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UDR, Inc. 10-Q 2011 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
FORM 10-Q
For the quarterly period ended March 31, 2011
OR
For the transition period from to
Commission file number
1-10524 (UDR, Inc.)
333-156002-01 (United Dominion Realty, L.P.) UDR, Inc.
United Dominion Realty, L.P.
(Exact name of registrant as specified in its charter)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code) (720) 283-6120
(Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
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):
UDR, Inc.:
United Dominion Realty, L.P.:
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The number of shares of UDR, Inc.’s common stock, $0.01 par value, outstanding as of April 29, 2011,
was 189,778,728.
UDR, INC.
UNITED DOMINION REALTY, L.P. INDEX
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EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended March 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-Q is being filed separately by
UDR and the Operating Partnership.
There are a number of differences between our company and our operating partnership,
which are reflected in our disclosure in this report. UDR is a real estate investment trust (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, land entitlement and short-term
hold investments. 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 March 31, 2011, UDR owned 110,883 units of the general partnership interests of the
Operating Partnership and 174,736,557 units (or approximately 97.2%) 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,” are
provided for each of UDR and the Operating Partnership. This combined Form 10-Q is being filed
separately by UDR and the Operating Partnership.
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UDR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
3
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UDR, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
4
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UDR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
See accompanying notes to consolidated financial statements.
5
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UDR, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share data) (Unaudited)
See accompanying notes to consolidated financial statements.
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011 (Unaudited) 1. CONSOLIDATION AND BASIS OF PRESENTATION
Consolidation and Basis of Presentation
UDR, Inc., collectively with our consolidated subsidiaries (“UDR”, the “Company”, “we”, “our”,
or “us”) is a self-administered real estate investment trust, or REIT, that owns, acquires,
renovates, develops, redevelops, and manages apartment communities. The accompanying consolidated
financial statements include the accounts of UDR and its subsidiaries, including United Dominion
Realty, L.P. (the “Operating Partnership”) and Heritage Communities L.P. (the “Heritage OP”). As of
March 31, 2011, there were 179,909,408 units in the Operating Partnership outstanding, of which
174,847,440 units or 97.2% were owned by UDR and 5,061,968 units or 2.8% were owned by limited
partners. The consolidated financial statements of UDR include the non-controlling interests of the
unitholders in the Operating Partnership.
The accompanying interim unaudited consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States have been condensed
or omitted according to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. In the opinion of
management, all adjustments and eliminations necessary for the fair presentation of our financial
position as of March 31, 2011, and results of operations for the three months ended March 31, 2011
and 2010 have been included. Such adjustments are normal and recurring in nature. The interim
results presented are not necessarily indicative of results that can be expected for a full year.
The accompanying interim unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and related notes appearing in UDR’s Annual
Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange
Commission on February 23, 2011.
The accompanying interim unaudited consolidated financial statements are presented in
accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial
statements and the amounts of revenues and expenses during the reporting periods. Actual amounts
realized or paid could differ from those estimates. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain previously reported amounts have been
reclassified to conform to the current financial statement presentation.
The Company evaluated subsequent events through the date its financial statements were issued.
Except as disclosed in Note 16, Subsequent Events, no other recognized or non-recognized subsequent
events were noted.
2. SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies
Revenue and real estate sales gain recognition
Rental income related to leases is recognized on an accrual basis when due from residents in
accordance with FASB ASC 840, Leases and SEC Staff Accounting Bulletin No. 104, “Revenue
Recognition”. Rental payments are
generally due on a monthly basis and recognized when earned. The Company recognizes interest
income, management and other fees and incentives when earned, fixed and determinable.
The Company accounts for sales of real estate in accordance with FASB ASC 360-20, Real Estate
Sales. For sale transactions meeting the requirements for full accrual profit recognition, such as
the Company no longer having continuing involvement in the property, we remove the related assets
and liabilities from our Consolidated Balance Sheets and record the gain or loss in the period the
transaction closes. For sale transactions that do not meet the full accrual sale criteria due to
our continuing involvement, we evaluate the nature of the continuing involvement and account for
the transaction under an alternate method of accounting.
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales to entities in which we retain or otherwise own an interest are accounted for as partial
sales. If all other requirements for recognizing profit under the full accrual method have been
satisfied and no other forms of continuing involvement are present, we recognize profit
proportionate to the outside interest in the buyer and will defer the gain on the interest we
retain. The Company will recognize any deferred gain when the property is then sold to a third
party. In transactions accounted by us as partial sales, we determine if the buyer of the majority
equity interest in the venture was provided a preference as to cash flows in either an operating or
a capital waterfall. If a cash flow preference has been provided, we recognize profit only to the
extent that proceeds from the sale of the majority equity interest exceed costs related to the
entire property.
Marketable Securities
Marketable securities represent common stock in a publicly held company. Marketable securities
are classified as “available-for-sale,” and are carried at fair value with unrealized gains and
losses reported as a component of stockholders’ equity. During the three months ended March 31,
2011, the Company sold marketable securities for $3.5 million, resulting in a gross realized gain
of $3.1 million, which is included in “Other Income” on the Consolidated Statements of Operations.
The cost of securities sold was based on the specific identification method. Unrealized gains of
$3.5 million were reclassified out of accumulated other comprehensive income/(loss) into earnings
during the three months ended March 31, 2011. Of the $3.5 million of proceeds from the sale of
securities, the Company recorded a trade date receivable of $3.0 million at March 31, 2011, which
is included in “Other Assets” on the Consolidated Balance Sheets.
The amortization of any discount and interest income on previously held debt securities are
included in “Other Income” on the Consolidated Statements of Operations for the three months ended
March 31, 2010.
Income Taxes
Due to the structure of the Company as a REIT and the nature of the operations for the
operating properties, no provision for federal income taxes has been provided for at UDR.
Historically, the Company has generally incurred only state and local income, excise and franchise
taxes. UDR has elected for certain consolidated subsidiaries to be treated as Taxable REIT
Subsidiaries (“TRS”), primarily those engaged in development activities.
Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax
rate is recognized in earnings in the period of the enactment date. The Company’s deferred tax
assets are generally the result of differing depreciable lives on capitalized assets and timing of
expense recognition for certain accrued liabilities. As of March 31, 2011, UDR recorded a net
current liability of $553,000 and a deferred tax asset of $6.6 million (net of a valuation
allowance of $58.3 million). For the three months ended March 31, 2011 and 2010, UDR recorded
income tax expense of $86,000 and $65,000, respectively, which is classified in “General and
Administrative” expenses.
FASB ASC 740, Income Taxes (“Topic 740”) defines a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. Topic 740 also provides guidance on derecognition,
classification, interest and penalties, accounting for interim periods, disclosure and transition.
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes its tax positions and evaluates them using a two-step process. First,
we determine whether a tax position is more likely than not (greater than 50 percent probability)
to be sustained upon examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. Then the Company will determine the
amount of benefit to recognize and record the amount that is more likely than not to be realized
upon ultimate settlement.
UDR had no unrecognized tax benefit, accrued interest or penalties at March 31, 2011. UDR and its
subsidiaries are subject to U.S. federal income tax as well as income tax of multiple
state jurisdictions. The tax years 2006 — 2010 remain open to examination by the major taxing
jurisdictions to which we are subject. When applicable, UDR recognizes interest and/or penalties
related to uncertain tax positions in income tax expense.
3. REAL ESTATE OWNED
Real estate assets owned by the Company consist of income producing operating properties,
properties under development and land held for future development. As of March 31, 2011 the Company
owned and consolidated 172 communities in 10 states plus the District of Columbia totaling 48,553
apartment homes. The following table summarizes the carrying amounts for our real estate owned (at
cost) as of March 31, 2011 and December 31, 2010 (dollar amounts in thousands):
The Company did not acquire any properties during the three months ended March 31, 2011
and 2010.
4. DISCONTINUED OPERATIONS
Discontinued operations represent properties that UDR has either sold or which management
believes meet the criteria to be classified as held for sale. In order to be classified as held for
sale and reported as discontinued operations, a property’s operations and cash flows have been or
will be divested to a third party by the Company whereby UDR will not have any significant
continuing involvement in the ownership or operation of the property after the sale or disposition.
The results of operations of the property are presented as discontinued operations for all periods
presented and do not impact the net earnings reported by the Company. Once a property is deemed as
held for sale, depreciation is no longer recorded. However, if the Company determines that the
property no longer meets the criteria of held for sale, the Company will recapture any unrecorded
depreciation for the property. The assets and
liabilities of properties classified as held for sale are presented separately on the
Consolidated Balance Sheets at the lower of their carrying amount or their estimated fair value
less the costs to sell the assets.
9
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had six communities with 1,418 apartment homes classified as held for disposition
at March 31, 2011. The Company did not dispose of any communities during the three months ended
March 31, 2011 and 2010. Discontinued operations for the three months ended March 31, 2010 also
includes operating activities related to one 149 unit community sold during the third quarter of
2010.
The following is a summary of income from discontinued operations for the three months ended
March 31, 2011 and 2010 (dollars in thousands):
5. JOINT VENTURES
UDR has entered into joint ventures with unrelated third parties for real estate assets that
are either consolidated and included in real estate owned on our Consolidated Balance Sheets or are
accounted for under the equity method of accounting, which are not consolidated and are included in
investment in unconsolidated joint ventures on our Consolidated Balance Sheets. The Company
consolidates an entity in which we own less than 100% but control the joint venture as well as any
variable interest entity where we are the primary beneficiary. In addition, the Company
consolidates any joint venture in which we are the general partner or managing member and the third
party does not have the ability to substantively participate in the decision-making process nor do
they have the ability to remove us as general partner or managing member without cause.
UDR’s joint ventures are funded with a combination of debt and equity. Our losses are limited
to our investment and except as noted below, the Company does not guarantee any debt, capital
payout or other obligations associated with our joint venture portfolio.
Consolidated Joint Ventures
UDR is a partner with an unaffiliated third party in a joint venture (“989 Elements”) which
owns and operates a 23-story, 166 home high-rise apartment community in the central business
district of Bellevue, Washington. In March 2010, the Company paid $7.7 million to acquire our
partner’s 49% interest in the joint venture. At March 31, 2011 and December 31, 2010, the Company’s
interest in 989 Elements was 98%.
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
UDR is a partner with an unaffiliated third party in a joint venture (“Elements Too”) which
owns and operates a 274 home apartment community in the central business district of Bellevue,
Washington. Construction began in the fourth quarter of 2006 and was completed in the first
quarter of 2010. In March 2010, the Company paid $3.2 million to acquire our partner’s 49% interest
in the joint venture. At March 31, 2011 and December 31, 2010, the Company’s interest in Elements
Too was 98%.
UDR is a partner with an unaffiliated third party in a joint venture (“Bellevue”) which owns
an operating retail site in Bellevue, Washington. The Company initially planned to develop a 430
home high rise apartment building with ground floor retail on an existing operating retail center.
However, the joint venture subsequently decided to continue to operate the retail property as
opposed to developing a high rise apartment building on the site. In March 2010, the Company paid
$5.2 million to acquire our partner’s 49% interest in the joint venture. At March 31, 2011 and
December 31, 2010, the Company’s interest in Bellevue was 98%.
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 March 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 (the“UDR/MetLife Partnership”). The UDR/MetLife
Partnership owns a portfolio of 26 operating communities containing 5,748 apartment homes and 11
land parcels with the potential to develop approximately 2,300 additional apartment homes. Under
the terms of the UDR/MetLife Partnership, UDR acts as the general partner and earns fees for
property and asset management and financing transactions.
UDR acquired a weighted average ownership interest of 12.27% in the operating communities and 4.14% in
the land parcels for $100.8 million. The initial investment of $100.8 million consists of $71.8
million in cash, which includes associated transaction costs, and a $30 million payable (includes
present value discount of $1 million) to Hanover. UDR agreed to pay the $30 million balance to
Hanover in two interest free installments in the amounts of $20 million and $10 million on the
first and second anniversaries of the closing, respectively. The $30 million payable was recorded
at its present value of $29 million using an effective interest rate of 2.67%. At March 31, 2011
and December 31, 2010, the net carrying value of the payable was $29.3 million and $29.1 million,
respectively. Interest expense of $195,000 was recorded during the three months ended March 31,
2011. At March 31, 2011 and December 31, 2010, the Company’s investment was $121.9 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 the UDR/MetLife Partnership of $111.4 million. The difference
of $10.6 million was attributable to certain assets and adjustments were allocated to UDR’s
proportionate share in the UDR/MetLife Partnership’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 is 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 three months ended March 31, 2011, the Company
recorded $396,000 of amortization.
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 $304 million in loans ($333
million outstanding at March 31, 2011) which are secured by a security interest in the operating
communities subject to the respective loans. The loans are to the sub-tier partnerships which own
the 26 operating communities. The Company anticipates that the balance of these loans will be
refinanced by the UDR/MetLife Partnership over the next twelve months.
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In October 2010, the Company entered into a joint venture with an affiliate of Hanover to
develop a 240-home community in Stoughton, Massachusetts. At March 31, 2011 and December 31, 2010,
UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $10
million. Our investment at March 31, 2011 and December 31, 2010 was $12.8 million and $10.3
million, respectively.
UDR is a partner with an unaffiliated third party, which formed a joint venture for the
investment of up to $450 million in multifamily properties located in key, high barrier to entry
markets. The partners will contribute equity of $180 million of which the Company’s maximum equity
will be 30% or $54 million when fully invested. In 2010, the joint venture acquired its first
property (151 homes) located in Metropolitan Washington D.C.. At March 31, 2011 and December 31,
2010, the Company owned a 30% interest in the joint venture. Our investment at March 31, 2011 and
December 31, 2010 was $5.1 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 March
31, 2011 and December 31, 2010 was $9.3 million and $10.3 million, respectively.
We 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.
The Company did not recognize any other-than-temporary decrease in the value of its other
investments in unconsolidated joint ventures during the three months ended March 31, 2011 and 2010.
Combined summary financial information relating to all of the unconsolidated joint ventures
operations (not just our proportionate share), is presented below for the three months ended March
31, (dollars in thousands):
Combined summary balance sheets relating to all of the unconsolidated joint ventures (not just
our proportionate share) are presented below as of March 31, 2011 and December 31, 2010 (dollars in
thousands):
As of March 31, 2011, the Company had deferred fees and deferred profit from the sale of
properties to a joint venture of $28.8 million, which the Company will not recognize until the
underlying property is sold to a third party. The Company recognized $1.3 million and $391,000 of management fees during the three months
ended March 31, 2011 and 2010, respectively, for our management of the joint ventures.
The Company may, in the future, make additional capital contributions to certain of our joint
ventures should additional capital contributions be necessary to fund acquisitions and operating
shortfalls.
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. SECURED DEBT
Our secured debt instruments generally feature either monthly interest and principal or
monthly interest-only payments with balloon payments due at maturity. For purposes of
classification of the following table, variable rate debt with a derivative financial instrument
designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively
established a fixed interest rate for the underlying debt instrument. Secured debt which encumbers
$2.8 billion or 40.3% of UDR’s real estate owned based upon book value ($4.1 billion or 59.7% of
UDR’s real estate owned is unencumbered) consists of the following as of March 31, 2011 (dollars in
thousands):
UDR has five secured credit facilities with Fannie Mae with an aggregate commitment of
$1.4 billion at March 31, 2011. 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 $896.6 million of the outstanding
balance fixed at a weighted average interest rate of 5.32% and the remaining balance on these
facilities is currently at a weighted average variable interest rate of 1.67%.
The Company will from time to time acquire properties subject to fixed rate debt
instruments. In those situations, management will record the secured debt at its estimated fair
value and amortize any difference between the fair value and par to interest expense over the life
of the underlying debt instrument. The unamortized fair market adjustment was a net discount of
$617,000 and $694,000 at March 31, 2011 and December 31, 2010, respectively.
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fixed Rate Debt
Mortgage notes payable. Fixed rate mortgage notes payable are generally due in monthly
installments of principal and interest and mature at various dates from August 2011 through
February 2017 and carry interest rates ranging from 1.93% to 6.60%. Mortgage notes payable includes
debt associated with development activities.
Secured credit facilities. At March 31, 2011, the Company had $896.6 million outstanding of
fixed rate secured credit facilities with Fannie Mae with a weighted average fixed interest rate of
5.32%.
Variable Rate Debt
Mortgage notes payable. Variable rate mortgage notes payable are generally due in monthly
installments of principal and interest and mature at various dates from August 2011 through April
2016. The mortgage notes payable are based on LIBOR plus basis points, which translate into
interest rates ranging from 0.99% to 3.89% at March 31, 2011.
Tax-exempt secured notes payable. The variable rate mortgage notes payable that secure
tax-exempt housing bond issues mature at various dates from August 2019 and March 2030. Interest on
these notes is payable in monthly installments. The variable mortgage notes have interest rates
ranging from 0.99% to 1.05% as of March 31, 2011.
Secured credit facilities. At March 31, 2011, the Company had $260.5 million outstanding of
variable rate secured credit facilities with Fannie Mae with a weighted average floating interest
rate of 1.67%.
The aggregate maturities, including amortizing principal payments, of our secured debt due
during each of the next five calendar years and thereafter are as follows (dollars in thousands):
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. UNSECURED DEBT
A summary of unsecured debt as of March 31, 2011 and December 31, 2010 is as follows (dollars
in thousands):
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of short-term bank borrowings under UDR’s bank credit facility at
March 31, 2011 and December 31, 2010 (dollars in thousands):
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The convertible notes are convertible at the option of the holder, and as such are presented
as if the holder will convert the debt instrument at the earliest available date. The aggregate
maturities of unsecured debt for the five years subsequent to March 31, 2011 are as follows
(dollars in thousands):
We were in compliance with the covenants of our debt instruments at March 31, 2011.
In 2010, the Operating Partnership guaranteed certain outstanding debt securities of UDR, Inc.
These guarantees provide that the Operating Partnership, as primary obligor and not merely as
surety, irrevocably and unconditionally guarantees to each holder of the applicable securities and
to the trustee and their successors and assigns under the respective indenture (a) the full and
punctual payment when due, whether as stated maturity, by acceleration or otherwise, of all
obligations of the Company under the respective indenture whether for principal or interest on the
securities (and premium, if any), and all other monetary obligations of the Company under the
respective indenture and the terms of the applicable securities and (b) the full and punctual
performance within the applicable grace periods of all other obligations of the Company under the
respective indenture and the terms of applicable securities.
8. LOSS PER SHARE
Basic and diluted loss per common share are computed based upon the weighted average number of
common shares outstanding during the period as the effect of adding stock options and other common
stock equivalents such as the non-vested restricted stock awards is anti-dilutive.
The following table sets forth the computation of basic and diluted loss per share for the
periods presented (amounts in thousands, except per share data):
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effect of the conversion of the OP Units, convertible preferred stock, convertible
debt, stock options and restricted stock is not dilutive and is therefore not included in the above
calculations as the Company reported a loss from continuing operations.
If the OP Units were converted to common stock, the additional weighted average common shares
outstanding for the three months ended March 31, 2011 and 2010 would be 5,061,968 and 5,975,967,
respectively.
If the convertible preferred stock were converted to common stock, the additional shares of
common stock outstanding for the three months ended March 31, 2011 and 2010 would be 3,035,548
weighted average common shares.
The dilution from stock options and unvested restricted stock and stock options would be an
additional 1,882,083 and 1,514,041 weighted average common shares for the three months ended March
31, 2011 and 2010, respectively.
9. NONCONTROLLING INTERESTS
Redeemable noncontrolling interests in operating partnerships
Interests in operating partnerships held by limited partners are represented by operating
partnership units (“OP Units”). The income is allocated to holders of OP Units based upon net
income attributable to common stockholders and the weighted average number of OP Units outstanding
to total common shares plus OP Units outstanding during the period. Capital contributions,
distributions, and profits and losses are allocated to non-controlling interests in accordance with
the terms of the individual partnership agreements.
Limited partners have the right to require the Operating Partnership to redeem all or a
portion of the OP Units held by the limited partner at a redemption price equal to and in the form
of the Cash Amount as defined in the limited partnership agreement of the Operating Partnership
(the “Partnership Agreement”), provided that such OP
Units have been outstanding for at least one year. UDR, as the general partner of the
Operating Partnership may, in its sole discretion, purchase the OP Units by paying to the limited
partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of the
Company for each OP Unit), as defined in the Partnership Agreement. Accordingly, the Company
records the OP Units outside of permanent equity and reports the OP Units at their redemption value
using the Company’s stock price at each balance sheet date.
The following table sets forth redeemable noncontrolling interests in the Operating
Partnership for the following period (dollars in thousands):
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following sets forth net loss attributable to common stockholders and transfers from
redeemable noncontrolling interests in the Operating Partnership for the following periods (dollars
in thousands):
Non-controlling interests
Non-controlling interests represent interests of unrelated partners in certain consolidated
affiliates, and is presented as part of equity in the Consolidated Balance Sheets since these
interests are not redeemable into any other ownership interests of the Company. During the three
months ended March 31, 2011 and 2010, net income attributable to non-controlling interests was
$51,000 and $35,000, respectively.
10. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair value is based on the price that would be received to sell an asset or the exit price
that would be paid to transfer a liability in an orderly transaction between market participants at
the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable
inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which
are described below:
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated fair values of the Company’s financial instruments either recorded or disclosed
on a recurring basis as of March 31, 2011 and December 31, 2010 are summarized as follows (dollars
in thousands):
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments Carried at Fair Value
The fair values of interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or receipts) are based on an
expectation of future interest rates (forward curves) derived from observable market interest rate
curves. The fair values of interest rate options are determined using the market standard
methodology of discounting the future expected cash receipts that would occur if variable interest
rates rise above the strike rate of the caps. The variable interest rates used in the calculation
of projected receipts on the cap are based on an expectation of future interest rates derived from
observable market interest rate curves and volatilities.
The Company incorporates credit valuation adjustments to appropriately reflect both its own
nonperformance risk and the respective counterparty’s nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Company has considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although the Company has determined that the majority of the inputs used to value its
derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments
associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads
to evaluate the likelihood of default by itself and its counterparties. However, as of March 31,
2011 and 2010, the Company has assessed the significance of the impact of the credit valuation
adjustments on the overall valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of its derivatives. As a
result, the Company has determined that its derivative valuations in their entirety are classified
in Level 2 of the fair value hierarchy.
We estimate the fair value of our Convertible Senior Unsecured Notes based on Level 1 inputs
which utilize quoted prices in active markets where we have the ability to access value for
identical liabilities.
Redeemable non-controlling interests in the Operating Partnership have a redemption feature
and are marked to its redemption value. The redemption value is based on the fair value of the
Company’s Common Stock at the redemption date, and therefore, is calculated based on the fair value
of the Company’s Common Stock at the balance sheet date. Since the valuation is based on observable
inputs such as quoted prices for similar instruments in active markets, redeemable non-controlling
interests in the Operating Partnership are classified as Level 2.
Financial Instruments Not Carried at Fair Value
At March 31, 2011, the fair values of cash and cash equivalents, restricted cash, notes
receivable, accounts receivable, prepaids, real estate taxes payable, accrued interest payable,
security deposits and prepaid rent, distributions payable and accounts payable approximated their
carrying values because of the short term nature of these instruments. The estimated fair values
of other financial instruments were determined by the Company using available market information
and appropriate valuation methodologies. Considerable judgment is necessary to interpret market
data and develop estimated fair values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company would realize on the disposition of the financial
instruments. The use of different market assumptions or estimation methodologies may have a
material effect on the estimated fair value amounts.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We estimate the fair value of our debt instruments by discounting the remaining cash flows of
the debt instrument at a discount rate equal to the replacement market credit spread plus the
corresponding treasury yields. Factors considered in determining a replacement market credit
spread include general market conditions, borrower specific credit spreads, time remaining to
maturity, loan-to-value ratios and collateral quality (Level 3).
We record impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated
to be generated by the future operation and disposition of those assets are less than the net book
value of those assets. Our cash flow estimates are based upon historical results adjusted to
reflect our best estimate of future market and operating conditions and our estimated holding
periods. The net book value of impaired assets is reduced to fair value. Our estimates of fair
value represent our best estimate based upon Level 3 inputs such as industry trends and reference
to market rates and transactions.
We consider various factors to determine if a decrease in the value of our investments in an
unconsolidated joint venture is other-than-temporary. These factors include, but are not limited
to, age of the venture, our intent and ability to retain our investment in the entity, the
financial condition and long-term prospects of the entity, and the relationships with the other
joint venture partners and its lenders. Based on the significance of the unobservable inputs, we
classify these fair value measurements within Level 3 of the valuation hierarchy. The Company did
not incur any other-than-temporary decrease in the value of its other investments in unconsolidated
joint ventures during the three months ended March 31, 2011 and 2011.
After determining an other-than-temporary decrease in the value of an equity method investment
has occurred, we estimate the fair value of our investment by estimating the proceeds we would
receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs
reflect management’s best estimate of what market participants would use in pricing the investment
giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture
asset. The inputs and assumptions utilized to estimate the future cash flows of the underlying
asset are based upon the Company’s evaluation of the economy, market trends, operating results, and
other factors, including judgments regarding costs to complete any construction activities, lease
up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate
the projected cash flows at the disposition, and discount rates.
11. DERIVATIVES AND HEDGING ACTIVITY
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk primarily by managing the amount,
sources, and duration of its debt funding and the use of derivative financial instruments.
Specifically, the Company may enter into derivative financial instruments to manage exposures that
arise from business activities that result in the receipt or payment of future known and uncertain
cash amounts, the value of which are determined by interest rates. The Company’s derivative
financial instruments are used to manage differences in the amount, timing, and duration of the
Company’s known or expected cash receipts and its known or expected cash payments principally
related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest
expense and to manage its exposure to interest rate movements. To accomplish this objective, the
Company primarily uses interest rate swaps and caps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate
amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of
the agreements without exchange of the underlying notional amount. Interest rate caps designated as
cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates
rise above the strike rate on the contract in exchange for an up front premium.
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The effective portion of changes in the fair value of derivatives designated and that qualify
as cash flow hedges is recorded in “Accumulated Other Comprehensive Income/(Loss)” and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. During the three months ended March 31, 2011 and 2010, such derivatives were used
to hedge the variable cash flows associated with existing variable-rate debt. The ineffective
portion of the change in fair value of the derivatives is recognized directly in earnings. During
the three months ended March 31, 2011 and 2010, the Company recorded less than a $1,000 loss of
ineffectiveness in earnings attributable to reset date and index mismatches between the derivative
and the hedged item, and the fair value of interest rate swaps that were not zero at inception of
the hedging relationship.
Amounts reported in “Accumulated Other Comprehensive Income/(Loss)” related to derivatives
will be reclassified to interest expense as interest payments are made on the Company’s
variable-rate debt. Through March 31, 2012, the Company estimates that an additional $8.1 million
will be reclassified as an increase to interest expense.
As of March 31, 2011, the Company had the following outstanding interest rate derivatives that
were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):
Derivatives not designated as hedges are not speculative and are used to manage the Company’s
exposure to interest rate movements and other identified risks but do not meet the strict hedge
accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of
derivatives not designated in hedging relationships are recorded directly in earnings and resulted
in losses of $50,000 and $317,000 for the three months ended March 31, 2011 and 2010, respectively.
As of March 31, 2011, the Company had the following outstanding derivatives that were not
designated as hedges in qualifying hedging relationships (dollar amounts in thousands):
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as
well as their classification on the Consolidated Balance Sheets as of March 31, 2011 and December
31, 2010 (amounts in thousands):
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— (Continued)
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of
Operations
The tables below present the effect of the Company’s derivative financial instruments on the
Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (dollar
amounts in thousands):
Credit-risk-related Contingent Features
The Company has agreements with some of its derivative counterparties that contain a provision
where (1) if the Company defaults on any of its indebtedness, including default where repayment of
the indebtedness has not been accelerated by the lender, then the Company could also be declared in
default on its derivative obligations; or (2) the Company could be declared in default on its
derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due
to the Company’s default on the indebtedness.
Certain of the Company’s agreements with its derivative counterparties contain provisions
where if there is a change in the Company’s financial condition that materially changes the
Company’s creditworthiness in an adverse manner, the Company may be required to fully collateralize
its obligations under the derivative instrument.
The Company also has an agreement with a derivative counterparty that incorporates the loan
and financial covenant provisions of the Company’s indebtedness with a lender affiliate of the
derivative counterparty. Failure to comply with these covenant provisions would result in the
Company being in default on any derivative instrument obligations covered by the agreement.
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of March 31, 2011, the fair value of derivatives in a net liability position, which
includes accrued interest but excludes any adjustment for nonperformance risk, related to these
agreements was $4.9 million. As of March 31, 2011, the Company has not posted any collateral
related to these agreements. If the Company had breached any of these provisions at March 31,
2011, it would have been required to settle its obligations under the agreements at their
termination value of $4.9 million.
12. OTHER COMPREHENSIVE INCOME/(LOSS)
Components of other comprehensive income/(loss) during the three months March 31, 2011 and
2010 are as follows (in thousands):
13. STOCK BASED COMPENSATION
During the three months ended March 31, 2011 and 2010, we recognized $2.7 million and $2.9
million, respectively, as stock based compensation expense, which is inclusive of awards granted to
our outside directors.
14. COMMITMENTS AND CONTINGENCIES
Commitments
Real Estate Under Development
The following summarizes the Company’s real estate commitments at March 31, 2011 (dollars in
thousands):
Contingencies
Litigation and Legal Matters
The Company is subject to various legal proceedings and claims arising in the ordinary course
of business. The Company cannot determine the ultimate liability with respect to such legal
proceedings and claims at this time. The Company believes that such liability, to the extent not
provided for through insurance or otherwise, will not have a material adverse effect on our
financial condition, results of operations or cash flow.
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. REPORTABLE SEGMENTS
GAAP guidance requires that segment disclosures present the measure(s) used by the chief
operating decision maker to decide how to allocate resources and for purposes of assessing such
segments’ performance. UDR’s chief operating decision maker is comprised of several members of its
executive management team who use several generally accepted industry financial measures to assess
the performance of the business for our reportable operating segments.
UDR owns and operates multifamily apartment communities that generate rental and other
property related income through the leasing of apartment homes to a diverse base of tenants. The
primary financial measures for UDR’s apartment communities are rental income and net operating
income (“NOI”). Rental income represents gross market rent less adjustments for concessions,
vacancy loss and bad debt. NOI is defined as total revenues less direct property operating
expenses. UDR’s chief operating decision maker utilizes NOI as the key measure of segment profit or
loss.
UDR’s two reportable segments are same communities and non-mature/other communities:
Management evaluates the performance of each of our apartment communities on a same community
and non-mature/other basis, as well as individually and geographically. This is consistent with the
aggregation criteria under GAAP as each of our apartment communities generally has similar economic
characteristics, facilities, services, and tenants. Therefore, the Company’s reportable segments
have been aggregated by geography in a manner identical to that which is provided to the chief
operating decision maker.
All revenues are from external customers and no single tenant or related group of tenants
contributed 10% or more of UDR’s total revenues during the three months ended March 31, 2011 and
2010.
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accounting policies applicable to the operating segments described above are the same as
those described in Note 2, Significant Accounting Policies. The following table details rental
income and NOI for UDR’s reportable segments for the three months ended March 31, 2011 and 2010,
and reconciles NOI to loss from continuing operations per the Consolidated Statements of Operations
(dollars in thousands):
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UDR, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table details the assets of UDR’s reportable segments as of March 31, 2011
and December 31, 2010 (dollars in thousands):
Capital expenditures related to our same communities totaled $8.0 million and $8.3
million for the three months ended March 31, 2011 and 2010, respectively. Capital expenditures
related to our non-mature/other communities totaled $949,000 and $547,000 for the three months
ended March 31, 2011 and 2010, respectively.
Markets included in the above geographic segments are as follows:
16. SUBSEQUENT EVENTS
On April 1, 2011, the Company, through its subsidiary United Dominion Realty, L.P., closed on
an acquisition of a multifamily apartment community referred to as 10 Hanover Square, located in
New York City, New York. The community was acquired for $259.8 million, which included the
assumption of $192.0 million of debt and is comprised of 493 homes.
On April 5, 2011, the Company and the Operating Partnership completed a $500 million asset exchange
whereby UDR acquired one multifamily apartment community (227 homes), and the Operating Partnership
acquired two multifamily apartment communities (833 homes) and a parcel of land. The acquired
assets are: 388 Beale in San Francisco, CA (227 homes); 14 North in Peabody, MA (387 homes); and
Inwood West in Woburn, MA (446 homes). The communities were acquired for $263.0 million, which
included the assumption of $55.8 million of debt. UDR sold two multifamily apartment communities
(434 homes) and the Operating Partnership sold four multifamily apartment communities (984 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.
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UNITED DOMINION REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit data)
See accompanying notes to the consolidated financial statements.
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UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit data)
See accompanying notes to the consolidated financial statements.
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UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for unit data)
(Unaudited)
See accompanying notes to the consolidated financial statements.
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UNITED DOMINION REALTY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL AND COMPREHENSIVE INCOME/(LOSS)
(In thousands)
(Unaudited)
See accompanying notes to the consolidated financial statements.
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UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011 (Unaudited) 1. CONSOLIDATION AND BASIS OF PRESENTATION
Consolidation and Basis of Presentation
United Dominion Realty, L.P. (“UDR, L.P.”, the “Operating Partnership”, “we” or “our”) is a
Delaware limited partnership, that owns, acquires, renovates, develops, redevelops, manages, and
disposes of multifamily apartment communities generally located in high barrier-to-entry markets
located in the United States. The high barrier-to-entry markets are characterized by limited land
for new construction, difficult and lengthy entitlement process, expensive single-family home
prices and significant employment growth potential. UDR, L.P. is a subsidiary of UDR, Inc. (“UDR”
or the “General Partner”), a real estate investment trust under the Internal Revenue Code of 1986,
and through which UDR conducts a significant portion of its business. During the three months ended
March 31, 2011 and 2010, revenues of the Operating Partnership represented 50% and 57% of the
General Partner’s consolidated revenues. At March 31, 2011, the Operating Partnership’s apartment
portfolio consisted of 81 communities located in 19 markets consisting of 23,351 apartment homes.
Interests in UDR, L.P. are represented by Operating Partnership Units (“OP Units”). The
Operating Partnership’s net income is allocated to the partners, which is initially based on their
respective distributions made during the year and secondly, their percentage interests.
Distributions are made in accordance with the terms of the Amended and Restated Agreement of
Limited Partnership of United Dominion Realty, L.P. (the “Operating Partnership Agreement”), on a
per unit basis that is generally equal to the dividend per share on UDR’s common stock, which is
publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “UDR”.
As of March 31, 2011, there were 179,909,408 OP Units in the Operating Partnership
outstanding, of which, 174,847,440 or 97.2% were owned by UDR and affiliated entities and 5,061,968
or 2.8% were owned by non-affiliated limited partners. See Note 9, Capital Structure.
The accompanying interim unaudited consolidated financial statements have been prepared
according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain
information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States have been condensed
or omitted according to such rules and regulations, although management believes that the
disclosures are adequate to make the information presented not misleading. In the opinion of
management, all adjustments and eliminations necessary for the fair presentation of our financial
position as of March 31, 2011, and results of operations for the three months ended March 31, 2011
and 2010 have been included. Such adjustments are normal and recurring in nature. The interim
results presented are not necessarily indicative of results that can be expected for a full year.
The accompanying interim unaudited consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and related notes included in the Form 10-K for
the year ended December 31, 2010 filed by UDR with the SEC on February 23, 2011.
The accompanying interim unaudited consolidated financial statements are presented in
accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial
statements and the amounts of revenues and expenses during the reporting periods. Actual amounts
realized or paid could differ from those estimates. All intercompany accounts and transactions have
been eliminated in consolidation. Certain previously reported amounts have been reclassified to
conform to the current financial statement presentation.
The Operating Partnership evaluated subsequent events through the date its financial statements
were issued. Except as disclosed in Note 13, Subsequent Events, no other recognized or
non-recognized subsequent events were noted.
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UNITED DOMINION REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES
Accounting Policies
Revenue and real estate sales gain recognition
Rental income related to leases is recognized on an accrual basis when due from residents in
accordance with FASB ASC 840, Leases and SEC Staff Accounting Bulletin No. 104, “Revenue
Recognition”. Rental payments are generally due on a monthly basis and recognized when earned. The
Operating Partnership recognizes interest income, management and other fees and incentives when
earned, fixed and determinable.
The Operating Partnership accounts for sales of real estate in accordance with FASB ASC
360-20, Real Estate Sales. For sale transactions meeting the requirements for full accrual profit
recognition, such as the Operating Partnership no longer having continuing involvement in the
property, we remove the related assets and liabilities from our Consolidated Balance Sheets and
record the gain or loss in the period the transaction closes. For sale transactions that do not
meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of
the continuing involvement and account for the transaction under an alternate method of accounting.
Sales to entities in which we or our General Partner retain or otherwise own an interest are
accounted for as partial sales. If all other requirements for recognizing profit under the full
accrual method have been satisfied and no other forms of continuing involvement are present, we
recognize profit proportionate to the outside interest in the buyer and will defer the gain on the
interest we or our General Partner retain. The Operating Partnership will recognize any deferred
gain when the property is then sold to a third party. In transactions accounted by us as partial
sales, we determine if the buyer of the majority equity interest in the venture was provided a
preference as to cash flows in either an operating or a capital waterfall. If a cash flow
preference has been provided, we recognize profit only to the extent that proceeds from the sale of
the majority equity interest exceed costs related to the entire property.
Income taxes
The taxable income or loss of the Operating Partnership is reported on the tax returns of the
partners. Accordingly, no provision has been made in the accompanying financial statements for
federal or state income taxes on income that is passed through to the partners. However, any state
or local revenue, excise or franchise taxes that result from the operating activities of the
Operating Partnership are recorded at the entity level. The Operating Partnership’s tax returns are
subject to examination by federal and state taxing authorities. Net income for financial reporting
purposes differs from the net income for income tax reporting purposes primarily due to temporary
differences, principally real estate depreciation and the tax deferral of certain gains on property
sales. The differences in depreciation result from differences in the book and tax basis of
certain real estate assets and the differences in the methods of depreciation and lives of the real
estate assets.
The Operating Partnership adopted certain accounting guidance within ASC Topic 740, Income
Taxes, with respect to how uncertain tax positions should be recognized, measured, presented, and
disclosed in the financial statements. The guidance requires the accounting and disclosure of tax
positions taken or expected to be taken in the course of preparing the Operating Partnership’s tax
returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the
applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would
be recorded as a tax benefit or expense in the current year. Management of the Operating
Partnership is required to analyze all open tax years, as defined by the statute of limitations,
for all major jurisdictions, which include federal and certain states. The Operating Partnership
has no examinations in progress and none are expected at this time.
Management of the Operating Partnership has reviewed all open tax years (2006-2010) and major
jurisdictions and concluded the adoption of the new accounting guidance resulted in no impact to
the Operating Partnership’s financial position or results of operations. There is no tax liability
resulting from unrecognized tax benefits relating to uncertain income tax positions taken or
expected to be taken in future tax returns.
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UNITED DOMINION REALTY, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings per OP unit
Basic earnings per OP Unit is computed by dividing net income/(loss) attributable to general
and limited partner units by the weighted average number of general and limited partner units
(including redeemable OP Units) outstanding during the year. Diluted earnings per OP Unit reflects
the potential dilution that could occur if securities or other contracts to issue OP Units were
exercised or converted into OP Units or resulted in the issuance of OP Units that shared in the
earnings of the Operating Partnership. For the three months ended March 31, 2011 and 2010, there
were no dilutive instruments outstanding, and therefore, diluted earnings per OP Unit and basic
earnings per OP Unit are the same.
3. REAL ESTATE OWNED
Real estate assets owned by the Operating Partnership consists of income producing operating
properties and land held for future development. At March 31, 2011, the Operating Partnership
owned and consolidated 81 communities in 8 states plus the District of Columbia totaling 23,351
apartment homes. The following table summarizes the carrying amounts for our real estate owned (at
cost) as of March 31, 2011 and December 31, 2010 (dollar amounts in thousands):
The Operating Partnership did not have any acquisitions during the three months ended
March 31, 2011.
4. DISCONTINUED OPERATIONS
Discontinued operations represent properties that the Operating Partnership has either sold or
which management believes meet the criteria to be classified as held for sale. In order to be
classified as held for sale and reported as discontinued operations, a property’s operations and
cash flows have or will be divested to a third party by the Operating Partnership whereby UDR, L.P.
will not have any significant continuing involvement in the ownership or operation of the property
after the sale or disposition. The results of operations of the property are presented as
discontinued operations for all periods presented and do not impact the net earnings reported by
the Operating Partnership. Once a property is deemed as held for sale, depreciation is no longer
recorded. However, if the Operating Partnership determines that the property no longer meets the
criteria of held for sale, the Operating Partnership will recapture any unrecorded depreciation for
the property. The assets and liabilities of properties deemed as held for sale are presented
separately on the Consolidated Balance Sheets. Properties deemed as held for sale are reported at
the lower of their carrying amount or their estimated fair value less the costs to sell the assets.
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UNITED DOMINION REALTY, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Operating Partnership had four communities with 984 apartment homes classified as held for
disposition at March 31, 2011. The Operating Partnership did not dispose of any communities during
the three months ended March 31, 2011 and 2010.
5. DEBT
Our secured debt instruments generally feature either monthly interest and principal or
monthly interest-only payments with balloon payments due at maturity. For purposes of
classification in the following table, variable rate debt with a derivative financial instrument
designated as a cash flow hedge is deemed as fixed rate debt due to the Operating Partnership
having effectively established the fixed interest rate for the underlying debt instrument. Secured
debt consists of the following as of March 31, 2011 (dollars in thousands):
As of March 31, 2011, the General Partner had secured credit facilities with Fannie Mae
(“FNMA”) with an aggregate commitment of $1.4 billion with $1.2 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 March 31, 2011, $896.6 million of the outstanding balance was fixed at a
weighted average interest rate of 5.32% and the remaining balance of $260.5 million on these
facilities had a weighted average variable interest rate of 1.67%. $736.9 million of these credit
facilities were allocated to the Operating Partnership at March 31, 2011 based on the ownership of
the assets securing the debt.
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UNITED DOMINION REALTY, L.P.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Operating Partnership may from time to time acquire properties subject to fixed rate debt
instruments. In those situations, management will record the secured debt at its estimated fair
value and amortize any difference between the fair value and par to interest expense over the life
of the underlying debt instrument. The unamortized fair value adjustment of the fixed rate debt
instruments on the Operating Partnership’s properties was a net discount of $1.1 million at March
31, 2011 and December 31, 2010.
Fixed Rate Debt
Mortgage notes payable. Fixed rate mortgage notes payable are generally due in monthly
installments of principal and interest and mature at various dates from August 2011 through June
2016 and carry interest rates ranging from 5.03% to 5.94%.
Secured credit facilities. At March 31, 2011, the General Partner had borrowings against its
fixed rate facilities of $896.6 million of which $561.0 million was allocated to the Operating
Partnership based on the ownership of the assets securing the debt. As of March 31, 2011, the fixed
rate Fannie Mae credit facilities allocated to the Operating Partnership had a weighted average
fixed interest rate of 5.21%.
Variable Rate Debt
Mortgage notes payable. Variable rate mortgage notes payable are generally due in monthly
installments of principal and interest and mature at various dates from July 2013 through April
2016. Interest on the variable rate mortgage notes is based on LIBOR plus some basis points, which
translated into interest rates ranging from 1.11% to 3.89% at March 31, 2011.
Tax-exempt secured note payable. The variable rate mortgage note payable that secures
tax-exempt housing bond issues matures in March 2030. Interest on this note is payable in monthly
installments. The mortgage note payable has an interest rate of 1.05% as of March 31, 2011.
Secured credit facilities. At March 31, 2011, the General Partner had borrowings against its
variable rate facilities of $260.5 million of which $175.9 million was allocated to the Operating
Partnership based on the ownership of the assets securing the debt. As of March 31, 2011, the
variable rate borrowings under the Fannie Mae credit facilities allocated to the Operating
Partnership had a weighted average floating interest rate of 1.92%.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The aggregate maturities of the Operating Partnership’s secured debt due during each of the
next five calendar years and thereafter are as follows (dollars in thousands):
Guarantor on Unsecured Debt
The Operating Partnership is a guarantor on the General Partner’s unsecured credit facility,
with an aggregate borrowing capacity of $600 million, a $250 million term loan, and a $100 million
term loan. At March 31, 2011 and December 31, 2010, the outstanding balance under the unsecured
credit facility was $185.6 million and $31.8 million, respectively.
On September 30, 2010, the Operating Partnership guaranteed certain outstanding debt
securities of the General Partner. These guarantees provide that the Operating Partnership, as
primary obligor and not merely as surety, irrevocably and unconditionally guarantees to each holder
of the applicable securities and to the trustee and their successors and assigns under the
respective indenture (a) the full and punctual payment when due, whether as stated maturity, by
acceleration or otherwise, of all obligations of the General Partner under the respective indenture
whether for principal or interest on the securities (and premium, if any), and all other monetary
obligations of the General Partner under the respective indenture and the terms of the applicable
securities and (b) the full and punctual performance within the applicable grace periods of all
other obligations of the General Partner under the respective indenture and the terms of applicable
securities.
6. RELATED PARTY TRANSACTIONS
Receivable due from the General Partner
The Operating Partnership participates in the General Partner’s central cash management
program, wherein all the Operating Partnership’s cash receipts are remitted to the General Partner
and all cash disbursements are funded by the General Partner. In addition, other miscellaneous
costs such as administrative expenses are incurred by the General Partner on behalf of the
Operating Partnership. As a result of these various transactions between the Operating Partnership
and the General Partner, the Operating Partnership had a net receivable balance of $459.5 million
and $492.7 million at March 31, 2011 and December 31, 2010, respectively, which is reflected as a
reduction of capital on the Consolidated Balance Sheets.
Allocation of General and Administrative Expenses
The General Partner provides various general and administrative and other overhead services
for the Operating Partnership including legal assistance, acquisitions analysis, marketing and
advertising, and allocates these expenses to the Operating Partnership first on the basis of direct
usage when identifiable, with the remainder allocated based on its pro-rata portion of UDR’s total
apartment homes. During the three months ended March 31, 2011 and 2010, the general and
administrative expenses allocated to the Operating Partnership by UDR were $6.9 million and $6.1
million, respectively, and are included in “General and Administrative” and “Property Management” expenses on the
consolidated statements of operations. In the opinion of management, this method of allocation
reflects the level of services received by the Operating Partnership from the General Partner.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Guaranty by the General Partner
The Operating Partnership provided a “bottom dollar” guaranty to certain limited partners as
part of their original contribution to the Operating Partnership. The guaranty protects the tax
basis of the underlying contribution and is
reflected on the OP unitholder’s Schedule K-1 tax form. The guaranty was made in the form of a
loan from the General Partner to the Operating Partnership at an annual interest rate of 1.14% at
March 31, 2011 and 0.593% December 31, 2010. Interest payments are made monthly and the note is due
December 31, 2011. At March 31, 2011 and December 31, 2010, the note payable due to the General
Partner was $78.3 million.
7. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair value is based on the price that would be received to sell an asset or the exit price
that would be paid to transfer a liability in an orderly transaction between market participants at
the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable
inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which
are described below:
The estimated fair values of the Operating Partnership’s financial instruments either recorded
or disclosed on a recurring basis as of March 31, 2011 and December 31, 2010 are summarized as
follows (dollars in thousands):
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Instruments Carried at Fair Value
The fair values of interest rate swaps are determined using the market standard methodology of
netting the discounted future fixed cash receipts (or payments) and the discounted expected
variable cash payments (or receipts). The variable cash payments (or receipts) are based on an
expectation of future interest rates (forward curves) derived from observable market interest rate
curves. The fair values of interest rate options are determined using the market standard
methodology of discounting the future expected cash receipts that would occur if variable interest
rates rise above the strike rate of the caps. The variable interest rates used in the calculation
of projected receipts on the cap are based on an expectation of future interest rates derived from
observable market interest rate curves and volatilities.
The Operating Partnership incorporates credit valuation adjustments to appropriately reflect
both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair
value measurements. In adjusting the fair value of its derivative contracts for the effect of
nonperformance risk, the Operating Partnership has considered the impact of netting and any
applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and
guarantees.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Although the Operating Partnership has determined that the majority of the inputs used to
value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current
credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as
of March 31, 2011 and December 31, 2010, the Operating Partnership has assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its derivative positions
and has determined that the credit valuation adjustments are not significant to the overall
valuation of its derivatives. As a result, the Operating Partnership has determined that its
derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Financial Instruments Not Carried at Fair Value
At March 31, 2011, the fair values of cash and cash equivalents, restricted cash, accounts
receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and
prepaid rent, distributions payable and
accounts payable approximated their carrying values because of the short term nature of these
instruments. The estimated fair values of other financial instruments were determined by the
Operating Partnership using available market information and appropriate valuation methodologies.
Considerable judgment is necessary to interpret market data and develop estimated fair values.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts the
Operating Partnership would realize on the disposition of the financial instruments. The use of
different market assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
The General Partner estimates the fair value of our debt instruments by discounting the
remaining cash flows of the debt instrument at a discount rate equal to the replacement market
credit spread plus the corresponding treasury yields. Factors considered in determining a
replacement market credit spread include general market conditions, borrower specific credit
spreads, time remaining to maturity, loan-to-value ratios and collateral quality (Level 3).
The Operating Partnership records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the undiscounted cash
flows estimated to be generated by the future operation and disposition of those assets are less
than the net book value of those assets. Cash flow estimates are based upon historical results
adjusted to reflect management’s best estimate of future market and operating conditions and our
estimated holding periods. The net book value of impaired assets is reduced to fair value. The
General Partner’s estimates of fair value represent management’s estimates based upon Level 3
inputs such as industry trends and reference to market rates and transactions.
8. DERIVATIVES AND HEDGING ACTIVITY
Risk Management Objective of Using Derivatives
The Operating Partnership is exposed to certain risk arising from both its business operations
and economic conditions. The General Partner principally manages its exposures to a wide variety of
business and operational risks through management of its core business activities. The General
Partner manages economic risks, including interest rate, liquidity, and credit risk primarily by
managing the amount, sources, and duration of its debt funding and through the use of derivative
financial instruments. Specifically, the General Partner enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or
payment of future known and uncertain cash amounts, the value of which are determined by interest
rates. The General Partner’s and the Operating Partnership’s derivative financial instruments are
used to manage differences in the amount, timing, and duration of the General Partner’s known or
expected cash receipts and its known or expected cash payments principally related to the General
Partner’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The General Partner’s objectives in using interest rate derivatives are to add stability to
interest expense and to manage its exposure to interest rate movements. To accomplish this
objective, the General Partner primarily uses interest rate swaps and caps as part of its interest
rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the
receipt of variable-rate amounts from a counterparty in exchange for the General Partner making
fixed-rate payments over the life of the agreements without exchange of the underlying notional
amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate
amounts from a counterparty if interest rates rise above the strike rate on the contract in
exchange for an up front premium.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A portion of the General Partner’s interest rate derivatives have been allocated to the
Operating Partnership based on the General Partner’s underlying debt instruments allocated to the
Operating Partnership. (See Note 5, Debt.)
The effective portion of changes in the fair value of derivatives designated and that qualify
as cash flow hedges is recorded in “Accumulated Other Comprehensive Income/(Loss)” and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. During the three months ended March 31, 2011 and 2010, such derivatives were used
to hedge the variable cash flows associated with existing variable-rate debt. The ineffective
portion of the change in fair value of the derivatives is recognized directly in earnings. During
the three months ended March 31, 2011 and 2010, the Operating Partnership recorded less than $1,000
of ineffectiveness in earnings attributable to reset date and index mismatches between the
derivative and the hedged item.
Amounts reported in “Accumulated Other Comprehensive Income/(Loss)” related to derivatives
will be reclassified to interest expense as interest payments are made on the General Partner’s
variable-rate debt that is allocated to the Operating Partnership. During the next twelve months
through March 31, 2012, we estimate that an additional $4.5 million will be reclassified as an
increase to interest expense.
As of March 31, 2011, the Operating Partnership had the following outstanding interest rate
derivatives designated as cash flow hedges of interest rate risk (dollar amounts in thousands):
Derivatives not designated as hedges are not speculative and are used to manage the Company’s
exposure to interest rate movements and other identified risks but do not meet the strict hedge
accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of
derivatives not designated in hedging relationships are recorded directly in earnings and resulted
in loss of $22,000 for the three months ended March 31, 2011.
As of March 31, 2011, we had the following outstanding derivatives that were not designated as
hedges in qualifying hedging relationships (dollar amounts in thousands):
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Operating Partnership’s derivative financial
instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2011
and December 31, 2010.
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations
The tables below present the effect of the derivative financial instruments on the
Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (dollar
amounts in thousands):
Credit-risk-related Contingent Features
The General Partner has agreements with some of its derivative counterparties that contain a
provision where (1) if the General Partner defaults on any of its indebtedness, including default
where repayment of the indebtedness has not been accelerated by the lender, then the General
Partner could also be declared in default on its derivative obligations; or (2) the General Partner
could be declared in default on its derivative obligations if repayment of the underlying
indebtedness is accelerated by the lender due to the General Partner’s default on the indebtedness.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Certain of the General Partner ‘s agreements with its derivative counterparties contain
provisions where if there is a change in the General Partner’s financial condition that materially
changes the General Partner ‘s creditworthiness in an adverse manner, the General Partner may be
required to fully collateralize its obligations under the derivative instrument.
The General Partner also has an agreement with a derivative counterparty that incorporates the
loan and financial covenant provisions of the General Partner’s indebtedness with a lender
affiliate of the derivative counterparty. Failure to comply with these covenant provisions would
result in the General Partner being in default on any derivative instrument obligations covered by
the agreement.
As of March 31, 2011, the fair value of derivatives in a net liability position that were
allocated to the Operating Partnership, which includes accrued interest but excludes any adjustment
for nonperformance risk, related to these
agreements was $4.7 million. As of March 31, 2011, the General Partner has not posted any
collateral related to these agreements. If the General Partner had breached any of these
provisions at March 31, 2011, it would have been required to settle its obligations under the
agreements at their termination value of $4.7 million.
9. CAPITAL STRUCTURE
General Partnership Units
The General Partner has complete discretion to manage and control the operations and business
of the Operating Partnership, which includes but is not limited to the acquisition and disposition
of real property, construction of buildings and making capital improvements, and the borrowing of
funds from outside lenders or UDR and its subsidiaries to finance such activities. The General
Partner can generally authorize, issue, sell, redeem or purchase any OP Unit or securities of the
Operating Partnership without the approval of the limited partners. The General Partner can also
approve, with regard to the issuances of OP units, the class or one or more series of classes, with
designations, preferences, participating, optional or other special rights, powers and duties
including rights, powers and duties senior to limited partnership interests without approval of any
limited partners except holders of Class A Partnership Units. There were 110,883 OP units
outstanding at March 31, 2011 and December 31, 2010, all of which were held by UDR.
Limited Partnership Units
At March 31, 2011 and December 31, 2010, there were 179,798,525 limited partnership units outstanding,
of which 1,751,671 were Class A Limited Partnership units. UDR owned 174,736,557 or 97.2% at March
31, 2011 and December 31, 2010, respectively. The remaining 5,061,968 or 2.8% OP Units outstanding
were held by non-affiliated partners at March 31, 2011 and December 31, 2010 of which 1,751,671,
respectively, were Class A Limited Partnership units.
The limited partners have the right to require the Operating Partnership to redeem all or a
portion of the OP Units held by the limited partner at a redemption price equal to and in the form
of the Cash Amount (as defined in the Operating Partnership Agreement), provided that such OP Units
have been outstanding for at least one year. UDR, as general partner of the Operating Partnership
may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash
Amount or the REIT Share Amount (generally one share of common stock of UDR for each OP Unit), as
defined in the Operating Partnership Agreement.
The non-affiliated limited partners’ capital is adjusted to redemption value at the end of
each reporting period with the corresponding offset against the UDR limited partner capital account
based on the redemption rights noted above. The aggregate value upon redemption of the
then-outstanding OP Units held by limited partners was $123.4 million and $119.1 million as of
March 31, 2011 and December 31, 2010, respectively, based on the value of UDR’s common stock at
each period end. Once an OP Unit has been redeemed, the redeeming partner has no right to receive
any distributions from the Operating Partnership on or after the date of redemption.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Class A Limited Partnership Units
Class A Partnership units have a cumulative, annual, non-compounded preferred return, which is
equal to 8% based on a value of $16.61 per Class A Partnership unit.
Holders of the Class A Partnership Units exclusively possess certain voting rights. The
Operating Partnership may not perform the following without approval of the holders of the Class A
Partnership Units: (i) increase the authorized or issued amount of Class A Partnership Units, (ii)
reclassify any other partnership interest into Class A Partnership Units, (iii) create, authorize
or issue any obligations or security convertible into or the right to purchase any Class
Partnership units, without the approval of the holders of the Class A Partnership Units, (iv) enter
into a merger or acquisition, or (v) amend or modify the Agreement of Limited Partnership of the
Operating Partnership in a manner that adversely affects the relative rights, preferences or
privileges of the Class A Partnership Units.
Allocation of profits and losses
Profit of the Operating Partnership is allocated in the following order: (i) to the General
Partner and the Limited Partners in proportion to and up to the amount of cash distributions made
during the year, and (ii) to the General Partner and Limited Partners in accordance with their
percentage interests. Losses and depreciation and amortization expenses, non-recourse liabilities
are allocated to the General Partner and Limited Partners in accordance with their percentage
interests. Losses allocated to the Limited Partners are capped to the extent that such an
allocation would not cause a deficit in the Limited Partners capital account. Such losses are,
therefore, allocated to the General Partner. If any Partner’s capital balance were to fall into a
deficit any income and gains are allocated to each Partner sufficient to eliminate its negative
capital balance.
10. OTHER COMPREHENSIVE (LOSS)/INCOME
Components of other comprehensive (loss)/income during the three months March 31, 2011 and
2010 are as follows (in thousands):
11. COMMITMENTS AND CONTINGENCIES
Contingencies
Litigation and Legal Matters
The Operating Partnership is subject to various legal proceedings and claims arising in the
ordinary course of business. The Operating Partnership cannot determine the ultimate liability with
respect to such legal proceedings and claims at this time. The General Partner believes that such
liability, to the extent not provided for through insurance or otherwise, will not have a material
adverse effect on the Operating Partnership’s financial condition, results of operations or cash
flow.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. REPORTABLE SEGMENTS
FASB ASC Topic 280, Segment Reporting, requires that segment disclosures present the
measure(s) used by the chief operating decision maker to decide how to allocate resources and for
purposes of assessing such segments’ performance. The Operating Partnership has the same chief
operating decision maker as that of its parent, the General Partner. The chief operating decision
maker consists of several members of UDR’s executive management team who use several generally
accepted industry financial measures to assess the performance of the business for our reportable
operating segments.
The Operating Partnership owns and operates multifamily apartment communities throughout the
United States that generate rental and other property related income through the leasing of
apartment homes to a diverse base of tenants. The primary financial measures of the Operating
Partnership’s apartment communities are rental income
and net operating income (“NOI”), and are included in the chief operating decision maker’s
assessment of UDR’s performance on a consolidated basis. Rental income represents gross market rent
less adjustments for concessions, vacancy loss and bad debt. NOI is defined as total revenues less
direct property operating expenses. The chief operating decision maker utilizes NOI as the key
measure of segment profit or loss.
The Operating Partnership’s two reportable segments are same communities and non-mature/other
communities:
Management evaluates the performance of each of our apartment communities on a same community
and non-mature/other basis, as well as individually and geographically. This is consistent with the
aggregation criteria of Topic 280 as each of our apartment communities generally has similar
economic characteristics, facilities, services, and tenants. Therefore, the Operating Partnership’s
reportable segments have been aggregated by geography in a manner identical to that which is
provided to the chief operating decision maker.
All revenues are from external customers and no single tenant or related group of tenants
contributed 10% or more of the Operating Partnership’s total revenues during the three months ended
March 31, 2011 and 2010.
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accounting policies applicable to the operating segments described above are the same as
those described in Note 1, “Summary of Significant Accounting Policies.” The following table
details rental income and NOI for the Operating Partnership’s reportable segments for the three
months ended March 31, 2011 and 2010, and reconciles NOI to income from continuing and discontinued
operations per the consolidated statement of operations (dollars in thousands):
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NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table details the assets of the Operating Partnership’s reportable segments as
of March 31, 2011 and December 31, 2010 (dollars in thousands):
Capital expenditures related to the Operating Partnership’s same communities totaled $5.5
million and $4.8 million for the three months ended March 31, 2011 and 2010, respectively. Capital
expenditures related to the Operating Partnership’s non-mature/other communities totaled $257,000
and $287,000 for the three months ended March 31, 2011 and 2010, respectively.
Markets included in the above geographic segments are as follows:
13. SUBSEQUENT EVENTS
On
April 1, 2011, UDR, through its subsidiary United Dominion Realty, L.P., closed on an acquisition of a multifamily
apartment community referred to as 10 Hanover Square, located in New York City, New York. The
community was acquired for $259.8 million, which included the assumption of $192.0 million of debt
and is comprised of 493 homes.
On April 5, 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); 14 North in Peabody, MA (387 homes); and Inwood West in
Woburn, MA (446 homes). The communities were acquired for $263.0 million, which included the
assumption of $55.8 million of debt. 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.
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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,” “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, unanticipated
adverse business developments affecting us, or our properties, adverse changes in the real estate
markets and general and local economies and business conditions.
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 II, Item 1A. Risk Factors. We encourage investors to review these risk factors.
Although we believe that the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements
included in this Report may not prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that the results or conditions
described in such statements or our objectives and plans will be achieved.
Forward-looking statements and such risks, uncertainties and other factors speak only as of
the date of this Report, and we expressly disclaim any obligation or undertaking to update or
revise any forward-looking statement contained herein, to reflect any change in our expectations
with regard thereto, or any other change in events, conditions or circumstances on which any such
statement is based, except to the extent otherwise required by law.
UDR, INC.:
Business Overview
UDR, Inc. is a real estate investment trust, or REIT, that owns, acquires, renovates,
develops, and manages apartment communities. We were formed in 1972 as a Virginia corporation. In
September 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.
Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the
Company,” or “UDR” refer collectively to UDR, Inc., its subsidiaries and its consolidated joint
ventures.
At March 31, 2011, our consolidated real estate portfolio included 172 communities with 48,553
apartment homes and our total real estate portfolio, inclusive of our unconsolidated communities,
included an additional 37 communities with 9,891 apartment homes.
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The following table summarizes our market information by major geographic markets as of March
31, 2011.
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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 March 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 2009 or 2010, 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.
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. Historically, 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 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.
On September 15, 2009, the Company entered into an equity distribution agreement under which
the Company may offer and sell up to 15 million shares of its common stock over time to or through
its sales agents. During the three months ended March 31, 2011, we sold 4,043,746 shares of common
stock through this program for aggregate gross proceeds of approximately $96.2 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 $2.0 million,
were approximately $94.2 million, and were used for general corporate purposes. The remaining
351,855 shares were sold prior to and settled subsequent to March 31, 2011.
On March 31, 2011, the Company entered into a new equity distribution agreement under which
the Company may offer and sell up to 20 million shares of its common stock over time to or through
its sales agents. No shares were sold through this program during the three months ended March 31,
2011. Subsequent to March 31, 2011, we sold 2,153,044 shares of common stock through this program.
Proceeds from the sale of shares through these programs are expected to fund general corporate
expenses.
Future Capital Needs
Future development and redevelopment expenditures may be funded through joint ventures,
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.
Future development expenditures are also expected to be funded with proceeds from construction
loans. Acquisition activity in strategic markets is expected to be largely financed 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.
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During the remainder of 2011, we have approximately $12.1 million of secured debt maturing,
inclusive of principal amortization and net of extension rights of $111.5 million and $96.2 million
of unsecured debt maturing, net of $156.9 million of convertible debt due 2035, which was redeemed
on April 4, 2011. We anticipate repaying that debt with cash flow from our operations, proceeds
from debt and equity offerings and by exercising extension rights with respect to the secured debt.
Critical Accounting Policies and Estimates
Our critical accounting policies are those having the most impact on the reporting of our
financial condition and results and those requiring significant judgments and estimates. These
policies include those related to (1) capital expenditures, (2) impairment of long-lived assets,
(3) real estate investment properties, and (4) revenue recognition.
Our other critical accounting policies are described in more detail in the section entitled
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in UDR’s
Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 23,
2011. There have been no significant changes in our critical accounting policies from those
reported in our Form 10-K filed with the SEC on February 23, 2011. With respect to these critical
accounting policies, we believe that the application of judgments and assessments is consistently
applied and produces financial information that fairly depicts the results of operations for all
periods presented.
Statements of Cash Flow
The following discussion explains the changes in net cash provided by operating activities,
net cash used in investing activities, and net cash provided by financing activities that are
presented in our Consolidated Statements of Cash Flows.
Operating Activities
For the three months ended March 31, 2011, our net cash flow provided by operating activities
was $48.0 million compared to $41.5 million for the comparable period in 2010. The increase in cash
flow from operating activities is primarily due to increases in receivables and prepaid expenses.
Investing Activities
For the three months ended March 31, 2011, net cash used in investing activities was $56.9
million compared to $57.4 million for the comparable period in 2010. The change in cash used for
investing activities was due to changes in the level of investment activities, which reflect our
strategy as it relates to acquisitions, capital expenditures, and development activities partially
offset by the payment of $16.1 million to acquire a partner’s interests in joint ventures, all of
which are discussed in further detail throughout this Report.
Acquisitions and Dispositions
The Company did not acquire or dispose of any properties during the three months ended March
31, 2011 and 2010.
On April 1, 2011, the Company, through its subsidiary United Dominion Realty, L.P., closed on
an acquisition of a multifamily apartment community referred to as 10 Hanover Square, located in
New York City, New York. The community was acquired for $259.8 million, which included the
assumption of $192.0 million of debt and is comprised of 493 homes.
On April 5, 2011, the Company and the Operating Partnership completed a $500 million asset
exchange whereby UDR acquired one multifamily apartment community (227 homes), and the Operating
Partnership acquired two multifamily apartment communities (833 homes) and a parcel of land. The
acquired assets are: 388 Beale in San Francisco, CA (227 homes); 14 North in Peabody, MA (387
homes); and Inwood West in Woburn, MA (446 homes). The communities were acquired for $263.0
million, which included the assumption of $55.8 million of debt. UDR sold two multifamily
apartment communities (434 homes) and the Operating Partnership sold four multifamily apartment
communities (984 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.
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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 Boston, California, Metropolitan D.C., New York, and
Washington state 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 favorable job formation, low single-family home affordability
and favorable demand/supply ratio for multifamily housing.
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 three months ended March 31, 2011, $6.7 million or $143 per 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 $7.1 million for the
three months ended March 31, 2011. Total capital expenditures, which in aggregate include recurring
capital expenditures and major renovations, of $13.8 million or $294 per home was spent on all of
our communities, excluding development and commercial properties, for the three months ended March
31, 2011.
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 three months ended March 31, 2011 and 2010:
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 2011 are currently expected to be approximately $1,050 per home.
Development
At March 31, 2011, our development pipeline for wholly-owned communities totaled 930 homes
with a budget of $338.9 million in which we have a carrying value of $112.5 million. We anticipate
the completion of these communities through the third quarter of 2013.
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Consolidated Joint Ventures
UDR is a partner with an unaffiliated third party in a joint venture (“989 Elements”) which
owns and operates a 23-story, 166 home high-rise apartment community in the central business
district of Bellevue, Washington. In March 2010, the Company paid $7.7 million to acquire our
partner’s 49% interest in the joint venture. At March 31, 2011 and December 31, 2010, the Company’s
interest in 989 Elements was 98%.
UDR is a partner with an unaffiliated third party in a joint venture (“Elements Too”) which
owns and operates a 274 home apartment community in the central business district of Bellevue,
Washington. Construction began in the fourth quarter of 2006 and was completed in the first
quarter of 2010. In March 2010, the Company paid $3.2 million to acquire our partner’s 49% interest
in the joint venture. At March 31, 2011 and December 31, 2010, the Company’s interest in Elements
Too was 98%.
UDR is a partner with an unaffiliated third party in a joint venture (“Bellevue”) which owns
an operating retail site in Bellevue, Washington. The Company initially planned to develop a 430
home high rise apartment building with ground floor retail on an existing operating retail center.
However, the joint venture subsequently decided to continue to operate the retail property as
opposed to developing a high rise apartment building on the site. In March 2010, the Company paid
$5.2 million to acquire our partner’s 49% interest in the joint venture. At March 31, 2011 and
December 31, 2010, the Company’s interest in Bellevue was 98%.
For additional information regarding these joint ventures, see Note 5, Joint Ventures, in the
Consolidated Financial Statements of UDR, Inc. included in this Report.
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 venture.
In addition, we may earn fees for providing management services to the unconsolidated joint
ventures. As of March 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 (the “UDR/MetLife Partnership”). The UDR/MetLife
Partnership owns a portfolio of 26 operating communities containing 5,748 apartment homes and 11
land parcels with the potential to develop approximately 2,300 additional apartment homes. Under
the terms of the UDR/MetLife Partnership, UDR acts as the general partner and earns fees for
property and asset management and financing transactions.
UDR acquired a weighted average ownership interest of 12.27% in the operating communities and 4.14% in
the land parcels for $100.8 million. The initial investment of $100.8 million consists of $71.8
million in cash, which includes associated transaction costs, and a $30 million payable (includes
discount of $1 million) to Hanover. UDR agreed to pay the $30 million balance to Hanover in two
interest free installments in the amounts of $20 million and $10 million on the first and second
anniversaries of the closing, respectively. The $30 million payable was recorded at its present
value of $29 million using an effective interest rate of 2.67%. At March 31, 2011 and December 31,
2010, the net carrying value of the payable was $29.3 million and $29.1 million, respectively.
Interest expense of $195,000 was recorded during the three months ended March 31, 2011. At March
31, 2011 and December 31, 2010, the Company’s investment was $121.9 million and $122.2 million,
respectively.
UDR’s total cost of its equity investment of $100.8 million differed from its proportionate
share in the underlying net assets of the UDR/MetLife Partnership of $111.4 million. The difference
of $10.6 million was attributable to certain assets and adjustments were allocated to UDR’s
proportionate share in the UDR/MetLife Partnership’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 is 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 three months ended March 31, 2011, the Company
recorded $396,000 of amortization.
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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 $304 million in loans ($333
million outstanding at March 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 balance of these loans will be refinanced
by the UDR/MetLife Partnership over the next twelve months.
In October 2010, the Company entered into a venture with an affiliate of Hanover to develop a
240-home community in Stoughton, Massachusetts. At March 31, 2011 and December 31, 2010, UDR owned
a noncontrolling interest of 95% in the joint venture. Our initial investment was $10 million. Our
investment at March 31, 2011 and December 31, 2010 was $12.8 million and $10.3 million,
respectively.
UDR is a partner with an unaffiliated third party, which formed a joint venture for the
investment of up to $450 million in multifamily properties located in key, high barrier to entry
markets. The partners will contribute equity of $180 million of which the Company’s maximum equity
will be 30% or $54 million when fully invested. In 2010, the joint venture acquired its first
property (151 homes) located in Metropolitan Washington D.C.. At March 31, 2011 and December 31,
2010, the Company owned a 30% interest in the joint venture. Our investment at March 31, 2011 and
December 31, 2010 was $5.1 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 March
31, 2011 and December 31, 2010 was $9.3 million and $10.3 million, respectively.
For additional information regarding these joint ventures, see Note 5, Joint Ventures, in the
Consolidated Financial Statements of UDR, Inc. included in this Report.
Disposition of Investments
During the three months ended March 31, 2011, the Company did not dispose of any apartment
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 three months ended March 31, 2011, our net cash provided by financing activities was
$11.1 million compared to $29.8 million for the comparable period of 2010.
The following significant financing activities occurred during the three months ended March
31, 2011:
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Credit Facilities
As of March 31, 2011, we have secured credit facilities with Fannie Mae with an aggregate
commitment of $1.4 billion with $1.2 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 $896.6 million of
the funded balance fixed at a weighted average interest rate of 5.32% and the remaining balance on
these facilities is currently at a weighted average variable rate of 1.67%.
We have a $600 million unsecured revolving credit facility that matures on July 26, 2012.
Under certain circumstances, we may increase the $600 million credit facility to $750 million.
Based on our current credit rating, the $600 million credit facility carries an interest rate equal
to LIBOR plus 47.5 basis points. In addition, the unsecured credit facility contains a provision
that allows us to bid up to 50% of the commitment and we can bid out the entire unsecured credit
facility once per quarter so long as we maintain an investment grade rating. As of March 31, 2011,
we had $185.6 million of borrowings outstanding under the credit facility leaving $414.4 million of
unused capacity (excluding $1.7 million of letters of credit at March 31, 2011).
The Fannie Mae credit facilities and the bank revolving credit facility are subject to
customary financial covenants and limitations.
Derivative Instruments
As part of UDR’s overall interest rate risk management strategy, we use derivatives as a means
to fix the interest rates of variable rate debt obligations or to hedge anticipated financing
transactions. UDR’s derivative transactions used for interest rate risk management include
interest rate swaps with indexes that relate to the pricing of specific financial instruments of
UDR. We believe that we have appropriately controlled our interest rate risk through the use of
derivative instruments to minimize any unintended effect on consolidated earnings. Derivative
contracts did not have a material impact on the results of operations during the three months ended
March 31, 2011 (see Note 11, Derivatives and Hedging Activity in the Consolidated Financial
Statements of UDR, Inc. included in this Report).
Funds from Operations
Funds from operations, or FFO, is defined as net income (computed in accordance with GAAP),
excluding 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.
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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, 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.
The following table outlines our FFO calculation and reconciliation to GAAP for the three
months ended March 31, 2011 and 2010 (dollars in thousands):
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