34,447 |
|
|
16 |
|
2.84 |
% |
1.3 |
|
|
|
Term Loan due September 2023 (d) (l) |
|
|
35,000 |
|
|
35,000 |
|
3.01 |
% |
4.0 |
|
|
|
Fixed Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
3.70% Medium-Term Notes due October 2020 (net of discounts of $0 and $14, respectively) (k) (l) |
|
|
— |
|
|
299,986 |
|
— |
% |
— |
|
|
|
4.63% Medium-Term Notes due January 2022 (net of discounts of $818 and $1,087, respectively) (l) |
|
|
399,182 |
|
|
398,913 |
|
4.63 |
% |
2.3 |
|
|
|
1.93% Term Loan due September 2023 (d) (l) |
|
|
315,000 |
|
|
315,000 |
|
1.93 |
% |
4.0 |
|
|
|
3.75% Medium-Term Notes due July 2024 (net of discounts of $495 and $574, respectively) (g) (l) |
|
|
299,505 |
|
|
299,426 |
|
3.75 |
% |
4.8 |
|
|
|
8.50% Debentures due September 2024 |
|
|
15,644 |
|
|
15,644 |
|
8.50 |
% |
5.0 |
|
|
|
4.00% Medium-Term Notes due October 2025 (net of discounts of $413 and $465, respectively) (h) (l) |
|
|
299,587 |
|
|
299,535 |
|
4.00 |
% |
6.0 |
|
|
|
2.95% Medium-Term Notes due September 2026 (l) |
|
|
300,000 |
|
|
300,000 |
|
2.95 |
% |
6.9 |
|
|
|
3.50% Medium-Term Notes due July 2027 (net of discounts of $547 and $600, respectively) (l) |
|
|
299,453 |
|
|
299,400 |
|
3.50 |
% |
7.8 |
|
|
|
3.50% Medium-Term Notes due January 2028 (net of discounts of $983 and $1,072, respectively) (l) |
|
|
299,017 |
|
|
298,928 |
|
3.50 |
% |
8.3 |
|
|
|
4.40% Medium-Term Notes due January 2029 (net of discounts of $6 and $6, respectively) (i) (l) |
|
|
299,994 |
|
|
299,994 |
|
4.40 |
% |
9.3 |
|
|
|
3.20% Medium-Term Notes due January 2030 (net of discounts of $990 and $0, respectively) (j) (l) |
|
|
299,010 |
|
|
— |
|
3.20 |
% |
10.3 |
|
|
|
3.00% Medium-Term Notes due August 2031 (net of discounts of $1,148 and $0, respectively) (k) (l) |
|
|
398,852 |
|
|
— |
|
3.00 |
% |
11.9 |
|
|
|
Other |
|
|
14 |
|
|
16 |
|
|
|
|
|
|
|
Deferred financing costs |
|
|
(19,432) |
|
|
(16,413) |
|
|
|
|
|
|
|
Total Unsecured Debt, net |
|
|
3,335,273 |
|
|
2,946,560 |
|
3.54 |
% |
6.9 |
|
|
|
Total Debt, net |
|
$ |
3,935,897 |
|
$ |
3,547,787 |
|
3.63 |
% |
6.9 |
|
|
For purposes of classification of the above table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively established a fixed interest rate for the underlying debt instrument.
27
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. As of September 30, 2019, secured debt encumbered $1.2 billion or 10.3% of UDR’s total real estate owned based upon gross book value ($10.4 billion or 89.7% of UDR’s real estate owned based on gross book value is unencumbered).
During the three months ended September 30, 2019, the Company refinanced a $90.0 million loan with Fannie Mae to a fixed rate mortgage due in October 2029 and took out a new mortgage of $72.5 million due in February 2030. Interest payments are due monthly at interest rates of 2.70% and 3.10%, respectively. The refinancing was accounted for as a debt modification.
The Company will from time to time acquire properties subject to fixed rate debt instruments. In those situations, the Company records the debt at its estimated fair value and amortizes any difference between the fair value and par value to interest expense over the life of the underlying debt instrument.
During the three months ended September 30, 2019 and 2018, the Company had $0.6 million and $0.9 million, respectively, and during the nine months ended September 30, 2019 and 2018, the Company had $1.7 million and $2.4 million, respectively, of amortization of the fair market adjustment of debt assumed in the acquisition of properties, which was included in Interest expense on the Consolidated Statements of Operations. The unamortized fair market adjustment was a net premium of $3.9 million and $5.0 million at September 30, 2019 and December 31, 2018, respectively.
Further information related to the Fannie Mae credit facility is as follows (dollars in thousands):
Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points and a facility fee of 15 basis points, and the Term Loan has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin under the Revolving
28
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Credit Facility ranges from 75 to 145 basis points, the facility fee ranges from 10 to 30 basis points, and the margin under the Term Loan ranges from 80 to 165 basis points.
The Credit Agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Credit Agreement also includes customary events of default, in certain cases subject to customary periods to cure. The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the Credit Agreement to be immediately due and payable.
The following is a summary of short-term bank borrowings under the Revolving Credit Facility at September 30, 2019 and December 31, 2018 (dollars in thousands):
| (1) | Excludes $2.8 million and $3.3 million of letters of credit at September 30, 2019 and December 31, 2018, respectively. |
The following is a summary of short-term bank borrowings under the unsecured commercial paper program at September 30, 2019 and December 31, 2018 (dollars in thousands):
29
The following is a summary of short-term bank borrowings under the Working Capital Credit Facility at September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
|
2019 |
|
2018 |
|
||
|
Total working capital credit facility |
|
$ |
75,000 |
|
$ |
75,000 |
|
|
Borrowings outstanding at end of period |
|
|
34,447 |
|
|
16 |
|
|
Weighted average daily borrowings during the period ended |
|
|
24,870 |
|
|
26,101 |
|
|
Maximum daily borrowings during the period ended |
|
|
66,170 |
|
|
64,633 |
|
|
Weighted average interest rate during the period ended |
|
|
3.2 |
% |
|
2.9 |
% |
|
Interest rate at end of the period |
|
|
2.8 |
% |
|
3.3 |
% |
30
The aggregate maturities, including amortizing principal payments on secured and unsecured debt, of total debt for the next ten calendar years subsequent to September 30, 2019 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed |
|
Total Variable |
|
Total |
|
Total |
|
Total |
|||||
|
Year |
|
Secured Debt |
|
Secured Debt |
|
Secured Debt |
|
Unsecured Debt |
|
Debt |
|||||
|
2019 |
|
$ |
974 |
|
$ |
— |
|
$ |
974 |
|
$ |
60,000 |
|
$ |
60,974 |
|
2020 |
|
|
108,077 |
|
|
— |
|
|
108,077 |
|
|
— |
|
|
108,077 |
|
2021 |
|
|
1,117 |
|
|
— |
|
|
1,117 |
|
|
34,447 |
|
|
35,564 |
|
2022 |
|
|
1,157 |
|
|
— |
|
|
1,157 |
|
|
400,000 |
|
|
401,157 |
|
2023 |
|
|
41,245 |
|
|
— |
|
|
41,245 |
|
|
350,000 |
|
|
391,245 |
|
2024 |
|
|
— |
|
|
— |
|
|
— |
|
|
315,644 |
|
|
315,644 |
|
2025 |
|
|
127,600 |
|
|
— |
|
|
127,600 |
|
|
300,000 |
|
|
427,600 |
|
2026 |
|
|
50,000 |
|
|
— |
|
|
50,000 |
|
|
300,000 |
|
|
350,000 |
|
2027 |
|
|
— |
|
|
— |
|
|
— |
|
|
300,000 |
|
|
300,000 |
|
2028 |
|
|
80,000 |
|
|
— |
|
|
80,000 |
|
|
300,000 |
|
|
380,000 |
|
Thereafter |
|
|
162,500 |
|
|
27,000 |
|
|
189,500 |
|
|
1,000,000 |
|
|
1,189,500 |
|
Subtotal |
|
|
572,670 |
|
|
27,000 |
|
|
599,670 |
|
|
3,360,091 |
|
|
3,959,761 |
|
Non-cash (a) |
|
|
1,020 |
|
|
(66) |
|
|
954 |
|
|
(24,818) |
|
|
(23,864) |
|
Total |
|
$ |
573,690 |
|
$ |
26,934 |
|
$ |
600,624 |
|
$ |
3,335,273 |
|
$ |
3,935,897 |
| (a) | Includes the unamortized balance of fair market value adjustments, premiums/discounts and deferred financing costs. The Company amortized $1.1 million and $1.1 million, respectively, during the three months ended September 30, 2019 and 2018, and $3.1 million and $3.2 million, respectively, during the nine months ended September 30, 2019 and 2018, of deferred financing costs into Interest expense. |
We were in compliance with the covenants of our debt instruments at September 30, 2019.
In October 2019, the Company issued $100.0 million of 3.20% senior unsecured medium-term notes due 2030 and $300.0 million of 3.10% senior unsecured medium-term notes due 2034. Interest is payable semi-annually in arrears on January 15 and July 15 for the 2030 notes, and May 1 and November 1 for the 2034 notes. The 2030 notes were priced at 103.32% of the principal amount at issuance, and the 2034 notes were priced at 99.56% of the principal amount at issuance. In combination with the issuance, the Company entered into treasury lock agreements to hedge against interest rate risk on all of this debt. The all-in weighted average interest rate, inclusive of the impact of the treasury locks, was 3.24% for the 2030 notes and 3.13% for the 2034 notes. The Company will use the net proceeds for the repayment of all $400.0 million aggregate principal amount (plus the make-whole amount of approximately $21.5 million and accrued and unpaid interest) of its 4.63% senior unsecured medium-term notes due January 2022. The 2034 notes were issued as “green” bonds and, as a result, the Company intends to allocate the net proceeds from the sale of the 2034 notes to fund eligible green projects, including previously incurred development costs related to properties that have received at least a LEED Silver certification.
The 2030 notes are a further issuance of, and form a single series with, the $300.0 million aggregate principal amount of the Company’s 3.20% notes due 2030 that were issued on July 2, 2019. As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was $400.0 million.
31
8. INCOME/(LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income/(loss) per share for the periods presented (dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Numerator for income/(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
29,422 |
|
$ |
20,258 |
|
$ |
94,342 |
|
$ |
131,927 |
|
|
Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership |
|
|
(2,162) |
|
|
(1,616) |
|
|
(6,871) |
|
|
(10,819) |
|
|
Net (income)/loss attributable to noncontrolling interests |
|
|
(56) |
|
|
(32) |
|
|
(145) |
|
|
(141) |
|
|
Net income/(loss) attributable to UDR, Inc. |
|
|
27,204 |
|
|
18,610 |
|
|
87,326 |
|
|
120,967 |
|
|
Distributions to preferred stockholders — Series E (Convertible) |
|
|
(1,031) |
|
|
(971) |
|
|
(3,073) |
|
|
(2,897) |
|
|
Income/(loss) attributable to common stockholders - basic and diluted |
|
$ |
26,173 |
|
$ |
17,639 |
|
$ |
84,253 |
|
$ |
118,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for income/(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
288,957 |
|
|
268,034 |
|
|
282,866 |
|
|
267,873 |
|
|
Non-vested restricted stock awards |
|
|
(251) |
|
|
(307) |
|
|
(268) |
|
|
(344) |
|
|
Denominator for basic income/(loss) per share |
|
|
288,706 |
|
|
267,727 |
|
|
282,598 |
|
|
267,529 |
|
|
Incremental shares issuable from assumed conversion of stock options, unvested LTIP Units, unvested restricted stock, and shares issuable upon settlement of forward sales agreements |
|
|
823 |
|
|
1,134 |
|
|
694 |
|
|
1,491 |
|
|
Denominator for diluted income/(loss) per share |
|
|
289,529 |
|
|
268,861 |
|
|
283,292 |
|
|
269,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per weighted average common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.09 |
|
$ |
0.07 |
|
$ |
0.30 |
|
$ |
0.44 |
|
|
Diluted |
|
$ |
0.09 |
|
$ |
0.07 |
|
$ |
0.30 |
|
$ |
0.44 |
|
Basic income/(loss) per common share is computed based upon the weighted average number of common shares outstanding. Diluted income/(loss) per common share is computed based upon the weighted average number of common shares outstanding plus the common shares issuable from the assumed conversion of the OP Units and DownREIT Units, convertible preferred stock, stock options, unvested long-term incentive plan units (“LTIP Units”), unvested restricted stock and continuous equity program forward sales agreements. Only those instruments having a dilutive impact on our basic income/(loss) per share are included in diluted income/(loss) per share during the periods. For the three and nine months ended September 30, 2019 and 2018, the effect of the conversion of the OP Units, DownREIT Units, LTIP Units, the Company’s Series E preferred stock and shares issuable upon settlement of forward sales agreements was not dilutive and therefore not included in the above calculation.
In July 2017, the Company entered into an ATM sales agreement under which the Company may offer and sell up to 20.0 million shares of its common stock, from time to time, to or through its sales agents and may enter into separate forward sales agreements to or through its forward purchasers. Upon entering into the ATM sales agreement, the Company simultaneously terminated the sales agreement for its prior at-the-market equity offering program, which was entered into in April 2017, which replaced the prior at-the-market equity offering program entered into in April 2012. During the three months ended September 30, 2019, the Company sold 2.2 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $100.5 million at a weighted average price per share of $46.19. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $1.1 million, were approximately $99.4 million, which were primarily used to fund the Company’s recent acquisitions. During the nine months ended September 30, 2019, the Company sold 7.0 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $316.5 million at a weighted average price per share of $45.29. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $4.0 million, were approximately $312.3 million, which were primarily used to fund the Company’s recent acquisitions. As of September 30, 2019, we had 13.0 million shares of common stock available for future issuance under the ATM program.
32
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
In connection with any forward sales agreement under the Company’s ATM program, the relevant forward purchasers will borrow from third parties and, through the relevant sales agent, acting in its role as forward seller, sell a number of shares of the Company’s common stock equal to the number of shares underlying the agreement. The Company does not initially receive any proceeds from any sale of borrowed shares by the forward seller.
In September 2019, the Company entered into a forward sales agreement under its ATM program for 1.3 million shares of common stock at an initial forward price per share of $47.68. The initial forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current federal funds rate and the amount of dividends paid to holders of UDR common stock over the term of the forward sales agreement. As of September 30, 2019, no shares under the forward sales agreement have been settled. The final date by which shares sold under the forward sales agreement must be settled is March 31, 2020.
The Company generally has the ability to determine the dates and method of settlement (i.e., gross physical settlement, net share settlement or cash settlement), subject to certain conditions and the right of the counterparty to accelerate settlement under certain circumstances. The Company currently expects to fully physically settle each forward sales agreement with the relevant forward purchaser on one or more dates specified by the Company on or prior to the maturity date of that particular forward sales agreement, in which case the Company expects to receive aggregate net cash proceeds at settlement equal to the number of shares underlying the particular forward sales agreement multiplied by the relevant forward sale price. However, subject to certain exceptions, the Company may also elect, in its discretion, to cash settle or net share settle a particular forward sales agreement, in which case the Company may not receive any proceeds (in the case of cash settlement) or will not receive any proceeds (in the case of net share settlement), and the Company may owe cash (in the case of cash settlement) or shares of UDR common stock (in the case of net share settlement) to the relevant forward purchaser.
In August 2019, the Company sold 7.5 million shares of its common stock for aggregate gross proceeds of approximately $349.9 million at a price per share of $46.65. Aggregate net proceeds from the sale, after offering-related expenses, were approximately $349.8 million, which were used for planned acquisitions of assets, working capital and general corporate purposes.
The following table sets forth the additional shares of common stock outstanding by equity instrument if converted to common stock for each of the three and nine months ended September 30, 2019 and 2018 (in thousands):
9. NONCONTROLLING INTERESTS
Redeemable Noncontrolling Interests in the Operating Partnership and DownREIT Partnership
Interests in the Operating Partnership and the DownREIT Partnership held by limited partners are represented by OP Units and DownREIT Units, respectively. The income is allocated to holders of OP Units/DownREIT Units based upon net income attributable to common stockholders and the weighted average number of OP Units/DownREIT Units outstanding to total common shares plus OP Units/DownREIT Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the partnership agreements of the Operating Partnership and the DownREIT Partnership.
Limited partners of the Operating Partnership and the DownREIT Partnership have the right to require such partnership to redeem all or a portion of the OP Units/DownREIT Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the partnership agreement of the Operating Partnership or the
33
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
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):
Noncontrolling Interests
Noncontrolling interests represent interests of unrelated partners and unvested LTIP Units in certain consolidated affiliates, and are presented as part of equity on the Consolidated Balance Sheets since these interests are not redeemable. Net (income)/loss attributable to noncontrolling interests was less than $(0.1) million during each of the three months ended September 30, 2019 and 2018, and $(0.1) million during each of the nine months ended September 30, 2019 and 2018.
The Company grants LTIP Units to certain employees and non-employee directors. The LTIP Units represent an ownership interest in the Operating Partnership and have vesting terms of between one and three years, specific to the individual grants.
Noncontrolling interests related to long-term incentive plan units represent the unvested LTIP Units of these employees and non-employee directors in the Operating Partnership. The net income/(loss) allocated to the unvested LTIP Units is included in Net (income)/loss attributable to noncontrolling interests on the Consolidated Statements of Operations.
10. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair value is based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
| ● | Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| ● | Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data. |
| ● | Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of September 30, 2019 and December 31, 2018, are summarized as follows (dollars in thousands):
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at December 31, 2018, Using |
|||||||
|
|
|
Total |
|
|
|
Quoted |
|
|
|
|
|||||
|
|
|
Carrying |
|
|
|
Prices in |
|
|
|
|
|||||
|
|
|
Amount in |
|
|
|
Active |
|
|
|
|
|||||
|
|
|
Statement of |
|
|
|
Markets |
|
Significant |
|
|
|||||
|
|
|
Financial |
|
Fair Value |
|
for Identical |
|
Other |
|
Significant |
|||||
|
|
|
Position at |
|
Estimate at |
|
Assets or |
|
Observable |
|
Unobservable |
|||||
|
|
|
December 31, |
|
December 31, |
|
Liabilities |
|
Inputs |
|
Inputs |
|||||
|
|
|
2018 |
|
2018 |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|||||
|
Description: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable (a) |
|
$ |
42,259 |
|
$ |
45,026 |
|
$ |
— |
|
$ |
— |
|
$ |
45,026 |
|
Derivatives - Interest rate contracts (b) |
|
|
4,757 |
|
|
4,757 |
|
|
— |
|
|
4,757 |
|
|
— |
|
Total assets |
|
$ |
47,016 |
|
$ |
49,783 |
|
$ |
— |
|
$ |
4,757 |
|
$ |
45,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives - Interest rate contracts (b) |
|
$ |
356 |
|
$ |
356 |
|
$ |
— |
|
$ |
356 |
|
$ |
— |
|
Secured debt instruments - fixed rate: (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
|
417,989 |
|
|
416,314 |
|
|
— |
|
|
— |
|
|
416,314 |
|
Fannie Mae credit facility |
|
|
90,000 |
|
|
90,213 |
|
|
— |
|
|
— |
|
|
90,213 |
|
Secured debt instruments - variable rate: (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt secured notes payable |
|
|
94,700 |
|
|
94,700 |
|
|
— |
|
|
— |
|
|
94,700 |
|
Unsecured debt instruments: (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital credit facility |
|
|
16 |
|
|
16 |
|
|
— |
|
|
— |
|
|
16 |
|
Commercial paper program |
|
|
101,115 |
|
|
101,115 |
|
|
— |
|
|
— |
|
|
101,115 |
|
Unsecured notes |
|
|
2,861,842 |
|
|
2,829,390 |
|
|
— |
|
|
— |
|
|
2,829,390 |
|
Total liabilities |
|
$ |
3,566,018 |
|
$ |
3,532,104 |
|
$ |
— |
|
$ |
356 |
|
$ |
3,531,748 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership (d) |
|
$ |
972,740 |
|
$ |
972,740 |
|
$ |
— |
|
$ |
972,740 |
|
$ |
— |
| (a) | See Note 2, Significant Accounting Policies. |
| (b) | See Note 11, Derivatives and Hedging Activity. |
| (c) | See Note 7, Secured and Unsecured Debt, Net. |
| (d) | See Note 9, Noncontrolling Interests. |
There were no transfers into or out of any of the levels of the fair value hierarchy during the nine months ended September 30, 2019.
Financial Instruments Carried at Fair Value
The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs,
36
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2019 and December 31, 2018, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. In conjunction with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership have a redemption feature and are marked to their redemption value. The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership are classified as Level 2.
Financial Instruments Not Carried at Fair Value
At September 30, 2019 and December 31, 2018, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments, which includes notes receivable and debt instruments, are classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs that are utilized in their respective valuations.
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair value. Our estimates of fair value represent our best estimate based upon Level 3 inputs such as industry trends and reference to market rates and transactions.
We consider various factors to determine if a decrease in the value of our Investment in and advances to unconsolidated joint ventures, net is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. Based on the significance of the unobservable inputs, we classify these fair value measurements within Level 3 of the valuation hierarchy. The Company did not incur any other-than-temporary impairments in the value of its investments in unconsolidated joint ventures during the three and nine months ended September 30, 2019 and 2018.
After determining an other-than-temporary decrease in the value of an equity method investment has occurred, we estimate the fair value of our investment by estimating the proceeds we would receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs reflect management’s best estimate of what market participants would use in pricing the investment giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture assets. The inputs and assumptions utilized to estimate the future cash flows of the underlying assets are based upon the Company’s evaluation of the economy, market trends, operating results, and other factors, including judgments regarding costs to complete any construction activities, lease up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate the projected cash flows at the disposition, and discount rates.
11. DERIVATIVES AND HEDGING ACTIVITY
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management
37
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended September 30, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
Amounts reported in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets related to derivatives that will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Through September 30, 2020, the Company estimates that an additional $9.8 million will be reclassified as a decrease to Interest expense.
As of September 30, 2019, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Product |
|
Instruments |
|
Notional |
|
|
Interest rate swaps (a) |
|
4 |
|
$ |
315,000 |
|
(a) |
In addition to the interest rate swaps summarized above, the Company entered into an additional interest rate swap with a notional value of $315.0 million that will become effective in January 2020 upon the maturity of the interest rate swaps summarized above. Additionally, the Company had previously entered into two additional interest rate swaps with a notional value totaling $75.0 million that were subsequently terminated and settled during the nine months ended September 30, 2019 in conjunction with the July 2019 issuance of $300.0 million of senior unsecured medium-term notes as disclosed in Note 7, Secured and Unsecured, Net. |
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in no gain or loss for both the three and nine months ended September 30, 2019 and 2018.
As of September 30, 2019, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Product |
|
Instruments |
|
Notional |
|
|
Interest rate caps |
|
1 |
|
$ |
19,880 |
38
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 September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
||||||||
|
|
|
(included in Other assets) |
|
(included in Other liabilities) |
||||||||
|
|
|
Fair Value at: |
|
Fair Value at: |
||||||||
|
|
|
September 30, |
|
December 31, |
|
September 30, |
|
December 31, |
||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
730 |
|
$ |
4,757 |
|
$ |
469 |
|
$ |
356 |
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations
The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain/(Loss) Recognized in |
||||
|
|
|
|
|
Gain/(Loss) Reclassified |
|
Interest expense |
||||||||||||
|
|
|
Unrealized holding gain/(loss) |
|
from Accumulated OCI into |
|
(Amount Excluded from |
||||||||||||
|
|
|
Recognized in OCI |
|
Interest expense |
|
Effectiveness Testing) |
||||||||||||
|
Derivatives in Cash Flow Hedging Relationships |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||||
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
(659) |
|
$ |
2,320 |
|
$ |
624 |
|
$ |
564 |
|
$ |
— |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
(7,181) |
|
$ |
4,312 |
|
$ |
2,504 |
|
$ |
1,162 |
|
$ |
— |
|
$ |
— |
The Company did not recognize any gain/(loss) in Interest income and other income/(expense), net related to derivatives not designated during each of the three and nine months ended September 30, 2019 and 2018.
Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.
The Company has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the Company or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity’s creditworthiness is materially weaker than the original party to the derivative agreement.
As of September 30, 2019, the fair value of derivatives was in a net asset position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, of $0.5 million.
39
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Tabular Disclosure of Offsetting Derivatives
The Company has elected not to offset derivative positions on the consolidated financial statements. The tables below present the effect on its financial position had the Company made the election to offset its derivative positions as of September 30, 2019 and December 31, 2018 (dollars in thousands):
| (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. |
| (a) | Amounts reconcile to the aggregate fair value of derivative liabilities in the “Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets” located in this footnote. |
12. STOCK BASED COMPENSATION
The Company recognized stock based compensation expense, inclusive of awards granted to our non-employee directors, net of capitalization, of $4.5 million and $3.6 million during the three months ended September 30, 2019 and 2018, respectively, and $13.0 million and $10.7 million during the nine months ended September 30, 2019 and 2018, respectively.
40
13. COMMITMENTS AND CONTINGENCIES
Commitments
Real Estate Commitments
The following summarizes the Company’s real estate commitments at September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
UDR's |
|
UDR's Remaining |
|
||
|
|
|
Properties |
|
Investment (a) |
|
Commitment |
|
||
|
Wholly-owned — under development |
|
1 |
|
$ |
21,845 |
|
$ |
75,655 |
|
|
Wholly-owned — redevelopment |
|
2 |
|
|
11,582 |
|
|
23,918 |
|
|
Joint ventures: |
|
|
|
|
|
|
|
|
|
|
Unconsolidated joint ventures - development |
|
1 |
|
|
14,402 |
|
|
21,496 |
(b) |
|
Preferred equity investments |
|
2 |
|
|
53,781 |
(c) |
|
27,390 |
(d) |
|
Other investments |
|
- |
|
|
12,926 |
|
|
9,000 |
(e) |
|
Total |
|
|
|
$ |
114,536 |
|
$ |
157,459 |
|
| (a) | Represents UDR’s investment as of September 30, 2019. |
| (b) | Represents UDR’s proportionate share of expected remaining costs to complete the development. |
| (c) | Represents UDR’s investment in 1300 Fairmount and Modera Lake Merritt for the properties under development as of September 30, 2019. |
| (d) | Represents UDR’s remaining commitment for 1300 Fairmount and Modera Lake Merritt. |
| (e) | Represents UDR’s remaining commitment for other investment ventures. |
Purchase Commitments
In 2019, the Company entered into a contract to purchase a development land parcel located in King of Prussia, Pennsylvania for a purchase price of approximately $14.8 million. The Company made a $0.8 million deposit on the purchase, which is generally non-refundable other than due to a failure of closing conditions pursuant to the terms of the purchase agreement. The acquisition is expected to close in 2020, subject to customary closing conditions.
Contingencies
Litigation and Legal Matters
The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. The Company believes that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition, results of operations or cash flows.
14. REPORTABLE SEGMENTS
GAAP guidance requires that segment disclosures present the measure(s) used by the Chief Operating Decision Maker to decide how to allocate resources and for purposes of assessing such segments’ performance. UDR’s Chief Operating Decision Maker is comprised of several members of its executive management team who use several generally accepted industry financial measures to assess the performance of the business for our reportable operating segments.
UDR owns and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The primary financial measures for UDR’s apartment communities are rental income and net operating income (“NOI”). Rental income represents gross market rent
41
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
less adjustments for concessions, vacancy loss and bad debt. NOI is defined as rental income less direct property rental expenses. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI is property management expense, which is calculated as 2.875% of property revenue to cover the regional supervision and accounting costs related to consolidated property operations, and land rent. UDR’s Chief Operating Decision Maker utilizes NOI as the key measure of segment profit or loss.
UDR’s two reportable segments are Same-Store Communities and Non-Mature Communities/Other:
| ● | Same-Store Communities represent those communities acquired, developed, and stabilized prior to July 1, 2018 (for quarter-to-date comparison) or January 1, 2018 (for year-to-date comparison) and held as of September 30, 2019. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. |
| ● | Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties. |
Management evaluates the performance of each of our apartment communities on a Same-Store Community and Non-Mature Community/Other basis, as well as individually and geographically. This is consistent with the aggregation criteria under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Company’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the Chief Operating Decision Maker.
Revenue is measured based on consideration specified in contracts with customers. The Company recognizes revenue when it satisfies a performance obligation by providing the services specified in a contract to the customer. All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of UDR’s total revenues during the three and nine months ended September 30, 2019 and 2018.
The following is a description of the principal streams from which the Company generates its revenue:
Lease Revenue
Lease revenue related to leases is recognized on an accrual basis when due from residents or tenants in accordance with ASC 842, Leases. Rental payments are generally due on a monthly basis and recognized on a straight-line basis over the noncancellable lease term because collection of the lease payments was probable at lease commencement, inclusive of any periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. In addition, in circumstances where a lease incentive is provided to tenants, the incentive is recognized as a reduction of lease revenue on a straight-line basis over the lease term.
Lease revenue also includes all pass-through revenue from retail and residential leases and common area maintenance reimbursements from retail leases. These services represent non-lease components in a contract as the Company transfers a service to the lessee other than the right to use the underlying asset. The Company has elected the practical expedient under the leasing standard to not separate lease and non-lease components from its resident and retail lease contracts as the timing and pattern of revenue recognition for the non-lease component and related lease component are the same and the combined single lease component would be classified as an operating lease.
Other Revenue
Other revenue is generated by services provided by the Company to its retail and residential tenants and other unrelated third parties. These fees are generally recognized as earned.
42
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2019
Joint venture management and other fees
The Joint venture management and other fees revenue consists of management fees charged to our equity method joint ventures per the terms of contractual agreements and other fees. Joint venture fee revenue is recognized monthly as the management services are provided and the fees are earned or upon a transaction whereby the Company earns a fee. Joint venture management and other fees are not allocable to a specific reportable segment or segments.
The following table details rental income and NOI for UDR’s reportable segments for the three and nine months ended September 30, 2019 and 2018, and reconciles NOI to Net income/(loss) attributable to UDR, Inc. on the Consolidated Statements of Operations (dollars in thousands):
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
||||||||
|
|
|
September 30, (a) |
|
September 30, (b) |
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
||||
|
Reportable apartment home segment lease revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
99,316 |
|
$ |
95,447 |
|
$ |
293,294 |
|
$ |
281,722 |
|
Mid-Atlantic Region |
|
|
52,826 |
|
|
51,291 |
|
|
157,179 |
|
|
152,867 |
|
Southeast Region |
|
|
28,540 |
|
|
27,773 |
|
|
84,551 |
|
|
81,554 |
|
Northeast Region |
|
|
30,196 |
|
|
29,491 |
|
|
89,650 |
|
|
87,776 |
|
Southwest Region |
|
|
15,451 |
|
|
15,060 |
|
|
40,705 |
|
|
39,586 |
|
Non-Mature Communities/Other |
|
|
40,975 |
|
|
24,237 |
|
|
106,499 |
|
|
66,906 |
|
Total segment and consolidated rental income |
|
$ |
267,304 |
|
$ |
243,299 |
|
$ |
771,878 |
|
$ |
710,411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable apartment home segment other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
7,869 |
|
$ |
7,168 |
|
$ |
23,488 |
|
$ |
21,567 |
|
Mid-Atlantic Region |
|
|
4,376 |
|
|
4,032 |
|
|
12,958 |
|
|
11,944 |
|
Southeast Region |
|
|
3,438 |
|
|
3,211 |
|
|
10,423 |
|
|
9,918 |
|
Northeast Region |
|
|
1,321 |
|
|
1,226 |
|
|
3,753 |
|
|
3,422 |
|
Southwest Region |
|
|
1,527 |
|
|
1,525 |
|
|
4,100 |
|
|
3,986 |
|
Non-Mature Communities/Other |
|
|
3,173 |
|
|
2,795 |
|
|
8,793 |
|
|
9,125 |
|
Total segment and consolidated rental income |
|
$ |
21,704 |
|
$ |
19,957 |
|
$ |
63,515 |
|
$ |
59,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reportable apartment home segment rental income |
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
107,185 |
|
$ |
102,615 |
|
$ |
316,782 |
|
$ |
303,289 |
|
Mid-Atlantic Region |
|
|
57,202 |
|
|
55,323 |
|
|
170,137 |
|
|
164,811 |
|
Southeast Region |
|
|
31,978 |
|
|
30,984 |
|
|
94,974 |
|
|
91,472 |
|
Northeast Region |
|
|
31,517 |
|
|
30,717 |
|
|
93,403 |
|
|
91,198 |
|
Southwest Region |
|
|
16,978 |
|
|
16,585 |
|
|
44,805 |
|
|
43,572 |
|
Non-Mature Communities/Other |
|
|
44,148 |
|
|
27,032 |
|
|
115,292 |
|
|
76,031 |
|
Total segment and consolidated rental income |
|
$ |
289,008 |
|
$ |
263,256 |
|
$ |
835,393 |
|
$ |
770,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable apartment home segment NOI |
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
81,170 |
|
$ |
77,321 |
|
$ |
240,442 |
|
$ |
229,129 |
|
Mid-Atlantic Region |
|
|
39,850 |
|
|
38,220 |
|
|
119,075 |
|
|
114,465 |
|
Southeast Region |
|
|
22,133 |
|
|
21,597 |
|
|
66,301 |
|
|
63,806 |
|
Northeast Region |
|
|
20,560 |
|
|
20,640 |
|
|
63,012 |
|
|
62,710 |
|
Southwest Region |
|
|
10,449 |
|
|
9,899 |
|
|
26,995 |
|
|
25,760 |
|
Non-Mature Communities/Other |
|
|
29,487 |
|
|
17,137 |
|
|
77,242 |
|
|
48,833 |
|
Total segment and consolidated NOI |
|
|
203,649 |
|
|
184,814 |
|
|
593,067 |
|
|
544,703 |
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture management and other fees |
|
|
6,386 |
|
|
2,888 |
|
|
11,982 |
|
|
8,819 |
|
Property management |
|
|
(8,309) |
|
|
(7,240) |
|
|
(24,018) |
|
|
(21,185) |
|
Other operating expenses |
|
|
(2,751) |
|
|
(3,314) |
|
|
(11,132) |
|
|
(8,148) |
|
Real estate depreciation and amortization |
|
|
(127,391) |
|
|
(107,881) |
|
|
(357,793) |
|
|
(322,537) |
|
General and administrative |
|
|
(12,197) |
|
|
(11,896) |
|
|
(37,002) |
|
|
(36,028) |
|
Casualty-related (charges)/recoveries, net |
|
|
1,088 |
|
|
(678) |
|
|
842 |
|
|
(2,364) |
|
Other depreciation and amortization |
|
|
(1,619) |
|
|
(1,682) |
|
|
(4,953) |
|
|
(5,057) |
|
Gain/(loss) on sale of real estate owned |
|
|
— |
|
|
— |
|
|
5,282 |
|
|
70,300 |
|
Income/(loss) from unconsolidated entities |
|
|
12,713 |
|
|
(1,382) |
|
|
19,387 |
|
|
(5,091) |
|
Interest expense |
|
|
(42,523) |
|
|
(34,401) |
|
|
(110,482) |
|
|
(95,942) |
|
Interest income and other income/(expense), net |
|
|
1,875 |
|
|
1,188 |
|
|
12,998 |
|
|
5,075 |
|
Tax (provision)/benefit, net |
|
|
(1,499) |
|
|
(158) |
|
|
(3,836) |
|
|
(618) |
|
Net (income)/loss attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership |
|
|
(2,162) |
|
|
(1,616) |
|
|
(6,871) |
|
|
(10,819) |
|
Net (income)/loss attributable to noncontrolling interests |
|
|
(56) |
|
|
(32) |
|
|
(145) |
|
|
(141) |
|
Net income/(loss) attributable to UDR, Inc. |
|
$ |
27,204 |
|
$ |
18,610 |
|
$ |
87,326 |
|
$ |
120,967 |
| (a) | Same-Store Community population consisted of 38,177 apartment homes. |
| (b) | Same-Store Community population consisted of 37,959 apartment homes. |
44
The following table details the assets of UDR’s reportable segments as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
|
2019 |
|
2018 |
||
|
Reportable apartment home segment assets: |
|
|
|
|
|
|
|
Same-Store Communities (a): |
|
|
|
|
|
|
|
West Region |
|
$ |
3,797,149 |
|
$ |
3,763,366 |
|
Mid-Atlantic Region |
|
|
2,338,963 |
|
|
2,317,369 |
|
Southeast Region |
|
|
799,739 |
|
|
779,310 |
|
Northeast Region |
|
|
1,498,500 |
|
|
1,491,994 |
|
Southwest Region |
|
|
595,982 |
|
|
589,188 |
|
Non-Mature Communities/Other |
|
|
2,534,062 |
|
|
1,254,932 |
|
Total segment assets |
|
|
11,564,395 |
|
|
10,196,159 |
|
Accumulated depreciation |
|
|
(4,000,608) |
|
|
(3,654,160) |
|
Total segment assets — net book value |
|
|
7,563,787 |
|
|
6,541,999 |
|
Reconciling items: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,895 |
|
|
185,216 |
|
Restricted cash |
|
|
21,646 |
|
|
23,675 |
|
Notes receivable, net |
|
|
37,899 |
|
|
42,259 |
|
Investment in and advances to unconsolidated joint ventures, net |
|
|
791,180 |
|
|
780,869 |
|
Operating lease right-of-use assets |
|
|
135,889 |
|
|
— |
|
Other assets |
|
|
145,301 |
|
|
137,710 |
|
Total consolidated assets |
|
$ |
8,697,597 |
|
$ |
7,711,728 |
| (a) | Same-Store Community population consisted of 38,177 apartment homes. |
Markets included in the above geographic segments are as follows:
| i. | West Region — Orange County, San Francisco, Seattle, Los Angeles, Monterey Peninsula, Other Southern California and Portland |
| ii. | Mid-Atlantic Region — Metropolitan D.C., Richmond and Baltimore |
| iii. | Southeast Region — Orlando, Nashville, Tampa and Other Florida |
| iv. | Northeast Region — New York and Boston |
| v. | Southwest Region — Dallas, Austin and Denver |
45
UNITED DOMINION REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
|
2019 |
|
2018 |
||
|
|
|
(unaudited) |
|
(audited) |
||
|
ASSETS |
|
|
|
|
|
|
|
Real estate owned: |
|
|
|
|
|
|
|
Real estate held for investment |
|
$ |
3,861,754 |
|
$ |
3,811,985 |
|
Less: accumulated depreciation |
|
|
(1,762,168) |
|
|
(1,658,161) |
|
Total real estate owned, net of accumulated depreciation |
|
|
2,099,586 |
|
|
2,153,824 |
|
Cash and cash equivalents |
|
|
40 |
|
|
125 |
|
Restricted cash |
|
|
14,637 |
|
|
13,563 |
|
Investment in unconsolidated entities |
|
|
82,269 |
|
|
103,026 |
|
Operating lease right-of-use assets |
|
|
135,766 |
|
|
— |
|
Other assets |
|
|
23,321 |
|
|
34,052 |
|
Total assets |
|
$ |
2,355,619 |
|
$ |
2,304,590 |
|
LIABILITIES AND CAPITAL |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Secured debt, net |
|
$ |
99,064 |
|
$ |
26,929 |
|
Notes payable due to the General Partner |
|
|
623,967 |
|
|
700,115 |
|
Operating lease liabilities |
|
|
130,013 |
|
|
— |
|
Real estate taxes payable |
|
|
11,747 |
|
|
2,699 |
|
Accrued interest payable |
|
|
213 |
|
|
32 |
|
Security deposits and prepaid rent |
|
|
14,878 |
|
|
15,250 |
|
Distributions payable |
|
|
63,367 |
|
|
59,461 |
|
Accounts payable, accrued expenses, and other liabilities |
|
|
12,153 |
|
|
14,215 |
|
Total liabilities |
|
|
955,402 |
|
|
818,701 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
|
Partners’ capital: |
|
|
|
|
|
|
|
General partner: |
|
|
|
|
|
|
|
110,883 OP Units outstanding at September 30, 2019 and December 31, 2018 |
|
|
883 |
|
|
950 |
|
Limited partners: |
|
|
|
|
|
|
|
183,952,659 and 183,525,660 OP Units outstanding at September 30, 2019 and December 31, 2018, respectively |
|
|
1,381,446 |
|
|
1,471,120 |
|
Total partners’ capital |
|
|
1,382,329 |
|
|
1,472,070 |
|
Noncontrolling interests |
|
|
17,888 |
|
|
13,819 |
|
Total capital |
|
|
1,400,217 |
|
|
1,485,889 |
|
Total liabilities and capital |
|
$ |
2,355,619 |
|
$ |
2,304,590 |
See accompanying notes to the consolidated financial statements.
47
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, |
|
September 30, |
|
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
111,700 |
|
$ |
109,539 |
|
$ |
330,384 |
|
$ |
323,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance |
|
|
17,835 |
|
|
17,412 |
|
|
50,945 |
|
|
50,535 |
|
|
Real estate taxes and insurance |
|
|
13,033 |
|
|
11,979 |
|
|
37,788 |
|
|
34,890 |
|
|
Property management |
|
|
3,211 |
|
|
3,012 |
|
|
9,498 |
|
|
8,893 |
|
|
Other operating expenses |
|
|
2,301 |
|
|
2,347 |
|
|
7,123 |
|
|
6,098 |
|
|
Real estate depreciation and amortization |
|
|
35,155 |
|
|
35,043 |
|
|
104,730 |
|
|
108,906 |
|
|
General and administrative |
|
|
4,066 |
|
|
4,143 |
|
|
12,878 |
|
|
12,997 |
|
|
Casualty-related charges/(recoveries), net |
|
|
(1,088) |
|
|
(10) |
|
|
(1,169) |
|
|
906 |
|
|
Total operating expenses |
|
|
74,513 |
|
|
73,926 |
|
|
221,793 |
|
|
223,225 |
|
|
Gain/(loss) on sale of real estate owned |
|
|
— |
|
|
— |
|
|
— |
|
|
70,300 |
|
|
Operating income |
|
|
37,187 |
|
|
35,613 |
|
|
108,591 |
|
|
170,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from unconsolidated entities |
|
|
(2,383) |
|
|
(2,378) |
|
|
(6,917) |
|
|
(10,102) |
|
|
Interest expense |
|
|
(538) |
|
|
(2,047) |
|
|
(889) |
|
|
(6,050) |
|
|
Interest expense on notes payable due to the General Partner |
|
|
(6,983) |
|
|
(3,053) |
|
|
(21,358) |
|
|
(9,159) |
|
|
Net income/(loss) |
|
|
27,283 |
|
|
28,135 |
|
|
79,427 |
|
|
145,161 |
|
|
Net (income)/loss attributable to noncontrolling interests |
|
|
(448) |
|
|
(440) |
|
|
(1,252) |
|
|
(1,278) |
|
|
Net income/(loss) attributable to OP unitholders |
|
$ |
26,835 |
|
$ |
27,695 |
|
$ |
78,175 |
|
$ |
143,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per weighted average OP Unit - basic and diluted |
|
$ |
0.15 |
|
$ |
0.15 |
|
$ |
0.42 |
|
$ |
0.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average OP Units outstanding - basic and diluted |
|
|
184,064 |
|
|
183,637 |
|
|
184,024 |
|
|
183,599 |
|
See accompanying notes to the consolidated financial statements.
48
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A |
|
Partners |
|
UDR, Inc. |
|
Total |
|
|
|
|
|
|
|||||||
|
|
|
Limited |
|
and LTIP |
|
Limited |
|
General |
|
Partners’ |
|
Noncontrolling |
|
|
|
||||||
|
|
|
Partner |
|
Units |
|
Partner |
|
Partner |
|
Capital |
|
Interests |
|
Total |
|||||||
|
Balance at June 30, 2019 |
|
$ |
78,633 |
|
$ |
273,910 |
|
$ |
1,058,850 |
|
$ |
905 |
|
$ |
1,412,298 |
|
$ |
17,440 |
|
$ |
1,429,738 |
|
Net income/(loss) |
|
|
255 |
|
|
890 |
|
|
25,674 |
|
|
16 |
|
|
26,835 |
|
|
448 |
|
|
27,283 |
|
Distributions |
|
|
(599) |
|
|
(2,416) |
|
|
(60,314) |
|
|
(38) |
|
|
(63,367) |
|
|
— |
|
|
(63,367) |
|
Adjustment to reflect limited partners’ capital at redemption value |
|
|
6,632 |
|
|
16,868 |
|
|
(23,500) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Long-Term Incentive Plan Unit grants |
|
|
— |
|
|
6,563 |
|
|
— |
|
|
— |
|
|
6,563 |
|
|
— |
|
|
6,563 |
|
Balance at September 30, 2019 |
|
$ |
84,921 |
|
$ |
295,815 |
|
$ |
1,000,710 |
|
$ |
883 |
|
$ |
1,382,329 |
|
$ |
17,888 |
|
$ |
1,400,217 |
See accompanying notes to the consolidated financial statements.
49
UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
||||
|
|
|
2019 |
|
2018 |
||
|
Operating Activities |
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
79,427 |
|
$ |
145,161 |
|
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
104,730 |
|
|
108,906 |
|
(Gain)/loss on sale of real estate owned |
|
|
— |
|
|
(70,300) |
|
(Income)/loss from unconsolidated entities |
|
|
6,917 |
|
|
10,102 |
|
Other |
|
|
843 |
|
|
850 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
(Increase)/decrease in operating assets |
|
|
2,801 |
|
|
(2,968) |
|
Increase/(decrease) in operating liabilities |
|
|
3,156 |
|
|
4,747 |
|
Net cash provided by/(used in) operating activities |
|
|
197,874 |
|
|
196,498 |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
Proceeds from sales of real estate investments, net |
|
|
— |
|
|
89,433 |
|
Capital expenditures and other major improvements — real estate assets |
|
|
(45,508) |
|
|
(31,828) |
|
Distributions received from unconsolidated entities |
|
|
13,840 |
|
|
13,033 |
|
Net cash provided by/(used in) investing activities |
|
|
(31,668) |
|
|
70,638 |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
Advances (to)/from the General Partner, net |
|
|
— |
|
|
(256,972) |
|
Proceeds from the issuance of secured debt |
|
|
72,500 |
|
|
— |
|
Issuance/(repayment) of notes payable to the General Partner |
|
|
(231,011) |
|
|
— |
|
Distributions paid to partnership unitholders |
|
|
(6,330) |
|
|
(9,438) |
|
Other |
|
|
(376) |
|
|
— |
|
Net cash provided by/(used in) financing activities |
|
|
(165,217) |
|
|
(266,410) |
|
Net increase/(decrease) in cash, cash equivalents, and restricted cash |
|
|
989 |
|
|
726 |
|
Cash, cash equivalents, and restricted cash, beginning of year |
|
|
13,688 |
|
|
12,872 |
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
14,677 |
|
$ |
13,598 |
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
Interest paid during the period, net of amounts capitalized |
|
$ |
28,755 |
|
$ |
20,139 |
|
Non-cash transactions: |
|
|
|
|
|
|
|
Development costs and capital expenditures incurred but not yet paid |
|
$ |
4,520 |
|
$ |
3,472 |
|
Recognition of operating lease right-of-use assets |
|
|
94,174 |
|
|
— |
|
Recognition of operating lease liabilities |
|
|
88,161 |
|
|
— |
|
Right-of-use asset obtained in exchange for operating lease liability remeasurement |
|
|
42,143 |
|
|
— |
|
LTIP Unit grants |
|
|
21,980 |
|
|
12,964 |
|
Distributions declared but not yet paid |
|
|
63,367 |
|
|
59,461 |
|
|
|
|
|
|
|
|
|
The following reconciles cash, cash equivalents, and restricted cash to the total of the same amounts as shown above: |
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash, beginning of year |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
125 |
|
$ |
293 |
|
Restricted cash |
|
|
13,563 |
|
|
12,579 |
|
Total cash, cash equivalents, and restricted cash as shown above |
|
$ |
13,688 |
|
$ |
12,872 |
|
Cash, cash equivalents, and restricted cash, end of period |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
40 |
|
$ |
83 |
|
Restricted cash |
|
|
14,637 |
|
|
13,515 |
|
Total cash, cash equivalents, and restricted cash as shown above |
|
$ |
14,677 |
|
$ |
13,598 |
See accompanying notes to the consolidated financial statements.
50
1. CONSOLIDATION AND BASIS OF PRESENTATION
Basis of Presentation
United Dominion Realty, L.P. (“UDR, L.P.,” the “Operating Partnership,” “we” or “our”) is a Delaware limited partnership, that owns, acquires, renovates, redevelops, manages, and disposes of multifamily apartment communities generally located in high barrier to entry markets located in the United States. The high barrier to entry markets are characterized by limited land for new construction, difficult and lengthy entitlement process, expensive single-family home prices and significant employment growth potential. UDR, L.P. is a subsidiary of UDR, Inc. (“UDR” or the “General Partner”), a self-administered real estate investment trust, or REIT, through which UDR conducts a significant portion of its business. During the three months ended September 30, 2019 and 2018, rental revenues of the Operating Partnership represented 39% and 42%, respectively, and for the nine months ended September 30, 2019 and 2018, 40% and 42%, respectively, of the General Partner’s consolidated rental revenues. As of September 30, 2019, the Operating Partnership’s apartment portfolio consisted of 52 communities located in 15 markets consisting of 16,434 apartment homes.
Interests in UDR, L.P. are represented by operating partnership units (“OP Units”). The Operating Partnership’s net income is allocated to the partners, which is initially based on their respective distributions made during the year and secondly, their percentage interests. Distributions are made in accordance with the terms of the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. (the “Operating Partnership Agreement”), on a per unit basis that is generally equal to the dividend per share on UDR’s common stock, which is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “UDR.”
As of September 30, 2019, there were 184,063,542 OP Units outstanding, of which 176,210,072, or 95.7%, were owned by UDR and affiliated entities and 7,853,470, or 4.3%, were owned by non-affiliated limited partners. There were 183,636,543 OP Units outstanding as of December 31, 2018, of which 174,248,699, or 94.9%, were owned by UDR and affiliated entities and 9,387,844, or 5.1%, were owned by non-affiliated limited partners. See Note 10, Capital Structure.
The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of September 30, 2019, and results of operations for the three and nine months ended September 30, 2019 and 2018, have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2018 included in the Annual Report on Form 10-K filed by UDR and the Operating Partnership with the SEC on February 19, 2019.
The accompanying interim unaudited consolidated statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All intercompany accounts and transactions have been eliminated in consolidation.
The Operating Partnership evaluated subsequent events through the date its financial statements were issued. No significant recognized or non-recognized subsequent events were noted other than those noted in Note 6, Debt, Net.
51
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires entities to estimate a lifetime expected credit loss for most financial assets, including trade and other receivables, held-to-maturity debt securities, loans and other financial instruments, and to present the net amount of the financial instrument expected to be collected. The updated standard will be effective for the Operating Partnership on January 1, 2020. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which amends the transition requirements and scope of ASU 2016-13 and clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leases standard. The Operating Partnership is currently evaluating the effect that the updated standard will have on the consolidated financial statements and related disclosures. However, the Operating Partnership does not expect the updated standard to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. The standard amended the existing lease accounting guidance and required lessees to recognize a lease liability and a right-of-use asset for all leases on their balance sheets. Lessees of operating leases continued to recognize lease expense in a manner similar to previous accounting. For lessors, accounting for leases under the new guidance was substantially the same as in prior periods, but eliminated current real estate-specific provisions and changed the treatment of initial direct costs. The standard was effective for the Operating Partnership on January 1, 2019.
The Operating Partnership elected the following package of practical expedients provided by the standard: (i) an entity need not reassess whether any expired or existing contract is a lease or contains a lease, (ii) an entity need not reassess the lease classification of any expired or existing leases, and (iii) an entity need not reassess initial direct costs for any existing leases. The Operating Partnership also elected the short-term lease exception provided for in the standard and therefore only recognizes right-of-use assets and lease liabilities for leases with a term greater than one year.
The Operating Partnership recognized right-of-use assets of $94.2 million and lease liabilities of $88.2 million as of January 1, 2019 upon adoption of the standard. The right-of-use assets included $6.0 million of prepaid rent and intangible assets that was included within Other assets on our Consolidated Balance Sheets as of December 31, 2018.
The lease liabilities represent the present value of the remaining minimum lease payments as of January 1, 2019 related to ground leases for communities where we are the lessee. The right-of-use assets represent our right to use an underlying asset for the lease term, which are calculated utilizing the lease liabilities plus any prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. Our right-of-use assets and related lease liabilities recognized as of January 1, 2019 may change as a result of updates to the projected future minimum lease payments. Certain of our ground lease agreements where we are the lessee have future minimum lease payments that reset in the future based upon a percentage of the fair market value of the land at the time of the reset. The Operating Partnership will continue to recognize lease expense for these leases in a manner similar to previous accounting based on our election of the package of practical expedients. However, in the event we modify existing ground leases and/or enter into new ground leases subsequent to the adoption of the standard, such leases would likely be classified as finance leases under the standard and require expense recognition based on the effective interest method. Under the standard, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, subsequent to the adoption of the standard, we are now expensing non-incremental leasing costs as incurred.
In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements, which provided entities with relief from the costs of implementing certain aspects of ASU 2016-02, Leases. The ASU provided a practical expedient which allowed lessors to not separate lease and non-lease components in a contract and allocate the consideration in the contract to the separate components if both: (i) the timing and pattern of revenue recognition for the non-lease component and the related lease component are the same and (ii) the combined single lease component would be classified as an operating lease. The Operating Partnership elected the practical expedient to account for lease and non-lease components as a single component in lease contracts where we are the lessor. The ASU also provided a transition
52
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
option that permitted entities to not recast the comparative periods presented when transitioning to the standard, which the Operating Partnership also elected.
Principles of Consolidation
The Operating Partnership accounts for subsidiary partnerships, joint ventures and other similar entities in which it holds an ownership interest in accordance with the consolidation guidance. The Operating Partnership first evaluates whether each entity is a variable interest entity (“VIE”). Under the VIE model, the Operating Partnership consolidates an entity when it has control to direct the activities of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Under the voting model, the Operating Partnership consolidates an entity when it controls the entity through ownership of a majority voting interest.
Income/(Loss) Per Operating Partnership Unit
Basic income/(loss) per OP Unit is computed by dividing net income/(loss) attributable to the general and limited partner unitholders by the weighted average number of general and limited partner units outstanding during the year. Diluted income/(loss) per OP Unit reflects the potential dilution that could occur if securities or other contracts to issue OP Units were exercised or converted into OP Units or resulted in the issuance of OP Units and then shared in the income/(loss) of the Operating Partnership.
Real Estate Sales Gain Recognition
For sale transactions resulting in a transfer of a controlling financial interest of a property, the Operating Partnership generally derecognizes the related assets and liabilities from its Consolidated Balance Sheets and records the gain or loss in the period in which the transfer of control occurs. If control of the property has not transferred to the counterparty, the criteria for derecognition are not met and the Operating Partnership will continue to recognize the related assets and liabilities on its Consolidated Balance Sheets.
Sale transactions to entities in which the Operating Partnership sells a controlling financial interest in a property but retains a noncontrolling interest are accounted for as partial sales. Partial sales resulting in a change in control are accounted for at fair value and a full gain or loss is recognized. Therefore, the Operating Partnership will record a gain or loss on the partial interest sold, and the initial measurement of our retained interest will be accounted for at fair value.
Sales of real estate to joint ventures or other noncontrolled investees are also accounted for at fair value and the Operating Partnership will record a full gain or loss in the period the property is contributed.
To the extent that the Operating Partnership acquires a controlling financial interest in a property that it previously accounted for as an equity method investment, the Operating Partnership will not remeasure its previously held interest if the acquisition is treated as an asset acquisition. The Operating Partnership will include the carrying amount of its previously held equity method interest along with the consideration paid and transaction costs incurred in determining the amounts to allocate to the related assets and liabilities acquired on its Consolidated Balance Sheets. When treated as an asset acquisition, the Operating Partnership will not recognize a gain or loss on consolidation of a property.
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 and nine months ended September 30, 2019 and 2018, the Operating Partnership’s other comprehensive income/(loss) consisted of the gain/(loss) on derivative instruments that are designated as and qualify as cash flow hedges and (gain)/loss reclassified from other comprehensive income/(loss) into earnings. The (gain)/loss reclassified from other comprehensive income/(loss) is included in Interest expense on the Consolidated Statements of Operations. See Note 9, Derivatives and Hedging Activity, for further discussion.
53
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
Income Taxes
The taxable income or loss of the Operating Partnership is reported on the tax returns of the partners. Accordingly, no provision has been made in the accompanying financial statements for federal or state income taxes on income that is passed through to the partners. However, any state or local revenue, excise or franchise taxes that result from the operating activities of the Operating Partnership are recorded at the entity level. The Operating Partnership’s tax returns are subject to examination by federal and state taxing authorities. Net income for financial reporting purposes differs from the net income for income tax reporting purposes primarily due to temporary differences, principally real estate depreciation and the tax deferral of certain gains on property sales. The differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.
The Operating Partnership evaluates the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Operating Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management of the Operating Partnership is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Operating Partnership has no examinations in progress and none are expected at this time.
Management of the Operating Partnership has reviewed all open tax years (2016 through 2018) of tax jurisdictions and concluded there is 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 September 30, 2019, the Operating Partnership owned and consolidated 52 communities in nine states plus the District of Columbia totaling 16,434 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of September 30, 2019 and December 31, 2018 (dollars in thousands):
Acquisitions
The Operating Partnership did not have any acquisitions of real estate during the nine months ended September 30, 2019.
Dispositions
The Operating Partnership did not have any dispositions of real estate during the nine months ended September 30, 2019.
54
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
Other Activity
Predevelopment, development, and redevelopment projects and related costs are capitalized and reported on the Consolidated Balance Sheets as Total real estate owned, net of accumulated depreciation. The 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 zero for the three months ended September 30, 2019 and 2018, respectively, and were $0.6 million and less than $0.1 million for the nine months ended September 30, 2019 and 2018, respectively. During both of the three months ended September 30, 2019 and 2018, total interest capitalized was less than $0.1 million, and during the nine months ended September 30, 2019 and 2018, total interest capitalized was $0.1 million and less than $0.1 million, respectively. As each home in a capital project is completed and becomes available for lease-up, the Operating Partnership ceases capitalization on the related portion of the costs and depreciation commences over the estimated useful life.
In connection with the acquisition of certain properties, the Operating Partnership agreed to pay certain of the tax liabilities of certain contributors if the Operating Partnership sells one or more of the properties contributed in a taxable transaction prior to the expiration of specified periods of time following the acquisition. The Operating Partnership may, however, sell, without being required to pay any tax liabilities, any of such properties in a non-taxable transaction, including, but not limited to, a tax deferred Section 1031 exchange.
Further, the Operating Partnership has agreed to maintain certain debt that may be guaranteed by certain contributors for specified periods of time following the acquisition. The Operating Partnership, however, has the ability to refinance or repay guaranteed debt or to substitute new debt if the debt and the guaranty continue to satisfy certain conditions.
4. UNCONSOLIDATED ENTITIES
The DownREIT Partnership is accounted for by the Operating Partnership under the equity method of accounting and is included in Investment in unconsolidated entities on the Consolidated Balance Sheets. The Operating Partnership recognizes earnings or losses from its investments in unconsolidated entities consisting of our proportionate share of the net earnings or losses of the partnership in accordance with the Partnership Agreement.
The DownREIT Partnership is a VIE as the limited partners lack substantive kick-out rights and substantive participating rights. The Operating Partnership is not the primary beneficiary of the DownREIT Partnership as it lacks the power to direct the activities that most significantly impact its economic performance and will continue to account for its interest as an equity method investment. See Note 2, Significant Accounting Policies.
As of September 30, 2019, the DownREIT Partnership owned 12 communities with 5,657 apartment homes. The Operating Partnership’s investment in the DownREIT Partnership was $82.3 million and $103.0 million as of September 30, 2019 and December 31, 2018, respectively.
55
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
Combined summary balance sheets relating to all of the DownREIT Partnership (not just our proportionate share) are presented below as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
|
2019 |
|
2018 |
||
|
Total real estate, net |
|
$ |
1,119,828 |
|
$ |
1,167,720 |
|
Cash and cash equivalents |
|
|
22 |
|
|
39 |
|
Note receivable from the General Partner |
|
|
221,789 |
|
|
221,022 |
|
Other assets |
|
|
5,259 |
|
|
5,561 |
|
Total assets |
|
$ |
1,346,898 |
|
$ |
1,394,342 |
|
|
|
|
|
|
|
|
|
Secured debt, net |
|
$ |
428,457 |
|
$ |
431,735 |
|
Other liabilities |
|
|
25,880 |
|
|
26,597 |
|
Total liabilities |
|
|
454,337 |
|
|
458,332 |
|
Total capital |
|
$ |
892,561 |
|
$ |
936,010 |
Combined summary financial information relating to all of the DownREIT Partnership (not just our proportionate share) is presented below for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
5. LEASES
Lessee - Ground Leases
The Operating Partnership owns six communities that are subject to ground leases, under which the Operating Partnership is the lessee, expiring between 2043 and 2103, inclusive of extension options we are reasonably certain will be exercised. All of these leases existed as of the adoption of the new lease accounting guidance on January 1, 2019 and we did not reassess lease classification per the practical expedient provided by the standard. As such, these leases will continue to be classified as operating leases through the lease term expiration. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the remaining lease term. We currently do not hold any finance leases.
As of September 30, 2019, the Operating lease right-of-use assets was $135.8 million and the Operating lease liabilities was $130.0 million on our Consolidated Balance Sheets related to our ground leases. The value of the Operating lease right-of-use assets exceeds the value of the Operating lease liabilities due to prepaid lease payments and intangible assets for ground leases acquired in the purchase of real estate. The calculation of these amounts includes minimum lease payments over the remaining lease term (described further in the table below). Variable lease payments are excluded from the right-of-use assets and lease liabilities and are recognized in earnings in the period in which the obligation for those payments is incurred.
As the discount rate implicit in the leases was not readily determinable, we determined the discount rate for these leases utilizing the Operating Partnership’s incremental borrowing rate at a portfolio level, adjusted for the remaining lease term, and the form of underlying collateral.
56
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
The weighted average remaining lease term for these leases was 55.3 years at September 30, 2019 and the weighted average discount rate was 5.1% at September 30, 2019.
Future minimum lease payments and total operating lease liabilities from our ground leases as of September 30, 2019 are as follows (dollars in thousands):
For purposes of recognizing our ground lease contracts, the Operating Partnership uses the minimum lease payments, if stated in the agreement. For ground lease agreements where there is a rent reset provision based on a change in an index or a rate (i.e., changes in fair market rental rates or changes in the consumer price index) but that does not include a specified minimum lease payment, the Operating Partnership uses the current rent over the remainder of the lease term. If there is a contingency, upon which some or all of the variable lease payments that will be paid over the remainder of the lease term are based, which is resolved such that those payments now meet the definition of lease payments, the Operating Partnership will remeasure the right-of-use asset and lease liability on the reset date. For the nine months ended September 30, 2019, Operating lease right-of-use assets and Operating lease liabilities increased by $42.1 million due to future minimum payments on one of our ground leases becoming fixed for the remainder of its term.
The components of operating lease expenses from our ground leases were as follows (dollars in thousands):
| (a) | Variable ground lease expense includes adjustments such as changes in the consumer price index and payments based on a percentage of income of the lessee. |
| (b) | Ground lease expense is reported within the line item Other operating expenses on the Consolidated Statements of Operations. |
| (c) | For the nine months ended September 30, 2019, Operating lease right-of-use assets and Operating lease liabilities amortized by $0.6 million and $0.3 million, respectively. The Operating Partnership recorded $0.1 million and $0.3 million of total operating lease expense during the three and nine months ended September 30, 2019, respectively, due to the net impact of the amortization. |
Lessor - Apartment Home and Retail and Commercial Leases
The Operating Partnership’s communities and retail and commercial space are leased to tenants under operating leases. As of September 30, 2019, our apartment home leases generally have initial terms of 12 months or less and represent 98.4% of our total lease revenue. As of September 30, 2019, our retail and commercial space leases generally have initial terms between 5 and 15 years and represent approximately 1.6% of our total lease revenue. Our apartment home leases are generally renewable at the end of the lease term, subject to potential increases in rental rates, and our retail and commercial space leases generally have renewal options, subject to associated increases in rental rates and
57
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
certain other conditions. (See Note 12, Reportable Segments for further discussion around our major revenue streams and disaggregation of our revenue.)
Future minimum lease payments from our retail and commercial leases as of September 30, 2019 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
Retail and Commercial Leases |
|
|
2019 |
|
$ |
1,810 |
|
2020 |
|
|
7,778 |
|
2021 |
|
|
7,442 |
|
2022 |
|
|
6,841 |
|
2023 |
|
|
6,517 |
|
Thereafter |
|
|
19,874 |
|
Total future minimum lease payments (a) |
|
$ |
50,262 |
| (a) | We have excluded our apartment home leases from this table as our apartment home leases generally have initial terms of 12 months of less. |
Certain of our leases with retail and commercial tenants provide for the payment by the lessee of additional variable rent based on a percentage of the tenant’s revenue. The amounts shown in the table above do not include these variable percentage rents. The Operating Partnership recorded variable percentage rents of less than $0.1 million and $0.1 million during the three and nine months ended September 30, 2019, respectively.
6. DEBT, NET
Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. For purposes of classification in the following table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Operating Partnership having effectively established the fixed interest rate for the underlying debt instrument. Secured debt consists of the following as of September 30, 2019 and December 31, 2018 (dollars in thousands):
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.
58
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
Fixed Rate Debt
Mortgage notes payable. During the nine months ended September 30, 2019, the Operating Partnership entered into a fixed rate mortgage note payable for $72.5 million with an interest rate of 3.10%. Interest payments are due monthly and the note matures in February 2030.
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 2.07% as of September 30, 2019.
Guarantor on Unsecured Debt
The Operating Partnership is the guarantor on the General Partner’s unsecured revolving credit facility with an aggregate borrowing capacity of $1.1 billion, an unsecured commercial paper program with an aggregate borrowing capacity of $500 million, $400 million of medium-term notes due January 2022, a $350 million term loan due September 2023, $300 million of medium-term notes due July 2024, $300 million of medium-term notes due October 2025, $300 million of medium-term notes due September 2026, $300 million of medium-term notes due July 2027, $300 million of medium-term notes due January 2028, $300 million of medium-term notes due January 2029, $300 million of medium-term notes due January 2030, and $400 million of medium-term notes due August 2031. As of September 30, 2019 and December 31, 2018, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $60.0 million and $101.1 million, respectively, outstanding under its unsecured commercial paper program.
In October 2019, the General Partner issued $100.0 million of 3.20% senior unsecured medium-term notes due 2030 and $300.0 million of 3.10% senior unsecured medium-term notes due 2034. The General Partner will use the net proceeds for the repayment of its $400.0 million aggregate principal amount (plus the make-whole amount of approximately $21.5 million and accrued and unpaid interest) of its 4.63% senior unsecured medium-term notes due January 2022. The 2034 notes were issued as “green” bonds and, as a result, the General Partner intends to allocate the net proceeds from the sale of the 2034 notes to fund eligible green projects, including previously incurred development costs related to properties that have received at least a LEED Silver certification.
The 2030 notes are a further issuance of, and form a single series with the $300.0 million aggregate principal amounts of the General Partner’s 3.20% notes due 2030 that were issued on July 2, 2019. As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was $400.0 million.
7. RELATED PARTY TRANSACTIONS
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 $2.7 million and $3.3 million during the three months ended September 30, 2019 and 2018, respectively, and $9.7 million and $10.5 million during the nine months ended September 30, 2019 and 2018, 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 September 30, 2019 and 2018, the Operating Partnership reimbursed the General Partner $4.6 million and $3.8 million, respectively, and during the nine months ended September 30, 2019 and 2018, the Operating Partnership reimbursed the General Partner $12.7 million and $11.4 million, respectively, for shared services related to corporate level property management costs incurred by the General Partner. These shared cost
59
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
reimbursements 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
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
The following table summarizes the Operating Partnership’s Notes payable due to the General Partner as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate at |
|
Balance Outstanding |
|||||
|
|
|
September 30, |
|
September 30, |
|
December 31, |
|||
|
|
|
2019 |
|
2019 |
|
2018 |
|||
|
Note due August 2021 |
|
5.34 |
% |
|
$ |
5,500 |
|
$ |
5,500 |
|
Note due December 2023 |
|
5.18 |
% |
|
|
83,196 |
|
|
83,196 |
|
Note due April 2026 |
|
4.12 |
% |
|
|
184,638 |
|
|
184,638 |
|
Note due November 2028 |
|
4.69 |
% |
|
|
133,205 |
|
|
133,205 |
|
Note due December 2028 (a) |
|
3.63 |
% |
|
|
217,428 |
|
|
293,576 |
|
Total notes payable due to the General Partner |
|
|
|
|
$ |
623,967 |
|
$ |
700,115 |
| (a) | In December 2018, the Operating Partnership converted the remaining outstanding portion of the Advances (to)/from the General Partner capital balance in connection with entering into an unsecured revolving note payable with the General Partner. There is no limit on the total commitments under this note. Interest is incurred on the unpaid principal balance at a variable interest rate equivalent to the General Partner’s weighted average interest rate on borrowings, or 3.63% as of September 30, 2019. The note matures on December 1, 2028. To the extent there is an outstanding principal balance on the revolving note payable, the General Partner, at its discretion, can demand payment at any time prior to the stated maturity date of the note, |
Certain limited partners of the Operating Partnership have provided guarantees or reimbursement agreements related to these notes payable. The guarantees were provided by the limited partners in conjunction with their contribution of properties to the Operating Partnership. The Operating Partnership recognized interest expense on the notes payable of $7.0 million and $3.1 million during the three months ended September 30, 2019 and 2018, respectively, and $21.4 million and $9.2 million during the nine months ended September 30, 2019 and 2018, respectively.
8. 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 September 30, 2019 and December 31, 2018 are summarized as follows (dollars in thousands):
| (a) | See Note 6, Debt, Net. |
There were no transfers into or out of each of the levels of the fair value hierarchy during the nine months ended September 30, 2019.
Financial Instruments Carried at Fair Value
The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.
61
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
The General Partner, on behalf of the Operating Partnership, incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Operating Partnership has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
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 September 30, 2019 and December 31, 2018, the Operating Partnership has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Operating Partnership has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. In conjunction with the FASB’s fair value measurement guidance, the Operating Partnership made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Financial Instruments Not Carried at Fair Value
As of September 30, 2019, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments, which includes debt instruments, are classified in Level 3 of the fair value hierarchy due to the significant unobservable inputs that are utilized in their respective valuations.
The Operating Partnership records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Cash flow estimates are based upon historical results adjusted to reflect management’s best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair value. The General Partner’s estimates of fair value represent management’s estimates based upon Level 3 inputs such as industry trends and reference to market rates and transactions. The Operating Partnership did not incur any other-than-temporary impairments in the value of its investments in unconsolidated entities during the three and nine months ended September 30, 2019 and 2018.
9. 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
62
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
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 upfront 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 6, Debt, Net.)
The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated other comprehensive income/(loss), net on the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. As of and during the three and nine months ended September 30, 2019 and 2018, no derivatives designated as cash flow hedges were held by the Operating Partnership.
Amounts reported in Accumulated other comprehensive income/(loss), net related to derivatives will be reclassified to interest expense as interest payments are made on the General Partner’s variable-rate debt that is owed by the Operating Partnership. As of September 30, 2019, no derivatives designated as cash flow hedges were held by the Operating Partnership and, as a result, no amounts are anticipated to be reclassified as an increase to interest expense through September 30, 2020.
Derivatives not designated as hedges are not speculative and are used to manage the Operating Partnership’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of GAAP. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in no gain or loss for each of the three and nine months ended September 30, 2019 and 2018.
As of September 30, 2019, we had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
Product |
|
Instruments |
|
Notional |
|
|
Interest rate caps |
|
1 |
|
$ |
19,880 |
Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Balance Sheets
As of September 30, 2019 and December 31, 2018, the fair value of the Operating Partnership’s derivative financial instruments was zero.
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations
During the three and nine months ended September 30, 2019 and 2018, the Operating Partnership’s derivative instruments did not impact the Consolidated Statement of Operations.
Credit-risk-related Contingent Features
The General Partner has agreements with its derivative counterparties that contain a provision where the General Partner could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the General Partner’s default on the indebtedness.
The General Partner has certain agreements with some of its derivative counterparties that contain a provision where, in the event of default by the General Partner or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative agreement, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity’s creditworthiness is materially weaker than the original party to the derivative agreement.
63
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
10. CAPITAL STRUCTURE
General Partnership Units
The General Partner has complete discretion to manage and control the operations and business of the Operating Partnership, which includes but is not limited to the acquisition and disposition of real property, construction of buildings and making capital improvements, and the borrowing of funds from outside lenders or UDR and its subsidiaries to finance such activities. The General Partner can generally authorize, issue, sell, redeem or purchase any OP Unit or securities of the Operating Partnership without the approval of the limited partners. The General Partner can also approve, with regard to the issuances of OP Units, the class or one or more series of classes, with designations, preferences, participating, optional or other special rights, powers and duties including rights, powers and duties senior to limited partnership interests without approval of any limited partners except holders of Class A Limited Partnership Units. There were 110,883 General Partnership units outstanding at September 30, 2019 and December 31, 2018, all of which were held by UDR.
Limited Partnership Units
As of September 30, 2019 and December 31, 2018, there were 183,952,659 and 183,525,660, respectively, of limited partnership units outstanding, of which 1,873,332 were Class A Limited Partnership Units for both periods. UDR owned 176,099,189, or 95.7%, and 174,137,816, or 94.9%, of OP Units outstanding at September 30, 2019 and December 31, 2018, respectively, of which 121,661 were Class A Limited Partnership Units for both periods. The remaining 7,853,470, or 4.3%, and 9,387,844, or 5.1%, of OP Units outstanding were held by non-affiliated partners at September 30, 2019 and December 31, 2018, respectively, of which 1,751,671 were Class A Limited Partnership Units for both periods.
Subject to the terms of the Operating Partnership Agreement, the limited partners have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the Operating Partnership Agreement), provided that such OP Units have been outstanding for at least one year. UDR, as general partner of the Operating Partnership, may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of UDR for each OP Unit), as defined in the Operating Partnership Agreement.
The 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 non-affiliated limited partners was $380.7 million and $371.9 million as of September 30, 2019 and December 31, 2018, 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.
64
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
The following table shows OP Units outstanding and OP Unit activity as of and for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UDR, Inc. |
|
|
||||
|
|
|
Class A |
|
|
|
|
|
Class A |
|
|
|
|
|
|
|
Limited |
|
Limited |
|
Limited |
|
Limited |
|
General |
|
|
|
|
|
Partners |
|
Partners |
|
Partner |
|
Partner |
|
Partner |
|
Total |
|
Ending balance at December 31, 2018 |
|
1,751,671 |
|
7,636,173 |
|
174,016,155 |
|
121,661 |
|
110,883 |
|
183,636,543 |
|
Vesting of LTIP Units |
|
— |
|
426,999 |
|
— |
|
— |
|
— |
|
426,999 |
|
OP redemptions for UDR stock |
|
— |
|
(1,961,373) |
|
1,961,373 |
|
— |
|
— |
|
— |
|
Ending balance at September 30, 2019 |
|
1,751,671 |
|
6,101,799 |
|
175,977,528 |
|
121,661 |
|
110,883 |
|
184,063,542 |
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 certain employees and non-employee directors and vest over a period of up to four years. Class 2 LTIP Units are granted to certain employees and vest over a period from one to three years subject to certain performance and market conditions being achieved. Vested LTIP Units may be converted into OP Units provided that such LTIP Units have been outstanding for at least two years from the date of grant.
Allocation of Profits and Losses
Profit of the Operating Partnership is allocated in the following order: (i) to the General Partner and the Limited Partners in proportion to and up to the amount of cash distributions made during the year, and (ii) to the General Partner and Limited Partners in accordance with their percentage interests. Losses and depreciation and amortization expenses, non-recourse liabilities are allocated to the General Partner and Limited Partners in accordance with their percentage interests. Losses allocated to the Limited Partners are capped to the extent that such an allocation would not cause a deficit in the Limited Partners’ capital account. Such losses are, therefore, allocated to the General Partner. If any Partner’s capital balance were to fall into a deficit, any income and gains are allocated to each Partner sufficient to eliminate its negative capital balance.
11. COMMITMENTS AND CONTINGENCIES
Commitments
Real Estate Commitments
The following summarizes the Operating Partnership’s real estate commitments at September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
Operating Partnership's |
||
|
|
|
Properties |
|
Investment |
|
Remaining Commitment |
||
|
Real estate communities - redevelopment |
|
1 |
|
$ |
6,254 |
|
$ |
18,746 |
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
65
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
otherwise, will not have a material adverse effect on the Operating Partnership’s financial condition, results of operations or cash flows.
12. REPORTABLE SEGMENTS
GAAP guidance requires that segment disclosures present the measure(s) used by the Chief Operating Decision Maker to decide how to allocate resources and for purposes of assessing such segments’ performance. The Operating Partnership has the same Chief Operating Decision Maker as that of its parent, the General Partner. The Chief Operating Decision Maker consists of several members of UDR’s executive management team who use several generally accepted industry financial measures to assess the performance of the business for our reportable operating segments.
The Operating Partnership owns and operates multifamily apartment communities throughout the United States that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The primary financial measures of the Operating Partnership’s apartment communities are rental income and net operating income (“NOI”), and are included in the Chief Operating Decision Maker’s assessment of the Operating Partnership’s performance on a consolidated basis. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. NOI is defined as total revenues less direct property operating expenses. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI are property management costs, which are the Operating Partnership’s allocable share of costs incurred by the General Partner for shared services of corporate level property management employees and related support functions and costs. The Chief Operating Decision Maker of the General Partner utilizes NOI as the key measure of segment profit or loss.
The Operating Partnership’s two reportable segments are Same-Store Communities and Non-Mature Communities/Other:
| ● | Same-Store Communities represent those communities acquired, developed, and stabilized prior to July 1, 2018 (for the quarter-to-date comparison) or January 1, 2018 (for the year-to-date) and held as of September 30, 2019. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. |
| ● | Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties. |
Management of the General Partner evaluates the performance of each of the Operating Partnership’s apartment communities on a Same-Store Community and Non-Mature Community/Other basis, as well as individually and geographically. This is consistent with the aggregation criteria under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Operating Partnership’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the Chief Operating Decision Maker.
All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of the Operating Partnership’s total revenues during the three and nine months ended September 30, 2019 and 2018.
The following is a description of the principal streams from which the Operating Partnership generates its revenue:
Lease Revenue
66
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
Lease revenue related to leases is recognized on an accrual basis when due from residents or tenants in accordance with ASC 842, Leases. Rental payments are generally due on a monthly basis and recognized on a straight-line basis over the noncancellable lease term because collection of the lease payments was probable at lease commencement, inclusive of any periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option. In addition, in circumstances where a lease incentive is provided to tenants, the incentive is recognized as a reduction of lease revenue on a straight-line basis over the lease term.
Lease revenue also includes all pass-through revenue from retail and residential leases and common area maintenance reimbursements from retail leases. These services represent non-lease components in a contract as the Operating Partnership transfers a service to the lessee other than the right to use the underlying asset. The Operating Partnership has elected the practical expedient under the leasing standard to not separate lease and non-lease components from its resident and retail lease contracts as the timing and pattern of revenue recognition for the non-lease component and related lease component are the same and the combined single lease component would be classified as an operating lease.
Other Revenue
Other revenue is generated by services provided by the Operating Partnership to its retail and residential tenants and other unrelated third parties. These fees are generally recognized as earned.
The following table details rental income and NOI for the Operating Partnership’s reportable segments for the three and nine months ended September 30, 2019 and 2018, and reconciles NOI to Net income/(loss) attributable to OP unitholders on the Consolidated Statements of Operations (dollars in thousands):
67
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
|
September 30, (a) |
|
September 30, (b) |
|
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Reportable apartment home segment lease revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
62,760 |
|
$ |
60,569 |
|
$ |
185,840 |
|
$ |
178,401 |
|
|
Mid-Atlantic Region |
|
|
14,900 |
|
|
14,645 |
|
|
44,592 |
|
|
43,814 |
|
|
Southeast Region |
|
|
12,808 |
|
|
12,604 |
|
|
37,957 |
|
|
36,782 |
|
|
Northeast Region |
|
|
8,098 |
|
|
7,936 |
|
|
24,036 |
|
|
23,541 |
|
|
Southwest Region |
|
|
1,901 |
|
|
1,865 |
|
|
— |
|
|
— |
|
|
Non-Mature Communities/Other |
|
|
7,468 |
|
|
8,694 |
|
|
27,295 |
|
|
30,830 |
|
|
Total segment and consolidated rental income |
|
$ |
107,935 |
|
$ |
106,313 |
|
$ |
319,720 |
|
$ |
313,368 |
|
|
Reportable apartment home segment other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
2,063 |
|
$ |
1,750 |
|
$ |
5,908 |
|
$ |
5,484 |
|
|
Mid-Atlantic Region |
|
|
551 |
|
|
441 |
|
|
1,515 |
|
|
1,359 |
|
|
Southeast Region |
|
|
799 |
|
|
658 |
|
|
2,301 |
|
|
2,099 |
|
|
Northeast Region |
|
|
187 |
|
|
178 |
|
|
521 |
|
|
496 |
|
|
Southwest Region |
|
|
87 |
|
|
58 |
|
|
— |
|
|
— |
|
|
Non-Mature Communities/Other |
|
|
78 |
|
|
141 |
|
|
419 |
|
|
591 |
|
|
Total segment and consolidated rental income |
|
$ |
3,765 |
|
$ |
3,226 |
|
$ |
10,664 |
|
$ |
10,029 |
|
|
Total reportable apartment home segment rental income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
64,823 |
|
$ |
62,319 |
|
$ |
191,748 |
|
$ |
183,885 |
|
|
Mid-Atlantic Region |
|
|
15,451 |
|
|
15,086 |
|
|
46,107 |
|
|
45,173 |
|
|
Southeast Region |
|
|
13,607 |
|
|
13,262 |
|
|
40,258 |
|
|
38,881 |
|
|
Northeast Region |
|
|
8,285 |
|
|
8,114 |
|
|
24,557 |
|
|
24,037 |
|
|
Southwest Region |
|
|
1,988 |
|
|
1,923 |
|
|
— |
|
|
— |
|
|
Non-Mature Communities/Other |
|
|
7,546 |
|
|
8,835 |
|
|
27,714 |
|
|
31,421 |
|
|
Total segment and consolidated rental income |
|
$ |
111,700 |
|
$ |
109,539 |
|
$ |
330,384 |
|
$ |
323,397 |
|
|
Reportable apartment home segment NOI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same-Store Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Region |
|
$ |
49,528 |
|
$ |
47,692 |
|
$ |
146,673 |
|
$ |
140,603 |
|
|
Mid-Atlantic Region |
|
|
10,611 |
|
|
10,178 |
|
|
31,691 |
|
|
30,953 |
|
|
Southeast Region |
|
|
9,371 |
|
|
9,336 |
|
|
27,984 |
|
|
26,979 |
|
|
Northeast Region |
|
|
5,736 |
|
|
6,001 |
|
|
18,201 |
|
|
18,260 |
|
|
Southwest Region |
|
|
1,405 |
|
|
1,253 |
|
|
— |
|
|
— |
|
|
Non-Mature Communities/Other |
|
|
4,181 |
|
|
5,688 |
|
|
17,102 |
|
|
21,177 |
|
|
Total segment and consolidated NOI |
|
|
80,832 |
|
|
80,148 |
|
|
241,651 |
|
|
237,972 |
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property management |
|
|
(3,211) |
|
|
(3,012) |
|
|
(9,498) |
|
|
(8,893) |
|
|
Other operating expenses |
|
|
(2,301) |
|
|
(2,347) |
|
|
(7,123) |
|
|
(6,098) |
|
|
Real estate depreciation and amortization |
|
|
(35,155) |
|
|
(35,043) |
|
|
(104,730) |
|
|
(108,906) |
|
|
General and administrative |
|
|
(4,066) |
|
|
(4,143) |
|
|
(12,878) |
|
|
(12,997) |
|
|
Casualty-related (charges)/recoveries, net |
|
|
1,088 |
|
|
10 |
|
|
1,169 |
|
|
(906) |
|
|
Gain/(loss) on sale of real estate owned |
|
|
— |
|
|
— |
|
|
— |
|
|
70,300 |
|
|
Income/(loss) from unconsolidated entities |
|
|
(2,383) |
|
|
(2,378) |
|
|
(6,917) |
|
|
(10,102) |
|
|
Interest expense |
|
|
(7,521) |
|
|
(5,100) |
|
|
(22,247) |
|
|
(15,209) |
|
|
Net (income)/loss attributable to noncontrolling interests |
|
|
(448) |
|
|
(440) |
|
|
(1,252) |
|
|
(1,278) |
|
|
Net income/(loss) attributable to OP unitholders |
|
$ |
26,835 |
|
$ |
27,695 |
|
$ |
78,175 |
|
$ |
143,883 |
|
| (a) | Same-Store Community population consisted of 15,941 apartment homes. |
| (b) | Same-Store Community population consisted of 15,723 apartment homes. |
68
UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SEPTEMBER 30, 2019
The following table details the assets of the Operating Partnership’s reportable segments as of September 30, 2019 and December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
||
|
|
|
2019 |
|
2018 |
||
|
Reportable apartment home segment assets |
|
|
|
|
|
|
|
Same-Store Communities (a): |
|
|
|
|
|
|
|
West Region |
|
$ |
2,003,088 |
|
$ |
1,981,007 |
|
Mid-Atlantic Region |
|
|
667,755 |
|
|
663,083 |
|
Southeast Region |
|
|
349,767 |
|
|
340,722 |
|
Northeast Region |
|
|
408,244 |
|
|
406,149 |
|
Southwest Region |
|
|
144,028 |
|
|
141,882 |
|
Non-Mature Communities/Other |
|
|
288,872 |
|
|
279,142 |
|
Total segment assets |
|
|
3,861,754 |
|
|
3,811,985 |
|
Accumulated depreciation |
|
|
(1,762,168) |
|
|
(1,658,161) |
|
Total segment assets - net book value |
|
|
2,099,586 |
|
|
2,153,824 |
|
Reconciling items: |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
40 |
|
|
125 |
|
Restricted cash |
|
|
14,637 |
|
|
13,563 |
|
Investment in unconsolidated entities |
|
|
82,269 |
|
|
103,026 |
|
Operating lease right-of-use assets |
|
|
135,766 |
|
|
— |
|
Other assets |
|
|
23,321 |
|
|
34,052 |
|
Total consolidated assets |
|
$ |
2,355,619 |
|
$ |
2,304,590 |
| (a) | Same-Store Community population consisted of 15,941 apartment homes. |
Markets included in the above geographic segments are as follows:
| i. | West Region — Orange County, San Francisco, Seattle, Los Angeles, Monterey Peninsula, Other Southern California and Portland |
| ii. | Mid-Atlantic Region — Metropolitan, D.C. and Baltimore |
| iii. | Southeast Region — Nashville, Tampa and Other Florida |
| iv. | Northeast Region — New York and Boston |
| v. | Southwest Region — Denver |
69
|
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 the availability of capital and the stability of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments and redevelopments, delays in completing lease-ups on schedule or at expected rent and occupancy levels, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, expectations on occupancy levels and rental rates, expectations concerning joint ventures and partnerships with third parties, expectations that automation will help grow net operating income, and expectations on annualized net operating income.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
| ● | general economic conditions; |
| ● | unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates; |
| ● | the failure of acquisitions to achieve anticipated results; |
| ● | possible difficulty in selling apartment communities; |
| ● | competitive factors that may limit our ability to lease apartment homes or increase or maintain rents; |
| ● | insufficient cash flow that could affect our debt financing and create refinancing risk; |
| ● | failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders; |
| ● | development and construction risks that may impact our profitability; |
| ● | potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs to us; |
| ● | risks from climate change that impacts our properties or operations; |
| ● | risks from extraordinary losses for which we may not have insurance or adequate reserves; |
| ● | risks from cybersecurity breaches of our information technology systems and the information technology systems of our third party vendors and other third parties; |
| ● | uninsured losses due to insurance deductibles, self-insurance retention, uninsured claims or casualties, or losses in excess of applicable coverage; |
| ● | delays in completing developments and lease-ups on schedule; |
| ● | our failure to succeed in new markets; |
| ● | risks that third parties who have an interest in or are otherwise involved in projects in which we have an interest, including mezzanine borrowers, joint venture partners or other investors, do not perform as expected; |
| ● | changing interest rates, which could increase interest costs and affect the market price of our securities; |
70
| ● | potential liability for environmental contamination, which could result in substantial costs to us; |
| ● | the imposition of federal taxes if we fail to qualify as a REIT under the Code in any taxable year; |
| ● | our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price; and |
| ● | changes in real estate laws, tax laws, rent control or stabilization laws or other laws affecting our business. |
A discussion of these and other factors affecting our business and prospects is set forth in Part 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.
The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on the consolidated financial statements for the three and nine months ended September 30, 2019 and 2018, of each of UDR, Inc. and United Domination Realty, L.P.
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 September 30, 2019, our consolidated real estate portfolio included 138 communities in 13 states plus the District of Columbia totaling 43,683 apartment homes, and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 29 communities with 7,453 apartment homes. The Same-Store Community apartment home population for the three and nine months ended September 30, 2019, was 38,177 and 37,959, respectively.
71
The following table summarizes our market information by major geographic markets as of and for the three and nine months ended September 30, 2019:
| (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 September 30, 2019, the Company was developing one wholly-owned community with a total of 292 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 July 1, 2018 (for quarter-to-date comparison) or January 1, 2018 (for year-to-date comparison) and held as of September 30, 2019. 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.
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.
72
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, sales of properties, borrowings under our credit agreements, and/or the issuance of debt and/or equity securities. Our primary source of liquidity is our cash flow from operations, as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes, and borrowings under our credit agreements. We routinely use our working capital credit facility, our unsecured revolving credit facility and issuances of commercial paper to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we continue to execute on maintaining a diversified portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through net cash provided by property operations, secured and unsecured borrowings, the issuance of debt or equity securities, and/or the disposition of properties. We believe that our net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings under credit agreements, the issuance of debt or equity securities, and/or dispositions of properties.
We have a shelf registration statement filed with the Securities and Exchange Commission, or “SEC,” which provides for the issuance of common stock, preferred stock, depositary shares, debt securities, guarantees of debt securities, warrants, subscription rights, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of issuance.
In July 2017, the Company entered into an ATM sales agreement under which the Company may offer and sell up to 20.0 million shares of its common stock, from time to time, to or through its sales agents and may enter into separate forward sales agreements to or through its forward purchasers. Upon entering into the ATM sales agreement, the Company simultaneously terminated the sales agreement for its prior at-the-market equity offering program, which was entered into in April 2017, which replaced the prior at-the-market equity offering program entered into in April 2012. During the three months ended September 30, 2019, the Company sold 2.2 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $100.5 million at a weighted average price per share of $46.19. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $1.1 million, were approximately $99.4 million, which were primarily used to fund the Company’s recent acquisitions. During the nine months ended September 30, 2019, the Company sold 7.0 million shares of common stock through its ATM program for aggregate gross proceeds of approximately $316.5 million at a weighted average price per share of $45.29. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $4.0 million, were approximately $312.3 million, which were primarily used to fund the Company’s recent acquisitions. As of September 30, 2019, we had 13.0 million shares of common stock available for future issuance under the ATM program.
In July 2019, the Company issued $300.0 million of 3.20% senior unsecured medium-term notes due January 15, 2030. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The notes were priced at 99.66% of the principal amount at issuance. The Company used the net proceeds for the repayment of debt, including amounts outstanding under the Company’s commercial paper program and Working Capital Credit Facility, and for other general corporate purposes. The Operating Partnership is the guarantor of this debt. The Company previously entered into forward starting interest rate swaps to hedge against the interest rate risk of this debt. The all-in weighted average interest rate, inclusive of the impact of these interest rate swaps, was 3.42%.
In August 2019, the Company issued $400.0 million of 3.00% senior unsecured medium-term notes due August 15, 2031. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2020. The notes were priced at 99.71% of the principal amount at issuance. In combination with the issuance, the Company entered into a treasury lock agreement to hedge against interest rate risk of this debt. The all-in weighted average interest rate, inclusive of the impact of the treasury lock, was 3.01%. The Company will use the net proceeds for the repayment of debt, including the repayment of all $300.0 million aggregate principal amount (plus the make whole amount of approximately $5.4 million) of its 3.70% senior unsecured medium-term notes due October 1, 2020, and to fund potential acquisitions or for other general corporate purposes.
73
In August 2019, the Company sold 7.5 million shares of its common stock for aggregate gross proceeds of approximately $349.9 million at a price per share of $46.65. Aggregate net proceeds from the sale, after offering-related expenses, were approximately $349.8 million, which were used for planned acquisitions of assets, working capital and general corporate purposes.
In September 2019, the Company entered into a forward sales agreement under its ATM program for 1.3 million shares of common stock at an initial forward price per share of $47.68. The initial forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current federal funds rate and the amount of dividends paid to holders of UDR common stock over the term of the forward sales agreement. The Company does not initially receive any proceeds from any sale of borrowed shares by the forward seller. As of September 30, 2019, no shares under the forward sales agreement have been settled. The final date by which shares sold under the forward sales agreement must be settled is March 31, 2020. See Note 6, Income/(Loss) per Share, in the Notes to the UDR Consolidated Financial Statements included in this Report for additional discussion of forward sales agreements.
In October 2019, the Company issued $100.0 million of 3.20% senior unsecured medium-term notes due 2030 and $300.0 million of 3.10% senior unsecured medium-term notes due 2034. Interest is payable semi-annually in arrears on January 15 and July 15 for the 2030 notes, and May 1 and November 1 for the 2034 notes. The 2030 notes were priced at 103.32% of the principal amount at issuance, and the 2034 notes were priced at 99.56% of the principal amount at issuance. In combination with the issuance, the Company entered into treasury lock agreements to hedge against interest rate risk on $150.0 million of this debt. The all-in weighted average interest rate, inclusive of the impact of the treasury locks, was 3.24% for the 2030 notes and 3.13% for the 2034 notes. The Company will use the net proceeds for the repayment of all $400.0 million aggregate principal amount (plus the make-whole amount of approximately $21.5 million and accrued and unpaid interest) of its 4.63% senior unsecured medium-term notes due January 2022. The 2034 notes were issued as “green” bonds and, as a result, the Company intends to allocate the net proceeds from the sale of the 2034 notes to fund eligible green projects, including previously incurred development costs related to properties that have received at least a LEED Silver certification.
The 2030 notes are a further issuance of, and form a single series with, the $300.0 million aggregate principal amount of the Company’s 3.20% notes due 2030 that were issued on July 2, 2019. As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was $400.0 million.
Future Capital Needs
Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, unsecured commercial paper, proceeds from the issuance of equity or debt securities, sales of properties, joint ventures, and, to a lesser extent, from cash flows provided by property operations. Acquisition activity in strategic markets may be funded through joint ventures, by the reinvestment of proceeds from the sale of properties, through the issuance of equity or debt securities, the issuance of operating partnership units and the assumption or placement of secured and/or unsecured debt.
During the remainder of 2019, we have approximately $1.0 million of secured debt maturing, inclusive of principal amortization, and $60.0 million of unsecured debt maturing, comprised solely of unsecured commercial paper. We anticipate repaying the remaining 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.
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 19, 2019. 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 19, 2019. 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.
74
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 nine months ended September 30, 2019 and 2018.
Operating Activities
For the nine months ended September 30, 2019, our Net cash provided by/(used in) operating activities was $456.9 million, compared to $406.7 million for the comparable period in 2018. The increase in cash flow from operating activities was primarily due to improved net operating income, primarily driven by revenue growth at communities and net operating income from communities acquired in 2019, partially offset by changes in operating assets and liabilities.
Investing Activities
For the nine months ended September 30, 2019, Net cash provided by/(used in) investing activities was $(1.4) billion, compared to $(203.1) million for the comparable period in 2018. The increase in cash used in investing activities was primarily due to the acquisitions made during the current period and a decrease in proceeds from the sales of real estate investments, partially offset by a decrease in spend for development of real estate assets and an increase in distributions received from unconsolidated joint ventures.
Acquisitions
In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 386 apartment home operating community in Anaheim, California, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $33.5 million. In connection with the acquisition, the Company repaid approximately $59.8 million of joint venture construction financing. As a result, in January 2019, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture. The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately $115.7 million and recorded approximately $2.4 million of in-place lease intangibles.
In January 2019, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 155 apartment home operating community located in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $20.0 million. In connection with the acquisition, the Company repaid approximately $26.0 million of joint venture construction financing. As a result, in January 2019, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture. The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately $58.1 million and recorded approximately $2.4 million of real estate intangibles and approximately $0.6 million of in-place lease intangibles.
In January 2019, the Company acquired a to-be-developed parcel of land located in Washington D.C. for approximately $27.1 million.
In February 2019, the Company acquired a to-be-developed parcel of land located in Denver, Colorado for approximately $13.7 million.
In February 2019, the Company acquired a 188 apartment home operating community located in Brooklyn, New York for approximately $132.1 million. The Company increased its real estate assets owned by approximately $97.5 million and recorded approximately $33.6 million of real estate intangibles and approximately $1.0 million of in-place lease intangibles.
In February 2019, the Company acquired a 381 apartment home operating community located in St. Petersburg, Florida for approximately $98.3 million. The Company increased its real estate assets owned by approximately $96.0 million and recorded approximately $2.3 million of in-place lease intangibles.
In April 2019, the Company acquired a 498 apartment home operating community located in Towson, Maryland for approximately $86.4 million. The Company increased its real estate assets owned by approximately $82.5 million and recorded approximately $3.9 million of in-place lease intangibles.
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In May 2019, the Company acquired a 313 apartment home operating community located in King of Prussia, Pennsylvania for approximately $107.3 million. The Company increased its real estate assets owned by approximately $106.4 million and recorded approximately $0.9 million of in-place lease intangibles.
In May 2019, the Company acquired a 240 apartment home operating community located in St. Petersburg, Florida for approximately $49.4 million. The Company increased its real estate assets owned by approximately $48.2 million and recorded approximately $1.2 million of in-place lease intangibles.
In June 2019, the Company acquired a 200 apartment home operating community located in Waltham, Massachusetts for approximately $84.6 million. The Company increased its real estate assets owned by approximately $82.6 million and recorded approximately $2.0 million of in-place lease intangibles.
In August 2019, the Company acquired a 914 apartment home operating community located in Norwood, Massachusetts for approximately $270.2 million. The Company increased its real estate assets owned by approximately $260.1 million and recorded approximately $10.1 million of in-place lease intangibles.
In August 2019, the Company acquired a 185 apartment home operating community located in Englewood, New Jersey for approximately $83.6 million. The Company increased its real estate assets owned by approximately $77.5 million and recorded approximately $4.6 million of real estate intangibles and approximately $1.5 million of in-place lease intangibles.
In August 2019, the Company purchased a 292 apartment home operating community in Washington, D.C., directly from the UDR/KFH joint venture, thereby increasing its ownership interest from 30% to 100%, for a purchase price at 100% of approximately $184.0 million, before $2.8 million of closing costs incurred by UDR at acquisition.
Subsequent to the acquisition, the Company received a distribution from the UDR/KFH joint venture of $22.9 million related to the 30% interest it previously held in the community following the payment of closing costs and repayment of the joint venture mortgage debt. As a result of the acquisition, in August 2019, the Company consolidated the operating community. The Company had previously accounted for its 30% ownership interest as an unconsolidated joint venture. The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate owned by approximately $156.0 million and recorded approximately $5.9 million of in-place lease intangibles.
Dispositions
In June 2019, the Company sold a parcel of land located in Los Angeles, California for $38.0 million, resulting in a gain of approximately $5.3 million. Prior to the sale, the parcel of land was subject to a ground lease, under which UDR was the lessor, scheduled to expire in 2065. The ground lease included a purchase option for the lessee to acquire the land during specific periods of the ground lease term. During the second quarter, the lessee exercised the purchase option resulting in the sale by the Company and the ground lease being terminated.
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 nine months ended September 30, 2019, total capital expenditures of $113.9 million, or $2,735 per stabilized home, which in aggregate include recurring capital expenditures and major renovations, were spent across our portfolio, excluding development, as compared to $80.4 million, or $2,037 per stabilized home, for the comparable period in 2018.
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The increase in total capital expenditures was primarily due to:
| ● | an increase of $21.6 million in spend for our operations platform, which include smart home installations in certain of our properties; and |
| ● | an increase of 65.9%, or $12.4 million, in major renovations, which include major structural changes and/or architectural revisions to existing buildings. |
The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, for the nine months ended September 30, 2019 and 2018 (dollars in thousands):
| (a) | NOI enhancing improvements are expenditures that result in increased income generation or decreased expense growth. |
| (b) | Major renovations include major structural changes and/or architectural revisions to existing buildings. |
| (c) | 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 NOI enhancing improvements, which we believe will provide a return on investment in excess of our cost of capital. Our objective in redeveloping a community is twofold: we aim to meaningfully grow rental rates while also achieving cap rate compression through asset quality improvement.
Consolidated Real Estate Under Development and Redevelopment
At September 30, 2019, our development pipeline consisted of one wholly-owned community totaling 292 homes, none of which have been completed, with a budget of $97.5 million, in which we have a carrying value of $21.8 million. The community is estimated to be completed during the first quarter of 2022.
At September 30, 2019, the Company was redeveloping two communities, located in Boston, Massachusetts and New York, New York, both of which are expected to be completed in the first quarter of 2021. The redevelopments include the renovation of building exteriors, corridors, and common area amenities as well as individual apartment homes.
During the nine months ended September 30, 2019, we incurred $31.3 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings, an increase of $12.4 million compared to the nine months ended September 30, 2018.
Unconsolidated Joint Ventures and Partnerships
The Company recognizes income or losses from our investments in unconsolidated joint ventures and partnerships consisting of our proportionate share of the net income or losses of the joint ventures and partnerships. In addition, we may earn fees for providing management services to the communities held by the unconsolidated joint ventures and partnerships.
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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 nine months ended September 30, 2019:
| ● | we made investments totaling $72.1 million in our unconsolidated joint ventures, including contributions of $48.8 million to four unconsolidated investments under our Developer Capital Program, which earn preferred returns ranging from 8.0% to 12.5%; |
| ● | our proportionate share of the net income/(loss) of the joint ventures and partnerships was $19.4 million, including a $10.6 million gain from the sale of two operating communities from our UDR/KFH joint venture and a $4.7 million unrealized gain recorded on an unconsolidated technology investment; and |
| ● | we received distributions of $65.5 million, of which $4.1 million were operating cash flows and $61.4 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 impairments in the value of its investments in unconsolidated joint ventures or partnerships during the nine months ended September 30, 2019 and 2018.
Financing Activities
For the nine months ended September 30, 2019, our Net cash provided by/(used in) financing activities was $740.6 million, compared to $(197.4) million for the comparable period of 2018.
The following significant financing activities occurred during the nine months ended September 30, 2019:
| ● | payments of secured debt of $160.5 million; which was offset by proceeds from the issuance of secured debt of $162.5 million; |
| ● | net repayment of $41.1 million on our unsecured commercial paper program; |
| ● | net proceeds of $34.4 million from the Company’s unsecured revolving credit facilities; |
| ● | net proceeds of $312.3 million from sales under our ATM program; |
| ● | sold 7.5 million shares of common stock for aggregate net proceeds of approximately $349.8 million at a net price per share of $46.63; |
| ● | issued $300 million of 3.20% senior unsecured medium-term notes due January 15, 2030, for net proceeds of approximately $296.6 million; |
| ● | issued $400 million of 3.00% senior unsecured medium-term notes due August 15, 2031, for net proceeds of approximately $395.7 million, $300.0 million of which was used to repay 3.70% medium-term notes due October 1, 2020; and |
| ● | payment of $282.7 million of distributions to our common stockholders. |
Credit Facilities and Commercial Paper Program
During the three months ended September 30, 2019, the Company prepaid the $90.0 million outstanding balance under its secured credit facility with Fannie Mae from proceeds received from the refinancing of the debt. This transaction was accounted for as a debt modification.
The Company has a $1.1 billion unsecured revolving credit facility and a $350.0 million unsecured term loan. The Credit Agreement for these facilities allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2023, with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date of September 30, 2023.
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Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points and a facility fee of 15 basis points, and the Term Loan has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 75 to 145 basis points, the facility fee ranges from 10 to 30 basis points, and the margin under the Term Loan ranges from 80 to 165 basis points.
As of September 30, 2019, we had no outstanding borrowings under the Revolving Credit Facility, leaving $1.1 billion of unused capacity (excluding $2.8 million of letters of credit at September 30, 2019), and $350.0 million of outstanding borrowings under the Term Loan.
We have a working capital credit facility, which provides for a $75 million unsecured revolving credit facility (the “Working Capital Credit Facility”) with a scheduled maturity date of January 15, 2021. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points. Depending on the Company’s credit rating, the margin ranges from 75 to 145 basis points.
As of September 30, 2019, we had $34.4 million of outstanding borrowings under the Working Capital Credit Facility, leaving $40.6 million of unused capacity.
The bank revolving credit facilities and the term loan are subject to customary financial covenants and limitations, all of which we were in compliance with at September 30, 2019.
We have an unsecured commercial paper program. Under the terms of the program, we may issue unsecured commercial paper up to a maximum aggregate amount outstanding of $500 million. The notes are sold under customary terms in the United States commercial paper market and rank pari passu with all of our other unsecured indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership. As of September 30, 2019, we had issued $60.0 million of commercial paper, for one month terms, at a weighted average annualized rate of 2.28%, leaving $440.0 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 $156.4 million in variable rate debt that is not subject to interest rate swap contracts as of September 30, 2019. If market interest rates for variable rate debt increased by 100 basis points, our interest expense for the nine months ended September 30, 2019 would increase by $2.6 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 11, 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):
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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 and nine months ended September 30, 2019 and 2018.
Net Income/(Loss) Attributable to Common Stockholders
Net income/(loss) attributable to common stockholders was $26.2 million ($0.09 per diluted share) for the three months ended September 30, 2019, as compared to $17.6 million ($0.07 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 $18.8 million primarily due to higher revenue per occupied home and NOI from operating communities, including those acquired in 2019 and recently developed, partially offset by a decrease from sold communities; and |
| ● | an increase in income/(loss) from unconsolidated entities of $14.1 million, primarily attributable to a $5.3 million gain recognized on the sale of an operating property from our UDR/KFH joint venture and a $4.4 million unrealized gain recorded on an unconsolidated technology investment. |
This was partially offset by:
| ● | an increase in depreciation expense of $19.5 million primarily due to communities acquired in 2019 and homes delivered from our development communities in 2018, partially offset by a decrease from sold communities and fully depreciated assets; and |
| ● | an increase in interest expense of $8.1 million primarily due to the early pay off of debt during 2019, resulting in prepayment costs. |
Net income/(loss) attributable to common stockholders was $84.3 million ($0.30 per diluted share) for the nine months ended September 30, 2019, as compared to $118.1 million ($0.44 per diluted share) for the comparable period in the prior year. The decrease resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
| ● | a gain of $5.3 million on the sale of a parcel of land in Los Angeles, California during the nine months ended September 30, 2019, as compared to a gain of $70.3 million on the sale of an operating community in Orange County, California during the nine months ended September 30, 2018; |
| ● | an increase in depreciation expense of $35.3 million primarily due to communities acquired in 2019 and homes delivered from our development communities in 2018, partially offset by a decrease from sold communities and fully depreciated assets; and |
| ● | an increase in interest expense of $14.5 million primarily due to higher average debt balances, higher average interest rates, lower capitalized interest, and the early pay off of debt during 2019, resulting in prepayment costs. |
This was partially offset by:
| ● | an increase in total property NOI of $48.4 million primarily due to higher revenue per occupied home and NOI from operating communities, including those acquired in 2019 and recently developed, partially offset by a decrease from sold communities; |
| ● | an increase in interest income and other income/(expense), net of $7.9 million, primarily attributable to an $8.5 million promoted interest on the prepayment of a note to a multifamily technology company; and |
| ● | an increase in income/(loss) from unconsolidated entities of $24.5 million, primarily attributable to a $10.5 million gain recognized on the sale of two operating properties from our UDR/KFH joint venture, a $4.7 million |
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| unrealized gain recorded on an unconsolidated technology investment and an increase in Developer Capital Program investment; and |
| ● | a decrease in net income attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership of $3.9 million, primarily attributable to the noncontrolling interest’s share of the gain on sale associated with the disposition in 2018. |
Apartment Community Operations
Our net income results are primarily from NOI generated from the operation of our apartment communities. The Company defines NOI, which is a non-GAAP financial measure, as rental income less direct property rental expenses. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI is property management expense which is calculated as 2.875% of property revenue to cover the regional supervision and accounting costs related to consolidated property operations and land rent.
Management considers NOI a useful metric for investors as it is a more meaningful representation of a community’s continuing operating performance than net income as it is prior to corporate-level expense allocations, general and administrative costs, capital structure and depreciation and amortization.
Although the Company considers NOI a useful measure of operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities as determined in accordance with GAAP. NOI excludes several income and expense categories as detailed in the reconciliation of NOI to Net income/(loss) attributable to UDR, Inc. below.
The following table summarizes the operating performance of our total property NOI for each of the periods presented (dollars in thousands):
| (a) | Same-Store consists of 38,177 apartment homes. |
| (b) | Same-Store consists of 37,959 apartment homes. |
| (c) | Excludes depreciation, amortization, and property management expenses. |
| (d) | 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. |
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The following table is our reconciliation of Net income/(loss) attributable to UDR, Inc. to total property NOI for the periods presented (dollars in thousands):
Same-Store Communities
Our Same-Store Community properties, those acquired, developed, and stabilized prior to July 1, 2018 (for the quarter-to-date comparison) and January 1, 2018 (for the year-to-date comparison) and held on September 30, 2019 consisted of 38,177 and 37,959 apartment homes and provided 85.5% and 87.0% of our total NOI for the three and nine months ended September 30, 2019, respectively.
Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018
NOI for our Same-Store Community properties increased 3.9%, or $6.5 million, for the three months ended September 30, 2019 compared to the same period in 2018. The increase in property NOI was attributable to a 3.7%, or $8.6 million, increase in property rental income, which was partially offset by a 3.1%, or $2.2 million, increase in operating expenses. The increase in property income was primarily driven by a 2.9%, or $6.4 million, increase in rental rates and an 11.4%, or $2.8 million, increase in reimbursement and ancillary and fee income. Physical occupancy increased 0.1% to 96.9% and total monthly income per occupied home increased 3.6% to $2,206.
The increase in operating expenses was primarily driven by a 17.5%, or $1.6 million, increase in repair and maintenance expense, offset by a 10.4%, or $1.6 million, decrease in personnel expense as a result of fewer employees, and a 5.8%, or $1.6 million, increase in real estate taxes, which was primarily due to higher assessed valuations.
The operating margin (property net operating income divided by property rental income) was 71.1% and 71.0% for the three months ended September 30, 2019 and 2018, respectively.
Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018
NOI for our Same-Store Community properties increased 4.0%, or $20.0 million, for the nine months ended September 30, 2019 compared to the same period in 2018. The increase in property NOI was attributable to a 3.7%, or $25.8 million, increase in property rental income, which was partially offset by a 2.9%, or $5.8 million, increase in operating expenses. The increase in property income was primarily driven by a 2.8%, or $18.1 million, increase in rental rates and an 11.8%, or $8.3 million, increase in reimbursement and ancillary and fee income. Physical occupancy stayed the same at 96.9% and total monthly income per occupied home increased 3.7% to $2,175.
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The increase in operating expenses was primarily driven by a 16.4%, or $4.0 million, increase in repair and maintenance expense, partially offset by a 7.9%, or $3.5 million, decrease in personnel expense as a result of fewer employees, and a 4.6%, or $3.7 million, increase in real estate taxes, which was primarily due to higher assessed valuations.
The operating margin (property net operating income divided by property rental income) was 71.6% and 71.4% for the nine months ended September 30, 2019 and 2018, respectively.
Non-Mature Communities/Other
UDR’s Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, which include communities recently developed or acquired, redevelopment properties, sold or held for disposition properties, and non-apartment components of mixed use properties.
Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018
The remaining 14.5%, or $29.5 million, of our total NOI during the three months ended September 30, 2019 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 72.1%, or $12.4 million, for the three months ended September 30, 2019 as compared to the same period in 2018. The increase was primarily attributable to a $13.9 million increase in stabilized, non-mature communities NOI and a $3.8 million increase in NOI from acquired communities, partially offset by a $3.1 million decrease in NOI from sold and held for disposition communities and a $1.5 million decrease in NOI from redevelopment communities.
Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018
The remaining 13.0%, or $77.2 million, of our total NOI during the nine months ended September 30, 2019 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 58.2%, or $28.4 million, for the nine months ended September 30, 2019 as compared to the same period in 2018. The increase was primarily attributable to a $21.5 million increase in development communities, an $17.9 million increase in stabilized, non-mature communities NOI and a $4.3 million increase in NOI from acquired communities, partially offset by a $7.9 million decrease in NOI from sold and held for disposition communities and a $5.0 million decrease in NOI from non-residential/other.
Real estate depreciation and amortization
For the three months ended September 30, 2019 and 2018, the Company recognized real estate depreciation and amortization of $127.4 million and $107.9 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to communities acquired in 2019 and homes delivered from our development communities in 2018, partially offset by a decrease from sold communities and fully depreciated assets.
For the nine months ended September 30, 2019 and 2018, the Company recognized real estate depreciation and amortization of $357.8 million and $322.5 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to communities acquired in 2019 and homes delivered from our development communities in 2018, partially offset by a decrease from sold communities and fully depreciated assets.
Gain/(Loss) on sale of real estate owned
During the nine months ended September 30, 2019, the Company recognized a gain of $5.3 million on the sale of a parcel of land in Los Angeles, California. During the nine months ended September 30, 2018, the Company recognized a gain of $70.3 million on the sale of an operating community in Orange County, California.
Income/(loss) from unconsolidated entities
For the three months ended September 30, 2019 and 2018, the Company recognized income/(loss) from unconsolidated entities of $12.7 million and $(1.4) million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to a $5.3 million gain recognized for the sale of an operating community in our UDR/KFH joint venture and a $4.4 million unrealized gain recorded on an unconsolidated technology investment.
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For the nine months ended September 30, 2019 and 2018, the Company recognized income/(loss) from unconsolidated entities of $19.4 million and $(5.1) million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to a $10.5 million gain recognized for the sale of two operating communities in our UDR/KFH joint venture, a $4.7 million unrealized gain recorded on an unconsolidated technology investment and an increase in Developer Capital Program investments.
Interest expense
For the nine months ended September 30, 2019 and 2018, the Company recognized interest expense of $110.5 million and $95.9 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to higher average debt balances, higher average interest rates, lower capitalized interest and the early pay off of debt during 2019, resulting in prepayment costs.
Interest income and other income/(expense), net
For the nine months ended September 30, 2019 and 2018, we recognized interest income and other income/(expense), net of $13.0 million and $5.1 million, respectively. The increase in 2019 as compared to 2018 was primarily attributable to an $8.5 million promoted interest on the prepayment of a note to a multifamily technology company.
Noncontrolling Interest
For the nine months ended September 30, 2019 and 2018, we recognized net income attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership of $6.9 million and $10.8 million, respectively. The decrease in 2019 as compared to 2018 was primarily attributable to the noncontrolling interest’s share of the gain on sale associated with the disposition in 2018.
Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and material costs, the majority of our apartment leases have initial terms of 12 months or less, which generally enables us to compensate for any inflationary effects by increasing rental rates on our apartment homes. Although an extreme escalation in costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the three and nine months ended September 30, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.
Funds from Operations, Funds from Operations as Adjusted, and Adjusted Funds from Operations
Funds from Operations
Funds from operations (“FFO”) attributable to common stockholders and unitholders is defined as Net income/(loss) attributable to common stockholders (computed in accordance with GAAP), excluding impairment write-downs of depreciable real estate related to the main business of the Company or of investments in non-consolidated investees that are directly attributable to decreases in the fair value of depreciable real estate held by the investee, gains and losses from sales of depreciable real estate related to the main business of the Company and income taxes directly associated with those gains and losses, plus real estate depreciation and amortization, and after adjustments for noncontrolling interests, and the Company’s share of unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust's (“Nareit”) definition issued in April 2002 and restated in November 2018. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, Nareit created FFO as a supplemental measure of a REIT’s operating performance. In the
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computation of diluted FFO, if OP Units, DownREIT Units, unvested restricted stock, unvested LTIP Units, stock options, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive, they are included in the diluted share count.
Management considers FFO a useful metric for investors as the Company uses FFO in evaluating property acquisitions and its operating performance, and believes that FFO should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company’s activities in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of funds available to fund our cash needs.
Funds from Operations as Adjusted
FFO as Adjusted (“FFOA”) attributable to common stockholders and unitholders is defined as FFO excluding the impact of non-comparable items including, but not limited to, acquisition-related costs, prepayment costs/benefits associated with early debt retirement, impairment write-downs or gains and losses on sales of real estate or other assets incidental to the main business of the Company and income taxes directly associated with those gains and losses, casualty-related expenses and recoveries, severance costs and legal and other costs.
Management believes that FFOA is useful supplemental information regarding our operating performance as it provides a consistent comparison of our operating performance across time periods and allows investors to more easily compare our operating results with other REITs. FFOA is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to FFOA. However, other REITs may use different methodologies for calculating FFOA or similar FFO measures and, accordingly, our FFOA may not always be comparable to FFOA or similar FFO measures calculated by other REITs. FFOA should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity.
Adjusted Funds from Operations
Adjusted FFO (“AFFO”) attributable to common stockholders and unitholders is defined as FFOA less recurring capital expenditures on consolidated communities that are necessary to help preserve the value of and maintain functionality at our communities. Therefore, management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO or FFOA.
AFFO is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to AFFO. Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs. However, other REITs may use different methodologies for calculating AFFO and, accordingly, our AFFO may not always be comparable to AFFO calculated by other REITs. AFFO should not be considered as an alternative to net income/(loss) (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
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The following table outlines our reconciliation of Net income/(loss) attributable to common stockholders to FFO, FFOA, and AFFO for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
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The following table is our reconciliation of FFO share information to weighted average common shares outstanding, basic and diluted, reflected on the UDR Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (shares in thousands):
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 September 30, 2019, the Operating Partnership’s real estate portfolio included 52 communities located in nine states and the District of Columbia with a total of 16,434 apartment homes.
As of September 30, 2019, UDR owned 110,883 units of our general partnership interests and 176,099,189 units of our limited partnership interests (the “OP Units”), or approximately 95.7% of our outstanding OP Units. By virtue of its ownership of our OP Units and being our sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this section of this Report to the Operating Partnership or “we,” “us” or “our” refer to UDR, L.P. together with its consolidated subsidiaries, and all references in this section to “UDR” or the “General Partner” refer solely to UDR, Inc.
UDR is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities. The General Partner was formed in 1972 as a Virginia corporation and changed its state of incorporation from Virginia to Maryland in June 2003. At September 30, 2019, the General Partner’s consolidated real estate portfolio included 138 communities located in 13 states and the District of Columbia with a total of 43,683 apartment homes. In addition, the General Partner had an ownership interest in 29 communities with 7,453 completed apartment homes through unconsolidated operating communities.
The Operating Partnership’s same-store community apartment home population for the three and nine months ended September 30, 2019 was 15,941 and 15,723, respectively.
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The following table summarizes our market information by major geographic markets as of and for the three and nine months ended September 30, 2019:
| (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 July 1, 2018 (for quarter-to-date comparison) or January 1, 2018 (for year-to-date comparison) and held as of September 30, 2019. 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.
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 working capital credit facility, its unsecured revolving credit facility and issuances of commercial paper to temporarily fund
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certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we continue to execute on maintaining a diversified portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings owed by us under the General Partner’s credit agreements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities and potential property acquisitions through net cash provided by property operations, borrowings and the disposition of properties. We believe that our net cash provided by property operations and borrowings will continue to be adequate to meet both operating requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings owed by us under the General Partner’s credit agreements, and the disposition of properties.
Future Capital 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 September 30, 2019, the Operating Partnership does not have any debt maturing during the remainder of 2019.
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 Annual Report on Form 10-K, filed with the SEC on February 19, 2019. 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 nine months ended September 30, 2019 and 2018.
Operating Activities
For the nine months ended September 30, 2019, Net cash provided by/(used in) operating activities was $197.9 million compared to $196.5 million for the comparable period in 2018. 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 nine months ended September 30, 2019, Net cash provided by/(used in) investing activities was $(31.7) million compared to $70.6 million for the comparable period in 2018. The decrease in cash provided by investing activities was primarily due to proceeds received from the sale of an operating community in Orange County, California in 2018 and an increase in capital expenditures during the nine months ended September 30, 2019, as compared to the same period in 2018.
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Acquisitions and Dispositions
The Operating Partnership did not have any acquisitions or dispositions of real estate during the nine months ended September 30, 2019.
Financing Activities
For the nine months ended September 30, 2019 and 2018, our Net cash provided by/(used in) financing activities was $(165.2) million compared to $(266.4) million for the comparable period of 2018. The decrease in cash used in financing activities was primarily due to an increase in proceeds from the issuance of secured debt and a decrease in advances to the General Partner, partially offset by the repayment of notes payable to the General Partner.
Guarantor on Unsecured Debt
The Operating Partnership is the guarantor on the General Partner’s unsecured revolving credit facility with an aggregate borrowing capacity of $1.1 billion, an unsecured commercial paper program with an aggregate borrowing capacity of $500 million, $400 million of medium-term notes due January 2022, a $350 million term loan due September 2023, $300 million of medium-term notes due July 2024, $300 million of medium-term notes due October 2025, $300 million of medium-term notes due September 2026, $300 million of medium-term notes due July 2027, $300 million of medium-term notes due January 2028, $300 million of medium-term notes due January 2029, $300 million of medium-term notes due January 2030, and $400 million of medium-term notes due August 2031. As of September 30, 2019 and December 31, 2018, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $60.0 million and $101.1 million, respectively, outstanding under its unsecured commercial paper program.
The credit facilities are subject to customary financial covenants and limitations.
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 $27.0 million in variable rate debt that is not subject to interest rate swap contracts as of September 30, 2019. If market interest rates for variable rate debt increased by 100 basis points, our interest expense for the nine months ended September 30, 2019 would increase by $0.2 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 9, 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):
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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 and nine months ended September 30, 2019 and 2018.
Net Income/(Loss) Attributable to OP Unitholders
Net income attributable to OP unitholders was $26.8 million ($0.15 per diluted OP Unit) for the three months ended September 30, 2019, as compared to net income of $27.7 million ($0.15 per diluted OP Unit) for the comparable period in the prior year. The decrease in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:
| ● | an increase in interest expense of $2.4 million primarily due to the conversion in 2018 of the Advances (to)/from the General Partner capital balance into an unsecured note payable and an unsecured revolving note payable, both with the General Partner. |
This was partially offset by:
| ● | an increase in total property NOI of $0.7 million primarily due to higher revenue per occupied home and NOI from operating communities, partially offset by a decrease from sold communities. |
Net income attributable to OP unitholders was $78.2 million ($0.42 per diluted OP Unit) for the nine months ended September 30, 2019, as compared to net income of $143.9 million ($0.78 per diluted OP Unit) for the comparable period in the prior year. The decrease in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:
| ● | no gains on the sale of real estate during the nine months ended September 30, 2019, as compared to a gain of $70.3 million on the sale of an operating community in Orange County, California during the nine months ended September 30, 2018; and |
| ● | and increase in interest expense of $7.0 million primarily due to the conversion in 2018 of the Advances (to)/from the General Partner capital balance into an unsecured note payable and an unsecured revolving note payable, both with the General Partner. |
This was partially offset by:
| ● | an increase in total property NOI of $3.7 million, primarily due to higher revenue per occupied home and NOI from operating communities, partially offset by a decrease from sold communities. |
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.
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The following table summarizes the operating performance of our total property NOI for the three and nine months ended September 30, 2019 and 2018 (dollars in thousands):
| (a) | Same-Store consists of 15,941 apartment homes. |
| (b) | Same-Store consists of 15,723 apartment homes. |
| (c) | Excludes depreciation, amortization, and property management expenses. |
| (d) | 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 and nine months ended September 30, 2019 and 2018 (dollars in thousands):
Same-Store Communities
Our Same-Store Community properties, those acquired, developed, and stabilized prior to July 1, 2018 (for quarter-to-date comparison) or January 1, 2018 (for year-to-date comparison) and held as of September 30, 2019, consisted of 15,941 and 15,723 apartment homes and provided 94.8% and 92.9% of our total NOI for the three and nine months ended September 30, 2019.
Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018
NOI for our Same-Store Community properties increased 2.9%, or $2.2 million, for the three months ended September 30, 2019 compared to the same period in 2018. The increase in property NOI was primarily attributable to a 3.4%, or $3.5 million, increase in property rental income, which was partially offset by a 4.8%, or $1.3 million, increase in operating expenses. The increase in property income was primarily driven by a 2.8%, or $2.6 million, increase in rental rates and a 12.8%, or $1.4 million, increase in reimbursement and ancillary and fee income. Physical occupancy increased 0.1% to 96.8% and total monthly income per occupied home increased 3.3% to $2,249.
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The increase in operating expenses was primarily driven by a 20.8%, or $0.8 million, increase in repair and maintenance expense, partially offset by a 10.6%, or $0.7 million, decrease in personnel expense as a result of fewer employees, and a 9.3%, or $0.9 million, increase in real estate taxes, which was primarily due to higher assessed valuations.
The operating margin (property net operating income divided by property rental income) was 73.6% and 73.9% for the three months ended September 30, 2019 and 2018, respectively.
Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018
NOI for our Same-Store Community properties increased 3.6%, or $7.8 million, for the nine months ended September 30, 2019 compared to the same period in 2018. The increase in property NOI was primarily attributable to a 3.7%, or $10.7 million, increase in property rental income, which was partially offset by a 3.9 %, or $2.9 million, increase in operating expenses. The increase in property income was primarily driven by a 2.8%, or $7.6 million, increase in rental rates and an 11.7%, or $3.6 million, increase in reimbursement and ancillary and fee income. Physical occupancy remained the same at 96.8% and total monthly income per occupied home increased 3.7% to $2,210.
The increase in operating expenses was primarily driven by a 20.2%, or $2.0 million, increase in repair and maintenance expense, partially offset by a 7.9%, or $1.4 million, decrease in personnel expense as a result of fewer employees, and a 6.5%, or $1.8 million, increase in real estate taxes, which was primarily due to higher assessed valuations.
The operating margin (property net operating income divided by property rental income) was 74.2% and 74.3% for the nine months ended September 30, 2019 and 2018, respectively.
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 September 30, 2019 vs. Three Months Ended September 30, 2018
The remaining 5.2% or $4.2 million, of our total NOI during the three months ended September 30, 2019 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 26.5%, or $1.5 million, for the three months ended September 30, 2019, compared to the same period in 2018. The decrease was primarily attributable to a $0.9 million decrease in NOI from redevelopment communities and a decrease of $0.5 million in NOI from non-residential/other.
Nine Months Ended September 30, 2019 vs. Nine Months Ended September 30, 2018
The remaining 7.1%, or $17.1 million, of our total NOI during the nine months ended September 30, 2019 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 19.2%, or $4.1 million, for the nine months ended September 30, 2019, compared to the same period in 2018. The decrease was primarily attributable to a $1.9 million decrease in NOI from non-residential/other, a $1.6 million decrease in NOI from redevelopment communities and a decrease of $0.9 million in NOI from sold communities.
Gain/(Loss) on Sale of Real Estate Owned
During the nine months ended September 30, 2019, the Operating Partnership did not recognize any gains on the sale of real estate. During the nine months ended September 30, 2018, the Operating Partnership recognized a gain of $70.3 million on the sale of an operating community in Orange County, California.
Interest Expense
During the three and nine months ended September 30, 2019, interest expense increased by $2.4 million and $7.0 million, respectively, as compared to the same periods in 2018, primarily due to the conversion in 2018 of the Advances (to)/from the General Partner capital balance into an unsecured note payable and an unsecured revolving note payable, both with the General Partner.
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Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and material costs, the majority of our apartment leases have initial terms of 12 months or less, which generally enables us to compensate for any inflationary effects by increasing rental rates on our apartment homes. Although an extreme escalation in costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the three and nine months ended September 30, 2019.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.
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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, 2018 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 September 30, 2019, 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, 2018.
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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 September 30, 2019, we carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, 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 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
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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.
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Item 1A. |
RISK FACTORS |
There are many factors that affect the business and the results of operations of the Company and the Operating Partnership, some of which are beyond the control of the Company and the Operating Partnership. The following is a description of important factors that may cause the actual results of operations of the Company and the Operating Partnership in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Report relating to our financial results, operations and business prospects. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
Risks Related to Our Real Estate Investments and Our Operations
Unfavorable Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels, Rental Revenues and the Value of Our Real Estate Assets. Unfavorable market conditions in the areas in which we operate or unfavorable economic conditions generally may significantly affect our occupancy levels, our rental rates and collections, the value of our properties and our ability to acquire or dispose of apartment communities on economically favorable terms. Our ability to lease our properties at favorable rates is adversely affected by the increase in supply in the multifamily and other rental markets and is dependent upon the overall level in the economy, which is adversely affected by, among other things, job losses and unemployment levels, recession, personal debt levels, housing markets, stock market volatility and uncertainty about the future. Some of our major expenses generally do not decline when related rents decline. We would expect that declines in our occupancy levels, 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 or the market value of our securities. Factors that may affect our occupancy levels, our rental revenues, and/or the value of our properties include the following, among others:
| ● | 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; |
| ● | changes 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. |
The Geographic Concentration of Our Communities in Certain Markets Could Have an Adverse Effect on Our Operations if a Particular Market is Adversely Impacted by Economic or Other Conditions. For the nine months ended
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September 30, 2019, approximately 51.0% of our total NOI was generated from communities located in the Washington, D.C. metropolitan area (15.7%), Orange County, CA (13.7%), the San Francisco Bay Area, CA (11.9%) and New York, NY (9.7%). For the year ended December 31, 2018, approximately 52.3% of our total NOI was generated from communities located in the Washington, D.C. metropolitan area (17.0%), Orange County, CA (12.8%), the San Francisco Bay Area, CA (12.2%) and New York, NY (10.3%). As a result, if any one or more of these markets is adversely impacted by regional or local economic conditions or local real estate market conditions or regulations, such conditions may have a greater adverse impact on our results of operations than if our portfolio was more geographically diverse.
We May Be Unable to Renew Leases or Relet Apartment Units as Leases Expire, or the Terms of Renewals or New Leases May Be Less Favorable Than Current Leases. When our residents decide to leave our apartments, whether because they decide not to renew their leases or they leave prior to their lease expiration date, we may not be able to relet their apartment units. Even if the residents do renew or we can relet the apartment units, the terms of renewal or reletting may be less favorable than current lease terms. Furthermore, because the majority of our apartment leases have initial terms of 12 months or less, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms. If we are unable to promptly renew the leases or relet the apartment units, or if the rental rates upon renewal or reletting are lower than expected rates, then our results of operations and financial condition may be adversely affected. If residents do not experience increases in their income, we may be unable to increase rent and/or delinquencies may increase.
We Face Certain Risks Related to Our Retail and Commercial Space. Certain of our properties include retail or commercial space that we lease to third parties. The long term nature of our retail and commercial leases (generally five to ten years with market based 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. We may not be able to lease new space for rents that are consistent with our projections or for market rates. Also, when leases for our retail or commercial space terminate either at the end of the lease or because a tenant leaves early, the space may not be relet or the terms of reletting, including the cost of allowances and concessions to tenants, may be less favorable than the prior lease terms. Our properties compete with other properties with retail or commercial space. The presence of competitive alternatives may adversely affect our ability to lease space and the level of rents we can obtain. If our retail or commercial tenants experience financial distress or bankruptcy, they may fail to comply with their contractual obligations, seek concessions in order to continue operations, or cease their operations, which could adversely impact our results of operations and financial condition.
Risk of Inflation/Deflation. Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses. The general risk of inflation is that interest on our debt, general and administrative expenses and other expenses increase at a rate faster than increases in our rental rates, which could adversely affect our financial condition or results of operations.
We Are Subject to Certain Risks Associated with Selling Apartment Communities, Which Could Limit Our Operational and Financial Flexibility. We periodically dispose of apartment communities that no longer meet our strategic objectives, but adverse market conditions may make it difficult to sell apartment communities we own. We cannot predict whether we will be able to sell any property for the price or on the terms we set, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. These conditions may limit our ability to dispose of properties and to change our portfolio in order to meet our strategic objectives, which could in turn adversely affect our financial condition, results of operations or our ability to fund other activities in which we may want to engage such as the purchase of properties, development or redevelopment, or funding the Developer Capital Program. We are also subject to the following risks in connection with sales of our apartment communities, among others:
| ● | a significant portion of the proceeds from 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,
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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:
| ● | we may be unable to obtain financing for acquisitions on favorable terms, including but not limited to interest rates, term 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 subsequently do not 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 and 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 acquire attractive investment opportunities on favorable terms, which could adversely affect our ability to grow or acquire properties profitably or with attractive returns.
Development and Construction Risks Could Impact Our Profitability. In the past we have selectively pursued the development and construction of apartment communities, and we intend to do so in the future as appropriate opportunities arise. Development activities have been, and in the future may be, conducted through wholly-owned affiliated companies or through joint ventures with unaffiliated parties. Our development and construction activities are subject to the following risks, among others:
| ● | we may be unable to obtain construction financing for development activities on favorable terms, including but not limited to interest rates, term 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 or quasi-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; |
| ● | cost may be higher or 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; |
| ● | 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 development opportunities; |
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| ● | 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; |
| ● | occupancy rates, rents and concessions at a newly developed community may fluctuate depending on a number of factors, including market and economic conditions, preventing us from meeting our expected return on our investment and our overall profitability goals; and |
| ● | when we sell communities or properties that we developed or renovated to third parties, we may be subject to warranty or construction defect claims that are uninsured or exceed the limits of our insurance. |
Bankruptcy or Defaults of Our Counterparties Could Adversely Affect Our Performance. We have relationships with and, from time to time, we execute transactions with or receive services from many counterparties, such as general contractors engaged in connection with our development activities or joint venture partners, among others. As a result, bankruptcies or defaults by these counterparties or their subcontractors could result in services not being provided, projects not being completed on time, or on budget, or at all, or volatility in the financial markets and economic weakness could affect the counterparties’ ability to complete transactions with us as intended, both of which could result in disruptions to our operations that may adversely affect our financial condition and results of operations.
Property Ownership Through Partnerships and Joint Ventures May Limit Our Ability to Act Exclusively in Our Interest. We have in the past and may in the future develop and/or acquire properties in partnerships and joint ventures, including those in which we own a preferred interest, with other persons or entities when we believe circumstances warrant the use of such structures. As of September 30, 2019, we had active joint ventures and partnerships, including our preferred equity investments, with a total equity investment of $791.2 million. We could become engaged in a dispute with one or more of our partners which could adversely impact us. Moreover, our partners may have business, economic or other objectives that are inconsistent with our objectives, including objectives that relate to the appropriate timing and terms of any sale or refinancing of a property. In some instances, our partners may have competing interests in our markets that could create conflicts of interest. Also, our partners might fail to make capital contributions when due 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 and could cause us to recognize unanticipated capital gains or losses or the loss of fee income.
We are also subject to other risks in connection with partnerships or joint ventures, including (i) a deadlock if we and our partner are unable to agree upon certain major and other decisions (which could result in litigation or disposing of an asset at a time at which we otherwise would not sell the asset), (ii) limitations on our ability to liquidate our position in the partnership or joint venture without the consent of the other partner, and (iii) requirements to provide guarantees in favor of lenders with respect to the indebtedness of the joint venture.
We May Not be Permitted to Dispose of Certain Properties or Pay Down the Indebtedness Associated with Those Properties When We Might Otherwise Desire to do so Without Incurring Additional Costs. In connection with certain property acquisitions, we have agreed with the sellers that we will not dispose of the acquired properties or reduce the mortgage indebtedness on such properties for significant periods of time unless we pay certain of the resulting tax costs of the sellers or dispose of the property in a transaction in which a gain is not recognized for federal income tax purposes by such sellers, and we may enter into similar agreements in connection with future property acquisitions. These agreements could result in us retaining properties that we would otherwise sell or not paying down or refinancing indebtedness that we would otherwise pay down or refinance. However, subject to certain conditions, we retain the right to substitute other property or debt to meet these obligations to the sellers.
We Could Incur Significant Insurance Costs and Some Potential Losses May Not Be Adequately Covered by Insurance. We have a comprehensive insurance program covering our properties and operating activities with limits of liability, deductibles and self-insured retentions customary within the multifamily industry. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, certain types of extraordinary losses which may not be adequately covered under our insurance program. In addition, we will sustain losses due to insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess of applicable coverage.
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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 insurance proceeds may occur in the future. If one or more of our significant properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could materially and adversely affect our financial condition and results of operations.
The cost of insuring our apartment communities is a component of expense. Insurance premiums and the terms and conditions of insurance policies are subject to significant fluctuations and changes, which are generally outside of our control. We insure our properties with insurance companies that we believe have a good rating at the time our policies are put into effect. The financial condition of one or more insurance companies that we hold policies with may be negatively impacted, which could result in their inability to pay on future insurance claims. Their inability to pay future claims may have a negative impact on our financial results. In addition, the failure, or exit or partial exit from an insurance market, of one or more insurance companies may affect our ability to obtain insurance or increase the costs to renew or replace our insurance policies or increase the cost of insuring properties.
Failure to Succeed in New Markets May Limit Our Growth. We have acquired in the past, and we may acquire in the future if appropriate opportunities arise, apartment communities that are outside of our existing markets. Entering into new markets may expose us to a variety of risks, and we may not be able to operate successfully in new markets. These risks include, among others:
| ● | 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 adversely affect our financial condition and results of operations.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.
We cannot assure you that costs or liabilities incurred as a result of environmental or building condition issues will not adversely affect our financial condition and results of operations.
Our Properties May Contain or Develop Harmful Mold or Suffer from Other Indoor Air Quality Issues, Which Could Lead to Liability for Adverse Health Effects or Property Damage or Cost for Remediation. When excessive moisture
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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 for property damage or personal injury.
Compliance or Failure to Comply with the Americans with Disabilities Act of 1990 or Other Safety Regulations and Requirements Could Result in Substantial Costs. The Americans with Disabilities Act generally requires that public buildings, including our properties, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. 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 and federal, state and local accessibility requirements in addition to those imposed by the Americans with Disabilities Act. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that could adversely affect our financial condition or results of operations.
The Adoption of, or Changes to, Rent Control, Rent Stabilization, Eviction, Tenants’ Rights and Similar Laws and Regulations in Our Markets Could Have an Adverse Effect on Our Results of Operations and Property Values. Various state and local governments have enacted and may continue to enact rent control, rent stabilization and similar laws and regulations that could limit our ability to raise rents or charge certain fees, including laws or court orders, either of which could have a retroactive effect. For example, in June 2019, the State of New York enacted new rent control regulations known as the Housing Stability and Tenant Protection Act of 2019 and, in October of 2019, the State of California enacted the Tenant Protection Act of 2019. We have seen a recent increase in governments enacting or considering, or being urged to consider, such laws and regulations. State and local governments or courts also may make changes to eviction and other tenants’ rights laws and regulations (including changes that apply retroactively) that could adversely impact our results of operations and the value of our properties. Laws and regulations regarding rent control, rent stabilization, eviction, tenants’ rights, and similar matters, as well as any lawsuits against us arising from such laws and regulations, may limit our ability to charge market rents, increase rents, evict delinquent tenants or recover increases in our operating expenses, which could have an adverse effect on our results of operations and the value of our properties.
Compliance with or Changes in Real Estate Tax and Other Laws and Regulations Could Adversely Affect Our Funds from Operations and Our Ability to Make Distributions to Stockholders. We are subject to federal, state and local laws, regulations, rules and ordinances at locations where we operate regarding a wide variety of matters that could affect, directly or indirectly, our operations. Generally, we do not directly pass through costs resulting from compliance with or changes in real estate tax laws to residential property tenants. We also do not generally pass through increases in income, service or other taxes to tenants under leases. These costs may adversely affect net operating income and the 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) 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 or unanticipated reductions in revenue, which could adversely affect our financial condition and results of operations. In addition, changes in federal and state legislation and regulation on climate change may result in increased capital expenditures to improve the energy efficiency of our existing communities and also may require us to spend more on our new development communities without a corresponding increase in revenue.
Risk of Damage from Catastrophic Weather and Natural Events. Our communities are located in areas that may experience catastrophic weather and other natural events from time to time, including mudslides, fires, hurricanes, tornadoes, floods, snow or ice storms, or other severe inclement weather. These adverse weather and natural events could cause damage or losses that may be greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We would also continue to be
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obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could adversely affect our financial condition and results of operations.
Risk of Potential Climate Change. To the extent that we experience any significant changes in the climate in areas where our communities are located, we may experience extreme weather conditions and changes in precipitation and temperature, all of which could result in physical damage to, and/or a decrease in demand for, our communities located in these areas or communities that are otherwise affected by these changes. Should the impact of such climate changes be material in nature, or occur for lengthy periods of time, our financial condition and results of operations could be adversely affected.
Risk of Earthquake Damage. Some of our communities are located in areas subject to earthquakes, including in the general vicinity of earthquake faults. We cannot assure you that an earthquake would not cause damage or losses greater than insured levels. In the event of a loss in excess of insured limits, we could lose our capital invested in the affected community, as well as anticipated future revenue from that community. We may also continue to be obligated to repay any mortgage indebtedness or other obligations related to the community. Any such loss could adversely affect our financial condition and results of operations. Insurance coverage for earthquakes can be costly due to limited industry capacity. As a result, we may experience shortages in desired coverage levels if market conditions are such that insurance is not available or the cost of insurance makes it, in management’s view, economically impractical.
Risk of Accidental Death or Injury Due to Fire, Natural Disasters or Other Hazards. The accidental death or injury of persons living in our communities due to fire, natural disasters or other hazards could have an adverse effect on our business and results of operations. Our insurance coverage may not cover all losses associated with such events, and we may experience difficulty marketing communities where any such events have occurred, which could have an adverse effect on our financial condition and results of operations.
Actual or Threatened Terrorist Attacks May Have an Adverse Effect on Our Business and Operating Results and Could Decrease the Value of Our Assets. Actual or threatened terrorist attacks and other acts of violence or war could have an adverse effect on our business and operating results. Attacks that directly impact one or more of our apartment communities could significantly affect our ability to operate those communities and thereby impair our ability to achieve our expected results. Further, our insurance coverage may not cover all losses caused by a terrorist attack. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have an adverse effect on our financial condition and results of operations.
Mezzanine Loan Assets Involve Greater Risks of Loss than Senior Loans Secured by Income-Producing Properties. We have in the past and may in the future originate mezzanine loans, which take the form of subordinated loans secured by second mortgages on the underlying property or subordinated loans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the entity owning the property. Mezzanine loans may involve a higher degree of risk than a senior mortgage secured by real property, because the security for the loan may lose all or substantially all of its value as a result of foreclosure by the senior lender and because it is in second position and there may not be adequate equity in the property. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some of or all our investment. In addition, mezzanine loans typically have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.
Risk Related to Preferred Equity Investments. We have in the past and may in the future make preferred equity investments in corporations, limited partnerships, limited liability companies or other entities that have been formed for the purpose of acquiring, developing or managing real property. Generally, we will not have the ability to control the daily operations of the entity, and we will not have the ability to select or remove a majority of the members of the board of directors, managers, general partner or partners or similar governing body of the entity or otherwise control its operations. Although we would seek to maintain sufficient influence over the entity to achieve our objectives, our partners may have interests that differ from ours and may be in a position to take actions without our consent or that are inconsistent with our interests. Further, if our partners were to fail to invest additional capital in the entity when required, we may have to invest additional capital to protect our investment. Our partners may fail to develop or operate the real property or refinance property indebtedness or sell the real property in the manner intended and as a result the entity may not be able to redeem our investment or pay the return expected to us in a timely manner if at all. In addition, we may not be able to dispose of our investment in the entity in a timely manner or at the price at which we would want to divest. In the event that such an entity fails to meet expectations or becomes insolvent, we may lose our entire investment in the entity.
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Risks Related to Ground Leases. We have in the past and may in the future enter into, as either landlord or tenant, a long-term ground lease with respect to a property or a portion thereof. Such ground leases may contain a rent reset provision that requires both parties to agree to a new rent or is based upon factors, for example fair market rent, that are not objective and are not within our control. We may not be able to agree with the counterparty to a revised rental rate, or the revised rental rate may be set by external factors, which could result in a different rental rate than we forecasted. In the past we have had disagreements with respect to revised rental rates and the disagreements have gone to arbitration (for resolution as provided in the applicable lease agreement) and certain of such arbitrations have been resolved in a manner adverse to us. In addition, the other party may not perform as expected under the ground lease or there may be a dispute with the other party to the ground lease. Any of these circumstances could have an adverse effect on our business, financial condition or operating results.
We May Experience a Decline in the Fair Value of Our Assets and Be Forced to Recognize Impairment Charges, Which Could Adversely Impact Our Financial Condition, Liquidity and Results of Operations and the Market Price of UDR’s Common Stock. A decline in the fair value of our assets may require us to recognize an impairment against such assets under generally accepted accounting principles as in effect in the United States (“GAAP”), if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we are required to recognize asset impairment charges in the future, these charges could adversely affect our financial condition, liquidity, results of operations and the per share trading price of UDR’s common stock.
Any Material Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an Adverse Effect on UDR’s Stock Price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we have one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on the per share trading price of UDR’s common stock.
A Breach of Information Technology Systems On Which We Rely Could Materially and Adversely Impact Our Business, Financial Condition, Results of Operations and Reputation. We rely on information technology systems, including the Internet and networks and systems maintained and controlled by third party vendors and other third parties, to process, transmit and store information and to manage or support our business processes. Third party vendors collect and hold personally identifiable information and other confidential information of our tenants, prospective tenants and employees. We also maintain confidential financial and business information regarding us and persons and entities with which we do business on our information technology systems. While we take steps, and generally require third party vendors to take steps, to protect the security of the information maintained in our and third party vendors’ information technology systems, including associate training and testing and the use of commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing of the information, it is possible that our or our third party vendors’ security measures will not be able to prevent human error or the systems’ improper functioning, or the loss, misappropriation, disclosure or corruption of personally identifiable information or other confidential or sensitive information, including information about our tenants and employees. Cybersecurity breaches, including physical or electronic break-ins, computer viruses, phishing scams, attacks by hackers, breaches due to employee error or misconduct, and similar breaches, can create system disruptions, shutdowns or unauthorized access to information maintained on our information technology systems or the information technology systems of our third party vendors or other third parties or otherwise cause disruption or negative impacts to occur to our business and adversely affect our financial condition and results of operations. While we maintain cyber risk insurance to provide some coverage for certain risks arising out of cybersecurity breaches, there is no assurance that such insurance would cover all or a significant portion of the costs or consequences associated with a cybersecurity breach. As the techniques used to obtain unauthorized access to information technology systems become more varied and sophisticated and the occurrence of such breaches becomes more frequent, we and our third party vendors and other third parties may be unable to adequately anticipate these techniques or breaches and implement appropriate preventative measures. Any failure to prevent cybersecurity breaches and maintain the proper function, security and availability of our or our third party vendors’ and other third parties’ information technology systems could interrupt our operations, damage our reputation and brand, damage our competitive position, make it difficult for us to attract and retain tenants, and subject us to liability claims or regulatory penalties, which could adversely affect our business, financial condition and results of operations.
Our Business and Operations Would Suffer in the Event of Information Technology System Failures. Despite system redundancy and the existence of a disaster recovery plan for our information technology systems, our information technology
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systems and the information technology systems maintained by our third party vendors are vulnerable to damage arising from any number of sources beyond our or our third party vendors’ control, including energy blackouts, natural disasters, terrorism, war, and telecommunication failures. Any failure to maintain proper function and availability of our or third party vendors’ information technology systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could adversely affect our business, financial condition and results of operations.
Social Media Presents Risks. The use of social media could cause us to suffer brand damage or unintended information disclosure. Negative posts or communications about us on a social networking website could damage our reputation. Further, employees or others may disclose non-public information regarding us or our business or otherwise make negative comments regarding us on social networking or other websites, which could adversely affect our business and results of operations. As social media evolves we will be presented with new risks and challenges.
Our Success Depends on Our Senior Management. Our success depends upon the retention of our senior management, whose continued service is not guaranteed. We may not be able to find qualified replacements for the individuals who make up our senior management if their services should no longer be available to us. The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations.
Changes in U.S. Accounting Standards May Materially and Adversely Affect Our Reported Results of Operations. Accounting for public companies in the United States is in accordance with GAAP, which is established by the Financial Accounting Standards Board (the “FASB”), an independent body whose standards are recognized by the SEC as authoritative for publicly held companies. Uncertainties posed by various initiatives of accounting standard-setting by the FASB and the SEC, which create and interpret applicable accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements. These changes could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements.
Risks Related to Our Indebtedness and Financings
Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are subject to the risks normally associated with debt financing, including the risk that our operating income and cash flow will be insufficient to make required payments of principal and interest, or could restrict our borrowing capacity under our line of credit due to debt covenant restraints. Sufficient cash flow may not be available to make all required debt payments and satisfy UDR’s distribution requirements to maintain its status as a REIT for federal income tax purposes. In addition, the amounts under our line of credit may not be available to us and we may not be able to access the commercial paper market if our operating performance falls outside the constraints of our debt covenants. We are also likely to need to refinance substantially all of our outstanding debt as it matures. We may not be able to refinance existing debt, or the terms of any refinancing may not be as favorable as the terms of the existing debt, which could create pressures to sell assets or to issue additional equity when we would otherwise not choose to do so. In addition, our failure to comply with our debt covenants could result in a requirement to repay our indebtedness prior to its maturity, which could have a material adverse effect on our financial condition and cash flow, and increase our financing costs and impact our ability to make distributions to UDR’s stockholders.
Failure to Generate Sufficient Income Could Impair Debt Service Payments and Distributions to Stockholders. If our apartment communities do not generate sufficient revenue to meet rental expenses, our ability to make required payments of interest and principal on our debt securities and to pay distributions to UDR’s stockholders or the Operating Partnership’s or the DownREIT Partnership’s unitholders will be adversely affected. The following factors, among others, may affect the income generated by our apartment communities:
| ● | the national and local economies; |
| ● | local real estate market conditions, such as an oversupply of apartment homes; |
| ● | tenants’ perceptions of the safety, convenience, and attractiveness of our communities and the neighborhoods where they are located; |
| ● | our ability to provide adequate management, maintenance and insurance; |
| ● | rental expenses, including real estate taxes and utilities; |
| ● | competition from other apartment communities; |
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| ● | changes in interest rates and the availability of financing; |
| ● | changes in governmental regulations and the related costs of compliance; and |
| ● | 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 revenue from that community. If a community is mortgaged to secure payment of debt and we are unable to make the mortgage payments, we could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgage holder.
Changing Interest Rates Could Increase Interest Costs and Adversely Affect Our Cash Flow and the Market Price of Our Securities. We currently have, and expect to incur in the future, interest-bearing debt, including unsecured commercial paper, at rates that vary with market interest rates. As of September 30, 2019, UDR had approximately $156.4 million of variable rate indebtedness outstanding, which constitutes approximately 4.0% of total outstanding indebtedness as of such date. As of September 30, 2019, the Operating Partnership had approximately $27.0 million of variable rate indebtedness outstanding, which constitutes approximately 27.1% of total outstanding indebtedness as of such date. An increase in interest rates would increase our interest expenses and increase the costs of refinancing existing indebtedness and of issuing new debt, including unsecured commercial paper. Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and to make distributions to security holders. The effect of prolonged interest rate increases could negatively impact our ability to make acquisitions and develop properties.
The Phase-Out of LIBOR and Transition to SOFR as a Benchmark Interest Rate Could Have Adverse Effects. In 2018, the Alternative Reference Rate Committee identified the Secured Overnight Financing Rate (“SOFR”) as the alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities, published by the Federal Reserve Bank of New York. By the end of 2021, it is expected that new contracts will not reference LIBOR and will instead use SOFR. Due to the broad use of LIBOR as a reference rate, all financial market participants, including us, are impacted by the risks associated with this transition and therefore it could adversely affect our operations and cash flows.
Our Debt Level May Be Increased. Our ability to incur debt is limited by covenants in our bank and other credit agreements. We manage our debt to be in compliance with these debt covenants, but subject to compliance with these covenants, we may increase the amount of our debt at any time without a concurrent improvement in our ability to service the additional debt.
Financing May Not Be Available and Could Be Dilutive. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit, construction loans and other forms of secured debt, commercial paper and other forms of unsecured debt, and equity financing, including common and preferred equity. We and other companies in the real estate industry have experienced limited availability of financing from time to time, including due to regulatory changes directly or indirectly affecting financing markets, for example the changes in terms on construction loans brought about by the Basel III capital requirements and the associated “High Volatility Commercial Real Estate” designation, which has adversely impacted the availability of loans, including construction loans, and the proceeds of and the interest rate thereon. Restricted lending practices could impact our ability to obtain financing or refinancing for our properties. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of UDR’s existing stockholders could be diluted.
Failure To Maintain Our Current Credit Ratings Could Adversely Affect Our Cost of Funds, Related Margins, Liquidity, and Access to Capital Markets. Moody’s and Standard & Poor’s routinely evaluate our debt and have given us ratings on our senior unsecured debt, commercial paper program and preferred stock. These ratings are based on a number of factors, which included their assessment of our financial strength, liquidity, capital structure, asset quality, and sustainability of cash flow and earnings. Due to changes in these factors and market conditions, we may not be able to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity, and access to capital markets, including our ability to access the commercial paper market.
Disruptions in Financial Markets May Adversely Impact Availability and Cost of Credit and Have Other Adverse Effects on Us and the Market Price of UDR’s Stock. Our ability to make scheduled payments on, or to refinance, our debt obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond our control. During the global financial crisis and the economic recession
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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, and may in the future be, suggested that could involve a reduction in the amount of financing Fannie Mae and Freddie Mac are able to provide, limitations on the loans that the agencies may make, which may not include loans secured by properties like our properties, or the phase out of Fannie Mae and Freddie Mac. While we believe Fannie Mae and Freddie Mac will continue to provide liquidity to our sector, should they discontinue doing so, have their mandates changed or reduced or be disbanded or reorganized by the government, or if there is reduced government support for multifamily housing generally, it may adversely affect interest rates, capital availability, development of multifamily communities and the value of multifamily residential real estate and, as a result, may adversely affect our business and results of operations.
The Soundness of Financial Institutions Could Adversely Affect Us. We have relationships with many financial institutions, including lenders under our credit facilities, and, from time to time, we execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, financial institutions or the financial services industry generally, could result in losses or defaults by these institutions. In the event that the volatility of the financial markets adversely affects these financial institutions or counterparties, we or other parties to the transactions with us may be unable to complete transactions as intended, which could adversely affect our results of operations.
Interest Rate Hedging Contracts May Be Ineffective and May Result in Material Charges. From time to time when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. We may do this to increase the predictability of our financing costs. Also, from time to time we may rely on interest rate hedging contracts to limit our exposure under variable rate debt to unfavorable changes in market interest rates. If the terms of new debt securities are not within the parameters of, or market interest rates fall below that which we incur under a particular interest rate hedging contract, the contract is ineffective. Furthermore, the settlement of interest rate hedging contracts has involved and may in the future involve material charges. In addition, our use of interest rate hedging arrangements may expose us to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Termination of these hedging agreements typically involves costs, such as transaction fees or breakage costs.
Risks Related to Tax Laws
We Would Incur Adverse Tax Consequences if UDR Failed to Qualify as a REIT. UDR has elected to be taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. We intend that our current organization and method of operation enable us to continue to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future. In addition, U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect UDR’s stockholders.
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If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including, for periods prior to 2018, any applicable alternative minimum tax) on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to UDR’s stockholders in computing our taxable income. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, we could not re-elect REIT status until the fifth calendar year after the year in which we first failed to qualify as a REIT. The additional tax liability from the failure to qualify as a REIT would reduce or eliminate the amount of cash available for investment or distribution to UDR’s stockholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In addition, we would no longer be required to make distributions to UDR’s stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.
Certain of our subsidiaries have also elected to be taxed as REITs under the Code, and are therefore subject to the same risks in the event that any such subsidiary fails to qualify as a REIT in any taxable year.
Dividends Paid By REITs Generally Do Not Qualify for Reduced Tax Rates. In general, the maximum U.S. federal income tax rate for dividends paid to individual U.S. stockholders is 20%. Unlike dividends received from a corporation that is not a REIT, our regular dividends (i.e., dividends other than capital gain dividends) to individual stockholders generally are not eligible for the reduced rates. However, under the Tax Cuts and Jobs Act of 2017, our individual U.S. stockholders generally may deduct 20% of such regular dividends under Section 199A of the Code, reducing the effective tax rate applicable to such dividends (although such provision will expire after 2025 absent future legislation).
UDR May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which are Subject to Certain Tax Risks. We have established taxable REIT subsidiaries. Despite UDR’s qualification as a REIT, its taxable REIT subsidiaries must pay income tax on their taxable income. In addition, we must comply with various tests to continue to qualify as a REIT for federal income tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not constitute permissible income and investments for certain of these tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature or are otherwise not respected.
REIT Distribution Requirements Limit Our Available Cash. As a REIT, UDR is subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth. We generally must distribute annually at least 90% of our net REIT taxable income, excluding any net capital gain, in order for our distributed earnings not to be subject to corporate income tax. We intend to make distributions to UDR’s stockholders to comply with the requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code.
Certain Property Transfers May Generate Prohibited Transaction Income, Resulting in a Penalty Tax on Gain Attributable to the Transaction. From time to time, we may transfer or otherwise dispose of some of our properties. Under the Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction and subject to a 100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction and we may jeopardize our ability to retain future gains on real property sales. In addition, income from a prohibited transaction might adversely affect UDR’s ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
Changes to the U.S. Federal Income Tax Laws, including the Enactment of Certain Tax Reform Measures, Could Have an Adverse Impact on Our Business and Financial Results. The Tax Cuts and Jobs Act of 2017 significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. The impact of the Act on us and our stockholders is uncertain, and may not become evident for some period of time. For example, the Act contained provisions that may reduce the relative competitive advantage of operating as a REIT, including the lowering of income tax rates on individuals and corporations, which eases the burden of double taxation on corporate dividends and potentially causes the single level of taxation on REIT distributions to become relatively less attractive. The Act also contains
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provisions allowing the expensing of capital expenditures, which could result in the bunching of taxable income and required distributions for REITs, and provisions extending the depreciable lives of certain real estate assets and further limiting the deductibility of interest expense, which could negatively impact the real estate market. In addition, there can be no assurance that future changes to the U.S. federal income tax laws or regulatory changes will not be proposed or enacted that could impact our business and financial results. The REIT rules are regularly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain of such changes could have an adverse impact on our business and financial results.
We cannot predict whether, when or to what extent the Tax Cuts and Jobs Act of 2017 and any new U.S. federal tax laws, regulations, interpretations or rulings will impact the real estate investment industry or REITs. Prospective investors are urged to consult their tax advisors regarding the effect of the Tax Cuts and Jobs Act of 2017 and potential future changes to the federal tax laws on an investment in our shares.
We May Be Adversely Affected by Changes in State and Local Tax Laws and May Become Subject to Tax Audits from Time to Time. Because UDR is organized and qualifies as a REIT, it is generally not subject to federal income taxes, but it is subject to certain state and local taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. A shortfall in tax revenues for states and local jurisdictions in which we own apartment communities may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional state and local taxes. These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to UDR’s stockholders. In the normal course of business, we or our affiliates (including entities through which we own real estate) may also become subject to federal, state or local tax audits. If we (or such entities) become subject to federal, state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition and results of operations.
The Operating Partnership and the DownREIT Partnership Intend to Qualify as Partnerships, but Cannot Guarantee That They Will Qualify. The Operating Partnership and the DownREIT Partnership intend to qualify as partnerships for federal income tax purposes, and intend to take that position for all income tax reporting purposes. If classified as partnerships, the Operating Partnership and the DownREIT Partnership generally will not be taxable entities and will not incur federal income tax liability. However, the Operating Partnership and the DownREIT Partnership would be treated as corporations for federal income tax purposes if they were “publicly traded partnerships,” unless at least 90% of their income was qualifying income as defined in the Code. A “publicly traded partnership” is a partnership whose partnership interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). Although neither the Operating Partnership’s nor the DownREIT Partnership’s partnership units are traded on an established securities market, because of the redemption rights of their limited partners, the Operating Partnership’s and DownREIT Partnership’s units held by limited partners could be viewed as readily tradable on a secondary market (or the substantial equivalent thereof), and the Operating Partnership and the DownREIT Partnership may not qualify for one of the “safe harbors” under the applicable tax regulations. Qualifying income for the 90% test generally includes passive income, such as real property rents, dividends and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most respects. The Operating Partnership and the DownREIT Partnership may not meet this qualifying income test. If either the Operating Partnership or the DownREIT Partnership were to be taxed as a corporation, it would incur substantial tax liabilities, and UDR would then fail to qualify as a REIT for tax purposes, unless it qualified for relief under certain statutory savings provisions, and our ability to raise additional capital would be impaired. In addition, even if the 90% test were met if the Operating Partnership or the DownREIT Partnership were a publicly traded partnership, there could be adverse tax impacts for certain limited partners.
Qualifying as a REIT Involves Highly Technical and Complex Provisions of the Code. Our qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the REIT income and asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we will not obtain independent appraisals, and upon our ability to successfully manage the composition of our income and assets on an ongoing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
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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:
| ● | general market and economic conditions; |
| ● | actual or anticipated variations in UDR’s quarterly operating results or dividends or UDR’s payment of dividends in shares of UDR’s stock; |
| ● | changes in our funds from operations or earnings estimates; |
| ● | difficulties or inability to access capital or extend or refinance existing debt; |
| ● | decreasing (or uncertainty in) real estate valuations; |
| ● | changes in market valuations of similar companies; |
| ● | publication of research reports about us or the real estate industry; |
| ● | 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); |
| ● | 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; |
| ● | a change in analyst ratings; |
| ● | additions or departures of key management personnel; |
| ● | adverse market reaction to any additional debt we incur in the future; |
| ● | speculation in the press or investment community; |
| ● | 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; |
| ● | failure to qualify as a REIT; |
| ● | strategic decisions by us or by our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy; |
| ● | failure to satisfy listing requirements of the NYSE; |
| ● | governmental regulatory action and changes in tax laws; and |
| ● | 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 an adverse effect on the market price of UDR’s common stock.
Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in UDR’s Stockholders’ Best Interests. Maryland business statutes may limit the ability of a third party to acquire control of us. As a
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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.
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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 September 30, 2019, we did not issue any shares of our common stock upon redemption of OP Units in reliance upon an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933.
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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. The following table summarizes all of UDR’s repurchases of shares of common stock under these programs during the three months ended September 30, 2019:
| (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. |
During the three months ended September 30, 2019, 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 September 30, 2019:
| (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. |
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Item 3. |
DEFAULTS UPON SENIOR SECURITIES |
None.
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Item 4. |
MINE SAFETY DISCLOSURES |
Not applicable.
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Item 5. |
OTHER INFORMATION |
None.
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Item 6. EXHIBITS
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4.1 |
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UDR, Inc. 3.200% Medium-Term Note, Series A due January 2030, issued July 2, 2019. |
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UDR, Inc. 3.000% Medium-Term Note, Series A due August 2031, issued August 15, 2019. |
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Rule 13a-14(a) Certification of the Chief Executive Officer of UDR, Inc. |
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Rule 13a-14(a) Certification of the Chief Financial Officer of UDR, Inc. |
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Section 1350 Certification of the Chief Executive Officer of UDR, Inc. |
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Section 1350 Certification of the Chief Financial Officer of UDR, Inc. |
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Inline XBRL (Extensible Business Reporting Language). The following materials from this Quarterly Report on Form 10-Q for the periods ended September 30, 2019, formatted in Inline XBRL: (i) consolidated balance sheets of UDR, Inc., (ii) consolidated statements of operations of UDR, Inc., (iii) consolidated statements of comprehensive income/(loss) of UDR, Inc., (iv) consolidated statements of changes in equity of UDR, Inc., (v) consolidated statements of cash flows of UDR, Inc., (vi) notes to consolidated financial statements of UDR, Inc., (vii) consolidated balance sheets of United Dominion Realty, L.P., (viii) consolidated statements of operations of United Dominion Realty, L.P., (ix) consolidated statements of changes in capital of United Dominion Realty, L.P., (x) consolidated statements of cash flows of United Dominion Realty, L.P., (xi) notes to consolidated financial statements of United Dominion Realty, L.P. and (xii) the cover page. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
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Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document. |
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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.
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UDR, Inc. |
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Date: |
October 30, 2019 |
/s/ Joseph D. Fisher |
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Joseph D. Fisher |
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Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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United Dominion Realty, L.P. |
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By: UDR, Inc., its general partner |
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Date: |
October 30, 2019 |
/s/ Joseph D. Fisher |
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Joseph D. Fisher |
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Senior Vice President and Chief Financial Officer (Principal Financial Officer) |
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Exhibit 4.1
UDR, INC.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE “DEPOSITARY”) (55 WATER STREET, NEW YORK, NEW YORK) TO THE ISSUER HEREOF OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
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REGISTERED
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CUSIP No.:
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PRINCIPAL AMOUNT:
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UDR, INC. |
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MEDIUM‑TERM NOTE
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE, FULLY AND UNCONDITIONALLY GUARANTEED BY UNITED DOMINION REALTY, L.P. (Fixed Rate) |
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ORIGINAL ISSUE DATE:
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INTEREST RATE: 3.200% |
STATED MATURITY DATE: January 15, 2030 |
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INTEREST PAYMENT DATE(S) |
[ ] CHECK IF DISCOUNT NOTE |
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[X] January 15 and July 15, commencing January 15, 2020 |
Issue Price: 99.662% plus accrued interest from July 2, 2019 |
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[ ] Other: |
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INITIAL REDEMPTION |
INITIAL REDEMPTION |
ANNUAL REDEMPTION |
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DATE: See Addendum |
PERCENTAGE: See Addendum |
PERCENTAGE |
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REDUCTION: See Addendum |
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OPTIONAL REPAYMENT |
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DATE(S): See Addendum |
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SPECIFIED CURRENCY: |
AUTHORIZED DENOMINATION: |
EXCHANGE RATE |
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[X] United States dollars
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[X] $2,000 and $1,000 integral
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AGENT: N/A |
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[ ] Other: |
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ADDENDUM ATTACHED |
DEFAULT INTEREST RATE: N/A |
OTHER/ADDITIONAL PROVISIONS: N/A |
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[X] Yes
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2
UDR, INC., a Maryland corporation (the “Company”, which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & Co., as nominee for The Depository Trust Company, or registered assigns, the Principal Amount of THREE HUNDRED MILLION DOLLARS ($300,000,000), on the Stated Maturity Date specified above (or any Redemption Date or Repayment Date, each as defined on the reverse hereof, or any earlier date of acceleration of maturity) (each such date being hereinafter referred to as the “Maturity Date” with respect to the principal repayable on such date) and to pay interest thereon (and on any overdue principal, premium and/or interest to the extent legally enforceable) at the Interest Rate per annum specified above, until the principal hereof is paid or duly made available for payment. The Company will pay interest in arrears on each Interest Payment Date, if any, specified above (each, an “Interest Payment Date”), commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, and on the Maturity Date; provided, however, that if the Original Issue Date occurs between a Record Date (as defined below) and the next succeeding Interest Payment Date, interest payment will commence on the Interest Payment Date immediately following the next succeeding Record Date to the registered holder (the “Holder”) of this Note on the next succeeding Record Date. Interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months.
United Dominion Realty, L.P., a Delaware limited partnership (the “Operating Partnership”), as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantees to the Holder and to the Trustee and their successors and assigns (a) the full and punctual payment when due, whether at the Maturity Date, by acceleration or otherwise, of all obligations of the Company now or hereafter existing under the Indenture whether for principal of or interest on the Notes (and premium and Make-Whole Amount, if applicable) and all other monetary obligations of the Company under the Indenture and the Notes and (b) the full and punctual performance within the applicable grace periods of all other obligations of the Company under the Indenture and the Notes (all such obligations guaranteed hereby by the Operating Partnership being the “Guarantee”). The Holder of this Note may enforce its rights under the Guarantee directly against the Operating Partnership without first making a demand or taking action against the Company or any other person or entity. The Operating Partnership may, without the consent of the Holder of this Note, assume all of the Company’s rights and obligations under this Note and, upon such assumption, the Company will be released from its liabilities under the Indenture and this Note.
Interest on this Note will accrue from, and including, the immediately preceding Interest Payment Date to which interest has been paid or duly provided for (or from, and including, the Original Issue Date if no interest has been paid or duly provided for) to, but excluding, the applicable Interest Payment Date or the Maturity Date, as the case may be (each, an “Interest Period”). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes, as defined on the reverse hereof) is registered at the close of business on the January 1 or July 1 (whether or not a Business Day, as defined below) immediately preceding such Interest Payment Date (the “Record Date”); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the principal hereof and premium, if any, hereon shall be payable. Any such interest not so punctually paid or duly provided for on any Interest Payment Date other than the Maturity Date (“Defaulted Interest”) shall forthwith cease to be payable to the Holder on the close of business on any Record
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Date and, instead, shall be paid to the person in whose name this Note is registered at the close of business on a special record date (the “Special Record Date”) for the payment of such Defaulted Interest to be fixed by the Trustee hereinafter referred to, notice whereof shall be given to the Holder of this Note by the Trustee not less than 10 calendar days prior to such Special Record Date or may be paid at any time in any other lawful manner, all as more fully provided for in the Indenture.
Payment of principal, premium, if any, and interest in respect of this Note due on the Maturity Date will be made in immediately available funds upon presentation and surrender of this Note (and, with respect to any applicable repayment of this Note, upon delivery of instructions as contemplated on the reverse hereof) at the office or agency maintained by the Company for that purpose in the Borough of Manhattan, The City of New York, currently the corporate trust office of the Trustee located at 40 Broad Street, 5th Floor, New York, New York 10004, or at such other paying agency in the Borough of Manhattan, The City of New York, as the Company may determine; provided, however, that if the Specified Currency (as defined below) is other than United States dollars and such payment is to be made in the Specified Currency in accordance with the provisions set forth below, such payment will be made by wire transfer of immediately available funds to an account with a bank designated by the Holder hereof at least 15 calendar days prior to the Maturity Date, provided that such bank has appropriate facilities therefor and that this Note is presented and surrendered and, if applicable, instructions are delivered at the aforementioned office or agency maintained by the Company in time for the Trustee to make such payment in such funds in accordance with its normal procedures. Payment of interest due on any Interest Payment Date other than the Maturity Date will be made at the aforementioned office or agency maintained by the Company or, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register maintained by the Trustee; provided, however, that a Holder of U.S.$10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in the Specified Currency) or more in aggregate principal amount of Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments on such Interest Payment Date by wire transfer of immediately available funds if such Holder has delivered appropriate wire transfer instructions in writing to the Trustee not less than 15 calendar days prior to such Interest Payment Date. Any such wire transfer instructions received by the Trustee shall remain in effect until revoked by such Holder.
If any Interest Payment Date or the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date or the Maturity Date, as the case may be, to the date of such payment on the next succeeding Business Day.
As used herein, “Business Day” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that if the Specified Currency is other than United States dollars, such day must also not be a day on which commercial banks are authorized or required by law, regulation or executive order to close in the Principal Financial Center (as defined below) of the country issuing the Specified Currency (or, if
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the Specified Currency is Euro, such day must also be a day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System is open). “Principal Financial Center” means the capital city of the country issuing the Specified Currency, except that with respect to United States dollars, Australian dollars, Canadian dollars, Euros, South African rands and Swiss francs, the “Principal Financial Center” shall be The City of New York, Sydney, Toronto, Johannesburg and Zurich, respectively.
The Company is obligated to make payment of principal, premium, if any, and interest in respect of this Note in the currency in which this Note is denominated above (or, if such currency is not at the time of such payment legal tender for the payment of public and private debts in the country issuing such currency or, if such currency is Euro, in the member states of the European Union that have adopted the single currency in accordance with the Treaty establishing the European Community, as amended by the Treaty on European Union, then the currency which is at the time of such payment legal tender in the related country or in the adopting member states of the European Union, as the case may be) (the “Specified Currency”). If the Specified Currency is other than United States dollars, except as otherwise provided below, any such amounts so payable by the Company will be converted by the Exchange Rate Agent specified above into United States dollars for payment to the Holder of this Note.
Any United States dollar amount to be received by the Holder of this Note will be based on the highest bid quotation in The City of New York received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of whom may be the Exchange Rate Agent) selected by the Exchange Rate Agent and approved by the Company for the purchase by the quoting dealer of the Specified Currency for United States dollars for settlement on such payment date in the aggregate amount of the Specified Currency payable to all Holders of Notes scheduled to receive United States dollar payments and at which the applicable dealer commits to execute a contract. All currency exchange costs will be borne by the Holder of this Note by deductions from such payments. If three such bid quotations are not available, payments on this Note will be made in the Specified Currency.
If the Specified Currency is other than United States dollars, the Holder of this Note may elect to receive all or a specified portion of any payment of principal, premium, if any, and/or interest, if any, in respect of this Note in the Specified Currency by submitting a written request for such payment to the Trustee at its corporate trust office in The City of New York on or prior to the applicable Record Date or at least 15 calendar days prior to the Maturity Date, as the case may be. Such written request may be mailed or hand delivered or sent by cable, telex or other form of facsimile transmission. The Holder of this Note may elect to receive all or a specified portion of all future payments in the Specified Currency in respect of such principal, premium, if any, and/or interest, if any, and need not file a separate election for each payment. Such election will remain in effect until revoked by written notice delivered to the Trustee, but written notice of any such revocation must be received by the Trustee on or prior to the applicable Record Date or at least 15 calendar days prior to the Maturity Date, as the case may be.
If the Specified Currency is other than United States dollars and the Holder of this Note shall have duly made an election to receive all or a specified portion of any payment of principal, premium, if any, and/or interest, if any, in respect of this Note in the Specified Currency, but the
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Specified Currency is not available due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the Holder of this Note by making such payment in United States dollars on the basis of the Market Exchange Rate (as defined below) determined by the Exchange Rate Agent on the second Business Day prior to such payment date or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate. The “Market Exchange Rate” for the Specified Currency other than United States dollars means the noon dollar buying rate in The City of New York for cable transfers for the Specified Currency as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. Any payment made in United States dollars under such circumstances shall not constitute an Event of Default (as defined in the Indenture).
All determinations referred to above made by the Exchange Rate Agent shall be at its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and binding on the Holder of this Note.
The Company agrees to indemnify the Holder of any Note against any loss incurred by such Holder as a result of any judgment or order being given or made against the Company for any amount due hereunder and such judgment or order requiring payment in a currency (the “Judgment Currency”) other than the Specified Currency, and as a result of any variation between (i) the rate of exchange at which the Specified Currency amount is converted into the Judgment Currency for the purpose of such judgment or order, and (ii) the rate of exchange at which such Holder, on the date of payment of such judgment or order, is able to purchase the Specified Currency with the amount of the Judgment Currency actually received by such Holder, as the case may be. The foregoing indemnity constitutes a separate and independent obligation of the Company and continues in full force and effect notwithstanding any such judgment or order as aforesaid. The term “rate of exchange” includes any premiums and costs of exchange payable in connection with the purchase of, or conversion into, the relevant currency.
Reference is hereby made to the further provisions of this Note set forth on the reverse hereof and, if so specified on the face hereof, in an Addendum hereto, which further provisions shall have the same force and effect as if set forth on the face hereof.
Notwithstanding the foregoing, if an Addendum is attached hereto or “Other/Additional Provisions” apply to this Note as specified above, this Note shall be subject to the terms set forth in such Addendum or such “Other/Additional Provisions”.
Unless the Certificate of Authentication hereon has been executed by the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
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IN WITNESS WHEREOF, UDR, Inc. has caused this Note to be duly executed by one of its duly authorized officers.
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UDR, INC. |
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By: |
/s/ Joseph D. Fisher |
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Name: |
Joseph D. Fisher |
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Title: |
Senior Vice President and Chief Financial Officer |
ATTEST:
By: /s/ Deborah J. Shannon
Name: Deborah J. Shannon
Title: Assistant Secretary
Dated: July 2, 2019
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the Debt Securities of
the series designated therein referred
to in the within‑mentioned Indenture.
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
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By: |
/s/ K. Wendy Kumar |
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Authentication Date: July 2, 2019 |
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Authorized Signatory |
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7
[REVERSE OF NOTE]
UDR, INC.
MEDIUM‑TERM NOTE, SERIES A
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE, FULLY AND UNCONDITIONALLY GUARANTEED BY UNITED DOMINION REALTY, L.P.
(Fixed Rate)
This Note is one of a duly authorized series of Debt Securities (the “Debt Securities”) of the Company issued and to be issued under an Indenture, dated as of November 1, 1995, as supplemented by the first supplemental indenture thereto, dated as of May 3, 2011, as further amended, modified or supplemented from time to time (the “Indenture”), between the Company (successor by merger to United Dominion Realty Trust, Inc., a Virginia corporation) and U.S. Bank National Association, successor trustee to Wachovia Bank, National Association (formerly known as First Union National Bank of Virginia), as trustee (the “Trustee”, which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Debt Securities, and of the terms upon which the Debt Securities are, and are to be, authenticated and delivered. This Note is one of the series of Debt Securities designated as “Medium-Term Notes, Series A Due Nine Months or More From Date of Issue, Fully and Unconditionally Guaranteed by United Dominion Realty, L.P.” (the “Notes”). All terms used but not defined in this Note or in an Addendum hereto shall have the meanings assigned to such terms in the Indenture or on the face hereof, as the case may be.
United Dominion Realty, L.P., a Delaware limited partnership (the “Operating Partnership”), as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantees to the Holder and to the Trustee and their successors and assigns (a) the full and punctual payment when due, whether at the Maturity Date, by acceleration or otherwise, of all obligations of the Company now or hereafter existing under the Indenture whether for principal of or interest on the Notes (and premium and Make-Whole Amount, if applicable) and all other monetary obligations of the Company under the Indenture and the Notes and (b) the full and punctual performance within the applicable grace periods of all other obligations of the Company under the Indenture and the Notes (all such obligations guaranteed hereby by the Operating Partnership being the “Guarantee”). The Holder of this Note may enforce its rights under the Guarantee directly against the Operating Partnership without first making a demand or taking action against the Company or any other person or entity. The Operating Partnership may, without the consent of the Holder of this Note, assume all of the Company’s rights and obligations under this Note and, upon such assumption, the Company will be released from its liabilities under the Indenture and this Note.
This Note is issuable only in registered form without coupons in minimum denominations of U.S. $1,000 and integral multiples thereof or other Authorized Denomination specified on the face hereof.
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This Note will not be subject to any sinking fund and, unless otherwise specified on the face hereof in accordance with the provisions of the following two paragraphs, will not be redeemable or repayable prior to the Stated Maturity Date.
This Note will be subject to redemption at the option of the Company on any date on or after the Initial Redemption Date, if any, specified on the face hereof, in whole or from time to time in part in increments of U.S. $1,000 or other integral multiple of an Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S. $1,000 or such other minimum Authorized Denomination), at the Redemption Price (as defined below), together with unpaid interest accrued thereon to the date fixed for redemption (the “Redemption Date”), on written notice given to the Holder hereof (in accordance with the provisions of the Indenture) not more than 60 nor less than 30 calendar days prior to the Redemption Date. The “Redemption Price” shall be an amount equal to the Initial Redemption Percentage specified on the face hereof (as adjusted by the Annual Redemption Percentage Reduction, if any, specified on the face hereof) multiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage, if any, shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, until the Redemption Price is 100% of unpaid principal amount to be redeemed. In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof and otherwise having the same terms and provisions as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.
This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of U.S. $1,000 or other integral multiple of an Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S. $1,000 or such other minimum Authorized Denomination), at a repayment price equal to 100% of the unpaid principal amount to be repaid, together with unpaid interest accrued thereon to the date fixed for repayment (the “Repayment Date”). For this Note to be repaid, the Trustee must receive at its corporate trust office in the Borough of Manhattan, The City of New York, not more than 60 nor less than 30 calendar days prior to the Repayment Date, such Note and instructions to such effect forwarded by the Holder hereof. Exercise of such repayment option by the Holder hereof shall be irrevocable. In the event of repayment of this Note in part only, a new Note of like tenor for the unrepaid portion hereof and otherwise having the same terms and provisions as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.
If this Note is specified on the face hereof to be a Discount Note, the amount payable to the Holder of this Note in the event of redemption, repayment or acceleration of maturity will be equal to the sum of (1) the Issue Price specified on the face hereof (increased by any accruals of the Discount, as defined below) and, in the event of any redemption of this Note (if applicable), multiplied by the Initial Redemption Percentage (as adjusted by the Annual Redemption Percentage Reduction, if applicable) and (2) any unpaid interest accrued thereon to the Redemption Date, Repayment Date or date of acceleration of maturity, as the case may be. The difference between the Issue Price and 100% of the principal amount of this Note is referred to herein as the “Discount”.
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For purposes of determining the amount of Discount that has accrued as of any Redemption Date, Repayment Date or date of acceleration of maturity of this Note, such Discount will be accrued so as to cause the yield on the Note to be constant. The constant yield will be calculated using a 30-day month, 360-day year convention, a compounding period that, except for the Initial Period (as defined below), corresponds to the shortest period between Interest Payment Dates (with ratable accruals within a compounding period) and an assumption that the maturity of this Note will not be accelerated. If the period from the Original Issue Date to the initial Interest Payment Date (the “Initial Period”) is shorter than the compounding period for this Note, a proportionate amount of the yield for an entire compounding period will be accrued. If the Initial Period is longer than the compounding period, then such period will be divided into a regular compounding period and a short period, with the short period being treated as provided in the preceding sentence.
The covenants set forth in Section 1004(a) and Section 1007 of the Indenture shall not apply to this Note, and the following covenants shall instead apply to this Note in place of the covenants set forth in Section 1004(a) and Section 1007 of the Indenture:
“The Trust will, and will cause the Subsidiaries to, have at all times Total Unencumbered Assets of not less than 150% of the aggregate principal amount of all of the Trust’s outstanding Unsecured Debt and the outstanding Unsecured Debt of the Subsidiaries, determined on a consolidated basis in accordance with GAAP.
The Trust will not, and will not permit any Subsidiary to, incur any Debt if, immediately after giving effect to the incurrence of such additional Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Debt of the Trust and its Subsidiaries on a consolidated basis determined in accordance with GAAP is greater than 65% of the sum of (without duplication) (i) the Trust’s Total Assets as of the end of the calendar quarter covered in the Trust’s Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently filed with the Commission (or, if such filing is not permitted under the Exchange Act, with the Trustee) prior to the incurrence of such additional Debt and (ii) the purchase price of any real estate assets or mortgages receivable acquired, and the amount of any securities offering proceeds received (to the extent such proceeds were not used to acquire real estate assets or mortgages receivable or used to reduce Debt), by the Trust or any Subsidiary since the end of such calendar quarter, including those proceeds obtained in connection with the incurrence of such additional Debt.
‘Total Unencumbered Assets’ means the sum of, without duplication, those Undepreciated Real Estate Assets which are not subject to a lien securing Debt and all other assets, excluding accounts receivable and intangibles, of the Trust and the Subsidiaries not subject to a lien securing Debt, all determined on a consolidated basis in accordance with GAAP; provided, however, that all investments by the Trust and the Subsidiaries in unconsolidated joint ventures, unconsolidated limited partnerships, unconsolidated limited liability companies and other unconsolidated entities shall be excluded from Total Unencumbered
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Assets to the extent that such investments would have otherwise been included.”
If an Event of Default shall occur and be continuing, the principal of the Notes may, and in certain cases shall, be accelerated in the manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance of (i) the entire indebtedness of the Notes or (ii) certain covenants and Events of Default with respect to the Notes, in each case upon compliance with certain conditions set forth therein, which provisions apply to the Notes.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Debt Securities at any time by the Company and the Trustee with the consent of the Holders of a majority of the aggregate principal amount of all Debt Securities at the time outstanding and affected thereby. The Indenture also contains provisions permitting the Holders of a majority of the aggregate principal amount of the outstanding Debt Securities of any series, on behalf of the Holders of all such Debt Securities, to waive compliance by the Company with certain provisions of the Indenture. Furthermore, provisions in the Indenture permit the Holders of a majority of the aggregate principal amount of the outstanding Debt Securities of any series, in certain instances, to waive, on behalf of all of the Holders of Debt Securities of such series, certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and other Notes issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay principal, premium, if any, and interest in respect of this Note at the times, places and rate or formula, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein and herein set forth, the transfer of this Note is registrable in the Security Register of the Company upon surrender of this Note for registration of transfer at the office or agency of the Company in any place where the principal hereof and any premium or interest hereon are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Notes having the same terms and provisions, of Authorized Denominations and for the same aggregate principal amount, will be issued by the Company to the designated transferee or transferees.
As provided in the Indenture and subject to certain limitations therein and herein set forth, this Note is exchangeable for a like aggregate principal amount of Notes of different Authorized Denominations but otherwise having the same terms and provisions, as requested by the Holder hereof surrendering the same.
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No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Holder as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary, except as required by law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF VIRGINIA.
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ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations:
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TEN COM |
‑ as tenants in common |
UNIF GIFT MIN ACT |
‑ ________ Custodian ______ |
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TEN ENT |
‑ as tenants by the entireties |
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(Cust) (Minor) |
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JT TEN |
‑ as joint tenants with right of
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under Uniform Gifts to Minors Act ____________________
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Additional abbreviations may also be used though not in the above list. |
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__________________________________
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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(Please print or typewrite name and address including postal zip code of assignee)
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this Note and all rights thereunder hereby irrevocably constituting and appointing
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Attorney to transfer this Note on the books of the Company, with full power of substitution in the premises.
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Dated: |
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Notice: The signature(s) on this Assignment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever. |
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UDR, INC.
ADDENDUM TO MEDIUM-TERM NOTE
(Fixed Rate)
The Company may redeem all or part of this Note at any time at its option at a redemption price equal to the greater of (1) the principal amount of this Note being redeemed plus accrued and unpaid interest to the redemption date or (2) the Make-Whole Amount for the principal amount of this Note being redeemed. If this Note is redeemed on or after October 15, 2029 (three months prior to the maturity date) (the “Par Call Date”), the redemption price will equal the principal amount of this Note being redeemed plus accrued and unpaid interest to the redemption date.
“Make-Whole Amount” means, as determined by the Quotation Agent, the sum of the present values of the principal amount of this Note to be redeemed, together with the scheduled payments of interest (exclusive of interest to the redemption date) from the redemption date to the Par Call Date of this Note being redeemed, in each case discounted to the redemption date on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Adjusted Treasury Rate, plus accrued and unpaid interest on the principal amount of this Note being redeemed to the redemption date.
“Adjusted Treasury Rate” means, with respect to any redemption date, the sum of (x) either (1) the yield for the maturity corresponding to the Comparable Treasury Issue, under the heading that represents the average for the immediately preceding week, appearing in the most recent published statistical release designated “H.15” or any successor publication that is published weekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities” (provided, if no maturity is within three months before or after the remaining term of this Note, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Adjusted Treasury Rate shall be interpolated or extrapolated from such yields on a straight line basis, rounded to the nearest month) or (2) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per year equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date, in each case calculated on the third business day preceding the redemption date, and (y) 0.200%.
“Comparable Treasury Issue” means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term of this Note (assuming, for this purpose, that this Note matured on the Par Call Date) that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of this Note (assuming, for this purpose, that this Note matured on the Par Call Date).
“Comparable Treasury Price” means, with respect to any redemption date, (x) the average of three Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest Reference Treasury Dealer Quotations so obtained, or (y) if fewer than five Reference Treasury Dealer Quotations are so obtained, the average of all such Reference Treasury Dealer Quotations so obtained.
“Quotation Agent” means the Reference Treasury Dealer selected by the indenture trustee after consultation with the Company.
“Reference Treasury Dealer” means any of Wells Fargo Securities, LLC, J.P. Morgan Securities LLC and three other nationally recognized investment banking firms selected by the Company that are primary U.S. Government securities dealers and their respective successors and assigns.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the indenture trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the indenture trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third business day preceding such redemption date.
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Exhibit 4.2
UDR, INC.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (THE “DEPOSITARY”) (55 WATER STREET, NEW YORK, NEW YORK) TO THE ISSUER HEREOF OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN CERTIFICATED FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY.
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UDR, INC., a Maryland corporation (the “Company”, which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to CEDE & Co., as nominee for The Depository Trust Company, or registered assigns, the Principal Amount of FOUR HUNDRED MILLION DOLLARS ($400,000,000), on the Stated Maturity Date specified above (or any Redemption Date or Repayment Date, each as defined on the reverse hereof, or any earlier date of acceleration of maturity) (each such date being hereinafter referred to as the “Maturity Date” with respect to the principal repayable on such date) and to pay interest thereon (and on any overdue principal, premium and/or interest to the extent legally enforceable) at the Interest Rate per annum specified above, until the principal hereof is paid or duly made available for payment. The Company will pay interest in arrears on each Interest Payment Date, if any, specified above (each, an “Interest Payment Date”), commencing with the first Interest Payment Date next succeeding the Original Issue Date specified above, and on the Maturity Date; provided, however, that if the Original Issue Date occurs between a Record Date (as defined below) and the next succeeding Interest Payment Date, interest payment will commence on the Interest Payment Date immediately following the next succeeding Record Date to the registered holder (the “Holder”) of this Note on the next succeeding Record Date. Interest on this Note will be computed on the basis of a 360-day year of twelve 30-day months.
United Dominion Realty, L.P., a Delaware limited partnership (the “Operating Partnership”), as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantees to the Holder and to the Trustee and their successors and assigns (a) the full and punctual payment when due, whether at the Maturity Date, by acceleration or otherwise, of all obligations of the Company now or hereafter existing under the Indenture whether for principal of or interest on the Notes (and premium and Make-Whole Amount, if applicable) and all other monetary obligations of the Company under the Indenture and the Notes and (b) the full and punctual performance within the applicable grace periods of all other obligations of the Company under the Indenture and the Notes (all such obligations guaranteed hereby by the Operating Partnership being the “Guarantee”). The Holder of this Note may enforce its rights under the Guarantee directly against the Operating Partnership without first making a demand or taking action against the Company or any other person or entity. The Operating Partnership may, without the consent of the Holder of this Note, assume all of the Company’s rights and obligations under this Note and, upon such assumption, the Company will be released from its liabilities under the Indenture and this Note.
Interest on this Note will accrue from, and including, the immediately preceding Interest Payment Date to which interest has been paid or duly provided for (or from, and including, the Original Issue Date if no interest has been paid or duly provided for) to, but excluding, the applicable Interest Payment Date or the Maturity Date, as the case may be (each, an “Interest Period”). The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, subject to certain exceptions described herein, be paid to the person in whose name this Note (or one or more predecessor Notes, as defined on the reverse hereof) is registered at the close of business on the February 1 or August 1 (whether or not a Business Day, as defined below) immediately preceding such Interest Payment Date (the “Record Date”); provided, however, that interest payable on the Maturity Date will be payable to the person to whom the principal hereof and premium, if any, hereon shall be payable. Any such interest not so punctually paid or duly provided for on any Interest Payment Date other than the Maturity Date (“Defaulted Interest”) shall forthwith cease to be payable to the Holder on the close of business on any Record
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Date and, instead, shall be paid to the person in whose name this Note is registered at the close of business on a special record date (the “Special Record Date”) for the payment of such Defaulted Interest to be fixed by the Trustee hereinafter referred to, notice whereof shall be given to the Holder of this Note by the Trustee not less than 10 calendar days prior to such Special Record Date or may be paid at any time in any other lawful manner, all as more fully provided for in the Indenture.
Payment of principal, premium, if any, and interest in respect of this Note due on the Maturity Date will be made in immediately available funds upon presentation and surrender of this Note (and, with respect to any applicable repayment of this Note, upon delivery of instructions as contemplated on the reverse hereof) at the office or agency maintained by the Company for that purpose in the Borough of Manhattan, The City of New York, currently the corporate trust office of the Trustee located at 40 Broad Street, 5th Floor, New York, New York 10004, or at such other paying agency in the Borough of Manhattan, The City of New York, as the Company may determine; provided, however, that if the Specified Currency (as defined below) is other than United States dollars and such payment is to be made in the Specified Currency in accordance with the provisions set forth below, such payment will be made by wire transfer of immediately available funds to an account with a bank designated by the Holder hereof at least 15 calendar days prior to the Maturity Date, provided that such bank has appropriate facilities therefor and that this Note is presented and surrendered and, if applicable, instructions are delivered at the aforementioned office or agency maintained by the Company in time for the Trustee to make such payment in such funds in accordance with its normal procedures. Payment of interest due on any Interest Payment Date other than the Maturity Date will be made at the aforementioned office or agency maintained by the Company or, at the option of the Company, by check mailed to the address of the person entitled thereto as such address shall appear in the Security Register maintained by the Trustee; provided, however, that a Holder of U.S.$10,000,000 (or, if the Specified Currency is other than United States dollars, the equivalent thereof in the Specified Currency) or more in aggregate principal amount of Notes (whether having identical or different terms and provisions) will be entitled to receive interest payments on such Interest Payment Date by wire transfer of immediately available funds if such Holder has delivered appropriate wire transfer instructions in writing to the Trustee not less than 15 calendar days prior to such Interest Payment Date. Any such wire transfer instructions received by the Trustee shall remain in effect until revoked by such Holder.
If any Interest Payment Date or the Maturity Date falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest shall be made on the next succeeding Business Day with the same force and effect as if made on the date such payment was due, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date or the Maturity Date, as the case may be, to the date of such payment on the next succeeding Business Day.
As used herein, “Business Day” means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or executive order to close in The City of New York; provided, however, that if the Specified Currency is other than United States dollars, such day must also not be a day on which commercial banks are authorized or required by law, regulation or executive order to close in the Principal Financial Center (as defined below) of the country issuing the Specified Currency (or, if
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the Specified Currency is Euro, such day must also be a day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System is open). “Principal Financial Center” means the capital city of the country issuing the Specified Currency, except that with respect to United States dollars, Australian dollars, Canadian dollars, Euros, South African rands and Swiss francs, the “Principal Financial Center” shall be The City of New York, Sydney, Toronto, Johannesburg and Zurich, respectively.
The Company is obligated to make payment of principal, premium, if any, and interest in respect of this Note in the currency in which this Note is denominated above (or, if such currency is not at the time of such payment legal tender for the payment of public and private debts in the country issuing such currency or, if such currency is Euro, in the member states of the European Union that have adopted the single currency in accordance with the Treaty establishing the European Community, as amended by the Treaty on European Union, then the currency which is at the time of such payment legal tender in the related country or in the adopting member states of the European Union, as the case may be) (the “Specified Currency”). If the Specified Currency is other than United States dollars, except as otherwise provided below, any such amounts so payable by the Company will be converted by the Exchange Rate Agent specified above into United States dollars for payment to the Holder of this Note.
Any United States dollar amount to be received by the Holder of this Note will be based on the highest bid quotation in The City of New York received by the Exchange Rate Agent at approximately 11:00 A.M., New York City time, on the second Business Day preceding the applicable payment date from three recognized foreign exchange dealers (one of whom may be the Exchange Rate Agent) selected by the Exchange Rate Agent and approved by the Company for the purchase by the quoting dealer of the Specified Currency for United States dollars for settlement on such payment date in the aggregate amount of the Specified Currency payable to all Holders of Notes scheduled to receive United States dollar payments and at which the applicable dealer commits to execute a contract. All currency exchange costs will be borne by the Holder of this Note by deductions from such payments. If three such bid quotations are not available, payments on this Note will be made in the Specified Currency.
If the Specified Currency is other than United States dollars, the Holder of this Note may elect to receive all or a specified portion of any payment of principal, premium, if any, and/or interest, if any, in respect of this Note in the Specified Currency by submitting a written request for such payment to the Trustee at its corporate trust office in The City of New York on or prior to the applicable Record Date or at least 15 calendar days prior to the Maturity Date, as the case may be. Such written request may be mailed or hand delivered or sent by cable, telex or other form of facsimile transmission. The Holder of this Note may elect to receive all or a specified portion of all future payments in the Specified Currency in respect of such principal, premium, if any, and/or interest, if any, and need not file a separate election for each payment. Such election will remain in effect until revoked by written notice delivered to the Trustee, but written notice of any such revocation must be received by the Trustee on or prior to the applicable Record Date or at least 15 calendar days prior to the Maturity Date, as the case may be.
If the Specified Currency is other than United States dollars and the Holder of this Note shall have duly made an election to receive all or a specified portion of any payment of principal, premium, if any, and/or interest, if any, in respect of this Note in the Specified Currency, but the
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Specified Currency is not available due to the imposition of exchange controls or other circumstances beyond the control of the Company, the Company will be entitled to satisfy its obligations to the Holder of this Note by making such payment in United States dollars on the basis of the Market Exchange Rate (as defined below) determined by the Exchange Rate Agent on the second Business Day prior to such payment date or, if such Market Exchange Rate is not then available, on the basis of the most recently available Market Exchange Rate. The “Market Exchange Rate” for the Specified Currency other than United States dollars means the noon dollar buying rate in The City of New York for cable transfers for the Specified Currency as certified for customs purposes (or, if not so certified, as otherwise determined) by the Federal Reserve Bank of New York. Any payment made in United States dollars under such circumstances shall not constitute an Event of Default (as defined in the Indenture).
All determinations referred to above made by the Exchange Rate Agent shall be at its sole discretion and shall, in the absence of manifest error, be conclusive for all purposes and binding on the Holder of this Note.
The Company agrees to indemnify the Holder of any Note against any loss incurred by such Holder as a result of any judgment or order being given or made against the Company for any amount due hereunder and such judgment or order requiring payment in a currency (the “Judgment Currency”) other than the Specified Currency, and as a result of any variation between (i) the rate of exchange at which the Specified Currency amount is converted into the Judgment Currency for the purpose of such judgment or order, and (ii) the rate of exchange at which such Holder, on the date of payment of such judgment or order, is able to purchase the Specified Currency with the amount of the Judgment Currency actually received by such Holder, as the case may be. The foregoing indemnity constitutes a separate and independent obligation of the Company and continues in full force and effect notwithstanding any such judgment or order as aforesaid. The term “rate of exchange” includes any premiums and costs of exchange payable in connection with the purchase of, or conversion into, the relevant currency.
Reference is hereby made to the further provisions of this Note set forth on the reverse hereof and, if so specified on the face hereof, in an Addendum hereto, which further provisions shall have the same force and effect as if set forth on the face hereof.
Notwithstanding the foregoing, if an Addendum is attached hereto or “Other/Additional Provisions” apply to this Note as specified above, this Note shall be subject to the terms set forth in such Addendum or such “Other/Additional Provisions”.
Unless the Certificate of Authentication hereon has been executed by the Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.
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IN WITNESS WHEREOF, UDR, Inc. has caused this Note to be duly executed by one of its duly authorized officers.
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UDR, INC. |
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By: |
/s/ Joseph D. Fisher |
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Name: |
Joseph D. Fisher |
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Title: |
Senior Vice President and Chief Financial Officer |
ATTEST:
By: /s/ Deborah J. Shannon
Name: Deborah J. Shannon
Title: Assistant Secretary
Dated: August 15, 2019
TRUSTEE'S CERTIFICATE OF AUTHENTICATION:
This is one of the Debt Securities of
the series designated therein referred
to in the within‑mentioned Indenture.
U.S. BANK NATIONAL ASSOCIATION,
as Trustee
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By: |
/s/ K. Wendy Kumar |
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Authentication Date: August 15, 2019 |
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Authorized Signatory |
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7
[REVERSE OF NOTE]
UDR, INC.
MEDIUM‑TERM NOTE, SERIES A
DUE NINE MONTHS OR MORE FROM DATE OF ISSUE, FULLY AND UNCONDITIONALLY GUARANTEED BY UNITED DOMINION REALTY, L.P.
(Fixed Rate)
This Note is one of a duly authorized series of Debt Securities (the “Debt Securities”) of the Company issued and to be issued under an Indenture, dated as of November 1, 1995, as supplemented by the first supplemental indenture thereto, dated as of May 3, 2011, as further amended, modified or supplemented from time to time (the “Indenture”), between the Company (successor by merger to United Dominion Realty Trust, Inc., a Virginia corporation) and U.S. Bank National Association, successor trustee to Wachovia Bank, National Association (formerly known as First Union National Bank of Virginia), as trustee (the “Trustee”, which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Debt Securities, and of the terms upon which the Debt Securities are, and are to be, authenticated and delivered. This Note is one of the series of Debt Securities designated as “Medium-Term Notes, Series A Due Nine Months or More From Date of Issue, Fully and Unconditionally Guaranteed by United Dominion Realty, L.P.” (the “Notes”). All terms used but not defined in this Note or in an Addendum hereto shall have the meanings assigned to such terms in the Indenture or on the face hereof, as the case may be.
United Dominion Realty, L.P., a Delaware limited partnership (the “Operating Partnership”), as primary obligor and not merely as surety, hereby irrevocably and unconditionally guarantees to the Holder and to the Trustee and their successors and assigns (a) the full and punctual payment when due, whether at the Maturity Date, by acceleration or otherwise, of all obligations of the Company now or hereafter existing under the Indenture whether for principal of or interest on the Notes (and premium and Make-Whole Amount, if applicable) and all other monetary obligations of the Company under the Indenture and the Notes and (b) the full and punctual performance within the applicable grace periods of all other obligations of the Company under the Indenture and the Notes (all such obligations guaranteed hereby by the Operating Partnership being the “Guarantee”). The Holder of this Note may enforce its rights under the Guarantee directly against the Operating Partnership without first making a demand or taking action against the Company or any other person or entity. The Operating Partnership may, without the consent of the Holder of this Note, assume all of the Company’s rights and obligations under this Note and, upon such assumption, the Company will be released from its liabilities under the Indenture and this Note.
This Note is issuable only in registered form without coupons in minimum denominations of U.S. $1,000 and integral multiples thereof or other Authorized Denomination specified on the face hereof.
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This Note will not be subject to any sinking fund and, unless otherwise specified on the face hereof in accordance with the provisions of the following two paragraphs, will not be redeemable or repayable prior to the Stated Maturity Date.
This Note will be subject to redemption at the option of the Company on any date on or after the Initial Redemption Date, if any, specified on the face hereof, in whole or from time to time in part in increments of U.S. $1,000 or other integral multiple of an Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S. $1,000 or such other minimum Authorized Denomination), at the Redemption Price (as defined below), together with unpaid interest accrued thereon to the date fixed for redemption (the “Redemption Date”), on written notice given to the Holder hereof (in accordance with the provisions of the Indenture) not more than 60 nor less than 30 calendar days prior to the Redemption Date. The “Redemption Price” shall be an amount equal to the Initial Redemption Percentage specified on the face hereof (as adjusted by the Annual Redemption Percentage Reduction, if any, specified on the face hereof) multiplied by the unpaid principal amount of this Note to be redeemed. The Initial Redemption Percentage, if any, shall decline at each anniversary of the Initial Redemption Date by the Annual Redemption Percentage Reduction, if any, until the Redemption Price is 100% of unpaid principal amount to be redeemed. In the event of redemption of this Note in part only, a new Note of like tenor for the unredeemed portion hereof and otherwise having the same terms and provisions as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.
This Note will be subject to repayment by the Company at the option of the Holder hereof on the Optional Repayment Date(s), if any, specified on the face hereof, in whole or in part in increments of U.S. $1,000 or other integral multiple of an Authorized Denomination (provided that any remaining principal amount hereof shall be at least U.S. $1,000 or such other minimum Authorized Denomination), at a repayment price equal to 100% of the unpaid principal amount to be repaid, together with unpaid interest accrued thereon to the date fixed for repayment (the “Repayment Date”). For this Note to be repaid, the Trustee must receive at its corporate trust office in the Borough of Manhattan, The City of New York, not more than 60 nor less than 30 calendar days prior to the Repayment Date, such Note and instructions to such effect forwarded by the Holder hereof. Exercise of such repayment option by the Holder hereof shall be irrevocable. In the event of repayment of this Note in part only, a new Note of like tenor for the unrepaid portion hereof and otherwise having the same terms and provisions as this Note shall be issued by the Company in the name of the Holder hereof upon the presentation and surrender hereof.
If this Note is specified on the face hereof to be a Discount Note, the amount payable to the Holder of this Note in the event of redemption, repayment or acceleration of maturity will be equal to the sum of (1) the Issue Price specified on the face hereof (increased by any accruals of the Discount, as defined below) and, in the event of any redemption of this Note (if applicable), multiplied by the Initial Redemption Percentage (as adjusted by the Annual Redemption Percentage Reduction, if applicable) and (2) any unpaid interest accrued thereon to the Redemption Date, Repayment Date or date of acceleration of maturity, as the case may be. The difference between the Issue Price and 100% of the principal amount of this Note is referred to herein as the “Discount”.
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For purposes of determining the amount of Discount that has accrued as of any Redemption Date, Repayment Date or date of acceleration of maturity of this Note, such Discount will be accrued so as to cause the yield on the Note to be constant. The constant yield will be calculated using a 30-day month, 360-day year convention, a compounding period that, except for the Initial Period (as defined below), corresponds to the shortest period between Interest Payment Dates (with ratable accruals within a compounding period) and an assumption that the maturity of this Note will not be accelerated. If the period from the Original Issue Date to the initial Interest Payment Date (the “Initial Period”) is shorter than the compounding period for this Note, a proportionate amount of the yield for an entire compounding period will be accrued. If the Initial Period is longer than the compounding period, then such period will be divided into a regular compounding period and a short period, with the short period being treated as provided in the preceding sentence.
The covenants set forth in Section 1004(a) and Section 1007 of the Indenture shall not apply to this Note, and the following covenants shall instead apply to this Note in place of the covenants set forth in Section 1004(a) and Section 1007 of the Indenture:
“The Trust will, and will cause the Subsidiaries to, have at all times Total Unencumbered Assets of not less than 150% of the aggregate principal amount of all of the Trust’s outstanding Unsecured Debt and the outstanding Unsecured Debt of the Subsidiaries, determined on a consolidated basis in accordance with GAAP.
The Trust will not, and will not permit any Subsidiary to, incur any Debt if, immediately after giving effect to the incurrence of such additional Debt and the application of the proceeds thereof, the aggregate principal amount of all outstanding Debt of the Trust and its Subsidiaries on a consolidated basis determined in accordance with GAAP is greater than 65% of the sum of (without duplication) (i) the Trust’s Total Assets as of the end of the calendar quarter covered in the Trust’s Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, most recently filed with the Commission (or, if such filing is not permitted under the Exchange Act, with the Trustee) prior to the incurrence of such additional Debt and (ii) the purchase price of any real estate assets or mortgages receivable acquired, and the amount of any securities offering proceeds received (to the extent such proceeds were not used to acquire real estate assets or mortgages receivable or used to reduce Debt), by the Trust or any Subsidiary since the end of such calendar quarter, including those proceeds obtained in connection with the incurrence of such additional Debt.
‘Total Unencumbered Assets’ means the sum of, without duplication, those Undepreciated Real Estate Assets which are not subject to a lien securing Debt and all other assets, excluding accounts receivable and intangibles, of the Trust and the Subsidiaries not subject to a lien securing Debt, all determined on a consolidated basis in accordance with GAAP; provided, however, that all investments by the Trust and the Subsidiaries in unconsolidated joint ventures, unconsolidated limited partnerships, unconsolidated limited liability companies and other unconsolidated entities shall be excluded from Total Unencumbered
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Assets to the extent that such investments would have otherwise been included.”
If an Event of Default shall occur and be continuing, the principal of the Notes may, and in certain cases shall, be accelerated in the manner and with the effect provided in the Indenture.
The Indenture contains provisions for defeasance of (i) the entire indebtedness of the Notes or (ii) certain covenants and Events of Default with respect to the Notes, in each case upon compliance with certain conditions set forth therein, which provisions apply to the Notes.
The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Debt Securities at any time by the Company and the Trustee with the consent of the Holders of a majority of the aggregate principal amount of all Debt Securities at the time outstanding and affected thereby. The Indenture also contains provisions permitting the Holders of a majority of the aggregate principal amount of the outstanding Debt Securities of any series, on behalf of the Holders of all such Debt Securities, to waive compliance by the Company with certain provisions of the Indenture. Furthermore, provisions in the Indenture permit the Holders of a majority of the aggregate principal amount of the outstanding Debt Securities of any series, in certain instances, to waive, on behalf of all of the Holders of Debt Securities of such series, certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and other Notes issued upon the registration of transfer hereof or in exchange heretofore or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay principal, premium, if any, and interest in respect of this Note at the times, places and rate or formula, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein and herein set forth, the transfer of this Note is registrable in the Security Register of the Company upon surrender of this Note for registration of transfer at the office or agency of the Company in any place where the principal hereof and any premium or interest hereon are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or by his attorney duly authorized in writing, and thereupon one or more new Notes having the same terms and provisions, of Authorized Denominations and for the same aggregate principal amount, will be issued by the Company to the designated transferee or transferees.
As provided in the Indenture and subject to certain limitations therein and herein set forth, this Note is exchangeable for a like aggregate principal amount of Notes of different Authorized Denominations but otherwise having the same terms and provisions, as requested by the Holder hereof surrendering the same.
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No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Holder as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary, except as required by law.
THE INDENTURE AND THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF VIRGINIA.
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ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations:
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TEN COM |
‑ as tenants in common |
UNIF GIFT MIN ACT |
‑ ________ Custodian ______ |
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TEN ENT |
‑ as tenants by the entireties |
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(Cust) (Minor) |
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JT TEN |
‑ as joint tenants with right of
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under Uniform Gifts to Minors Act ____________________
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Additional abbreviations may also be used though not in the above list. |
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__________________________________
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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(Please print or typewrite name and address including postal zip code of assignee)
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this Note and all rights thereunder hereby irrevocably constituting and appointing
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Attorney to transfer this Note on the books of the Company, with full power of substitution in the premises.
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Dated: |
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Notice: The signature(s) on this Assignment must correspond with the name(s) as written upon the face of this Note in every particular, without alteration or enlargement or any change whatsoever. |
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UDR, INC.
ADDENDUM TO MEDIUM-TERM NOTE
(Fixed Rate)
The Company may redeem all or part of this Note at any time at its option at a redemption price equal to the greater of (1) the principal amount of this Note being redeemed plus accrued and unpaid interest to the redemption date or (2) the Make-Whole Amount for the principal amount of this Note being redeemed. If this Note is redeemed on or after May 15, 2031 (three months prior to the maturity date) (the “Par Call Date”), the redemption price will equal the principal amount of this Note being redeemed plus accrued and unpaid interest to the redemption date.
“Make-Whole Amount” means, as determined by the Quotation Agent, the sum of the present values of the principal amount of this Note to be redeemed, together with the scheduled payments of interest (exclusive of interest to the redemption date) from the redemption date to the Par Call Date of this Note being redeemed, in each case discounted to the redemption date on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at the Adjusted Treasury Rate, plus accrued and unpaid interest on the principal amount of this Note being redeemed to the redemption date.
“Adjusted Treasury Rate” means, with respect to any redemption date, the sum of (x) either (1) the yield for the maturity corresponding to the Comparable Treasury Issue, under the heading that represents the average for the immediately preceding week, appearing in the most recent published statistical release designated “H.15” or any successor publication that is published weekly by the Board of Governors of the Federal Reserve System and that establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption “Treasury Constant Maturities” (provided, if no maturity is within three months before or after the remaining term of this Note, yields for the two published maturities most closely corresponding to the Comparable Treasury Issue shall be determined and the Adjusted Treasury Rate shall be interpolated or extrapolated from such yields on a straight line basis, rounded to the nearest month) or (2) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per year equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date, in each case calculated on the third business day preceding the redemption date, and (y) 0.200%.
“Comparable Treasury Issue” means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term of this Note (assuming, for this purpose, that this Note matured on the Par Call Date) that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of this Note (assuming, for this purpose, that this Note matured on the Par Call Date).
“Comparable Treasury Price” means, with respect to any redemption date, (x) the average of three Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest Reference Treasury Dealer Quotations so obtained, or (y) if fewer than five Reference Treasury Dealer Quotations are so obtained, the average of all such Reference Treasury Dealer Quotations so obtained.
“Quotation Agent” means the Reference Treasury Dealer selected by the indenture trustee after consultation with the Company.
“Reference Treasury Dealer” means any of BofA Securities, Inc., Wells Fargo Securities, LLC, J.P. Morgan Securities LLC and two other nationally recognized investment banking firms selected by the Company that are primary U.S. Government securities dealers and their respective successors and assigns.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the indenture trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the indenture trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third business day preceding such redemption date.
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EXHIBIT 31.1
CERTIFICATION
I, Thomas W. Toomey, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of UDR, Inc.;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d) Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: October 30, 2019 |
/s/ Thomas W. Toomey |
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Thomas W. Toomey |
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Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION
I, Joseph D. Fisher, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of UDR, Inc.;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report, based on such evaluation; and
(d) Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: October 30, 2019 |
/s/ Joseph D. Fisher |
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Joseph D. Fisher |
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Chief Financial Officer and Senior Vice President
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EXHIBIT 31.3
CERTIFICATION
I, Thomas W. Toomey, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of United Dominion Realty, L.P.;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and
(d) Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: October 30, 2019 |
/s/ Thomas W. Toomey |
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Thomas W. Toomey |
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Chairman of the Board and Chief Executive Officer |
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(Principal Executive Officer) of UDR, Inc., |
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general partner of United Dominion Realty, L.P. |
EXHIBIT 31.4
CERTIFICATION
I, Joseph D. Fisher, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of United Dominion Realty, L.P.;
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report, based on such evaluation; and
(d) Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: October 30, 2019 |
/s/ Joseph D. Fisher |
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Joseph D. Fisher |
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Chief Financial Officer and Senior Vice President
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general partner of United Dominion Realty, L.P. |
EXHIBIT 32.1
CERTIFICATION
In connection with the periodic report of UDR, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas W. Toomey, Chairman of the Board and Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
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Uly 27Jul |
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Date: October 30, 2019 |
/s/ Thomas W. Toomey |
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Thomas W. Toomey |
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Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION
In connection with the periodic report of UDR, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Joseph D. Fisher, Senior Vice President and Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.
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Uly 27 |
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Date: October 30, 2019 |
/s/ Joseph D. Fisher |
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Joseph D. Fisher |
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Chief Financial Officer and Senior Vice President (Principal Financial Officer) |
EXHIBIT 32.3
CERTIFICATION
In connection with the periodic report of United Dominion Realty, L.P. (the “Operating Partnership”) on Form 10-Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Thomas W. Toomey, Chairman of the Board and Chief Executive Officer of UDR, Inc., the general partner of the Operating Partnership, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership at the dates and for the periods indicated.
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Date: October 30, 2019 |
/s/ Thomas W. Toomey |
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Thomas W. Toomey |
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Chairman of the Board and Chief Executive Officer |
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(Principal Executive Officer) of UDR, Inc., |
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general partner of United Dominion Realty, L.P. |
EXHIBIT 32.4
CERTIFICATION
In connection with the periodic report of United Dominion Realty, L.P. (the “Operating Partnership”) on Form 10-Q for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I, Joseph D. Fisher, Senior Vice President and Chief Financial Officer of UDR, Inc., the general partner of the Operating Partnership, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership at the dates and for the periods indicated.
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Date: October 30, 2019 |
/s/ Joseph D. Fisher |
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Joseph D. Fisher |
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Chief Financial Officer and Senior Vice President |
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(Principal Financial Officer) of UDR, Inc., |
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general partner of United Dominion Realty, L.P. |