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UDR, Inc. 10-K 2012 Documents found in this filing:Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
For the fiscal year ended December 31, 2011
Or
Commission file number 1-10524 (UDR, Inc.)
Commission file number 333-156002-01 (United Dominion Realty, L.P.) UDR, INC.
United Dominion Realty, L.P. (Exact name of registrant as specified in its charter)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code) Registrant’s telephone number, including area code: (720) 283-6120 Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
The aggregate market value of the shares of common stock of UDR, Inc. held by non-affiliates
on June 30, 2011 was approximately $2.6 billion. This calculation excludes shares of common stock
held by the registrant’s officers and directors and each person known by the registrant to
beneficially own more than 5% of the registrant’s outstanding shares, as such persons may be deemed
to be affiliates. This determination of affiliate status should not be deemed conclusive for any
other purpose. As of February 17, 2012 there were 223,340,334 shares of UDR, Inc’s common stock
outstanding.
There is no public trading market for the partnership units of United Dominion Realty, L.P. As
a result, an aggregate market value of the partnership units of United Dominion Realty, L.P. cannot
be determined.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is
incorporated by reference from UDR, Inc.’s definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 15, 2012.
TABLE OF CONTENTS
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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the fiscal year ended December 31,
2011 of UDR, Inc. a Maryland corporation, and United Dominion Realty, L.P., a Delaware limited
partnership, of which UDR 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 the Operating Partnership. Unless the context otherwise requires, the
references in this Report to the “Operating Partnership” 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 are referred to as “OP Units” and the holders of
the OP Units are referred to as “unitholders”. This combined Form 10-K is being filed separately
by UDR and the Operating Partnership.
There are a number of differences between our company and our operating partnership, which are
reflected in our disclosure in this report. UDR is a real estate investment trust (a “REIT”),
whose most significant asset is its ownership interest in the Operating Partnership. UDR also
conducts business through other subsidiaries and operating partnerships, including its subsidiary
RE3, whose activities include development of land. UDR acts as the sole general partner
of the Operating Partnership, holds interests in other operating partnerships, 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 securities of UDR.
As of December 31, 2011, UDR owned 110,883 units of the general partnership interests of the
Operating Partnership and 174,749,068 units (or approximately 94.9%) of the limited partnership
interests of the Operating Partnership (the “OP Units”). 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 being the Operating Partnership’s sole general partner,
UDR has the ability to control all of the day-to-day operations of the Operating Partnership.
Separate financial statements and accompanying notes, as well as separate discussions under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity
Securities” and “Controls and Procedures” are provided for each of UDR and the Operating
Partnership. In addition, certain disclosures in “Business” are separated by entity to the extent
that the discussion relates to UDR’s business outside of the Operating Partnership.
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PART I
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements include, without limitation, statements concerning property acquisitions and
dispositions, development activity and capital expenditures, capital raising activities, rent
growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,”
“plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and
similar expressions are intended to identify such forward-looking statements. Such statements
involve known and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the results of operations or
plans expressed or implied by such forward-looking statements. Such factors include, among other
things, unfavorable changes in the apartment market, changing economic conditions, the impact of
inflation/deflation on rental rates and property operating expenses, expectations concerning
availability of capital and the stabilization of the capital markets, the impact of competition and
competitive pricing, acquisitions, developments and redevelopments not achieving anticipated
results, delays in completing developments, redevelopments and lease-ups on schedule, expectations
on job growth, home affordability and demand/supply ratio for multifamily housing, expectations
concerning development and redevelopment activities, and expectations on occupancy levels. 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 Annual 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. For a further discussion of these
and other factors that could impact future results, performance or transactions, see “Item 1A. Risk
Factors” elsewhere in this Annual Report.
Forward-looking statements and such risks, uncertainties and other factors speak only as of
the date of this Annual 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.
Item 1. BUSINESS
General
UDR is a self administered real estate investment trust, or REIT, that owns, operates,
acquires, renovates, develops, redevelops, and manages multifamily apartment communities generally
located in high barrier-to-entry markets located throughout the United States. The high
barrier-to-entry markets are characterized by limited land for new construction, difficult and
lengthy entitlement process, expensive single-family home prices and significant employment growth
potential. At December 31, 2011, our consolidated apartment portfolio included 163 communities
located in 22 markets, with a total of 47,343 completed apartment homes, which are held through our
operating partnerships, including the Operating Partnership, our subsidiaries and consolidated
joint ventures. In addition, we have an ownership interest in 39 communities containing 10,496
completed apartment homes through unconsolidated joint ventures. At
December 31, 2011, the Company is developing seven wholly-owned
communities with 2,108 apartment homes, 145 of which have been
completed.
At December 31, 2011, the Operating Partnership’s consolidated apartment portfolio included 77
communities located in 17 markets, with a total of 23,160 completed apartment homes. The Operating
Partnership owns, operates, acquires, renovates, develops, redevelops, and manages multifamily
apartment communities generally located in high barrier-to-entry markets located throughout the
United States. During the fiscal year ended December 31, 2011, revenues of the Operating
Partnership represented approximately 53% of our total rental revenues.
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UDR elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which
we refer to in this Report as the “Code”. To continue to qualify as a REIT, we must continue to
meet certain tests which, among other things, generally require that our assets consist primarily
of real estate assets, our income be derived primarily from real estate assets, and that we
distribute at least 90% of our REIT taxable income (other than our net capital gains) to our
stockholders annually. As a qualified REIT, we generally will not be subject to U.S. federal income
taxes at the corporate level on our net income to the extent we distribute such net income to our
stockholders annually. In 2011, we declared total distributions of $0.80 per common share and paid
dividends of $0.77 per common share.
UDR was formed in 1972 as a Virginia corporation. In June 2003, we changed our state of
incorporation from Virginia to Maryland. The Operating Partnership was formed in 2004 as Delaware
limited partnership. The Operating Partnership is the successor-in-interest to United Dominion
Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations
in 1995. Our corporate offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch,
Colorado and our telephone number is (720) 283-6120. Our website is located at www.udr.com.
As of February 17, 2012, we had 1,652 full-time associates and 98 part-time associates, all of
whom were employed by UDR.
Reporting Segments
We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same
Communities segment includes those communities acquired, developed, and stabilized prior to January
1, 2010, and held as of December 31, 2011. These communities were owned and had stabilized
occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct
substantial redevelopment activities, and the community is not classified as held for sale at year
end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at
least three consecutive months. Our Non-Mature/Other Communities segment includes those
communities that were acquired or developed in 2009, 2010 or 2011, sold properties, redevelopment
properties, properties classified as real estate held for sale, condominium conversion properties,
joint venture properties, properties managed by third parties, and the non-apartment components of
mixed use properties. For additional information regarding our operating segments, see Note 15 to
UDR’s consolidated financial statements and Note 11 to the Operating Partnership’s consolidated
financial statements.
Business Objectives
Our principal business objective is to maximize the economic returns of our apartment
communities to provide our stockholders with the greatest possible total return and value. To
achieve this objective, we intend to continue to pursue the following goals and strategies:
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2011 Highlights
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Other than the following, there were no significant changes to the Operating Partnership’s
business during 2011 (the above 2011 highlights relate to UDR or other subsidiaries of UDR):
Our Strategies and Vision
We previously announced our vision to be the innovative multifamily public real estate
investment trust of choice. We identified the following strategies to guide decision-making and
growth:
Strengthen quality of our Portfolio
We are focused on increasing our presence in markets with favorable job formation, low
single-family home affordability, and a favorable demand/supply ratio for multifamily housing.
Portfolio decisions consider internal analyses and third-party research, taking into account job
growth, multifamily permitting and housing affordability.
For the year ended December 31, 2011, approximately 50.9% of our same store net operating
income (“NOI”) was provided by our communities located in California, Metropolitan Washington,
D.C., Oregon and Washington state.
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Grow our cash flow to support dividend growth
Acquisitions and Dispositions
During 2011, in conjunction with our strategy to strengthen our portfolio, we acquired eight
operating communities with 3,161 apartment homes for approximately $1.5 billion. Four of these
operating communities, representing 1,833 homes, were acquired by the Operating Partnership for
approximately $761.2 million.
When evaluating potential acquisitions, we consider:
We regularly monitor our assets to increase the quality and performance of our portfolio.
Factors we consider in deciding whether to dispose of a property include:
During 2011, we sold eighteen apartment home communities, of which eight communities were
owned by the Operating Partnership.
The following table summarizes our apartment community acquisitions, apartment community
dispositions and our consolidated year-end ownership position for the past five years (dollars in
thousands):
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The following table summarizes our apartment community acquisitions, apartment community
dispositions and our year-end ownership position of the Operating Partnership for the past five
years (dollars in thousands):
Development Activities
The following wholly owned projects were under development as of December 31, 2011:
None of these projects are held by the Operating Partnership.
Redevelopment Activities
During 2011, we continued to redevelop properties in targeted markets where we concluded there
was an opportunity to add value. During the year ended December 31, 2011, we incurred $30.0 million
in major renovations, which include major structural changes and/or architectural revisions to
existing buildings.
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Joint Venture Activities
Consolidated joint venture
In August 2011, the Company invested in a consolidated joint venture with an unaffiliated
third party to acquire and redevelop an existing commercial property into a 173-apartment home
community in Orange County, California. At closing the Company contributed $9.0 million and at
December 31, 2011, UDR owned a 90% controlling interest in the investment. Under the terms of the
operating agreement, our partner is required to achieve certain criteria as it relates to the
entitlement process. If the criteria are met on or before 730 days after the site plan application
is deemed complete by the city, the Company is obligated to contribute an additional $3.0 million
to the joint venture for distribution to our partner. At the acquisition date, the Company accrued
and capitalized $3.0 million related to the contingent consideration, which represents the
difference between fair value of the property of $9.8 million on the formation date and the
estimated fair value of the underlying property upon completion of the entitlement process of $12.8
million.
Unconsolidated joint ventures
In May 2011, the Company entered into a joint venture to develop a 263-home community in San
Diego, California. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of 95%
in the joint venture. Our initial investment was $9.9 million and our investment at December 31,
2011 was $12.1 million.
In June 2011, one of our existing joint ventures (UDR/MetLife I) sold a parcel of land to a
joint venture, in which the Company is a partner, to develop a 256-home community in College Park,
Maryland. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the
joint venture. Our initial investment was $7.1 million and our investment at December 31, 2011 was
$8.6 million.
UDR is a partner with an unaffiliated third party, which formed a joint venture for the
investment of up to $450.0 million in multifamily properties located in key, high barrier to entry
markets such as Metropolitan Washington D.C. The partners will contribute equity of $180.0 million
of which the Company’s maximum equity will be 30% or $54.0 million when fully invested. In 2011,
the joint venture acquired two properties (509 homes). At December 31, 2011, the Company owned a
30% interest in the joint venture. Our investment at December 31, 2011 was $34.1 million.
For additional information regarding these and our other joint ventures, see Note 5, Joint
Ventures to the Consolidated Financial Statements of UDR, Inc. in this Report.
The Operating Partnership is not a party to any of the joint venture activities described
above.
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Increase our balance sheet strength and flexibility
We maintain a capital structure that allows us to seek, and not just react to, opportunities
available in the marketplace. We have structured our borrowings to stagger our debt maturities and
to be able to opportunistically access both secured and unsecured debt.
Financing Activities
As part of our plan to strengthen our capital structure, we utilized proceeds from debt and
equity offerings and refinancings to extend maturities, pay down existing debt and acquire
apartment communities. The following is a summary of our major financing activities in 2011.
Great place to work and live
We continue to make progress on automating our business as a way to drive operating
efficiencies and to better meet the changing needs of our residents. Since its launch in January
2009, our residents have been utilizing the resident internet portal on our website. Our residents
have access to conduct business with us 24 hours a day, 7 days a week, to pay rent on line and to
submit service requests. In July 2010, we completed the roll out of online renewals throughout our
entire portfolio. As a result of transforming operations through technology, our residents get the
convenience they want, and our operating teams have become more efficient. These improvements in
adopting the web as a way to conduct business with us have also resulted in a decline in marketing
and advertising costs, improved cash management, and improved capabilities to better manage pricing
of our available apartment homes.
In 2011, UDR.com features and functionality were enhanced to increase user engagement and
increase lead volume year-over-year, such as, improved photography, enhancements to the online web
forms and improved layout of the individual UDR community homepages. In addition to improvements to
www.udr.com, we also improved our suite of mobile and tablet devices on the iPhone, iPad
and Android platforms. These overall enhancements have contributed to increasing our web visitor
traffic to almost 3.1 million visitors (up 31%), almost 2.1 million organic search engine visitors
(up 38%), mobile traffic increased 112%, mobile leads generated increased 115% and mobile as a
percent of total web traffic was at 22% in Q4 2011. Overall, the UDR.com and mobile initiatives
contributed to a 17% year-over-year lead stream increase.
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Operating Partnership Strategies and Vision
The Operating Partnership’s long-term strategic plan is to achieve greater operating
efficiencies by investing in fewer, more concentrated markets and
enhance resident and associate service through technology. As a result, the Operating
Partnership has sought to expand its interests in communities located in New York, New York; San
Francisco, California; Boston, Massachusetts; and Metropolitan D.C. markets over the past years.
Prospectively, we plan to continue to channel new investments into those markets we believe will
continue to provide the best investment returns. Markets will be targeted based upon defined
criteria including above average job growth, low single-family home affordability and limited new
supply for multifamily housing- three key drivers to strong rental growth.
Markets and Competitive Conditions
At December 31, 2011, 50.9% of our consolidated same store net operating income and 72.4% of
the Operating Partnership’s same store net operating income was generated from apartment homes
located in California, Metropolitan Washington D.C., Oregon, and Washington state. We believe that
this diversification increases investment opportunity and decreases the risk associated with
cyclical local real estate markets and economies, thereby increasing the stability and
predictability of our earnings.
Competition for new residents is generally intense across all of our markets. Some competing
communities offer features that our communities do not have. Competing communities can use
concessions or lower rents to obtain temporary competitive advantages. Also, some competing
communities are larger or newer than our communities. The competitive position of each community is
different depending upon many factors including sub-market supply and demand. In addition, other
real estate investors compete with us to acquire existing properties and to develop new properties.
These competitors include insurance companies, pension and investment funds, public and private
real estate companies, investment companies and other public and private apartment REITs, some of
which may have greater resources, or lower capital costs, than we do.
We believe that, in general, we are well-positioned to compete effectively for residents and
investments. We believe our competitive advantages include:
Moving forward, we will continue to emphasize aggressive lease management, improved expense
control, increased resident retention efforts and the alignment of employee incentive plans tied to
our bottom line performance. We believe this plan of operation, coupled with the portfolio’s
strengths in targeting renters across a geographically diverse platform, should position us for
continued operational improvement in spite of the difficult economic environment.
Communities
At December 31, 2011, our apartment portfolio included 163 consolidated communities having a
total of 47,343 completed apartment homes and an additional 1,963 apartment homes under
development, which included the Operating Partnership’s apartment portfolio of 77 consolidated
communities having a total of 23,160 completed apartment homes. The overall quality of our
portfolio enables us to raise rents and to attract residents with higher levels of disposable
income who are more likely to absorb expenses, such as water and sewer costs, from the landlord to
the resident. In addition, it potentially reduces recurring capital expenditures per apartment
home, and therefore should result in increased cash flow in the future.
At
December 31, 2011, the Company is developing seven wholly-owned
communities with 2,108 apartment homes, 145 of which have been
completed.
At
December 31, 2011, the Company is redeveloping seven wholly-owned
communities with 3,123 apartment homes, 467 of which have been
completed.
Same Store Community Comparison
We believe that one pertinent quantitative measurement of the performance of our portfolio is
tracking the results of our same store community’s net operating income, which is total rental
revenue, less rental expenses excluding property management and other operating expenses. Our same
store community population are operating communities which we own and have stabilized occupancy,
revenues and expenses as of the beginning of the prior year.
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For the year ended December 31, 2011, our same store NOI increased by $18.1 million or 5.6%
compared to the prior year. The increase in NOI for the 37,869 apartment homes which make up the
same store population was driven by an increase in rental rates and fee and reimbursement income,
partially offset by an increase in operating expenses and decreased occupancy.
For the year ended December 31, 2011, the Operating Partnership’s same store NOI increased by
$11.5 million or 6.2% compared to the prior year. The increase in NOI for the 19,194 apartment
homes which make up the same store population was driven by an increase in revenue rental rates,
partially offset by an increase in operating expenses and decreased occupancy.
Revenue growth in 2012 may be impacted by general adverse conditions affecting the economy,
reduced occupancy rates, increased rental concessions, increased bad debt and other factors which
may adversely impact our ability to increase rents.
Tax Matters
UDR has elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, UDR
must continue to meet certain tests that, among other things, generally require that our assets
consist primarily of real estate assets, our income be derived primarily from real estate assets,
and that we distribute at least 90% of our REIT taxable income (other than net capital gains) to
our stockholders annually. Provided we maintain our qualification as a REIT, we generally will not
be subject to U.S. federal income taxes at the corporate level on our net income to the extent such
net income is distributed to our stockholders annually. Even if we continue to qualify as a REIT,
we will continue to be subject to certain federal, state and local taxes on our income and
property.
We may utilize taxable REIT subsidiaries to engage in activities that REITs may be prohibited
from performing, including the provision of management and other services to third parties and the
conduct of certain nonqualifying real estate transactions. Taxable REIT subsidiaries generally are
taxable as regular corporations and therefore are subject to federal, state and local income taxes.
The Operating Partnership intends to qualify as a partnership for federal income tax purposes.
As a partnership, the Operating Partnership generally is not a taxable entity and does not incur
federal income tax liability. However, any state or local revenue, excise or franchise taxes that
result from the operating activities of the Operating Partnership are incurred at the entity level.
Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While
the impact of inflation primarily impacts our results through wage pressures, utilities and
material costs, substantially all of our leases are for a term of one year or less, which generally
enables us to compensate for any inflationary effects by increasing rents on our apartment homes.
Although an escalation in energy and food costs could have a negative impact on our residents and
their ability to absorb rent increases, we do not believe this has had a material impact on our
results for the year ended December 31, 2011.
Environmental Matters
Various environmental laws govern certain aspects of the ongoing operation of our communities.
Such environmental laws include those regulating the existence of asbestos-containing materials in
buildings, management of surfaces with lead-based paint (and notices to residents about the
lead-based paint), use of active underground petroleum storage tanks, and waste-management
activities. The failure to comply with such requirements could subject us to a government
enforcement action and/or claims for damages by a private party.
To date, compliance with federal, state and local environmental protection regulations has not
had a material effect on our capital expenditures, earnings or competitive position. We have a
property management plan for hazardous materials. As part of the plan, Phase I environmental site
investigations and reports have been completed for each property we acquire. In addition, all
proposed acquisitions are inspected prior to acquisition. The inspections are conducted by
qualified environmental consultants, and we review the issued report prior to the purchase or
development of any property. Nevertheless, it is possible that our environmental assessments will
not reveal all environmental liabilities, or that some material environmental liabilities exist of
which we are unaware. In some cases, we have abandoned otherwise economically attractive
acquisitions because the costs of removal or control of hazardous materials have been prohibitive
or we have been unwilling to accept the potential risks involved. We do not believe we will be
required to engage in any large-scale abatement at any of our properties. We believe that through
professional environmental inspections and testing for asbestos, lead paint and other hazardous
materials, coupled with a relatively conservative posture toward accepting known environmental
risk, we can minimize our exposure to potential liability associated with environmental hazards.
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Federal legislation requires owners and landlords of residential housing constructed prior to
1978 to disclose to potential residents or purchasers of the communities any known lead paint
hazards and imposes treble damages for failure to provide such notification. In addition, lead
based paint in any of the communities may result in lead poisoning in children residing in that
community if chips or particles of such lead based paint are ingested, and we may be held liable
under state laws for any such injuries caused by ingestion of lead based paint by children living
at the communities.
We are unaware of any environmental hazards at any of our properties that individually or in
the aggregate may have a material adverse impact on our operations or financial position. We have
not been notified by any governmental authority, and we are not otherwise aware, of any material
non-compliance, liability, or claim relating to environmental liabilities in connection with any of
our properties. We do not believe that the cost of continued compliance with applicable
environmental laws and regulations will have a material adverse effect on us or our financial
condition or results of operations. Future environmental laws, regulations, or ordinances, however,
may require additional remediation of existing conditions that are not currently actionable. Also,
if more stringent requirements are imposed on us in the future, the costs of compliance could have
a material adverse effect on us and our financial condition.
Insurance
We carry comprehensive general liability coverage on our communities, with limits of liability
customary within the industry to insure against liability claims and related defense costs. We are
also insured, with limits of liability customary within the industry, against the risk of direct
physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred
to repair or rebuild each property, including loss of rental income during the reconstruction
period.
Executive Officers of the Company
UDR is the sole general partner of the Operating Partnership. The following table sets forth
information about our executive officers as of February 17, 2012. The executive officers listed
below serve in their respective capacities at the discretion of our Board of Directors.
Set forth below is certain biographical information about our executive officers.
Mr. Toomey spearheads the vision and strategic direction of the Company and oversees its
executive officers. He joined us in February 2001 as President, Chief Executive Officer and
Director. Prior to joining us, Mr. Toomey was with Apartment Investment and Management Company
(AIMCO), where he served as Chief Operating Officer for two years and Chief Financial Officer for
four years. During his tenure at AIMCO, Mr. Toomey was instrumental in the growth of AIMCO from
34,000 apartment homes to 360,000 apartment homes. He has also served as a Senior Vice President
at Lincoln Property Company, a national real estate development, property management and real
estate consulting company, from 1990 to 1995. He currently serves on the Executive Board of the
National Association of Real Estate Investment Trusts (NAREIT), as a member of the Real Estate
Roundtable, as a trustee with the Urban Land Institute and as a trustee of the Oregon State
University Foundation.
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Mr. Troupe oversees all financial, treasury, tax and legal functions of the Company. He
joined us in March 2008 as Senior Executive Vice President. In May 2008, he was appointed the
Company’s Corporate Compliance Officer and in October 2008 he was named the Company’s Corporate
Secretary. Prior to joining us, Mr. Troupe was a partner with Morrison & Forester LLP from 1997 to
2008, where his practice focused on all aspects of corporate finance including, but not limited to,
public and private equity offerings, traditional loan structures, debt placements to subordinated
debt financings, workouts and recapitalizations. While at Morrison & Forester LLP he represented
both public and private entities in connection with merger and acquisition transactions, including
tender offers, hostile proxy contests and negotiated acquisitions. He currently is a member of the
National Multi Housing Council (NMHC), the Pension Real Estate Association (PREA) and the Urban
Land Institute.
Mr. Alcock oversees the Company’s acquisitions, dispositions, redevelopment and asset
management. He joined us in December 2010 as Senior Vice
President — Asset Management. Prior to joining the company, Mr. Alcock was with AIMCO for over 16
years, serving most recently as Executive Vice President, co-Head of Transactions and Asset
Management. He was appointed Executive Vice President and Chief Investment officer in 1999, a
position he held through 2007. Mr. Alcock established and chaired the company’s Investment
Committee, established the portfolio management function and at various times ran the property debt
and redevelopment departments. Prior to the formation of AIMCO, from 1992 to 1994, Mr. Alcock was
with Heron Financial and PDI, predecessor companies to AIMCO. From 1988 to 1992 he worked for
Larwin Company, a national homebuilder.
Mr. Davis oversees property operations, human resources and technology. He originally joined
us in March 1989 as Controller and subsequently moved into Operations as an Area Director and in
2001, he accepted the position of Chief Operating Officer of JH Management Co., a California-based
apartment company. He returned to the Company in March 2002 and in 2008, Mr. Davis was promoted to
Senior Vice President — Property Operations. He began his career in 1984 as a Staff Accountant for
Arthur Young & Co.
Mr. Messenger oversees the areas of accounting, risk management, financial planning and
analysis, property tax administration and SEC reporting. He joined us in August 2002 as Vice
President and Controller. In March 2006, Mr. Messenger was appointed Vice President and Chief
Accounting Officer and in January 2007, while retaining the Chief Accounting Officer title, he was
promoted to Senior Vice President. Prior to joining the company in 2002, Mr. Messenger was owner
and President of TRC Management Company, a restaurant management company, in Chicago. Mr.
Messenger began his career in real estate and financial services with Ernst & Young LLP, as a
manager in their Chicago real estate division.
Mr. Wesson oversees all aspects of the company’s information technology infrastructure and
strategy. He joined us in May 2011 as Senior Vice President — Chief Information Officer. Prior to
joining the Company, Mr. Wesson was with RealFoundations, a global real estate management
consultancy, where he served as Managing Director from 2008 to 2011. From 1997 to 2008 he was with
Apartment Investment and Management Company (AIMCO) where he served as Senior Vice President, Chief
Investment Officer. He took on the additional role of Chief Strategy Officer for AIMCO in 2006.
From 1991 to 1997 Mr. Wesson was with Lincoln Property Company in the role of Vice President of
Information Systems. Prior to that time he worked for five years as a District Manager for ADP.
Mr. Wesson began his career in Dallas, Texas working as an Analyst for Federated Department Stores.
Available Information
Both UDR and the Operating Partnership file electronically with the Securities and Exchange
Commission their respective annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K, and amendments to those reports on the day of filing with
the SEC on our website at www.udr.com, or by sending an e-mail message to ir@udr.com.
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Item 1A. RISK FACTORS
There are many factors that affect the business and the results of operations of the Company
and the Operating Partnership, some of which are beyond the control of the Company and the
Operating Partnership. The following is a description of important factors that may cause the
actual results of operations of the Company and the Operating Partnership in future periods to
differ materially from those currently expected or discussed in forward-looking statements set
forth in this Report relating to our financial results, operations and business prospects.
Forward-looking statements and such risks, uncertainties and other factors speak only as of the
date of this Report, and we expressly disclaim any obligation or undertaking to update or revise
any forward-looking statement contained herein, to reflect any change in our expectations with
regard thereto, or any other change in events, conditions or circumstances on which any such
statement is based, except to the extent otherwise required by law.
Risks Related to Our Real Estate Investments and Our Operations
Unfavorable Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels,
Rental Revenues and the Value of Our Real Estate Assets. Unfavorable market conditions in the
areas in which we operate and unfavorable economic conditions generally may significantly affect
our occupancy levels, our rental rates and collections, the value of the properties and our ability
to strategically acquire or dispose of apartment communities on economically favorable terms. Our
ability to lease our properties at favorable rates is adversely affected by the increase in supply
in the multifamily market 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, the downturn in the housing market, stock market volatility and uncertainty about the
future. Some of our major expenses, including mortgage payments and real estate taxes, generally do
not decline when related rents decline. We would expect that declines in our occupancy levels,
rental revenues and/or the values of our apartment communities would cause us to have less cash
available to pay our indebtedness and to distribute to UDR’s stockholders, which could adversely
affect our financial condition and the market value of our securities. Factors that may affect our
occupancy levels, our rental revenues, and/or the value of our properties include the following,
among others:
Continued Economic Weakness Following the Economic Recession that the U.S. Economy Recently
Experienced May Materially and Adversely Affect our Financial Condition and Results of Operations.
The U.S. economy continues to experience weakness following a severe recession, which has
resulted in increased unemployment, decreased consumer spending and a decline in residential and
commercial property values. Although it is not clear whether the U.S. economy has fully emerged
from the recession, high levels of unemployment have continued to persist. If the economic recovery
slows or stalls, we may experience adverse effects on our occupancy levels, our rental revenues and
the value of our properties, any of which could adversely affect our cash flow, financial condition
and results of operations.
Substantial International, National and Local Government Spending and Increasing Deficits May
Adversely Impact Our Business, Financial Condition and Results of Operations. The values of, and
the cash flows from, the properties we own are affected by developments in global, national and
local economies. As a result of the recent recession and the significant government interventions,
federal, state and local governments have incurred record deficits and assumed or guaranteed
liabilities of private financial institutions or other private entities. These increased budget
deficits and the weakened financial condition of federal, state and local governments may lead to
reduced governmental spending, tax increases, public sector job losses, increased interest rates,
currency devaluations or other adverse economic events, which may directly or indirectly adversely
affect our business, financial condition and results of operations.
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Risk of Inflation/Deflation. Substantial inflationary or deflationary pressures could have a
negative effect on rental rates and property operating expenses. Neither inflation nor deflation
has materially impacted our operations in the recent past. The general risk of inflation is that
our debt interest and general and administrative expenses increase at a rate higher than our rental
rates. The predominant effects of deflation include high unemployment and credit contraction.
Restricted lending practices could impact our ability to obtain financing or refinancing for our
properties. High unemployment may have a negative effect on our occupancy levels and our rental
revenues.
We Are Subject to Certain Risks Associated with Selling Apartment Communities, Which Could
Limit Our Operational and Financial Flexibility. We periodically dispose of apartment communities
that no longer meet our strategic objectives, but adverse market conditions may make it difficult
to sell apartment communities like the ones we own. We cannot predict whether we will be able to
sell any property for the price or on the terms we set, or whether any price or other terms offered
by a prospective purchaser would be acceptable to us. We also cannot predict the length of time
needed to find a willing purchaser and to close the sale of a property. Furthermore, we may be
required to expend funds to correct defects or to make improvements before a property can be sold.
These conditions may limit our ability to dispose of properties and to change our portfolio
promptly in order to meet our strategic objectives, which may in turn have a material adverse
effect on our financial condition and the market value of our securities. We are also subject to
the following risks in connection with sales of our apartment communities:
Competition Could Limit Our Ability to Lease Apartment Homes or Increase or Maintain
Rents. Our apartment communities compete with numerous housing alternatives in attracting
residents, including other apartment communities, condominiums and single-family rental homes, as
well as owner occupied single-and multi-family homes. Competitive housing in a particular area
could adversely affect our ability to lease apartment homes and increase or maintain rents.
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:
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In the past, other real estate investors, including insurance companies, pension and
investment funds, developer partnerships, investment companies and other public and private
apartment REITs, have competed with us to acquire existing properties and to develop new
properties, and such competition in the future may make it more difficult for us to pursue
attractive investment opportunities on favorable terms, which could adversely affect growth.
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:
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In some cases in the past, the costs of upgrading acquired communities exceeded our original
estimates. We may experience similar cost increases in the future. Our inability to charge rents
that will be sufficient to offset the effects of any increases in these costs may impair our
profitability.
Bankruptcy of Developers in Our Development Joint Ventures Could Impose Delays and Costs on Us
With Respect to the Development of Our Communities and May Adversely Affect Our Financial Condition
and Results of Operations. The bankruptcy of one of the developers in any of our development
joint ventures could materially and adversely affect the relevant property or properties. If the
relevant joint venture through which we have invested in a property has incurred recourse
obligations, the discharge in bankruptcy of the developer may require us to honor a completion
guarantee and therefore might result in our ultimate liability for a greater portion of those
obligations than we would otherwise bear.
Property Ownership Through Joint Ventures May Limit Our Ability to Act Exclusively in Our
Interest. We have in the past and may in the future develop and acquire properties in joint
ventures with other persons or entities when we believe circumstances warrant the use of such
structures. If we use such a structure, we could become engaged in a dispute with one or more of
our joint venture partners that might affect our ability to operate a jointly-owned property.
Moreover, joint venture 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, joint venture partners may have
competing interests in our markets that could create conflicts of interest.
We Could Incur Significant Insurance Costs and Some Potential Losses May Not Be Adequately
Covered by Insurance. We have a comprehensive insurance program covering our property and
operating activities. We believe the policy specifications and insured limits of these policies are
adequate and appropriate. There are, however, certain types of extraordinary losses which may not
be adequately covered under our insurance program. In addition, we will sustain losses due to
insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess
of applicable coverage.
If an uninsured loss or a loss in excess of insured limits occur, 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 adversely affect our cash flow and
ability to make distributions to UDR’s stockholders.
As a result of our substantial real estate holdings, the cost of insuring our apartment
communities is a significant component of expense. Insurance premiums are subject to significant
increases and fluctuations, which can be widely outside of our control. We insure our properties
with insurance companies that we believe have a good rating at the time our policies are put into
effect. The financial condition of one or more of our insurance companies that we hold policies
with may be negatively impacted resulting in their inability to pay on future insurance claims.
Their inability to pay future claims may have a negative impact on our financial results. In
addition, the failure of one or more insurance companies may increase the costs to renew our
insurance policies or increase the cost of insuring additional properties and recently developed or
redeveloped properties.
Failure to Succeed in New Markets May Limit Our Growth. We have acquired in the past, and we
may acquire in the future if appropriate opportunities arise, apartment communities that are
outside of our existing markets. Entering into new markets may expose us to a variety of risks, and
we may not be able to operate successfully in new markets. These risks include, among others:
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Potential Liability for Environmental Contamination Could Result in Substantial Costs. Under
various federal, state and local environmental laws, as a current or former owner or operator of
real estate, we could be required to investigate and remediate the effects of contamination of
currently or formerly owned real estate by hazardous or toxic substances, often regardless of our
knowledge of or responsibility for the contamination and solely by virtue of our current or former
ownership or operation of the real estate. In addition, we could be held liable to a governmental
authority or to third parties for property damage and for investigation and clean-up costs incurred
in connection with the contamination. These costs could be substantial, and in many cases
environmental laws create liens in favor of governmental authorities to secure their payment. The
presence of such substances or a failure to properly remediate any resulting contamination could
materially and adversely affect our ability to borrow against, sell or rent an affected property.
In addition, our properties are subject to various federal, state and local environmental,
health and safety laws, including laws governing the management of wastes and underground and
aboveground storage tanks. Noncompliance with these environmental, health and safety laws could
subject us to liability. Changes in laws could increase the potential costs of compliance with
environmental laws, health and safety laws or increase liability for noncompliance. This may result
in significant unanticipated expenditures or may otherwise materially and adversely affect our
operations.
As the owner or operator of real property, we may also incur liability based on various
building conditions. For example, buildings and other structures on properties that we currently
own or operate or those we acquire or operate in the future contain, may contain, or may have
contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that
ACM be properly managed and maintained and may impose fines or penalties on owners, operators or
employers for non-compliance with those requirements.
These requirements include special precautions, such as removal, abatement or air monitoring,
if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially
resulting in substantial costs. In addition, we may be subject to liability for personal injury or
property damage sustained as a result of exposure to ACM or releases of ACM into the environment.
We cannot assure you that costs or liabilities incurred as a result of environmental issues
will not affect our ability to make distributions to our shareholders, or that such costs or
liabilities will not have a material adverse effect on our financial condition and results of
operations.
Our Properties May Contain or Develop Harmful Mold or Suffer from Other Indoor Air Quality
Issues, Which Could Lead to Liability for Adverse Health Effects or Property Damage or Cost for
Remediation. When excessive moisture 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. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our tenants or others if property damage or personal injury occurs.
Compliance or Failure to Comply with the Americans with Disabilities Act of 1990 or Other
Safety Regulations and Requirements Could Result in Substantial Costs. The Americans with
Disabilities Act generally requires that public buildings, including our properties, be made
accessible to disabled persons. Noncompliance could result in the imposition of fines by the
federal government or the award of damages to private litigants. From time to time claims may be
asserted against us with respect to some of our properties under this Act. If, under the Americans
with Disabilities Act, we are required to make substantial alterations and capital expenditures in
one or more of our properties, including the removal of access barriers, it could adversely affect
our financial condition and results of operations.
Our properties are subject to various federal, state and local regulatory requirements, such
as state and local fire and life safety requirements. If we fail to comply with these requirements,
we could incur fines or private damage awards. We do not know whether existing requirements will
change or whether compliance with future requirements will require significant unanticipated
expenditures that will affect our cash flow and results of operations.
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Real Estate Tax and Other Laws. Generally we do not directly pass through costs resulting
from compliance with or changes in real estate tax laws to residential property tenants. We also do
not generally pass through increases in income, service or other taxes, to tenants under leases.
These costs may adversely affect net operating income and the ability to make distributions to
stockholders. Similarly, compliance with or changes in (i) laws increasing the potential liability
for environmental conditions existing on properties or the restrictions on discharges or other
conditions or (ii) rent control or rent stabilization laws or other laws regulating housing, such
as the Americans with Disabilities Act and the Fair Housing Amendments Act of 1988, may result in
significant unanticipated expenditures, which would adversely affect funds from operations and the
ability to make distributions to stockholders.
Risk of Damage from Catastrophic Weather Events. Certain of our communities are located in
the general vicinity of active earthquake faults, mudslides and fires, and others where there are
hurricanes, tornadoes or risks of other inclement weather. The adverse weather events could cause
damage or losses that may be greater than insured levels. In the event of a loss in excess of
insured limits, we could lose our capital invested in the affected community, as well as
anticipated future revenue from that community. We would also continue to be obligated to repay any
mortgage indebtedness or other obligations related to the community. Any such loss could materially
and adversely affect our business and 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 a material adverse effect on our business and
operating results. Attacks that directly impact one or more of our apartment communities could
significantly affect our ability to operate those communities and thereby impair our ability to
achieve our expected results. Further, our insurance coverage may not cover all losses caused by a
terrorist attack. In addition, the adverse effects that such violent acts and threats of future
attacks could have on the U.S. economy could similarly have a material adverse effect on our
business and results of operations.
We May Experience a Decline in the Fair Value of Our Assets and Be Forced to Recognize
Impairment Charges, Which Could Materially and Adversely Impact Our Financial Condition, Liquidity
and Results of Operations and the Market Price of UDR’s Common Stock. A decline in the fair value
of our assets may require us to recognize an impairment against such assets under GAAP if we were
to determine that, with respect to any assets in unrealized loss positions, we do not have the
ability and intent to hold such assets to maturity or for a period of time sufficient to allow for
recovery to the amortized cost of such assets. If such a determination were to be made, we would
recognize unrealized losses through earnings and write down the amortized cost of such assets to a
new cost basis, based on the fair value of such assets on the date they are considered to be
impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent
disposition or sale of such assets could further affect our future losses or gains, as they are
based on the difference between the sale price received and adjusted amortized cost of such assets
at the time of sale. If we are required to recognize asset impairment charges in the future, these
charges could materially and adversely affect our financial condition, liquidity, results of
operations and the per share trading price of UDR’s common stock.
Any Material Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have
an Adverse Effect on UDR’s Stock Price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us
to evaluate and report on our internal control over financial reporting. If we identify one or more
material weaknesses in our internal control over financial reporting, we could lose investor
confidence in the accuracy and completeness of our financial reports, which in turn could have an
adverse effect on UDR’s stock price.
Our Business and Operations Would Suffer in the Event of System Failures. Despite system
redundancy, the implementation of security measures and the existence of a disaster recovery plan
for our internal information technology systems, our systems are vulnerable to damages from any
number of sources, including computer viruses, unauthorized access, energy blackouts, natural
disasters, terrorism, war, and telecommunication failures. We rely on information technology
networks and systems, including the Internet, to process, transmit and store electronic information
and to manage or support a variety of our business processes, including financial transactions and
keeping of records, which may include personal identifying information of tenants and lease data.
We rely on commercially available systems, software, tools and monitoring to provide security for
processing, transmitting and storing confidential tenant information, such as individually
identifiable information relating to financial accounts. Although we take steps to protect the
security of the data maintained in our information systems, it is possible that our security
measures will not be able to prevent the systems’ improper functioning, or the improper disclosure
of personally identifiable information, such as in the event of cyber attacks. Security breaches,
including physical or electronic break-ins, computer viruses, attacks by hackers and similar
breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential
information. Any failure to maintain proper function, security and availability of our information
systems could interrupt our operations, damage our reputation, subject us to liability claims or
regulatory penalties and could materially and adversely affect us.
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.
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We May be Adversely Affected by New Laws and Regulations. The United States Administration
and Congress have enacted, or called for consideration of, proposals relating to a variety of
issues, including with respect to health care, financial regulation reform, climate control,
executive compensation and others. We believe that these and other potential proposals could have
varying degrees of impact on us ranging from minimal to material. At this time, we are unable to
predict with certainty what level of impact specific proposals could have on us.
Certain rulemaking and administrative efforts that may have an impact on us focus principally
on the areas perceived as contributing to the global financial crisis and the recent economic
downturn. These initiatives have created a degree of uncertainty regarding the basic rules
governing the real estate industry and many other businesses that is unprecedented in the United
States at least since the wave of lawmaking and regulatory reform that followed in the wake of the
Great Depression. The federal legislative response in this area culminated in the enactment on
July 21, 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”).
Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed
effective dates and will require extensive rulemaking by regulatory authorities; thus, the impact
on us may not be known for an extended period of time. The Dodd-Frank Act, including future rules
implementing its provisions and the interpretation of those rules, along with other legislative and
regulatory proposals that are proposed or pending in the United States Congress, may limit our
revenues, impose fees or taxes on us, and/or intensify the regulatory framework in which we operate
in ways that are not currently identifiable.
Changing laws, regulations and standards relating to corporate governance and public
disclosure in particular, including certain provisions of the Dodd-Frank Act and the rules and
regulations promulgated thereunder, have created uncertainty for public companies like ours and
could significantly increase the costs and risks associated with accessing the U.S. public markets.
Because we are committed to maintaining high standards of internal control over financial
reporting, corporate governance and public disclosure, our management team will need to devote
significant time and financial resources to comply with these evolving standards for public
companies. We intend to continue to invest appropriate resources to comply with both existing and
evolving standards, and this investment has resulted and will likely continue to result in
increased general and administrative expenses and a diversion of management time and attention from
revenue generating activities to compliance activities.
The Adoption of Derivatives Legislation by Congress Could Have an Adverse Impact on our
Ability to Hedge Risks Associated with our Business. The Dodd-Frank Act regulates derivative
transactions, which include certain instruments used in our risk management activities. The
Dodd-Frank Act contemplates that most swaps will be required to be cleared through a registered
clearing facility and traded on a designated exchange or swap execution facility. There are some
exceptions to these requirements for entities that use swaps to hedge or mitigate commercial risk.
While we may ultimately be eligible for such exceptions, the scope of these exceptions is currently
uncertain, pending further definition through rulemaking proceedings. Although the Dodd-Frank Act
includes significant new provisions regarding the regulation of derivatives, the impact of those
requirements will not be known definitively until regulations have been adopted by the SEC and the
Commodities Futures Trading Commission. The new legislation and any new regulations could increase
the operational and transactional cost of derivatives contracts and affect the number and/or
creditworthiness of available hedge counterparties to us.
Changes in the System for Establishing U.S. Accounting Standards May Materially and Adversely
Affect Our Reported Results of Operations. Accounting for public companies in the United States
has historically been conducted in accordance with generally accepted accounting principles as in
effect in the United States (“GAAP”). GAAP 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. The International Accounting Standards Board (the “IASB”) is a
London-based independent board established in 2001 and charged with the development of
International Financial Reporting Standards (“IFRS”). IFRS generally reflects accounting practices
that prevail in Europe and in developed nations around the world.
IFRS differs in material respects from GAAP. Among other things, IFRS has historically relied
more on “fair value” models of accounting for assets and liabilities than GAAP. “Fair value” models
are based on periodic revaluation of assets and liabilities, often resulting in fluctuations in
such values as compared to GAAP, which relies more frequently on historical cost as the basis for
asset and liability valuation.
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We are monitoring the SEC’s activity with respect to the proposed adoption of IFRS by United
States public companies. It is unclear at this time how the SEC will propose that GAAP and IFRS be
harmonized if the proposed change is adopted. In addition, switching to a new method of accounting
and adopting IFRS will be a complex undertaking. We may need to develop new systems and controls
based on the principles of IFRS. Since these are new endeavors, and the precise requirements of the
pronouncements ultimately to be adopted are not now known, the magnitude of costs associated with
this conversion are uncertain.
We are currently evaluating the impact of the adoption of IFRS on our financial position and
results of operations. Such evaluation cannot be completed, however, without more clarity regarding
the specific IFRS standards that will be adopted. Until there is more certainty with respect to the
IFRS standards to be adopted, prospective investors should consider that our conversion to IFRS
could have a material adverse impact on our reported results of operations.
Risks Related to Our Indebtedness and Financings
Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are
subject to the risks normally associated with debt financing, including the risk that our operating
income and cash flow will be insufficient to make required payments of principal and interest, or
could restrict our borrowing capacity under our line of credit due to debt covenant restraints.
Sufficient cash flow may not be available to make all required principal payments and still satisfy
UDR’s distribution requirements to maintain its status as a REIT for federal income tax purposes.
In addition, the full limits of our line of credit may not be available to us 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 an
adverse effect on our cash flow, increase our financing costs and impact our ability to make
distributions to UDR’s stockholders.
Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to
Stockholders. If our apartment communities do not generate sufficient net rental income to meet
rental expenses, our ability to make required payments of interest and principal on our debt
securities and to pay distributions to UDR’s stockholders will be adversely affected. The following
factors, among others, may affect the net rental income generated by our apartment communities:
Expenses associated with our investment in an apartment community, such as debt service, real
estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a
reduction in rental income from that community. If a community is mortgaged to secure payment of
debt and we are unable to make the mortgage payments, we could sustain a loss as a result of
foreclosure on the community or the exercise of other remedies by the mortgage holder.
Our Debt Level May Be Increased. Our current debt policy does not contain any limitations on
the level of debt that we may incur, although our ability to incur debt is limited by covenants in
our bank and other credit agreements. We manage our debt to be in compliance with these debt
covenants, but subject to compliance with these covenants, we may increase the amount of our debt
at any time without a concurrent improvement in our ability to service the additional debt.
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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 and other forms of secured and 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. If we issue additional equity securities to finance
developments and acquisitions instead of incurring debt, the interests of our 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, the
major debt rating agencies, routinely evaluate our debt and have given us ratings on our senior
unsecured debt. 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 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.
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 or to refinance 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 past few years, the United States stock and credit markets
have experienced significant price volatility, dislocations and liquidity disruptions, which have
caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt
financings to widen considerably. These circumstances have materially impacted liquidity in the
financial markets, making terms for certain financings less attractive, and in some cases have
resulted in the unavailability of financing. The recent downgrade of the U.S. credit rating by
Standard & Poor’s and the ongoing European debt crisis have contributed to the instability in
global credit markets. Continued uncertainty in the stock and credit markets may negatively impact
our ability to access additional financing for acquisitions, development of our properties and
other purposes at reasonable terms, which may negatively affect our business. Additionally, due to
this uncertainty, we may be unable to refinance our existing indebtedness or the terms of any
refinancing may not be as favorable as the terms of our existing indebtedness. If we are not
successful in refinancing this debt 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. The disruptions in the financial
markets have had and may continue to have a material adverse effect on the market value of UDR’s
common shares and other adverse effects on us and our business.
Prospective buyers of our properties may also experience difficulty in obtaining debt
financing which might make it more difficult for us to sell properties at acceptable pricing
levels. Tightening of credit in financial markets and high unemployment rates may also adversely
affect the ability of tenants to meet their lease obligations and for us to continue increasing
rents on a prospective basis. Disruptions in the credit and financial markets may also have other
adverse effects on us and the overall economy.
A Change in U.S. Government Policy Regarding Fannie Mae or Freddie Mac Could Have a Material
Adverse Impact on Our Business. Fannie Mae and Freddie Mac are a major source of financing for
secured multifamily rental real estate. We and other multifamily companies depend heavily on Fannie
Mae and Freddie Mac to finance growth by purchasing or guaranteeing apartment loans. In September
2008, the U.S. government assumed control of Fannie Mae and Freddie Mac and placed both companies
into a government conservatorship under the Federal Housing Finance Agency. The Administration has
proposed potential options for the future of mortgage finance in the U.S. that could involve 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, it would significantly reduce our
access to debt capital and adversely affect our ability to finance or refinance existing
indebtedness at competitive rates and it may adversely affect our ability to sell assets.
Uncertainty in the future activity and involvement of Fannie Mae and Freddie Mac as a source of
financing could negatively impact our ability to make acquisitions and make it more difficult or
not possible for us to sell properties or may adversely affect the price we receive for properties
that we do sell, as prospective buyers may experience increased costs of debt financing or
difficulties in obtaining debt financing.
The Soundness of Financial Institutions Could Adversely Affect Us. We have relationships with
many financial institutions, including lenders under our credit facilities, and, from time to time,
we execute transactions with counterparties in the financial services industry. As a result,
defaults by, or even rumors or questions about, financial institutions or the financial services
industry generally, could result in losses or defaults by these institutions. In the event that the
volatility of the financial markets adversely affects these financial institutions or
counterparties, we or other parties to the transactions with us may be unable to complete
transactions as intended, which could adversely affect our business and results of operations.
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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 at rates that vary with market interest rates. As of December 31, 2011, UDR
had approximately $1.1 billion of variable rate indebtedness outstanding, which constitutes
approximately 28% of total outstanding indebtedness as of such date. As of December 31, 2011, the
Operating Partnership had approximately $287.0 million of variable rate indebtedness outstanding,
which constitutes approximately 24% of total outstanding indebtedness to third parties 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. 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. In addition, an increase in market interest
rates may lead our security holders to demand a higher annual yield, which could adversely affect
the market price of UDR’s common and preferred stock and debt securities.
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 desired beneficial impact on our results
of operations or financial condition. Termination of these hedging agreements typically involves
costs, such as transaction fees or breakage costs.
Risks Related to Tax Laws
We Would Incur Adverse Tax Consequences if UDR Failed to Qualify as a REIT. UDR has elected
to be taxed as a REIT under the Code. Our qualification as a REIT requires us to satisfy numerous
requirements, some on an annual and quarterly basis, established under highly technical and complex
Code provisions for which there are only limited judicial or administrative interpretations, and
involves the determination of various factual matters and circumstances not entirely within our
control. We intend that our current organization and method of operation enable us to continue to
qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the
future. In addition, U.S. federal income tax laws governing REITs and other corporations and the
administrative interpretations of those laws may be amended at any time, potentially with
retroactive effect. Future legislation, new regulations, administrative interpretations or court
decisions could adversely affect our ability to qualify as a REIT or adversely affect UDR’s
stockholders.
If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax
(including 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.
REITs May Pay a Portion of Dividends in Common Stock. In December 2009, the Internal Revenue
Service issued Revenue Procedure 2010-12, which expanded previously issued temporary guidance
relating to certain stock distributions made by publicly traded REITs to satisfy their tax-related
distribution requirements. This expanded temporary guidance is intended to permit REITs to limit
cash distributions in order to maintain liquidity during the current downturn in economic
conditions. Under this expanded guidance, for stock dividends declared on or after January 1, 2008
and before December 31, 2012, with respect to a taxable year ending on or before December 31, 2011,
the Internal Revenue Service will treat a distribution of stock by a publicly traded REIT, pursuant
to certain stockholder elections to receive either stock or cash, as a taxable distribution of
property, provided that, among other conditions, (i) the total amount of cash available for
distribution is not less than 10% of the aggregate declared distribution, and (ii) if too many
stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro
rata amount of cash corresponding to its respective entitlement under the declaration, but in no
event will any such electing stockholder receive less than 10% of the stockholder’s entire
entitlement in money. The amount of such stock distribution will generally be treated as equal to
the amount of cash that could have been received instead. If we pay a portion of our dividends in
shares of UDR’s common stock pursuant to this temporary guidance, UDR’s stockholders may receive
less cash than they received in distributions in prior years and the market value of our securities
may decline.
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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. shareholders is 15%
(through 2012). Unlike dividends received from a corporation that is not a REIT, our distributions
to individual shareholders generally are not eligible for the reduced rates.
UDR May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which are Subject
to Certain Tax Risks. We have established several taxable REIT subsidiaries. Despite UDR’s
qualification as a REIT, its taxable REIT subsidiaries must pay income tax on their taxable income.
In addition, we must comply with various tests to continue to qualify as a REIT for federal income
tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not
constitute permissible income and investments for these tests. While we will attempt to ensure that
our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification,
we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be
subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real
property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our
dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature or are
otherwise not respected.
REIT Distribution Requirements Limit Our Available Cash. As a REIT, UDR is subject to annual
distribution requirements, which limit the amount of cash we retain for other business purposes,
including amounts to fund our growth. We generally must distribute annually at least 90% of our net
REIT taxable income, excluding any net capital gain, in order for our distributed earnings not to
be subject to corporate income tax. We intend to make distributions to UDR’s stockholders to comply
with the requirements of the Code. However, differences in timing between the recognition of
taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a
short-term or long-term basis to meet the 90% distribution requirement of the Code.
Certain Property Transfers May Generate Prohibited Transaction Income, Resulting in a Penalty
Tax on Gain Attributable to the Transaction. From time to time, we may transfer or otherwise
dispose of some of our properties. Under the Code, any gain resulting from transfers of properties
that we hold as inventory or primarily for sale to customers in the ordinary course of business
would be treated as income from a prohibited transaction and subject to a 100% penalty tax. Since
we acquire properties for investment purposes, we do not believe that our occasional transfers or
disposals of property are prohibited transactions. However, whether property is held for investment
purposes is a question of fact that depends on all the facts and circumstances surrounding the
particular transaction. The Internal Revenue Service may contend that certain transfers or
disposals of properties by us are prohibited transactions. If the Internal Revenue Service were to
argue successfully that a transfer or disposition of property constituted a prohibited transaction,
then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited
transaction and we may jeopardize our ability to retain future gains on real property 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.
We Could Face Possible State and Local Tax Audits and Adverse Changes in State and Local Tax
Laws. As discussed in the risk factors above, because UDR is organized and qualifies as a REIT it
is generally not subject to federal income taxes, but it is subject to certain state and local
taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may
result in an increase in our tax liability. A shortfall in tax revenues for states and
municipalities in which we own apartment communities may lead to an increase in the frequency and
size of such changes. If such changes occur, we may be required to pay additional state and local
taxes. These increased tax costs could adversely affect our financial condition and the amount of
cash available for the payment of distributions to UDR’s stockholders. In the normal course of
business, entities through which we own real estate may also become subject to tax audits. If such
entities become subject to state or local tax audits, the ultimate result of such audits could have
an adverse effect on our financial condition.
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The Operating Partnership Intends to Qualify as a Partnership, But Cannot Guarantee That It
Will Qualify. The Operating Partnership intends to qualify as a partnership for federal income
tax purposes at any such time that the Operating Partnership admits additional limited partners
other than UDR. If classified as a partnership, the Operating Partnership generally will not be a
taxable entity and will not incur federal income tax liability. However, the Operating Partnership
would be treated as a corporation for federal income tax purposes if it were a “publicly traded
partnership,” unless at least 90% of the Operating Partnership’s 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 the Operating Partnership’s partnership units are not
traded on an established securities market, because of the redemption right, the Operating
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 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 may not meet this qualifying income
test. If the Operating 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.
Qualifying as a REIT Involves Highly Technical and Complex Provisions of the Code. Our
qualification as a REIT involves the application of highly technical and complex Code provisions
for which only limited judicial and administrative authorities exist. Even a technical or
inadvertent violation could jeopardize our REIT qualification. Moreover, new legislation, court
decisions or administrative guidance, in each case possibly with retroactive effect, may make it
more difficult or impossible for us to qualify as a REIT. Our qualification as a REIT will depend
on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership
and other requirements on a continuing basis. Our ability to satisfy the REIT income and asset
tests depends upon our analysis of the characterization and fair market values of our assets, some
of which are not susceptible to a precise determination and for which we will not obtain
independent appraisals, and upon our ability to successfully manage the composition of our income
and assets on an ongoing basis. In addition, our ability to satisfy the requirements to qualify as
a REIT depends in part on the actions of third parties over which we have no control or only
limited influence, including in cases where we own an equity interest in an entity that is
classified as a partnership for U.S. federal income tax purposes.
Risks Related to Our Organization and Ownership of UDR’s Stock
Changes in Market Conditions and Volatility of Stock Prices Could Adversely Affect the Market
Price of UDR’s Common Stock. The stock markets, including the New York Stock Exchange (“NYSE”),
on which we list UDR’s common stock, have experienced significant price and volume fluctuations. As
a result, the market price of UDR’s common stock could be similarly volatile, and investors in
UDR’s common stock may experience a decrease in the value of their shares, including decreases
unrelated to our operating performance or prospects. In addition to the risks listed in this “Risk
Factors” section, a number of factors could negatively affect the price per share of UDR’s common
stock, including:
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Many of the factors listed above are beyond our control. These factors may cause the market
price of shares of UDR’s common stock to decline, regardless of our financial condition, results of
operations, business or our prospects.
We May Change the Dividend Policy for UDR’s Common Stock in the Future. The decision to
declare and pay dividends on UDR’s common stock, as well as the timing, amount and composition of
any such future dividends, will be at the sole discretion of our board of directors and will depend
on our earnings, funds from operations, liquidity, financial condition, capital requirements,
contractual prohibitions or other limitations under our indebtedness, the annual distribution
requirements under the REIT provisions of the Code, state law and such other factors as our board
of directors considers relevant. Any change in our dividend policy could have a material adverse
effect on the market price of UDR’s common stock.
Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be
in UDR’s Stockholders’ Best Interests. Maryland business statutes may limit the ability of a
third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland
laws which may have the effect of discouraging offers to acquire our Company and of increasing the
difficulty of consummating any such offers, even if our acquisition would be in UDR’s stockholders’
best interests. The Maryland General Corporation Law restricts mergers and other business
combination transactions between us and any person who acquires beneficial ownership of shares of
UDR’s stock representing 10% or more of the voting power without our board of directors’ prior
approval. Any such business combination transaction could not be completed until five years after
the person acquired such voting power, and generally only with the approval of stockholders
representing 80% of all votes entitled to be cast and 66 2 / 3 % of the votes entitled to be cast,
excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides
generally that a person who acquires shares of our equity stock that represents 10% (and certain
higher levels) of the voting power in electing directors will have no voting rights unless approved
by a vote of two-thirds of the shares eligible to vote.
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Limitations on Share Ownership and Limitations on the Ability of UDR’s Stockholders to Effect
a Change in Control of Our Company Restricts the Transferability of UDR’s Stock and May Prevent
Takeovers That are Beneficial to UDR’s Stockholders. One of the requirements for maintenance of
our qualification as a REIT for U.S. federal income tax purposes is that no more than 50% in value
of our outstanding capital stock may be owned by five or fewer individuals, including entities
specified in the Code, during the last half of any taxable year. Our charter contains ownership and
transfer restrictions relating to UDR’s stock primarily to assist us in complying with this and
other REIT ownership requirements; however, the restrictions may have the effect of preventing a
change of control, which does not threaten REIT status. These restrictions include a provision that
generally limits ownership by any person of more than 9.9% of the value of our outstanding equity
stock, unless our board of directors exempts the person from such ownership limitation, provided
that any such exemption shall not allow the person to exceed 13% of the value of our outstanding
equity stock. Absent such an exemption from our board of directors, the transfer of UDR’s stock to
any person in excess of the applicable ownership limit, or any transfer of shares of such stock in
violation of the ownership requirements of the Code for REITs, will be considered null and void,
and the intended transferee of such stock will acquire no rights in such shares. These provisions
of our charter may have the effect of delaying, deferring or preventing someone from taking control
of us, even though a change of control might involve a premium price for UDR’s stockholders or
might otherwise be in UDR’s stockholders’ best interests.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
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Item 2. PROPERTIES
At December 31, 2011, our consolidated apartment portfolio included 163 communities located in
24 markets, with a total of 47,343 completed apartment homes.
We lease approximately 38,000 square feet of office space in Highlands Ranch, Colorado for our
corporate headquarters. We also lease an additional 3,000 square feet for a regional office in
Richmond, Virginia.
The tables below set forth a summary of real estate portfolio by geographic market of the
Company and of the Operating Partnership at December 31, 2011.
SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2011
UDR, INC.
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SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2011
UNITED DOMINION REALTY, L.P.
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Item 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims arising in the ordinary course of
business. We cannot determine the ultimate liability with respect to such legal proceedings and
claims at this time. We believe that such liability, to the extent not provided for through
insurance or otherwise, will not have a material adverse effect on our financial condition, results
of operations or cash flow.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.
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PART II
UDR, Inc.:
Common Stock
UDR, Inc.’s common stock has been listed on the New York Stock Exchange, or “NYSE”, under the
symbol “UDR” since May 7, 1990. The following tables set forth the quarterly high and low sale
prices per common share reported on the NYSE for each quarter of the last two fiscal years.
Distribution information for common stock reflects distributions declared per share for each
calendar quarter and paid at the end of the following month.
On
February 17, 2012, the closing sale price of our common stock
was $25.73 per share on the
NYSE and there were
5,563
holders of record of the
223,340,334
outstanding shares of our common stock.
We have determined that, for federal income tax purposes, approximately 64% of the
distributions for 2011 represented ordinary income, 10% represented long-term capital gain, and 26%
represented unrecaptured section 1250 gain.
UDR pays regular quarterly distributions to holders of its common stock. Future distributions
will be at the discretion of our Board of Directors and will depend on our actual funds from
operations, financial condition and capital requirements, the annual distribution requirements
under the REIT provisions of the Code, and other factors.
Series E Preferred Stock
The Series E Cumulative Convertible Preferred Stock (“Series E”) has no stated par value and a
liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each
share of the Series E is convertible at any time and from time to time at the holder’s option into
1.083 shares of our common stock. The holders of the Series E are entitled to vote on an
as-converted basis as a single class in combination with the holders of common stock at any meeting
of our stockholders for the election of directors or for any other purpose on which the holders of
common stock are entitled to vote. The Series E has no stated maturity and is not subject to any
sinking fund or any mandatory redemption. In connection with a special dividend (declared on
November 5, 2008), the Company reserved for issuance upon conversion of the Series E additional
shares of common stock to which a holder of the Series E would have received if the holder had
converted the Series E immediately prior to the record date for this special dividend.
Distributions declared on the Series E for the year ended December 31, 2011 were $1.33 per
share or $0.3322 per quarter. The Series E is not listed on any exchange. At December 31, 2011, a
total of 2,803,812 shares of the Series E were outstanding.
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Series F Preferred Stock
We are authorized to issue up to 20,000,000 shares of our Series F (“Series F”) Preferred
Stock. The Series F Preferred Stock may be purchased by holders of our Operating Partnership Units,
or OP Units, described below under “Operating Partnership Units,” at a purchase price of $0.0001
per share. OP Unitholders are entitled to subscribe for and purchase one share of the Series F for
each OP Unit held. At December 31, 2011, a total of 2,534,846 shares of the Series F were
outstanding at a value of $253. Holders of the Series F are entitled to one vote for each share of
the Series F they hold, voting together with the holders of our common stock, on each matter
submitted to a vote of security holders at a meeting of our stockholders. The Series F does not
entitle its holders to any other rights, privileges or preferences.
Series G Preferred Stock
In May 2007, UDR issued 5,400,000 shares of our 6.75% Series G Cumulative Redeemable Preferred
Stock (“Series G”). The Series G has no stated par value and a liquidation preference of $25 per
share. The Series G generally has no voting rights except under certain limited circumstances and
as required by law. The Series G has no stated maturity and is not subject to any sinking fund or
mandatory redemption and is not convertible into any of our other securities. The Series G is not
redeemable prior to May 31, 2012. On or after this date, the Series G may be redeemed for cash at
our option, in whole or in part, at a redemption price of $25 per share plus accrued and unpaid
dividends. During the year ended December 31, 2011, the Company repurchased 141,200 shares of
Series G, for less than the liquidation preference of $25 per share resulting in a loss of $175,000
to our net income attributable to common stockholders. Distributions declared on the Series G for
the year ended December 31, 2011 was $1.69 per share. The Series G is listed on the NYSE under the
symbol “UDRPrG”. At December 31, 2011, a total of 3,264,362 shares of the Series G were
outstanding.
Distribution Reinvestment and Stock Purchase Plan
We have a Distribution Reinvestment and Stock Purchase Plan under which holders of our common
stock may elect to automatically reinvest their distributions and make additional cash payments to
acquire additional shares of our common stock. Stockholders who do not participate in the plan
continue to receive distributions as and when declared. As of February 17, 2012, there were
approximately
2,607
participants in the plan.
United Dominion Realty, L.P.:
Operating Partnership Units
There is no established public trading market for United Dominion Realty, L.P.’s Operating
Partnership Units. From time to time we issue shares of our common stock in exchange for OP Units
tendered to the Operating Partnership, for redemption in accordance with the provisions of the
Operating Partnership’s limited partnership agreement. At December 31, 2011, there were 184,281,253
OP Units outstanding in the Operating Partnership, of which 174,859,951 OP Units or 94.9% were
owned by UDR and 9,421,302 OP Units or 5.1% were owned by limited partners. Under the terms of the
Operating Partnership’s limited partnership agreement, the holders of OP Units have the right to
require the Operating Partnership to redeem all or a portion of the OP Units held by the holder in
exchange for a cash payment based on the market value of our common stock at the time of
redemption. However, the Operating Partnership’s obligation to pay the cash amount is subject to
the prior right of the Company to acquire such OP Units in exchange for either the cash amount or
the number of shares of our common stock equal to the number of OP Units being redeemed. During
2011, we issued a total of 12,511 shares of common stock upon redemption of OP Units.
Purchases of Equity Securities
In February 2006, UDR’s Board of Directors authorized a 10,000,000 share repurchase program.
In January 2008, UDR’s Board of Directors authorized a new 15,000,000 share repurchase program.
Under the two share repurchase programs, UDR may repurchase shares of our common stock in open
market purchases, block purchases, privately negotiated transactions or otherwise. As reflected in
the table below, no shares of common stock were repurchased under these programs during the quarter
ended December 31, 2011.
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The following table set forth certain information regarding our common stock repurchases
during the quarter ended December 31, 2011.
Comparison of Five- year Cumulative Total Returns
The following graph compares the five-year cumulative total returns for UDR common stock with
the comparable cumulative return of the NAREIT Equity REIT Index, Standard & Poor’s 500 Stock
Index, the NAREIT Equity Apartment Index and the MSCI US REIT Index. Each graph assumes that $100
was invested on December 31 (of the initial year shown in the graph), in each of our common stock
and the indices presented. Historical stock price performance is not necessarily indicative of
future stock price performance. The comparison assumes that all dividends are reinvested.
The performance graph and the related chart and text, are being furnished solely to
accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not
being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are
not to be incorporated by reference into any filing of ours, whether made before or after the date
hereof, regardless of any general incorporation language in such filing.
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Item 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other information of UDR,
Inc. and of the Operating Partnership as of and for each of the years in the five-year period ended
December 31, 2011. The table should be read in conjunction with each of UDR, Inc.’s and the
Operating Partnership’s respective consolidated financial statements and the notes thereto, and
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,
included elsewhere in this Report.
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United Dominion Realty, L.P.
Years Ended December 31, (In thousands, except per OP unit data and apartment homes owned)
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Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements
include, without limitation, statements concerning property acquisitions and dispositions,
development activity and capital expenditures, capital raising activities, rent growth, occupancy,
and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,”
“will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are
intended to identify such forward-looking statements. Such statements involve known and unknown
risks, uncertainties and other factors which may cause our actual results, performance or
achievements to be materially different from the results of operations or plans expressed or
implied by such forward-looking statements. Such factors include, among other things, unfavorable
changes in the apartment market, changing economic conditions, the impact of inflation/deflation on
rental rates and property operating expenses, expectations concerning availability of capital and
the stabilization of the capital markets, the impact of competition and competitive pricing,
acquisitions, developments and redevelopments not achieving anticipated results, delays in
completing developments, redevelopments and lease-ups on schedule, expectations on job growth, home
affordability and demand/supply ratio for multifamily housing, expectations concerning development
and redevelopment activities, and expectations on occupancy levels.
The following factors, among others, could cause our future results to differ materially from
those expressed in the forward-looking statements:
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A discussion of these and other factors affecting our business and prospects is set forth in
Part I, Item 1A. Risk Factors. We encourage investors to review these risk factors.
Although we believe that the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements
included in this Report may not prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that the results or conditions
described in such statements or our objectives and plans will be achieved.
Forward-looking statements and such risks, uncertainties and other factors speak only as of
the date of this report, and we expressly disclaim any obligation or undertaking to update or
revise any forward-looking statement contained herein, to reflect any change in our expectations
with regard thereto, or any other change in events, conditions or circumstances on which any such
statement is based, except to the extent otherwise required by law.
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 and the accompanying notes for the years ended December 31, 2011, 2010 and 2009 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, acquires,
renovates, develops, redevelops, and manages apartment communities in select markets throughout the
United States. 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 an operating partnership
United Dominion Realty, L.P., a Delaware limited partnership.
At December 31, 2011, our consolidated real estate portfolio included 163 communities located
in 22 markets with a total of 47,343 completed apartment homes and our total real estate portfolio,
inclusive of our unconsolidated communities, included an additional 39 communities with 10,400
completed apartment homes.
At
December 31, 2011, the Company is developing seven wholly-owned
communities with 2,108 apartment homes, 145 of which have been
completed.
At
December 31, 2011, the Company is redeveloping seven wholly-owned
communities with 3,123 apartment homes, 467 of which have been
completed.
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The following table summarizes our market information by major geographic markets as of
December 31, 2011.
We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same
Communities segment includes those communities acquired, developed, and stabilized prior to January
1, 2010, and held as of December 31, 2011. These communities were owned and had stabilized
occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct
substantial redevelopment activities, and the community is not held for sale within the current
quarter. A community is considered to have stabilized occupancy once it achieves 90% occupancy for
at least three consecutive months. Our Non-Mature/Other Communities segment includes those
communities that were acquired or developed in 2009, 2010, and 2011, sold properties, redevelopment
properties, properties classified as real estate held for sale, condominium conversion properties,
joint venture properties, properties managed by third parties, and the non-apartment components of
mixed use properties.
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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 and equity. Both the
coordination of asset and liability maturities and effective capital management are important to
the maintenance of liquidity. 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 credit agreements. We routinely use our unsecured credit
facility to temporarily fund certain investing and financing activities prior to arranging for
longer-term financing or the issuance of equity or debt securities. During the past several years,
proceeds from the sale of real estate have been used for both investing and financing activities as
we repositioned our portfolio.
We expect to meet our short-term liquidity requirements generally through cash flow provided
by operations and borrowings under credit agreements. We expect to meet certain long-term liquidity
requirements such as scheduled debt maturities, the repayment of financing on development
activities, and potential property acquisitions, through secured and unsecured borrowings, the
issuance of debt or equity securities, and the disposition of properties. We believe that our net
cash provided by operations and borrowings under credit agreements 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,
and the issuance of debt or equity securities.
We have a shelf registration statement filed with the Securities and Exchange Commission, or
“SEC” which provides for the issuance of an indeterminate amount of Common Stock, Preferred Stock,
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 September 2009, the Company entered into an equity distribution agreement under which the
Company may offer and sell up to 15.0 million shares of its common stock over time to or through
its sales agents. During the year ended December 31, 2011, we sold 4,395,601 shares of common stock
through this program for aggregate gross proceeds of approximately $104.5 million at a weighted
average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related
expenses, including commissions paid to the sales agents of approximately $2.1 million, were
approximately $102.4 million.
In March 2011, the Company entered into a new equity distribution agreement under which the
Company may offer and sell up to 20.0 million shares of its common stock over time to or through
its sales agents. During the year ended December 31, 2011, we sold 11,849,079 shares of common
stock through this program (of which 419,048 shares were settled subsequent to December 31, 2011)
for aggregate gross proceeds of approximately $297.7 million at a weighted average price per share
of $25.12. Aggregate net proceeds from such sales, after deducting related expenses, including
commissions paid to the sales agents of approximately $6.0 million, were approximately $291.7
million. In September 2011, the Company entered into a new equity distribution agreement in
connection with filing a new registration statement on Form S-3. The new equity distribution
agreement replaced the March 2011 agreement, and no material changes were made to the equity
distribution agreement.
In May 2011, the Company issued $300 million aggregate principal amount of 4.250% senior
unsecured notes due June 2018 under its existing shelf registration statement. Interest is payable
semiannually beginning in December 2011. The notes were priced at 98.988 % of the principal amount
plus accrued interest from May 23, 2011 to yield 4.419% to maturity. The notes are fully and
unconditionally guaranteed by the Operating Partnership.
In July 2011, the Company closed a public offering of 20,700,000 shares of its common stock,
including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment
option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately
$496.3 million after underwriting discounts and commissions and estimated offering expenses.
In October 2011, the Company entered into a $900 million unsecured revolving credit facility,
replacing the Company’s $600 million credit facility. The Operating Partnership issued a guarantee
in connection with the new credit facility, similar to the guarantee it issued under the prior
facility. The new facility has an initial term of four years and includes a one-year extension
option, and contains an accordion feature that allows the Company to increase the facility to $1.35
billion. Based on the Company’s current credit ratings, the credit facility carries an interest
rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points.
As of December 31, 2011, we had $421.0 million of borrowings outstanding under the credit facility leaving $479.0 million of
unused capacity (excluding $3.6 million of letters of credit at December 31, 2011).
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In January 2012, the Company issued $400 million aggregate principal amount of 4.625% Medium
Term Notes due January 2022. Interest is payable semiannually beginning in July 2012. The notes
were priced at 99.100% of the principal amount plus accrued interest from January 10, 2012 to yield
4.739% to maturity. The notes are fully and unconditionally guaranteed by the Operating
Partnership.
Future Capital Needs
Future development expenditures are expected to be funded through unsecured or secured credit
facilities, proceeds from the issuance of equity or debt securities, the sale of properties and to
a lesser extent, with cash flows provided by operating activities. 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 2012, we have approximately $207.8 million of secured debt maturing, inclusive of
principal amortization and net of extension rights of $99.0 million, and $99.4 million of unsecured
debt maturing. We anticipate repaying that debt with proceeds from our operations, debt and equity
offerings, proceeds from the sales of properties, and by exercising extension rights with respect
to the secured debt.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use
judgment in the application of accounting policies, including making estimates and assumptions. A
critical accounting policy is one that is both important to our financial condition and results of
operations as well as involves some degree of uncertainty. Estimates are prepared based on
management’s assessment after considering all evidence available. Changes in estimates could affect
our financial position or results of operations. Below is a discussion of the accounting policies
that we consider critical to understanding our financial condition or results of operations where
there is uncertainty or where significant judgment is required.
Capital Expenditures
In conformity with GAAP, we capitalize those expenditures that materially enhance the value of
an existing asset or substantially extend the useful life of an existing asset. Expenditures
necessary to maintain an existing property in ordinary operating condition are expensed as
incurred.
During 2011, $51.9 million or $1,081 per apartment home was spent on recurring capital
expenditures. These include revenue enhancing capital expenditures, exterior/interior upgrades,
turnover related expenditures for floor coverings and appliances, other recurring capital
expenditures such as exterior paint, roofs, siding, parking lots, and asset preservation capital
expenditures. In addition, major renovations totaled $30.0 million for the year ended December 31,
2011. Total capital expenditures, which in aggregate include recurring capital expenditures and
major renovations, of $81.9 million or $1,706 per home was spent on all of our communities,
excluding development and commercial properties, for the year ended December 31, 2011.
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The following table outlines capital expenditures and repair and maintenance costs for all of
our communities, excluding real estate under development, condominium conversions and commercial
properties, for the periods presented:
We will continue to selectively add revenue enhancing improvements which we believe will
provide a return on investment substantially in excess of our cost of capital. Recurring capital
expenditures during 2012 are currently expected to be approximately $1,150 per apartment home.
Investment in Unconsolidated Joint Ventures
We continually evaluate our investments in unconsolidated joint ventures when events or
changes in circumstances indicate that there may be an other-than-temporary decline in value. We
consider various factors to determine if a decrease in the value of the investment is
other-than-temporary. These factors include, but are not limited to, age of the venture, our intent
and ability to retain our investment in the entity, the financial condition and long-term prospects
of the entity, and the relationships with the other joint venture partners and its lenders. The
amount of loss recognized is the excess of the investment’s carrying amount over its estimated fair
value. If we believe that the decline in fair value is temporary, no impairment is recorded. The
aforementioned factors are taken as a whole by management in determining the valuation of our
investment property. Should the actual results differ from management’s judgment, the valuation
could be negatively affected and may result in a negative impact to our Consolidated Financial
Statements.
Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by the future operation and disposition of those assets are less than the net book
value of those assets. Our cash flow estimates are based upon historical results adjusted to
reflect our best estimate of future market and operating conditions and our estimated holding
periods. The net book value of impaired assets is reduced to fair market value. Our estimates of
fair market value represent our best estimate based upon industry trends and reference to market
rates and transactions.
Real Estate Investment Properties
We purchase real estate investment properties from time to time and record the fair value to
various components, such as land, buildings, and intangibles related to in-place leases, based on
the fair value of each component. The fair value of buildings is determined as if the buildings
were vacant upon acquisition and subsequently leased at market rental rates. As such, the
determination of fair value considers the present value of all cash flows expected to be generated
from the property including an initial lease-up period. We determine the fair value of in-place
leases by assessing the net effective rent and remaining term of the lease relative to market terms
for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases,
the foregone rents associated with the lease-up period, and the carrying costs associated with the
lease-up period. The fair value of in-place leases is recorded and amortized as amortization
expense over the remaining average contractual lease period.
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REIT Status
We are a Maryland corporation that has elected to be treated for federal income tax purposes
as a REIT. A REIT is a legal entity that holds interests in real estate and is required by the
Code to meet a number of organizational and operational requirements, including a requirement that
a REIT must distribute at least 90% of our REIT taxable income (other than our net capital gain) to
our stockholders. If we were to fail to qualify as a REIT in any taxable year, we will be subject
to federal and state income taxes at the regular corporate rates and may not be able to qualify as
a REIT for four years. Based on the net earnings reported for the year ended December 31, 2011 in
our Consolidated Statements of Operations we would have incurred immaterial federal and state GAAP
income taxes if we had failed to qualify as a REIT.
Statements of Cash Flow
The following discussion explains the changes in net cash provided by operating activities,
net cash used in investing, and net cash provided by/(used in) financing activities that are
presented in our Consolidated Statements of Cash Flows.
Operating Activities
For the year ended December 31, 2011, our net cash flow provided by operating activities was
$244.2 million compared to $214.2 million for 2010. The increase in cash flow from operating
activities is primarily due to an increase in property net operating income from our apartment
community portfolio, which was partially offset by the increase in operating assets and a decrease
in operating liabilities.
For the year ended December 31, 2010, our net cash flow provided by operating activities was
$214.2 million compared to $229.4 million for 2009. The decrease in cash flow from operating
activities is primarily due to changes in operating assets and operating
liabilities, which include accrued restructuring and severance charges. This decrease is partially
offset by an increase in property net operating income.
Investing Activities
For the year ended December 31, 2011, net cash used in investing activities was $1.1 billion
compared to net cash used in investing activities of $583.8 million for 2010. The change relates to
acquisitions of real estate assets and investments in unconsolidated joint ventures, which are
discussed in further detail throughout this Report.
For the year ended December 31, 2010, net cash used in investing activities was $583.8 million
compared to net cash used in investing activities of $158.0 million for 2009. The change relates to
acquisitions of real estate assets and investments in unconsolidated joint ventures, which are
discussed in further detail throughout this Report.
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Acquisitions
The following table summarizes UDR’s real estate community acquisitions for the year ended
December 31, 2011 (dollar amounts in thousands):
During the year ended December 31, 2011, the Company also acquired three parcels of land
located in Huntington Beach, California; Addison, Texas; and Boston, Massachusetts for a gross
purchase price of $34.3 million.
Our long-term strategic plan is to continue achieving greater operating efficiencies by
investing in fewer, more concentrated markets. As a result, we have been seeking to expand our
interests in communities located in the New York, New York; San Francisco, California; Boston,
Massachusetts; and Metropolitan D.C. markets over the past years. Prospectively, we plan to channel
new investments into those markets we believe will provide the best investment returns. Markets
will be targeted based upon defined criteria including above average job growth, low single-family
home affordability and limited new supply for multifamily housing-three key drivers to strong
rental growth.
For the year ended December 31, 2010, the Company acquired five apartment communities located
in Orange County, California; Baltimore, Maryland; Los Angeles, California; and Boston,
Massachusetts for a total gross purchase price of $412.0 million. During the same period, the
Company also acquired land located in San Francisco, California for a gross purchase price of $23.6
million.
Real
Estate Under Development and Redevelopment
At
December 31, 2011, our development pipeline for wholly-owned communities totaled 2,108
apartment homes with a budget of $674.3 million in which we have a carrying value of $248.7
million. We anticipate the completion of these communities from the first quarter of 2012 through
the fourth quarter of 2013.
At
December 31, 2011, the Company is redeveloping seven wholly-owned
communities with 3,123 apartment homes, 467 of which have been
completed.
For
the year ended December 31, 2011, we invested approximately $98.7 million in development and redevelopment
projects, an increase of $6.6 million from our 2010 level of $92.1 million.
Consolidated Joint Ventures
In August 2011, the Company invested in a joint venture with an unaffiliated third party to
acquire and redevelop an existing commercial property into a 173 apartment home community in Orange
County, California. At closing the Company contributed $9.0 million and at December 31, 2011, UDR
owned a 90% controlling interest in the investment. Under the terms of the operating agreement, our
partner is required to achieve certain criteria as it relates to the entitlement process. If the
criteria are met on or before 730 days after the site plan application is deemed complete by the
city, the Company is obligated to contribute an additional $3.0 million to the joint venture for
distribution to our partner. At the acquisition date, the Company accrued and capitalized $3.0
million related to the contingent consideration, which represents the difference between fair value
of the property of $9.8 million on the formation date and the estimated fair value of the
underlying property upon completion of the entitlement process of $12.8 million. The Company
estimated the fair value based in part on a third party valuation
that utilized Level 3 inputs.
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During the year ended December 31, 2011, the Company paid $450,000 to acquire from our partner
its remaining 2% noncontrolling interests in the 989 Elements, Elements Too, and Bellevue joint
ventures. The consideration paid was in excess of the book value of the noncontrolling interest,
and is reflected as a reduction of the Company’s equity.
Unconsolidated Joint Ventures
The Company recognizes earnings or losses from our investments in unconsolidated joint
ventures consisting of our proportionate share of the net earnings or loss of the joint ventures.
In addition, we may earn fees for providing management services to the unconsolidated joint
ventures. As of December 31, 2011, UDR had investments in the following unconsolidated joint
ventures which are accounted for under the equity method of accounting.
In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests
in the Hanover/MetLife Master Limited Partnership (“UDR/MetLife I”) at a cost of $100.8 million.
UDR/MetLife I owns a portfolio of 26 operating communities containing 5,748 apartment homes and 10
land parcels with the potential to develop approximately 2,000 additional apartment homes. Under
the terms of UDR/MetLife I, UDR acts as the general partner and earns fees for property and asset
management and financing transactions.
UDR has a weighted average ownership interest of 12.27% in the operating communities and 4.11%
in the land parcels. The initial investment of $100.8 million consisted of $71.8 million in cash,
which included associated transaction costs, and a $30 million payable (includes present value
discount of $1.0 million) to Hanover. UDR agreed to pay the $30.0 million balance to Hanover in two
interest free installments in the amounts of $20.0 million (paid in November 2011) and $10.0
million on the second anniversary of the closing. The $30.0 million payable was recorded at its
present value of $29.0 million using an effective interest rate of 2.67%. At December 31, 2011 and
2010, the net carrying value of the payable was $9.8 million and $29.1 million, respectively.
Interest expense of $697,000 and $129,000 was recorded during the years ended December 31, 2011 and
2010, respectively. At December 31, 2011 and 2010, the Company’s investment was $133.8 million and
$122.2 million, respectively.
UDR’s total cost of its equity investment of $100.8 million differed from the proportionate
share in the underlying net assets of UDR/MetLife I of $111.4 million. The difference of $10.6
million was attributable to certain assets and adjustments that were allocated to UDR’s
proportionate share in UDR/MetLife I’s buildings of $8.4 million, land of $3.9 million, and ($1.6
million) of lease intangible assets. With the exception of land, the difference related to
buildings is amortized and recorded as a component of loss from unconsolidated entities over 45
years and the difference related to lease intangible assets was amortized and recorded as a
component of loss from unconsolidated entities over 11 months with the offset to the Company’s
carrying value of its equity investment. During the years ended December 31, 2011 and 2010, the
Company recorded $1.1 million and $264,000 of amortization, respectively.
On January 12, 2012, the Company formed a new real estate joint venture, UDR/MetLife II, with
MetLife wherein each party owns a 50% interest in a $1.3 billion portfolio of 12 operating
communities containing 2,528 apartment homes. The 12 communities in the joint venture include seven
from UDR/MetLife I, while the remaining five operating communities have been newly acquired by
UDR/MetLife II. The newly acquired communities, collectively known as Columbus Square, are recently
developed, high-rise apartment buildings located on the Upper West Side of Manhattan and were
purchased for $630 million.
The Company serves as the general partner for UDR/MetLife II and earns property management,
asset management and financing fees.
With the closing of UDR/MetLife II, the original joint venture between the parties,
UDR/MetLife I, now comprises 19 operating properties containing 3,930 homes as well as 10 vacant
land parcels. Historical cost of the venture now stands at $1.8 billion and the Company’s weighted
average ownership interest in the UDR/MetLife I operating assets is now 12.6 % and 4.0 % for the
land parcels in the venture.
In connection with the purchase of Hanover’s interests in UDR/MetLife I, UDR agreed to
indemnify Hanover from liabilities arising from Hanover’s guaranty of $506.0 million in loans
($51.0 million outstanding at December 31, 2011) which are secured by a security interest in the
operating communities subject to the respective loans. The loans were to the sub-tier partnerships
which own the 26 operating communities. The Company anticipates that the $51.0 million outstanding
at December 31, 2011 will be refinanced by UDR/MetLife I over the next twelve months.
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In October 2010, the Company entered into a joint venture to develop a 240-home community in
Stoughton, Massachusetts. At December 31, 2011 and 2010, UDR owned a noncontrolling interest of 95%
in the joint venture. Our initial investment was $10.0 million. Our investment at December 31, 2011
and 2010 was $17.2 million and $10.3 million, respectively.
In May 2011, the Company entered into a joint venture with to develop a 263-home community in
San Diego, California. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of
95% in the joint venture. Our initial investment was $9.9 million and our investment at December
31, 2011 was $12.1 million.
In
June 2011, UDR/MetLife I sold a parcel of land to a joint
venture, in which the Company is a
partner, to develop a 256-home community in College Park, Maryland. At December 31, 2011 and at
closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment
was $7.1 million and our investment at December 31, 2011 was $8.6 million.
UDR is a partner with an unaffiliated third party, which formed a joint venture for the
investment of up to $450.0 million in multifamily properties located in key, high barrier to entry
markets such as Metropolitan Washington D.C. The partners will contribute equity of $180.0 million
of which the Company’s maximum equity will be 30% or $54.0 million when fully invested. In 2010,
the joint venture acquired its first property (151 homes). During the year ended December 31,
2011, the joint venture acquired two additional properties (509 homes). At December 31, 2011 and
2010, the Company owned a 30% interest in the joint venture. Our investment at December 31, 2011
and 2010 was $34.1 million and $5.2 million, respectively.
UDR is a partner with an unaffiliated third party, which owns and operates 10 operating
properties located in Texas (3,992 homes). UDR contributed cash and a property equal to 20% of the
fair value of the properties. The unaffiliated member contributed cash equal to 80% of the fair
value of the properties comprising the joint venture, which was then used to purchase the nine
operating properties from UDR. Our initial investment was $20.4 million. Our investment at
December 31, 2011 and 2010 was $7.1 million and $10.3 million, respectively.
Disposition of Investments
In 2011, we sold 18 apartment home communities (4,488 homes), which included six apartment
home communities (1,418 homes) sold in conjunction with an asset exchange in
April 2011, for a total sales price
of $593.4 million. UDR recognized gains for financial reporting purposes of $138.5
million, which is included in discontinued operations. Proceeds from the sale were used primarily
to acquire apartment home communities and reduce debt.
In
2010, UDR sold one 149 apartment home community for a total sales
price of $21.2 million. In
2009, we did not dispose of any apartment home communities.
We plan to continue to pursue our strategy of exiting markets where long-term growth prospects
are limited and redeploying capital into markets we believe will provide the best investment
returns.
Financing Activities
For the year ended December 31, 2011, our net cash provided by financing activities was $812.0
million compared to $373.1 million for the comparable period of 2010.
The following significant financing activity occurred during the year ended December 31, 2011.
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For the year ended December 31, 2010, our net cash provided by/(used in) financing activities
was $373.1 million compared to ($78.1 million) for the comparable period of 2009. The increase in
cash provided by financing activities was primarily due to an increase in net proceeds from
issuance of our Common Stock through a public offering in 2010.
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Credit Facilities
As of December 31, 2011 and 2010, we have secured revolving credit facilities with Fannie Mae
with an aggregate commitment of $1.3 billion with $1.1 billion outstanding. The Fannie Mae credit
facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and
certain variable rate facilities can be extended for an additional five years at our option. We
have $744.5 million of the funded balance fixed at a weighted average interest rate of 5.14% and
the remaining balance on these facilities is currently at a weighted average variable rate of 1.63%
as of December 31, 2011. We had $897.3 million of the funded balance fixed at a weighted average
interest rate of 5.32% and $260.5 million was at a weighted average variable rate of 1.68% as of
December 31, 2010.
In October 2011, the Company entered into a $900 million unsecured revolving credit facility,
replacing the Company’s $600 million credit facility noted below. The Operating Partnership issued
a guarantee in connection with the new facility, similar to the guarantee it issued under the prior
facility. The unsecured credit facility has an initial term of four years and includes a one-year
extension option, and contains an accordion feature that allows the Company to increase the
facility to $1.35 billion. Based on the Company’s current credit ratings, the credit facility
carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of
22.5 basis points (1.53% at December 31, 2011). As of December 31, 2011, we had $421.0 million of
borrowings outstanding under the credit facility leaving $479.0 million of unused capacity
(excluding $3.6 million of letters of credit at December 31, 2011).
We had an unsecured revolving credit facility with an aggregate borrowing capacity of $600
million, which we could have increased to $750 million at our election under certain circumstances.
This credit facility carried an interest rate equal to LIBOR plus 47.5 basis points (0.89% interest
at December 30, 2010), and had a maturity of July 2012. As of December 31, 2010, we had $31.8
million of borrowings outstanding under the credit facility leaving $568.2 million of unused
capacity (excluding $4.8 million of letters of credit at December 31, 2010).
The Fannie Mae credit facilities and the bank revolving credit facility are subject to
customary financial covenants and limitations. As of December 31, 2011, we were in compliance with
all financial covenants under these credit facilities.
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 $1.1 billion in variable rate debt that is not subject to interest rate swap
contracts as of December 31, 2011. If market interest rates for variable rate debt increased by 100
basis points, our interest expense would increase by $9.2 million based on the average balance
outstanding during the year.
These amounts are determined by considering the impact of hypothetical interest rates on our
borrowing cost. 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.
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Funds from Operations
Funds from operations, or FFO, is defined as net income (computed in accordance with GAAP),
excluding impairment write-downs of depreciable real estate or of investments in non-consolidated
investees that are driven by measurable decreases in the fair value of depreciable real estate held
by the investee, gains (or losses) from sales of depreciable property, plus real estate
depreciation and amortization, and after adjustments for unconsolidated partnerships and joint
ventures. We compute FFO for all periods presented in accordance with the recommendations set forth
by the National Association of Real Estate Investment Trust’s (“NAREIT”) April 1, 2002 White Paper.
We consider FFO in evaluating property acquisitions and our operating performance, and believe that
FFO should be considered along with, but not as an alternative to, net income and cash flow as a
measure of our activities in accordance with generally accepted accounting principles. FFO does not
represent cash generated from operating activities in accordance with generally accepted accounting
principles and is not necessarily indicative of cash available to fund cash needs.
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 REIT operating performance and defines FFO as net income (computed in
accordance with accounting principles generally accepted in the United States), excluding gains (or
losses) from sales of depreciable property, premiums or original issuance costs associated with
preferred stock redemptions, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. The use of FFO, combined with the required
presentations, has been fundamentally beneficial, improving the understanding of operating results
of REITs among the investing public and making comparisons of REIT operating results more
meaningful. We generally consider FFO to be a useful measure for reviewing our comparative
operating and financial performance (although FFO should be reviewed in conjunction with net income
which remains the primary measure of performance) because by excluding gains or losses related to
sales of previously depreciated operating real estate assets and excluding real estate asset
depreciation and amortization, FFO can help one compare the operating performance of a Company’s
real estate between periods or as compared to different companies. We believe that FFO is the best
measure of economic profitability for real estate investment trusts.
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The following table outlines our FFO calculation and reconciliation to GAAP for the three
years ended December 31, 2011 (dollars in thousands):
In the computation of diluted FFO, OP Units, unvested restricted stock, stock options, and the
shares of Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are
included in the diluted share count. The effect of the conversion of the Series E Out-Performance
Partnership Shares (the Series E Out-Performance Program terminated on December 31, 2009) are
anti-dilutive for the year ended December 31, 2009 and are excluded from the diluted share count.
RE3 is our subsidiary whose activities include development and land entitlement.
RE3 tax benefits and gain on sales, net of taxes, is defined as net sales proceeds less
a tax provision and the gross investment basis of the asset before accumulated depreciation. To
determine whether gains from RE3 will be included in FFO, the Company considers whether
the operating asset has been a short term investment. We consider FFO with RE3 tax
benefits and gain on sales, net of taxes, to be a meaningful supplemental measure of performance
because the short-term use of funds produce a profit that differs from the traditional long-term
investment in real estate for REITs.
The following table is our reconciliation of FFO share information to weighted average common
shares outstanding, basic and diluted, reflected on the Consolidated Statements of Operations for
the three years ended December 31, 2011 (shares in thousands):
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FFO also does not represent cash generated from operating activities in accordance with GAAP,
and therefore should not be considered an alternative to net cash flows from operating activities,
as determined by generally accepted accounting principles, as a measure of liquidity. Additionally,
it is not necessarily indicative of cash availability to fund cash needs. A presentation of cash
flow metrics based on GAAP is as follows (dollars in thousands):
Results of Operations
The following discussion includes the results of both continuing and discontinued operations
for the periods presented.
Net Income/(Loss) Attributable to Common Stockholders
2011-vs-2010
Net income attributable to common stockholders was $10.5 million ($0.05 per diluted share) for
the year ended December 31, 2011 as compared to net loss attributable to common stockholders of
$112.4 million ($0.68 per diluted share) for the comparable period in the prior year. The increase
in net income attributable to common stockholders for the year ended December 31, 2011 resulted
primarily from the following items, all of which are discussed in further detail elsewhere within
this Report:
The increase to our net income attributable to common stockholders was partially offset by:
2010-vs-2009
Net loss attributable to common stockholders was $112.4 million ($0.68 per diluted share) for
the year ended December 31, 2010 as compared to net loss attributable to common stockholders of
$95.9 million ($0.64 per diluted share) for the comparable period in the prior year. The increase
in net loss attributable to common stockholders for the year ended December 31, 2010 resulted
primarily from the following items, all of which are discussed in further detail elsewhere within
this Report:
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The increase to our net loss attributable to common stockholders was partially offset by:
Apartment Community Operations
Our net income is primarily generated from the operation of our apartment communities. The
following table summarizes the operating performance of our total apartment portfolio which
excludes commercial operating income and expense for each of the periods presented (dollars in
thousands):
(a) Excludes depreciation, amortization, and property management expenses.
The following table is our reconciliation of property NOI to net income/(loss) attributable to
UDR, Inc. as reflected, for both continuing and discontinued operations, for the periods presented
(dollars in thousands):
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Same Communities
2011-vs.-2010
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2010
and held on December 31, 2011) consisted of 37,869 apartment homes and provided $344.4 million or
72% of our total property NOI for the year ended December 31, 2011.
NOI for our same community properties increased 5.6% or $18.1 million for the year ended
December 31, 2011 compared to the same period in 2010. The increase in property NOI was primarily
attributable to a 4.1% or $20.5 million increase in property rental income which was offset by a
1.4% or $2.3 million increase in operating expenses. The increase in revenues was primarily driven
by a 4.0% or $19.1 million increase in rental rates and a 12.1% or $4.4 million increase in fee and
reimbursement income which was offset by a 12.2% or $2.2 million increase in vacancy loss. Physical
occupancy decreased 0.2% to 95.5% and total income per occupied home increased $50 to $1,188.
The increase in property operating expenses was primarily driven by a 6.5% or $1.8 million
increase in utilities expense, a 1.5% or $781,000 increase in taxes, and a 4.1% or $369,000
increase in insurance costs, which was partially offset by a 1.5% or $647,000 decrease in personnel
cost.
As a result of the percentage changes in property rental income and property operating
expenses, the operating margin (property net operating income divided by property rental income)
increased to 66.8% as compared to 65.9% in the comparable period in the prior year.
2010-vs.-2009
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2009
and held on December 31, 2010) consisted of 39,281 apartment homes and provided $341.3 million or
84% of our total property NOI for the year ended December 31, 2010.
NOI for our same community properties decreased 1.8% or $6.2 million for the year ended
December 31, 2010 compared to the same period in 2009. The decrease in property NOI was primarily
attributable to a 0.9% or $4.6 million decrease in property rental income and a 0.9% or $1.5
million increase in operating expenses. The decrease in revenues was primarily driven by a 2.4% or
$12.1 million decrease in rental rates which was offset by a 57.8% or $2.7 million decrease in
concessions, a 7.9% or $1.7 million decrease in vacancy loss and a 12.4% or $2.7 million increase
in reimbursement income. Physical occupancy increased 0.4% to 95.7% and total income per occupied
home decreased $15 to $1,144.
The increase in property operating expenses was primarily driven by a 3.2% or $874,000
increase in utilities expense, a 3.9% or $1.1 million increase in repairs and maintenance, and a
2.6% or $1.1 million increase in personnel costs, which was partially offset by a 2.5% or $1.3
million decrease in real estate taxes.
As a result of the percentage changes in property rental income and property operating
expenses, the operating margin (property net operating income divided by property rental income)
decreased to 66.1% as compared to 66.7% in the comparable period in the prior year.
Non-Mature Communities
2011-vs.-2010
The remaining $130.8 million and $78.4 million of our NOI during the year ended December 31,
2011 and 2010, respectively, was generated from communities that we classify as “non-mature
communities”. UDR’s non-mature communities consist of communities that do not meet the criteria to
be included in same communities, which include communities developed or acquired, redevelopment
properties, sold properties, and properties classified as real estate held for disposition. For the
year ended December 31, 2011, we recognized NOI for our developments of $14.5 million, acquired
communities of $49.7 million, redeveloped properties of $37.8 million, and sold properties of $23.9
million. For the year ended December 31, 2010, we recognized NOI for our developments of $3.6
million, acquired communities of $8.3 million, redeveloped properties of $23.7 million, and sold
properties of $37.9 million.
2010-vs.-2009
The remaining $63.4 million and $44.1 million of our NOI during the year ended December 31,
2010 and 2009, respectively, was generated from communities that we classify as “non-mature
communities.” UDR’s non-mature communities consist of communities that do not meet the criteria to
be included in same communities, which include communities developed or acquired, redevelopment
properties, sold properties, properties classified as real estate held for sale, joint venture
properties, properties managed by third-parties, and the non-apartment components of mixed use
properties, and condominium properties. For the year ended December 31, 2010, we recognized NOI for
our properties held for sale of $18.6 million, developments of $15.6 million, acquired communities
of $10.8 million, redeveloped properties of $12.3 million, and sold properties of $980,000. For the
year ended December 31, 2009, we recognized NOI for our properties held for sale of $17.3 million,
developments of $7.0 million, acquired communities of $2.1 million, redeveloped properties of $11.5
million, and sold properties of $1.4 million.
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Other Income
For the year ended December 31, 2011, significant amounts reflected in other income include:
fees earned from the Company’s joint ventures of $9.6 million, a gain of $3.1 million from the sale
of marketable securities, and a gain of $3.9 million from the sale of our cost investment in a
privately held company. For the year ended December 31, 2010, significant amounts reflected in
other income include: a gain of $4.7 million from the sale of marketable securities, a reversal of
certain tax accruals of $2.1 million, and $3.2 million of fees earned for both recurring and
non-recurring items related to the Company’s joint ventures. For the years ended December 31, 2010
and 2009, other income also included interest income and discount amortization from an interest in
a convertible debt security of $2.9 million and $3.6 million, respectively. For the year ended
December 31, 2009, other income also included $5.1 million of interest income from a note for $200
million that the Company received related to the disposition of 86 properties during 2008. In May
2009, the $200 million note was paid in full.
Tax Benefit/Expense of Taxable REIT Subsidiaries
UDR 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. For the year ended December
31, 2011, we recognized a benefit of $5.7 million in continuing operations due to the results of
operations and temporary differences associated with the TRS, and an
expense of $13.2 million in
discontinued operations due to assets disposed of at a gain. For the year ended December 31, 2010,
we recognized a net benefit of $2.5 million from the write-off of income taxes payable (net of
income taxes paid). For the year ended December 31, 2009, we recognized tax expense of $311,000 to
the extent of cash taxes paid.
Real Estate Depreciation and Amortization
For the year ended December 31, 2011, real estate depreciation and amortization on both
continuing and discontinued operations increased 22.0% or $66.9 million as compared to the
comparable period in 2010. The increase in depreciation and amortization for the year ended
December 31, 2011 is primarily the result of the Company’s acquisition of eight communities with
3,161 apartment homes during 2011, development and redevelopment activity during 2011 and 2010, and
additional capital expenditures.
For the year ended December 31, 2010, real estate depreciation and amortization on both
continuing and discontinued operations increased 9.0% or $25.1 million as compared to the
comparable period in 2009. The increase in depreciation and amortization for the year ended
December 31, 2010 is primarily the result of the Company’s acquisition of five communities with
1,374 apartment homes during 2010, development completions during 2010 and 2009, and additional
capital expenditures.
As part of the Company’s acquisition activity a portion of the purchase price is attributable
to the fair value of intangible assets which are typically amortized over a period of less than one
year.
Interest Expense
For the year ended December 31, 2011, interest expense on both continuing and discontinued
operations increased 5.0% or $7.5 million as compared to 2010. This increase in interest expense
was primarily due to slightly higher debt balances. The increase was also attributable to the write
off of $4.6 million of deferred financing costs related to the prepayment of debt.
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For the year ended December 31, 2010, interest expense on both continuing and discontinued
operations increased 6.1% or $8.6 million as compared to 2009. This increase is primarily due to
the Company’s debt repurchase activity during 2010 and 2009. During the year ended December 31,
2010, we recognized a loss of $1.0 million as a result of repurchasing some of our 3.625%
convertible Senior Notes in the open market as compared to our recognition of $9.8 million in gains
resulting from the repurchase of unsecured debt securities with a notional amount of $238.9 million
in the open market in 2009. The decrease in our gain from debt repurchase activity was partially
offset by a decrease of $3.8 million of expenses related to the tender of $37.5 million of
unsecured debt in 2009.
Severance Costs and Other Restructuring Charges
For the year ended December 31, 2010, the Company recognized $6.8 million of severance and
restructuring charges as the Company consolidated its corporate operations and centralized job
functions to its Highlands Ranch, Colorado headquarters from its Richmond, Virginia office. Also
included in these charges were severance costs related to the retirement of an executive officer.
Gains on the Sale of Depreciable Property
For the years ended December 31, 2011, 2010 and 2009, we recognized gains for financial
reporting purposes of $138.5 million, $4.1 million, and $2.4 million, respectively. Changes in the
level of gains recognized from period to period reflect the changing level of our divestiture
activity from period to period as well as the extent of gains related to specific properties sold.
Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While
the impact of inflation primarily impacts our results through wage pressures, utilities and
material costs, substantially all of our leases are for a term of one year or less, which generally
enables us to compensate for any inflationary effects by increasing rents on our apartment homes.
Although an extreme escalation in energy and food costs could have a negative impact on our
residents and their ability to absorb rent increases, we do not believe this has had a material
impact on our results for the year ended December 31, 2011.
Off-Balance Sheet Arrangements
In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests
in the Hanover/MetLife Master Limited Partnership (“UDR/MetLife I”).
In connection with the purchase of Hanover’s interests in the UDR/MetLife Partnership, UDR
agreed to indemnify Hanover from liabilities from Hanover’s guaranty of $506.0 million in loans
($51.0 million outstanding at December 31, 2011) which are secured by a security interest in the
operating communities subject to the loan. The loans are to the sub-tier partnerships which own the
26 operating communities. The Company anticipates that the remaining $51.0 million will be
refinanced by the UDR/MetLife Partnership over the next twelve months.
We do not have any other off-balance sheet arrangements that have, or are reasonably likely to
have, a current or future effect on our financial condition, changes in financial condition,
revenue or expenses, results of operations, liquidity, capital expenditures or capital resources
that are material.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2011 (dollars in
thousands):
During 2011, we incurred gross interest costs of $171.3 million, of which $13.0 million was
capitalized.
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 (as amended from time to time, or any successor to
such statute, the “Act”). The Operating Partnership is the successor-in-interest to United
Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced
operations on November 4, 1995. Our sole general partner is UDR, Inc., a Maryland corporation
(“UDR” or the “General Partner”), which conducts a substantial amount of its business and holds a
substantial amount of its assets through the Operating Partnership. At December 31, 2011, the
Operating Partnership’s real estate portfolio included 77 communities located in 9 states plus the
District of Columbia, with a total of 23,160 apartment homes.
As of December 31, 2011, UDR owned 110,883 units of our general limited partnership interests
and 174,749,068 units of our limited partnership interests (the “OP Units”), or approximately 94.9%
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 Report to the Operating Partnership refer to the Operating Partnership together with its
consolidated subsidiaries, and all references in this “Item 7. Management’s Discussion and
Analysis—United Dominion Realty, L.P”. to “we,” “us” or “our” refer to the Operating Partnership
together with its consolidated subsidiaries. We refer to our General Partner together with its
consolidated subsidiaries (including us) and the General Partner’s consolidated joint ventures as
“UDR” or the “General Partner”.
UDR operates as a self administered real estate investment trust, or REIT, for federal income
tax purposes. UDR focuses on owning, acquiring, renovating, developing, redeveloping, and managing
apartment communities in select markets throughout the United States. The General Partner was
formed in 1972 as a Virginia corporation and changed its state of incorporation from Virginia to
Maryland in September 2003. At December 31, 2011, UDR’s consolidated real estate portfolio
included 163 communities located in 22 markets with a total of 47,343 completed apartment homes and
UDR’s total real estate portfolio, inclusive of UDR’s unconsolidated communities, included an
additional 39 communities with 10,400 completed apartment homes.
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The following table summarizes our market information by major geographic markets as of
December 31, 2011.
We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same
Communities segment includes those communities acquired, developed, and stabilized prior to January
1, 2010, and held as of December 31, 2011. These communities were owned and had stabilized
occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct
substantial redevelopment activities, and the community is not held for disposition within the
current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy
for at least three consecutive months. Our Non-Mature/Other Communities segment includes those
communities that were acquired or developed in 2010 or 2011, sold properties, redevelopment
properties, properties classified as real estate held for disposition, condominium conversion
properties, joint venture properties, properties managed by third parties, and the non-apartment
components of mixed use properties.
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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 allocated to us under the General Partner’s credit agreements. The
General Partner will routinely use its unsecured credit facility to temporarily fund certain
investing and financing activities prior to arranging for longer-term financing or the issuance of
equity or debt securities. During the past several years, proceeds from the sale of real estate
have been used for both investing and financing activities as we repositioned our portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by
operations and borrowings allocated to us under the General Partner’s credit agreements. We expect
to meet certain long-term liquidity requirements such as scheduled debt maturities and potential
property acquisitions through borrowings and the disposition of properties. We believe that our net
cash provided by operations and borrowings will continue to be adequate to meet both operating
requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements
and renovations of certain properties are expected to be funded from property operations and
borrowings allocated to us under the General Partner’s credit agreements the Operating Partnership
is a party to.
Future Capital Needs
Future capital expenditures are expected to be funded with proceeds from the issuance of
secured debt, the sale of properties, the borrowings allocated to us under our General Partner’s
credit agreements, and to a lesser extent, with cash flows provided by operating activities.
Acquisition activity in strategic markets is expected to be largely financed by the reinvestment of
proceeds from the sale of properties, the issuance of OP Units and the assumption or placement of
secured debt.
During 2012, we have approximately $210.2 million of secured debt maturing and we anticipate
that we will repay that debt with operating cash flows, proceeds from borrowings allocated to us
under our General Partner’s credit agreements, or by exercising extension rights on such secured
debt, as applicable. The repayment of debt will be recorded as an offset to the “Receivable due
from General Partner”.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use
judgment in the application of accounting policies, including making estimates and assumptions. A
critical accounting policy is one that is both important to our financial condition and results of
operations and that involves some degree of uncertainty. Estimates are prepared based on
management’s assessment after considering all evidence available. Changes in estimates could affect
our financial position or results of operations. Below is a discussion of the accounting policies
that we consider critical to understanding our financial condition or results of operations where
there is uncertainty or where significant judgment is required.
Capital Expenditures
In conformity with GAAP, we capitalize those expenditures that materially enhance the value of
an existing asset or substantially extend the useful life of an existing asset. Expenditures
necessary to maintain an existing property in ordinary operating condition are expensed as
incurred.
During the year ended December 31, 2011, $63.2 million was spent on capital expenditures for
all of our communities as compared to $59.5 million for the year ended December 31, 2010. These
capital improvements included turnover-related capital expenditures, revenue enhancing capital
expenditures, asset preservation expenditures, kitchen and bath upgrades, other extensive
interior/exterior upgrades and major renovations.
We will continue to selectively add revenue enhancing improvements which we believe will
provide a return on investment substantially in excess of our cost of capital.
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Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by the future operation and disposition of those assets are less than the net book
value of those assets. Our cash flow estimates are based upon historical results adjusted to
reflect our best estimate of future market and operating conditions and our estimated holding
periods. The net book value of impaired assets is reduced to fair market value. Our estimates of
fair market value represent our best estimate based upon industry trends and reference to market
rates and transactions.
Real Estate Investment Properties
We purchase real estate investment properties from time to time and record the fair value to
various components, such as land, buildings, and intangibles related to in-place leases based on
the fair value of each component. The fair value of buildings is determined as if the buildings
were vacant upon acquisition and subsequently leased at market rental rates. As such, the
determination of fair value considers the present value of all cash flows expected to be generated
from the property including an initial lease-up period. We determine the fair value of in-place
leases by assessing the net effective rent and remaining term of the lease relative to market terms
for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases,
the foregone rents associated with the lease-up period, and the carrying costs associated with the
lease-up period. The fair value of in-place leases is recorded and amortized as amortization
expense over the remaining average contractual lease period.
Statements of Cash Flows
The following discussion explains the changes in net cash provided by operating activities,
net cash (used in)/provided by investing activities and net cash provided by/(used in) financing
activities that are presented in our Consolidated Statements of Cash Flows.
Operating Activities
For the year ended December 31, 2011, net cash flow provided by operating activities was
$156.1 million compared to $146.6 million for the comparable period in 2010. The increase in net
cash flow from operating activities is primarily due to an increase in property net operating
income from our apartment community portfolio, which was partially offset by the increase in
operating assets and a decrease in operating liabilities.
For the year ended December 31, 2010, our net cash flow provided by operating activities was
$146.6 million compared to $157.3 million for 2009. The decrease in net cash flow from operating
activities is primarily due to an increase in consolidated net loss, primarily due to a decrease in
property net operating income and increase in allocated general and administrative costs.
Investing Activities
For the year ended December 31, 2011, net cash used in investing activities was $227.0 million
compared to $59.5 million for the comparable period in 2010. The increase in net cash used in
investing activities was primarily due to acquisition activities partially offset by proceeds
received from dispositions in 2011.
For the year ended December 31, 2010, net cash used in investing activities was $59.5 million
compared to net cash provided by investing activities of $129.6 million for the comparable period
in 2009. This change was primarily due to the full payment received on a $200.0 million note
receivable in 2009. The activity during 2010 consisted entirely of capital expenditures.
Acquisitions and Dispositions
In April 2011, UDR and the Operating Partnership closed on an acquisition of a 493- home
multifamily apartment community referred to as 10 Hanover Square, located in New York, New York.
The community was acquired for $259.8 million, which included assumed debt with a fair value of
$208.1 million and the issuance of 2,569,606 OP Units of the Operating Partnership. The OP Units
were deemed to have a value equal to the greater of $25.00 or the volume weighted average closing
price per share of the Company’s common stock for the 10 day period ended on (and including) the
date one business day prior to the settlement date. For purchase price accounting purposes, the
fair value of these OP units was $24.47 at the settlement date.
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In April 2011, the Operating Partnership and its General Partner completed a $500 million
asset exchange whereby the Operating Partnership acquired two multifamily apartment communities
(833 homes) and a parcel of land, and UDR acquired one multifamily apartment community (227 homes).
The acquired assets are: 388 Beale in San Francisco, CA (227 homes)- acquired by UDR; 14 North in
Peabody, MA (387 homes); and Inwood West in Woburn, MA (446 homes). The communities acquired were
valued at $263.0 million representing their estimated fair value. The Company and the Operating
Partnership paid $28.1 million of cash and assumed debt with a fair value of $61.7 million. The
Operating Partnership sold four multifamily apartment communities (984 homes) and UDR sold two
multifamily apartment communities (434 homes) located in California as part of the transaction. The
communities are: Crest at Phillips Ranch, Villas at San Dimas, Villas at Bonita, The Arboretum,
Rancho Vallecitos and Milazzo.
In August 2011, UDR and the Operating Partnership closed on the acquisition of a 507- home
multifamily apartment community referred to as 95 Wall located in New York, New York. The community
was acquired for $328.9 million, which included the issuance of 1,802,239 OP Units of the Operating
Partnership. The OP Units were deemed to have a value equal to the greater of $25.00 or the volume
weighted average closing price per share of the Company’s common stock for the 10-day period ended
on (and including) the date one business day prior to the settlement date. For purchase price
accounting purposes, the fair value of these OP units was $26.71 at the settlement date.
For the year ended December 31, 2010, the Operating Partnership had no property acquisitions.
The Operating Partnership’s long-term strategic plan is to achieve greater operating
efficiencies by investing in fewer, more concentrated markets. As a result, we have been seeking to
expand our interests in communities located in Boston, California, Metropolitan Washington D.C.,
New York, and the Washington state markets over the past years. Prospectively, we plan to continue
to channel new investments into those markets we believe will continue to provide the best
investment returns. Markets will be targeted based upon defined criteria including above average
job growth, low single-family home affordability and limited, new supply for multifamily housing-
three key drivers to strong rental growth.
In 2011, the Operating Partnership sold eight apartment home communities (2,024 homes), which
included four apartment home communities (984 homes) sold in conjunction with an asset exchange in
April 2011, for a total sales price of $299.6 million. Proceeds from the sales were used primarily to
acquire new communities, reduce debt, and repay our General Partner. During the year ended December
31, 2010, we did not dispose of any apartment home communities.
Financing Activities
For the year ended December 31, 2011, our net cash provided by financing activities was $70.7
million compared to net cash used in financing activities of $86.7 million for 2010. The increase
in cash provided by financing activities was primarily due to an increase in advances from the
General Partner, partially offset by an increase in payments of secured debt.
For the year ended December 31, 2010, our net cash used in financing activities was $86.7
million compared to $290.1 million for 2009. The decrease in cash used in financing activities was
primarily due to a net decrease in payments to the General Partner, partially offset by a decrease
in the proceeds from secured debt.
Credit Facilities
As of December 31, 2011, the General Partner had secured credit facilities with Fannie Mae
with an aggregate commitment of $1.3 billion with $1.1 billion outstanding. The Fannie Mae credit
facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and
certain variable rate facilities can be extended for an additional five years at the General
Partner’s option. At December 31, 2011, $744.5 million of the outstanding balance was fixed at a
weighted average interest rate of 5.14% and the remaining balance of $310.5 million on these
facilities had a weighted average variable interest rate of 1.63%. $667.5 million of these credit
facilities were allocated to the Operating Partnership at December 31, 2011 based on the ownership
of the assets securing the debt.
At December 31, 2010, there was $897.3 million of the funded balance fixed at a weighted
average interest rate of 5.3% and the remaining balance on these facilities was at a weighted
average variable rate of 1.7%. $736.9 million of these credit facilities were allocated to the
Operating Partnership at December 31, 2009 based on the ownership of the assets securing the debt.
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At December 31, 2010, the Operating Partnership guaranteed the General Partner’s unsecured
credit facility, with an aggregate borrowing capacity of $600 million. The outstanding balance
under the unsecured credit facility was $31.8 million at December 31, 2010. On October 25, 2011,
the Operating Partnership issued a guarantee in conjunction with a new $900 million unsecured
revolving credit facility entered into by our General Partner. The new facility replaces the
General Partner’s $600 million facility. The outstanding balance under the new $900 million
unsecured revolving credit facility was $421.0 million at December 31, 2011.
The
Operating Partnership is also a guarantor on the General
Partner’s $250 million term loan which matures
January 2016, $100 million term loan which matures
December 2016, $300 million of medium term notes due
June 2018, and $400 million of medium term notes due
January 2022 (issued in January 2012).
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 $287.0 million in variable rate debt that is not subject to interest rate swap
contracts as of December 31, 2011. If market interest rates for variable rate debt increased by 100
basis points, our interest expense would increase by $2.8 million based on the balance at December
31, 2011.
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.
Results of Operations
The following discussion explains the changes in results of operations that are presented in
our Consolidated Statements of Operations for each of the three years ended December 31, 2011, and
includes the results of both continuing and discontinued operations for the periods presented.
Net Income/(Loss) Attributable to OP Unitholders
2011 — vs. — 2010
Net income attributable to OP unitholders was $30.2 million ($0.17 per OP unit) for the year
ended December 31, 2011 as compared to a net loss of $20.7 million ($0.12 per OP unit) for the
comparable period in the prior year. The increase in net income attributable to OP unit holders for
the year ended December 31, 2011 resulted primarily from the following items, all of which are
discussed in further detail elsewhere within this Report:
The increase to our net income attributable to OP unitholders was partially offset by:
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2010 — vs. — 2009
Net loss attributable to OP unit holders was $20.7 million ($0.12 per OP unit) for the year
ended December 31, 2010 as compared to $4.2 million ($0.02 per OP unit) for the comparable period
in the prior year. The increase in net loss attributable to OP unit holders for the year ended
December 31, 2010 resulted primarily from the following items, all of which are discussed in
further detail elsewhere within this Report:
Apartment Community Operations
Our net income is primarily generated from the operation of our apartment communities.
The following table summarizes the operating performance of our total portfolio for the years
ended December 31, 2011, 2010 and 2009 (dollars in thousands):
The following table is our reconciliation of property NOI to net income attributable to OP
unitholders as reflected, for both continuing and discontinued operations, for the years ended
December 31, 2011, 2010 and 2009 (dollars in thousands):
Same Store Communities
2011 — vs. — 2010
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2010
and held on December 31, 2011) consisted of 19,194 apartment homes and provided 75.3% of our total
NOI for the year ended December 31, 2011.
NOI for our same store community properties increased 6.2% or $11.5 million for the year ended
December 31, 2011 compared to the same period in 2010. The increase in property NOI was primarily
attributable to a 4.5% or $12.7 million increase in rental income and by a 1.3% or $1.2 million
increase in operating expenses. The increase in revenues was primarily driven by a 4.4% or $11.8
million increase in rental rates. Physical occupancy decreased 0.3% to 95.3% and total income per
occupied home increased $62 to $1,333 for the year ended December 31, 2011 as compared to the prior
year.
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The increase in property operating expenses was primarily due to a 6.8% or $989,000 increase
in utility costs.
As a result of the percentage changes in property rental income and property operating
expenses, the operating margin (property net operating income divided by property rental income)
was 68.0% for the year ended December 31, 2011 as compared to 67.0% for the comparable period in
2010.
2010 — vs. — 2009
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2009
and held on December 31, 2010) consisted of 21,120 apartment homes and provided 88.8% of our total
NOI for the year ended December 31, 2010.
NOI for our same store community properties decreased 2.8 % or $6.0 million for the year ended
December 31, 2010 compared to the same period in 2009. The decrease in property NOI was primarily
attributable to a 1.4% or $4.3 million decrease in property rental income and by a 1.7% or $1.7
million increase in operating expenses. The decrease in revenues was primarily driven by a 2.8% or
$8.8 million decrease in rental rates which was partially offset by a 54.8% or $1.7 million
decrease in concessions, a 7.3% or $926,000 decrease in vacancy loss and a 4.7% or $1.1 million
increase in reimbursement income. Physical occupancy increased 0.3% to 95.6% and total income per
occupied home decreased $22 to $1,279 for the year ended December 31, 2010 as compared to the prior
year.
The increase in property operating expenses was primarily driven by a 3.5% or $533,000
increase in utilities, a 4.9% or $743,000 increase in repairs and maintenance, and a 3.0% or
$719,000 increase in personnel costs which was partially offset by a 0.7% or $242,000 decrease in
real estate taxes and a 3.7% or $241,000 decrease in administrative and marketing costs.
As a result of the percentage changes in property rental income and property operating
expenses, the operating margin (property net operating income divided by property rental income)
was 67.1% for the year ended December 31, 2010 as compared to 68.1% for the comparable period in
2009.
Non-Mature/Other Communities
2011 — vs. — 2010
The remaining $65.4 million and $46.8 million of our NOI during the year ended December 31,
2011 and 2010, respectively, was generated from communities that we classify as “non-mature
communities”. Our non-mature communities consist of communities that do not meet the criteria to be
included in same store communities, which include communities developed or acquired, redevelopment
properties, sold properties, properties managed by third-parties, and properties classified as real
estate held for disposition. For the year ended December 31, 2011, we recognized NOI for acquired
communities of $22.6 million, redevelopments of $23.9 million, and sold properties of $11.8
million. For the year ended December 31, 2010, we recognized NOI for redeveloped properties of
$21.3 million and sold properties of $20.8 million.
2010 — vs. — 2009
The remaining $26.2 million and $26.7 million of our NOI during the year ended December 31,
2010 and 2009, respectively, was generated from communities that we classify as “non-mature
communities.” Our non-mature communities consist of communities that do not meet the criteria to be
included in same store communities, which includes communities developed or acquired, redevelopment
properties, sold properties, properties managed by third-parties, the non-apartment components of
mixed use properties, and properties classified as real estate held for sale. For the year ended
December 31, 2010, we recognized NOI of $11.4 million for our properties held for sale and $10.2
million of NOI for our redevelopments. The remainder was primarily due to the non-apartment
components of mixed use properties. For the year ended December 31, 2009, we recognized NOI of
$11.5 million for our properties and $9.5 million of NOI for redeveloped properties. The remaining
NOI was primarily due to the non-apartment components of mixed use properties.
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Other Income
For the year ended December 31, 2010, other income primarily includes a reversal of certain
real estate tax accruals partially offset by losses due to the change in the fair value of
derivatives.
For the years ended December 31, 2009, other income primarily includes interest income on a
note for $200 million that a subsidiary of the Operating Partnership received related to the
disposition of 55 properties during 2008. In May 2009, the $200 million note was paid in full.
Real Estate Depreciation and Amortization
For the year ended December 31, 2011, real estate depreciation and amortization from
continuing and discontinued operations increased 18.9% or $31.5 million as compared to the
comparable period in 2010. The increase in depreciation and amortization expense is primarily due
to the acquisition of four apartment home communities in 2011. As part of the Operating
Partnership’s acquisition activities a portion of the purchase price is attributable to the fair
value of intangible assets which are typically amortized over a period of less than one year.
For the years ended December 31, 2010, real estate depreciation and amortization from
continuing and discontinued operations did not change significantly as compared to the comparable
period in 2009 as the Operating Partnership did not have any acquisitions or dispositions during
this period.
Interest Expense
For the year ended December 31, 2011, interest expense increased 2.7% or $1.4 million, as
compared to the same period in 2010. This increase is primarily due to a higher debt balances from
mortgages assumed on certain 2011 acquisitions, issuance of a note payable due to the General
Partner in 2011, and an increase in the interest rate charged on the note payable due to the
General Partner. The increase is partially offset by lower average borrowings on secured credit
facilities, lower weighted average interest rates and the payment of a tax exempt secured note
payable in 2011.
For the year ended December 31, 2010, interest expense decreased 2.5% or $1.3 million, as
compared to the same period in 2009. This decrease is primarily due a decrease in the interest rate
charged on the note payable due to the General Partner partially offset by slightly higher average
borrowings on secured credit facilities.
General and Administrative
The Operating Partnership is charged directly for general and administrative expenses it
incurs. The Operating Partnership is also charged for other general and administrative expenses
that have been allocated by UDR to each of its subsidiaries, including the Operating Partnership,
based on each subsidiary’s pro-rata portion of UDR’s total apartment homes.
For the year ended December 31, 2011, general and administrative expenses increased 13.2% or
$3.1 million, as compared to the comparable period in 2010. The increase was primarily due to
acquisition-related costs associated directly with acquisitions of the Operating Partnership.
For the year ended December 31, 2010, general and administrative expenses increased 37.9% or
$6.4 million, as compared to the comparable period in 2009. The increase was due to a number of
factors including acquisition-related costs and severance and other restructuring charges
recognized in 2010. The increases were consistent with the changes in UDR’s general and
administrative expenses and severance and other restructuring expenses for the year ended December
31, 2010.
Income from Discontinued Operations
For
the years ended December 31, 2011, 2010 and 2009, we recognized
gains on property sales for financial
reporting purposes of $60.1 million, $152,000, and $1.5 million, respectively. The increase in
gains recognized for the year ended December 31, 2011 as compared to the comparable period in 2010
was primarily due to the sale of eight apartment home communities in 2011. Changes in the level of
gains recognized in 2010 as compared to 2009 reflect the residual activities from specific
properties sold.
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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 through wage pressures, utilities and
material costs, substantially all of our leases are for a term of one year or less, which generally
enables us to compensate for any inflationary effects by increasing rents on our apartment homes.
Although an extreme escalation in energy and food costs could have a negative impact on our
residents and their ability to absorb rent increases, we do not believe this has had a material
impact on our results for the year ended December 31, 2011.
Off-Balance Sheet Arrangements
At December 31, 2010, the Operating Partnership was a guarantor on the General Partner’s
unsecured credit facility, with an aggregate borrowing capacity of $600 million ($31.8 million
outstanding at December 31, 2010). On October 25, 2011, the Operating Partnership issued a
guarantee in conjunction with a $900 million unsecured revolving credit facility entered into by
the General Partner. The facility replaced the General Partner’s $600 million credit facility. At
December 31, 2011, the outstanding balance under the $900 million unsecured credit facility was
$421.0 million.
The Operating
Partnership is also a guarantor on the General Partner’s
$250 million term loan
which matures January 2016, a $100 million term loan which matures December 2016, $300 million of medium-term notes due
June 2018, and $400 million medium-term notes due
January 2022 (issued in January 2012).
We do not have any other 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.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2011 (dollars in
thousands):
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in and incorporated by reference from Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations of this
Report.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial information required to be filed
are attached to this Report. Reference is made to page 74 of this Report for the Index to
Consolidated Financial Statements and Schedule of UDR, Inc. and United Dominion Realty, L.P.
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None.
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The disclosure controls and procedures of the Company and the Operating Partnership are
designed with the objective of ensuring that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and 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 December 31, 2011, we carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer of the Company, which is the sole
General Partner of the Operating Partnership of the
effectiveness of the design and operation of the disclosure controls and procedures of the Company
and the Operating Partnership. Based on this evaluation, the Chief Executive Officer and Chief
Financial Officer of the Company concluded that the disclosure controls and procedures of the
Company and the Operating Partnership are effective at the reasonable assurance level described
above.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f)
under the Exchange Act for the Company and the Operating Partnership. Under the supervision and with the participation of the management, the
Chief Executive Officer and Chief Financial Officer of the Company, which is the sole General
Partner of the Operating Partnership, conducted an evaluation of the effectiveness of the internal
control over financial reporting based on the framework in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations (COSO). Based on such evaluation, management
concluded that the Company’s and the Operating Partnership’s internal control over financial
reporting was effective as of December 31, 2011.
Ernst & Young LLP, the independent registered public accounting firm that audited our
consolidated financial statements included in this Report, has audited UDR, Inc.’s internal control
over financial reporting as of December 31, 2011. The report of Ernst & Young LLP, which expresses
an unqualified opinion on UDR, Inc.’s internal control over financial reporting as of December 31,
2011, is included under the heading “Report of Independent Registered Public Accounting Firm” of
UDR, Inc. contained in this Report. Further, an attestation report of the registered public
accounting firm of United Dominion Realty, L.P. will not be required as long as United Dominion
Realty, L.P. is a non-accelerated filer.
Changes in Internal Control Over Financial Reporting
There have not been any changes in either the Company’s or the Operating Partnership’s
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fourth fiscal quarter to which this report relates that
materially affected, or are reasonably likely to materially affect, the internal control over
financial reporting of either the Company or the Operating Partnership.
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Item 9B. OTHER INFORMATION
Other Agreements with Executive Officers. In December 2011, we entered into separate aircraft
time-share agreements with Mr. Toomey and Mr. Troupe. Under each aircraft time-share agreement, we
have agreed to lease an aircraft, including crew and flight services, to each of Mr. Toomey and Mr.
Troupe for personal flights from time to time upon their request. Mr. Toomey and Mr. Troupe will
each pay us a lease fee as may be set by the board from time to time for the flight expenses that
may be charged under applicable regulations. We will invoice Mr. Toomey and Mr. Troupe on the last
day of the month in which any respective flight occurs. Each aircraft time-share agreement will
remain in effect until December 15, 2014, and each agreement may be terminated by either party,
upon ten days’ prior written notice. Each agreement automatically terminates upon the date either
Mr. Toomey or Mr. Troupe, respectively, are no longer employed by the Company.
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PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information set
forth under the headings “Election of Directors,” “Corporate Governance Matters,” “Audit Committee
Report,” “Corporate Governance Matters-Board Leadership Structure and Committees-Audit Committee
Financial Expert,” “Corporate Governance Matters-Identification and Selection of Nominees for
Directors,” “Corporate Governance Matters-Board of Directors and Committee Meetings” and “Section
16(a) Beneficial Ownership Reporting Compliance” in UDR, Inc.’s definitive proxy statement (our
“definitive proxy statement”) for its Annual Meeting of Stockholders to be held on May 15, 2012.
UDR is the sole general partner of the Operating Partnership.
Information required by this item regarding our executive officers is included in Part I of
this Report in the section entitled “Business-Executive Officers of the Company”.
We have a code of ethics for senior financial officers that applies to our principal executive
officer, all members of our finance staff, including the principal financial officer, the principal
accounting officer, the treasurer and the controller, our director of investor relations, our
corporate secretary, and all other Company officers. We also have a code of business conduct and
ethics that applies to all of our employees. Information regarding our codes is available on our
website, www.udr.com, and is incorporated by reference to the information set forth under the
heading “Corporate Governance Matters” in our definitive proxy statement for UDR’s Annual Meeting
of Stockholders to be held on May 15, 2012. We intend to satisfy the disclosure requirements under
Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of our codes by
posting such amendment or waiver on our website.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information set
forth under the headings “Security Ownership of Certain Beneficial Owners and Management,”
“Corporate Governance Matters-Board Leadership Structure and Committees-Compensation Committee
Interlocks and Insider Participation,” “Executive Compensation,” “Compensation of Directors” and
“Compensation Committee Report” in the definitive proxy statement for UDR’s Annual Meeting of
Stockholders to be held on May 15, 2012. UDR is the sole general partner of the Operating
Partnership.
The information required by this item is incorporated by reference to the information set
forth under the headings “Security Ownership of Certain Beneficial Owners and Management,”
“Executive Compensation” and “Equity Compensation Plan Information” in the definitive proxy
statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the sole
general partner of the Operating Partnership.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information set
forth under the heading “Security Ownership of Certain Beneficial Owners and Management,”
“Corporate Governance Matters-Corporate Governance Overview,” “Corporate Governance
Matters-Director Independence,” “Corporate Governance Matters-Board Leadership Structure and
Committees-Independence of Audit, Compensation and Governance Committees,” and “Executive
Compensation” in the definitive proxy statement for UDR’s Annual Meeting of Stockholders to be held
on May 15, 2012. UDR is the sole general partner of the Operating Partnership.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information set
forth under the headings “Audit Fees” and “Pre-Approval Policies and Procedures” in the definitive
proxy statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the
sole general partner of the Operating Partnership.
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