UDR-2013.3.31-10Q (1)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number
1-10524 (UDR, Inc.)
333-156002-01 (United Dominion Realty, L.P.)
UDR, Inc.
United Dominion Realty, L.P.
(Exact name of registrant as specified in its charter)
Maryland (UDR, Inc.)
 
54-0857512
Delaware (United Dominion Realty, L.P.)
 
54-1776887
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation of organization)
 
Identification No.)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
(720) 283-6120
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
UDR, Inc.
 
Yes x No o
United Dominion Realty, L.P.
 
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
UDR, Inc.
 
Yes x No o
United Dominion Realty, L.P.
 
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.:
 
 
 
 
 
 
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
United Dominion Realty, L.P.:
 
 
 
 
 
 
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
UDR, Inc.
 
Yes o No x
United Dominion Realty, L.P.
 
Yes o No x
The number of shares of UDR, Inc.’s common stock, $0.01 par value, outstanding as of April 26, 2013 was 250,744,241.

Table of Contents

UDR, INC.
UNITED DOMINION REALTY, L.P.
INDEX
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 4. Mine Safety Disclosures
 
 
 
 
 
 
 
 
Exhibit 10.1
 
Exhibit 12.1
 
Exhibit 12.2
 
Exhibit 31.1
 
Exhibit 31.2
 
Exhibit 31.3
 
Exhibit 31.4
 
Exhibit 32.1
 
Exhibit 32.2
 
Exhibit 32.3
 
Exhibit 32.4
 

Table of Contents

EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2013 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, including its taxable REIT subsidiary ("TRS"), RE3, whose activities include development of land and land entitlement. UDR acts as the sole general partner of the Operating Partnership, holds interests in subsidiaries and joint ventures, owns and operates properties, issues securities from time to time and guarantees debt of certain of our subsidiaries. The Operating Partnership conducts the operations of a substantial portion of the business and is structured as a partnership with no publicly traded equity securities. The Operating Partnership has guaranteed certain outstanding securities of UDR.
As of March 31, 2013, UDR owned 110,883 units (100%) of the general partnership interests of the Operating Partnership and 174,844,389 units (or approximately 94.9%) of the limited partnership interests of the Operating Partnership (the “OP Units”). UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and being the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are provided for each of UDR and the Operating Partnership.





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

 
March 31,
2013
 
December 31,
2012
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Real estate owned:
 
 
 
Real estate held for investment
$
7,729,300

 
$
7,564,780

Less: accumulated depreciation
(2,006,349
)
 
(1,923,429
)
Real estate held for investment, net
5,722,951

 
5,641,351

Real estate under development (net of accumulated depreciation of $1,133 and $1,253)
451,683

 
489,795

Total real estate owned, net of accumulated depreciation
6,174,634

 
6,131,146

Cash and cash equivalents
7,121

 
12,115

Restricted cash
24,628

 
23,561

Deferred financing costs, net
23,654

 
24,990

Notes receivable, net
66,193

 
64,006

Investment in and advances to unconsolidated joint ventures, net
461,397

 
477,631

Other assets
133,154

 
125,654

Total assets
$
6,890,781

 
$
6,859,103

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Secured debt
$
1,425,663

 
$
1,430,135

Unsecured debt
2,073,444

 
1,979,198

Real estate taxes payable
11,132

 
14,076

Accrued interest payable
29,404

 
30,937

Security deposits and prepaid rent
48,448

 
42,589

Distributions payable
61,907

 
57,915

Accounts payable, accrued expenses, and other liabilities
83,060

 
87,003

Total liabilities
3,733,058

 
3,641,853

 
 
 
 
Commitments and contingencies (Note 12)


 


 
 
 
 
Redeemable noncontrolling interests in operating partnership
225,595

 
223,418

 
 
 
 
Equity:
 
 
 
Preferred stock, no par value; 50,000,000 shares authorized
 
 
 
2,803,812 shares of 8.00% Series E Cumulative Convertible issued and outstanding (2,803,812 shares at December 31, 2012)
46,571

 
46,571

Common stock, $0.01 par value; 350,000,000 shares authorized 250,741,559 shares issued and outstanding (250,139,408 shares at December 31, 2012)
2,507

 
2,501

Additional paid-in capital
4,101,683

 
4,098,882

Distributions in excess of net income
(1,210,054
)
 
(1,143,781
)
Accumulated other comprehensive loss, net
(9,499
)
 
(11,257
)
Total stockholders’ equity
2,931,208

 
2,992,916

Noncontrolling interest
920

 
916

Total equity
2,932,128

 
2,993,832

Total liabilities and equity
$
6,890,781

 
$
6,859,103

See accompanying notes to consolidated financial statements.

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

 
 
Three Months Ended March 31,
 
 
2013
 
2012
 
 
 
 
 
REVENUES:
 
 
 
 
Rental income
 
$
184,301

 
$
172,242

 
 
 
 
 
Joint venture management and other fees
 
2,923

 
2,989

Total revenues
 
187,224

 
175,231

 
 
 
 
 
OPERATING EXPENSES:
 
 
 
 
Property operating and maintenance
 
35,461

 
34,389

Real estate taxes and insurance
 
23,524

 
20,911

Property management
 
5,068

 
4,737

Other operating expenses
 
1,643

 
1,383

Real estate depreciation and amortization
 
83,442

 
87,907

General and administrative
 
9,476

 
9,379

Hurricane-related (recoveries)/charges, net
 
(3,021
)
 
—

Other depreciation and amortization
 
1,146

 
918

Total operating expenses
 
156,739

 
159,624

 
 
 
 
 
Operating income
 
30,485

 
15,607

 
 
 
 
 
Loss from unconsolidated entities
 
(2,802
)
 
(2,691
)
Interest expense
 
(30,981
)
 
(34,745
)
Interest and other income, net
 
1,016

 
694

Loss before income taxes and discontinued operations
 
(2,282
)
 
(21,135
)
Tax benefit of taxable REIT subsidiary, net
 
1,973

 
22,876

(Loss)/income from continuing operations
 
(309
)
 
1,741

Income from discontinued operations, net of tax
 
—

 
84,887

Net (loss)/income
 
(309
)
 
86,628

Net loss/(income) attributable to redeemable noncontrolling interests in OP
 
45

 
(3,420
)
Net income attributable to noncontrolling interests
 
(4
)
 
(52
)
Net (loss)/income attributable to UDR, Inc.
 
(268
)
 
83,156

Distributions to preferred stockholders — Series E (Convertible)
 
(931
)
 
(931
)
Distributions to preferred stockholders — Series G
 
—

 
(1,377
)
Net (loss)/income attributable to common stockholders
 
$
(1,199
)
 
$
80,848

 
 
 
 
 
Income/(loss) per weighted average common share — basic and diluted:
 
 
 
 
Loss from continuing operations attributable to common stockholders
 
$
0.00

 
$
(0.02
)
Income from discontinued operations
 
$
0.00

 
$
0.38

Net (loss)/income attributable to common stockholders
 
$
0.00

 
$
0.37

 
 
 
 
 
Common distributions declared per share
 
$
0.235

 
$
0.220

 
 
 
 
 
Weighted average number of common shares outstanding — basic and diluted
 
249,917

 
221,500

See accompanying notes to consolidated financial statements.

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


 
Three Months Ended March 31,
 
2013
 
2012
Net (loss)/income
$
(309
)
 
$
86,628

Other comprehensive income/(loss), including portion attributable to noncontrolling interests:
 
 
 
Other comprehensive income/(loss) - derivative instruments:
 
 
 
Unrealized holding loss
(92
)
 
(1,959
)
Loss reclassified into earnings from other comprehensive income
1,937

 
1,855

Other comprehensive income/(loss), including portion attributable to noncontrolling interests
1,845

 
(104
)
Comprehensive income
1,536

 
86,524

Comprehensive (income) attributable to noncontrolling interests
(46
)
 
(3,405
)
Comprehensive income attributable to UDR, Inc.
$
1,490

 
$
83,119


See accompanying notes to consolidated financial statements.


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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paid-in Capital
 
Distributions in Excess of Net Income
 
Accumulated Other Comprehensive Income/(Loss), net
 
Noncontrolling Interest
 
Total
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2012
2,803,812

 
$
46,571

 
250,139,408

 
$
2,501

 
$
4,098,882

 
$
(1,143,781
)
 
$
(11,257
)
 
$
916

 
$
2,993,832

Net loss
—

 
—

 
—

 
—

 
—

 
(268
)
 
—

 
—

 
(268
)
Net income attributable to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
4

 
4

Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
1,758

 
 
 
1,758

Issuance of common and restricted shares, net
—

 
—

 
532,914

 
5

 
1,153

 
—

 
—

 
—

 
1,158

Adjustment for conversion of noncontrolling interest of unitholders in Operating Partnership
—

 
—

 
69,237

 
1

 
1,648

 
—

 
—

 
—

 
1,649

Common stock distributions declared ($0.235 per share)
—

 
—

 
—

 
—

 
—

 
(58,930
)
 
—

 
—

 
(58,930
)
Preferred stock distributions declared-Series E ($0.3322 per share)
—

 
—

 
—

 
—

 
—

 
(931
)
 
—

 
—

 
(931
)
Adjustment to reflect redemption value of redeemable noncontrolling interests
—

 
—

 
—

 
—

 
—

 
(6,144
)
 
—

 
—

 
(6,144
)
Balance at March 31, 2013
2,803,812

 
$
46,571

 
250,741,559

 
$
2,507

 
$
4,101,683

 
$
(1,210,054
)
 
$
(9,499
)
 
$
920

 
$
2,932,128

See accompanying notes to consolidated financial statements.

7
UDR, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
(Unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
 
 
 
 
Operating Activities
 
 
 
Net (loss)/income
$
(309
)
 
$
86,628

Adjustments to reconcile net (loss)/income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
84,588

 
95,165

Net gain on the sale of depreciable property, net of tax
—

 
(80,525
)
Tax benefit of taxable REIT subsidiary, net
(1,973
)
 
(22,876
)
Gain on debt extinguishment
—

 
(4,428
)
Loss from unconsolidated entities
2,802

 
2,691

Hurricane-related (recoveries)/charges, net
(548
)
 
—

Other
4,775

 
5,574

Changes in operating assets and liabilities:
 
 
 
(Increase)/decrease in operating assets
(3,269
)
 
3,272

Decrease in operating liabilities
(19,406
)
 
(15,487
)
Net cash provided by operating activities
66,660

 
70,014

 
 
 
 
Investing Activities
 
 
 
Development of real estate assets
(85,181
)
 
(56,519
)
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
(22,208
)
 
(25,897
)
Capital expenditures related to rehabilitation of hurricane-damaged assets
(2,592
)
 
—

Capital expenditures — non-real estate assets
(2,313
)
 
(1,092
)
Investment in unconsolidated joint ventures
(936
)
 
(259,156
)
Distributions received from unconsolidated joint ventures
14,393

 
940

Issuance of notes receivable
(2,180
)
 
(13,200
)
Proceeds from sales of real estate investments, net
—

 
130,571

Net cash used in investing activities
(101,017
)
 
(224,353
)
 
 
 
 
Financing Activities
 
 
 
Payments on secured debt
(3,199
)
 
(72,953
)
Proceeds from the issuance of secured debt
—

 
188

Payments on unsecured debt
—

 
(100,000
)
Proceeds from the issuance of unsecured debt
—

 
396,400

Net proceeds/(repayment) of revolving bank debt
94,000

 
(224,000
)
Proceeds from the issuance of common shares through public offering, net
—

 
200,623

Distributions paid to redeemable noncontrolling interests
(2,263
)
 
(2,231
)
Distributions paid to preferred stockholders
(931
)
 
(2,308
)
Distributions paid to common stockholders
(55,035
)
 
(47,314
)
Other
(3,209
)
 
(3,011
)
Net cash provided by financing activities
29,363

 
145,394

 
 
 
 
Net decrease in cash and cash equivalents
(4,994
)
 
(8,945
)
Cash and cash equivalents, beginning of period
12,115

 
12,503

Cash and cash equivalents, end of period
$
7,121

 
$
3,558

 
Three Months Ended March 31,
 
2013
 
2012
Supplemental Information:
 
 
 
 
 
 
 
Interest paid during the period, net of amounts capitalized
$
41,573

 
$
31,774

 
 
 
 
Non-cash transactions:
 
 
 
Conversion of operating partnership redeemable noncontrolling interests to common stock (69,237 shares in 2013 and 0 shares in 2012)
$
1,649

 
$
—

See accompanying notes to consolidated financial statements.

8
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013





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”). As of March 31, 2013, there were 184,281,253 units in the Operating Partnership outstanding, of which 174,955,272 units or 94.9% were owned by UDR and 9,325,981 units or 5.1% were owned by limited partners. The consolidated financial statements of UDR include the noncontrolling 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 note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of March 31, 2013, and results of operations for the three months ended March 31, 2013 and 2012 have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2012 appearing in UDR’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 27, 2013.
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. No recognized or non-recognized subsequent events were noted.

2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-10, Disclosures about Offsetting Assets and Liabilities. The objective of this update is to provide enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of this update. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either 1) offset on the balance sheet in accordance with the “Offsetting Guidance” in ASC 210-20-45 or ASC 815-10-45 (collectively, the offsetting guidance) or 2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether they are offset in accordance with the “Offsetting Guidance”. The amendments, which were adopted by the Company for the three months reporting period ended March 31, 2013, impact the Company's disclosures related to its derivative activities. (See Note 10, Derivatives and Hedging Activity.) The new guidance did not have any impact on the Company's consolidated financial position, results of operations, or cash flows.
In February 2012, the FASB issued ASU No. 2013-02, Other Comprehensive Income (Topic 220) to require preparers to report, in one place, information about reclassifications out of accumulated other comprehensive income. For significant items reclassified out of AOCI to net income in their entirety in the same reporting period, reporting (either on the face of the

9
Table of Contents
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



statement where net income is presented or in the notes thereto) is required about the effect of the reclassifications on the respective line items in the statement where net income is presented. For items that are not reclassified to net income in their entirety in the same reporting period, a cross reference to other existing disclosures is required in the notes. The amendments, which were adopted by us for the three months reporting period ended March 31, 2013, do not have any impact on the Company's consolidated financial position, results of operations, or cash flows. The accompanying consolidated financial statements include the required disclosures in the consolidated statement of comprehensive income/(loss) or in the notes thereto for each of the three months period ended March 31, 2013 and 2012.
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 GAAP. Rental payments are generally due on a monthly basis and recognized when earned. The Company recognizes interest income, management and other fees and incentives when earned, and the amounts are fixed and determinable.
The Company accounts for sales of real estate in accordance with GAAP. 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. Unless certain limited criteria are met, non-monetary transactions, including property exchanges, are accounted for at fair value.
Sales to entities in which we retain or otherwise own an interest are accounted for as partial sales. If all other requirements for recognizing profit under the full accrual method have been satisfied and no other forms of continuing involvement are present, we recognize profit proportionate to the outside interest in the buyer and defer the gain on the interest we retain. The Company recognizes any deferred gain when the property is sold to a third party. In transactions accounted for by us as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, we recognize profit only to the extent that proceeds from the sale of the majority equity interest exceed costs related to the entire property.
Notes Receivable
The following table summarizes our notes receivable as of March 31, 2013 and December 31, 2012 (in thousands):
 
Balance outstanding
 

 
March 31, 2013
 
December 31, 2012
 
Interest rate
Note due October 2014 - related party
$
24,481

 
$
24,481

 
2.95
%
Note due February 2017
14,580

 
13,200

 
10.00
%
Note due June 2022 (net of discount of $268 and $275)
26,232

 
26,225

 
7.00
%
Note due July 2017
900

 
100

 
8.00
%
Total notes receivable, net
$
66,193

 
$
64,006

 
 
The Company has a $24.5 million unsecured note receivable with one of its unconsolidated joint ventures, which bears an interest rate of one month LIBOR plus 2.75% per annum. Interest payments are due monthly. The note is due October 2014, and may be extended for one year.
The Company has a secured note receivable with an unaffiliated third party with an aggregate commitment of $14.6 million, which bears an interest rate of 10.00% per annum. During the three months ended March 31, 2013, the Company loaned an additional $1.4 million under the note. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $5.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (February 2017).

10
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



In 2012, the Company purchased mezzanine debt securing a mortgage on a class A community in West Los Angeles. The $26.5 million loan was purchased at a yield of 7.25% and bears a coupon rate of 7.00%. Interest payments are due monthly and the note is due June 2022. The discount is amortized using the effective interest method.
The Company has a secured note receivable with an unaffiliated third party with an aggregate commitment of $2.5 million, which bears an interest rate of 8.00% per annum. During the three months ended March 31, 2013, the Company loaned an additional $800,000 under the note. Interest payments are due monthly. The note matures at the earliest of the following: (a) the closing of any private or public capital raising in the amount of $5.0 million or greater; (b) an acquisition; (c) acceleration in the event of default; or (d) the fifth anniversary of the date of the note (July 2017).
During the three months ended March 31, 2013 and 2012, the Company recognized $1.0 million and $245,000 of interest income, net of accretion, from these notes receivable, of which $181,000 and $0 was related party interest income, respectively. Interest income is included in "Interest and other income, net" on the Consolidated Statements of Operations.
Comprehensive Income/(Loss)
Comprehensive income/(loss), which is defined as the change in equity during each period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Consolidated Statements of Comprehensive Income/(Loss). For the three months ended March 31, 2013 and 2012, the Company's other comprehensive income/(loss) consists of the loss (effective portion) on derivative instruments that are designated as and qualify as cash flow hedges, loss reclassified from accumulated other comprehensive income/(loss) into earnings, and the allocation of other comprehensive income/(loss) to redeemable noncontrolling interests. The loss reclassified from accumulated other income income/(loss) is included in interest expense incurred in the accompanying Consolidated Statements of Operations. See Note 10, Derivatives and Hedging Activity for further discussion. The allocation of other comprehensive income/(loss) to redeemable noncontrolling interests during the three months ended March 31, 2013 and 2012 was $87,000 and $(67,000), respectively.
Income Taxes
Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, no provision for federal income taxes has been provided for at UDR. Historically, the Company has generally incurred only state and local excise and franchise taxes. UDR has elected for certain consolidated subsidiaries to be treated as Taxable REIT Subsidiaries (“TRS”), 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 the timing of expense recognition for certain accrued liabilities. As of March 31, 2013, UDR recorded a net income tax receivable of $1.4 million and a deferred tax asset of $24.8 million (net of a valuation allowance of $1.4 million), which are classified in "Other assets" on the Consolidated Balance Sheets.

Prior to 2012, the TRS had a history of losses and, as a result, historically recognized a valuation allowance for net deferred tax assets.  Each quarter, the Company evaluates the need to retain all or a portion of the valuation allowance on its net deferred tax assets.  During the three months ended March 31, 2012, the Company determined that it was more likely than not that the deferred tax assets, including any remaining net operating loss carry forward, would be realized. In making this determination, the Company analyzed, among other things, its recent history of earnings from sales of depreciable property, forecasts of future earnings and its cumulative earnings for the last twelve quarters. The reversal of the valuation allowance resulted in an income tax benefit of $22.9 million during the three months ended March 31, 2012, which is reflected in continuing operations, and classified as "Tax benefit of taxable REIT subsidiary" in the Consolidated Statements of Operations. 
GAAP defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. GAAP also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



The Company recognizes its tax positions and evaluates them using a two-step process. First, UDR determines whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company will then determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.
UDR had no material unrecognized tax benefit, accrued interest or penalties at March 31, 2013. UDR and its subsidiaries are subject to federal income tax as well as income tax of various state jurisdictions. The tax years 2008 through 2011 remain open to examination by tax jurisdictions to which we are subject. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in 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, 2013, the Company owned and consolidated 143 communities in 10 states plus the District of Columbia totaling 41,750 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of March 31, 2013 and December 31, 2012 (dollar amounts in thousands):
 
March 31, 2013
 
December 31, 2012
Land
$
1,945,846

 
$
1,907,169

Depreciable property — held and used:
 
 
 
Building and improvements
5,502,984

 
5,384,971

Furniture, fixtures and equipment
280,470

 
272,640

Under development:
 
 
 
Land
119,750

 
151,154

Construction in progress
333,066

 
339,894

Real estate owned
8,182,116

 
8,055,828

Accumulated depreciation
(2,007,482
)
 
(1,924,682
)
Real estate owned, net
$
6,174,634

 
$
6,131,146


All development projects and related carrying costs are capitalized and reported on the Consolidated Balance Sheets as “Real estate under development.” The costs of development projects which include interest, real estate taxes, insurance and allocated development overhead related to support costs for personnel working directly on the development are capitalized during the construction period. These costs, excluding the direct costs of development and capitalized interest for the three months ended March 31, 2013 and 2012 were $3.0 million and $2.7 million, respectively. During the three months ended March 31, 2013 and 2012, total capitalized interest was $8.4 million and $4.9 million, respectively.

In October 2012, Hurricane Sandy hit the East Coast, affecting three of the Company’s operating communities (1,706 apartment homes) located in New York City. The properties suffered some physical damage, and were closed to residents for a period following the hurricane. The Company has insurance policies that provide coverage for property damage and business interruption.
Based on the claims filed and management’s estimates, the Company recognized a $9.0 million impairment charge for the damaged assets’ net book value and incurred $10.4 million of repair and cleanup costs during the year ended December 31, 2012. The impairment charge and the repair and cleanup costs incurred were reduced as of December 31, 2012 by $14.5 million of estimated insurance recovery, and were classified in “Hurricane related (recoveries)/charges, net” on the Consolidated Statements of Operations. During the three months ended March 31, 2013, no further impairment charge related to the damaged assets' net book value has been recognized. With the exception of one of the properties that is under redevelopment at March 31, 2013, the rehabilitation of the remaining two properties is expected to be completed in the third quarter of 2013. See Note 14, Hurricane Related (Recoveries)/Charges for additional information.

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013




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 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.
There were no sales during the three months ended March 31, 2013. During the three months ended March 31, 2012, the Company sold six communities with 1,576 apartment homes. The Company had no communities that met the criteria to be classified as held for sale and included in discontinued operations at March 31, 2013. During the three months ended March 31, 2012, UDR recognized gains (before tax) on the sale of communities for financial reporting purposes of $80.5 million, which are included in discontinued operations. The results of operations for sold properties are classified on the Consolidated Statements of Operations in the line item entitled “Income from discontinued operations, net of tax.” Discontinued operations for the three months ended March 31, 2012 also includes operating activities related to 14 communities (4,918 homes) sold during the second quarter of 2012.
The following is a summary of Income from discontinued operations, net of tax for the three months ended March 31, 2013 and 2012 (dollars in thousands):
 
Three Months Ended March 31,
 
2013
 
2012
Rental income
$
—

 
$
17,101

 
 
 
 
Rental expenses
—

 
5,929

Property management
—

 
470

Real estate depreciation
—

 
6,340

 
—

 
12,739

Income before net gain on the sale of depreciable property
—

 
4,362

Net gain on the sale of depreciable property, net of tax
—

 
80,525

Income from discontinued operations, net of tax
$
—

 
$
84,887


5. JOINT VENTURES
UDR has entered into joint ventures with unrelated third parties to acquire 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, and are included in "Investment in and advances to unconsolidated joint ventures, net" 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 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.

13
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



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.
The following table summarizes the Company’s investment in and advances to unconsolidated joint ventures, net which are accounted for under the equity method of accounting as of March 31, 2013 and December 31, 2012 (dollar amounts in thousands):
Joint Venture
 
Location of Properties
 
Number of Properties
 
Number of Apartment Homes
 
Investment at
 
UDR’s Ownership Interest
 
 
 
 
March 31, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating:
 
 
 
 
 
 
 
 
 
 
 
 
UDR/MetLife I
 
Various
 
14 communities
 
2,547

 
$
75,959

 
$
75,129

 
13.3
%
 
 
 
 
8 land parcels
 
N/A

 
 
 
 
 
4.3
%
UDR/MetLife II
 
Various
 
13 communities
 
2,752

 
311,005

 
327,001

 
50.0
%
Lodge at Stoughton
 
Stoughton, MA
 
1 community
 
240

 
16,162

 
16,311

 
95.0
%
KFH
 
Washington D.C.
 
3 communities
 
660

 
28,598

 
29,663

 
30.0
%
Texas JV
 
Texas
 
8 communities
 
3,359

 
2,608

 
3,457

 
20.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Development:
 
 
 
 
 
 
 
 
 
 
 
 
13th & Market
 
San Diego, CA
 
1 community
 
264

 
30,514

 
29,930

 
95.0
%
Domain College Park
 
College Park, MD
 
1 community
 
256

 
25,930

 
25,546

 
95.0
%
 
 
 
 
 
 
 
 
490,776

 
507,037

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred fees and gains on the sale of depreciable property
 
 
 
(29,379
)
 
(29,406
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total investment in and advances to unconsolidated joint ventures, net
 
 
 
$
461,397

 
$
477,631

 
 
As of March 31, 2013 and December 31, 2012, the Company had deferred fees and deferred profit from the sale of properties to joint ventures of $29.4 million, respectively, which will be recognized through earnings over the weighted average life of the related properties, or upon the disposition of the properties to a third party.
The Company recognized $2.7 million and $3.0 million of management fees during the three months ended March 31, 2013 and 2012, respectively, for our management of the joint ventures. The management fees are classified in “Joint venture management and other fees” in the Consolidated Statements of Operations.
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.
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 investments in unconsolidated joint ventures during the three months ended March 31, 2013 and 2012.

14
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



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, 2013 and 2012 (dollars in thousands):
 
Three Months Ended March 31,
 
2013
 
2012
 
 
 
 
Revenues
$
61,080

 
$
63,025

Real estate depreciation and amortization
21,778

 
25,885

Net loss
3,837

 
8,621

UDR recorded loss from unconsolidated entities
2,802

 
2,691

Combined summary balance sheets relating to all of the unconsolidated joint ventures (not just our proportionate share) are presented below as of March 31, 2013 and December 31, 2012 (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Real estate, net
$
3,181,823

 
$
3,189,814

Total assets
3,248,847

 
3,266,518

Amount due to UDR
30,310

 
34,843

Third party debt
1,676,444

 
1,663,427

Total liabilities
1,740,604

 
1,747,855

Total equity, inclusive of noncontrolling interest
1,508,243

 
1,518,663

Equity held by noncontrolling interest
12,490

 
12,755

UDR’s investment in unconsolidated joint ventures, net
461,397

 
477,631

Consolidated Joint Ventures
In January 2012, the Company formed a joint venture with an unaffiliated third party to acquire 399 Fremont (land for future development) in San Francisco, California. At closing, UDR owned a noncontrolling interest of 92.5% in the joint venture.The Company’s total investment was $55.5 million, which consists of its initial investment of $37.3 million and an option to acquire its partner’s 7.5% ownership interest in the joint venture. In October 2012, the Company exercised the option and paid $13.5 million, resulting in the consolidation of the joint venture at fair value. In January 2013, the Company subsequently acquired its partner's 7.5% ownership interest for $4.7 million.


15
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



6. SECURED AND UNSECURED DEBT
The following is a summary of our secured and unsecured debt at March 31, 2013 and December 31, 2012 (amounts in thousands):
 
Principal Outstanding
 
For the Three Months Ended March 31, 2013
 
 
 
Weighted Average
Interest Rate
 
Weighted Average
Years to Maturity
 
Number of Communities
Encumbered
 
March 31, 2013
 
December 31, 2012
 
 
 
 
 
 
 
 
Secured Debt:
 
 
 
 
 
 
 
 
 
 Fixed Rate Debt
 
 
 
 
 
 
 
 
 
  Mortgage notes payable (a)
$
453,076

 
$
455,533

 
5.41
%
 
3.3

 
8

  Fannie Mae credit facilities (c)
629,063

 
631,078

 
5.11
%
 
5.6

 
23

 Total fixed rate secured debt
1,082,139

 
1,086,611

 
5.24
%
 
4.6

 
31

 Variable Rate Debt
 
 
 
 
 
 
 
 
 
  Mortgage notes payable (b)
37,415

 
37,415

 
1.09
%
 
0.3

 
2

  Tax-exempt secured notes payable (d)
94,700

 
94,700

 
0.87
%
 
9.9

 
2

  Fannie Mae credit facilities (c)
211,409

 
211,409

 
2.06
%
 
5.3

 
7

 Total variable rate secured debt
343,524

 
343,524

 
1.63
%
 
6.1

 
11

 Total Secured Debt
1,425,663

 
1,430,135

 
4.37
%
 
5.0

 
42

 
 
 
 
 
 
 
 
 
 
Unsecured Debt:
 
 
 
 
 
 
 
 
 
 Commercial Banks
 
 
 
 
 
 
 
 
 
Borrowings outstanding under an unsecured credit facility due October 2015 (e), (f)
170,000

 
76,000

 
1.15
%
 
2.6

 
 
 Senior Unsecured Notes
 
 
 
 
 
 
 
 
 
4.63% Medium-Term Notes due January 2022 (net of discount of $3,151 and $3,241) (f)
396,849

 
396,759

 
4.63
%
 
8.8

 
 
1.64% Term Notes due January 2016 (f)
35,000

 
35,000

 
1.64
%
 
2.8

 
 
2.68% Term Notes due January 2016 (f)
65,000

 
65,000

 
2.68
%
 
2.8

 
 
6.05% Medium-Term Notes due June 2013
122,500

 
122,500

 
6.05
%
 
0.2

 
 
5.13% Medium-Term Notes due January 2014
184,000

 
184,000

 
5.13
%
 
0.8

 
 
5.50% Medium-Term Notes due April 2014 (net of discount of $71 and $89)
128,429

 
128,411

 
5.50
%
 
1.0

 
 
5.25% Medium-Term Notes due January 2015 (net of discount of $230 and $262)
324,945

 
324,913

 
5.25
%
 
1.8

 
 
5.25% Medium-Term Notes due January 2016
83,260

 
83,260

 
5.25
%
 
2.8

 
 
2.90% Term Notes due January 2016 (f)
250,000

 
250,000

 
2.90
%
 
2.8

 
 
8.50% Debentures due September 2024
15,644

 
15,644

 
8.50
%
 
11.5

 
 
4.25% Medium-Term Notes due June 2018 (net of discount of $2,215 and $2,322) (f)
297,785

 
297,678

 
4.25
%
 
5.2

 
 
Other
32

 
33

 
N/A

 
N/A

 
 
  Total Unsecured Debt
2,073,444

 
1,979,198

 
4.31
%
 
3.8

 
 
Total Debt
$
3,499,107

 
$
3,409,333

 
4.34
%
 
4.2

 
 

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 above table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively established a fixed interest rate for the underlying debt instrument. Secured debt encumbers $2.3 billion or 28.4% of UDR’s total real estate owned based upon gross book value ($5.9 billion or 71.6% of UDR’s real estate owned based on gross book value is unencumbered) as of March 31, 2013.

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



(a) At March 31, 2013, fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from December 2014 through May 2019 and carry interest rates ranging from 3.43% to 5.94%.
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. During the three months ended March 31, 2013 and 2012, the Company had $1.3 million and $1.1 million of a reduction to interest expense based on amortization on the fair market adjustment of debt assumed in acquisition of properties, respectively. The unamortized fair market adjustment was a net premium of $15.6 million and $16.9 million at March 31, 2013 and December 31, 2012, respectively.
(b) Variable rate mortgage notes payable are generally due in monthly installments of principal and interest and mature July 2013. The mortgage notes payable are based on LIBOR plus specified basis points, which translate into an interest rate of 1.09% at March 31, 2013.
(c) UDR has three secured credit facilities with Fannie Mae with an aggregate commitment of $929.3 million at March 31, 2013. The Fannie Mae credit facilities are for an initial term of 10 years (maturing at various dates from May 2017 through December 2019) and bear interest at floating and fixed rates. At March 31, 2013, we have $629.1 million of the outstanding balance fixed at a weighted average interest rate of 5.11% and the remaining balance of $211.4 million on these facilities is currently at a weighted average variable interest rate of 2.06%.
Further information related to these credit facilities is as follows (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Borrowings outstanding
$
840,472

 
$
842,487

Weighted average borrowings during the period ended
840,921

 
903,817

Maximum daily borrowings during the period ended
841,494

 
1,054,735

Weighted average interest rate during the period ended
4.4
%
 
4.3
%
Weighted average interest rate at the end of the period
4.3
%
 
4.4
%
(d) The variable rate mortgage notes payable that secure tax-exempt housing bond issues mature on August 2019 and March 2032, respectively. Interest on these notes is payable in monthly installments. The variable rate mortgage notes have interest rates of 0.86% and 0.90%, respectively, as of March 31, 2013.

(e) The Company has a $900 million unsecured revolving credit facility. The unsecured credit facility has an initial term of four years and includes a one-year extension option. It contains an accordion feature that allows the Company to increase the facility to $1.35 billion. The credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points.

The following is a summary of short-term bank borrowings under UDR’s bank credit facility at March 31, 2013 and December 31, 2012 (dollars in thousands):
 
March 31, 2013
 
December 31, 2012
Total revolving credit facility
$
900,000

 
$
900,000

Borrowings outstanding at end of period (1)
170,000

 
76,000

Weighted average daily borrowings during the period ended
118,268

 
167,038

Maximum daily borrowings during the period ended
184,500

 
788,000

Weighted average interest rate during the period ended
1.2
%
 
1.5
%
Interest rate at end of the period
1.2
%
 
1.4
%
(1) Excludes $2.5 million and $3.9 million of letters of credit at March 31, 2013 and December 31, 2012, respectively.

17
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013




(f) The Operating Partnership is a guarantor at March 31, 2013 and December 31, 2012.

The aggregate maturities, including amortizing principal payments of secured debt, of total debt for the next five calender years subsequent to March 31, 2013 are as follows (dollars in thousands):
Year
 
Total Fixed Secured Debt
 
Total Variable Secured Debt
 
Total Secured Debt
 
Total Unsecured Debt (a)
 
Total Debt
2013
 
$
8,928

 
$
37,415

 
$
46,343

 
$
121,776

 
$
168,119

2014
 
46,369

 
—

 
46,369

 
311,577

 
357,946

2015
 
197,229

 
—

 
197,229

 
494,389

 
691,618

2016
 
138,449

 
—

 
138,449

 
432,484

 
570,933

2017
 
178,378

 
65,000

 
243,378

 
—

 
243,378

Thereafter
 
512,786

 
241,109

 
753,895

 
713,218

 
1,467,113

Total
 
$
1,082,139

 
$
343,524

 
$
1,425,663

 
$
2,073,444

 
$
3,499,107

 
 
 
 
 
 
 
 
 
 
 
(a) With the exception of the 1.64% Term Notes due January 2016 and revolving credit facility which carry a variable interest rate, all unsecured debt carries fixed interest rates.
We were in compliance with the covenants of our debt instruments at March 31, 2013.

7. EARNINGS/(LOSS) PER SHARE
Basic and diluted (loss)/income per common share are computed based upon the weighted average number of common shares outstanding during the periods 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)/earnings per share for the periods presented (amounts in thousands, except per share data):
 
Three Months Ended March 31,
 
2013
 
2012
Numerator for earnings per share — basic and diluted:
 
 
 
Net (loss)/income attributable to common stockholders
$
(1,199
)
 
$
80,848

Denominator for earnings per share — basic and diluted:
 
 
 
Weighted average common shares outstanding
250,500

 
222,737

Non-vested restricted stock awards
(583
)
 
(1,237
)
Denominator for basic and diluted earnings per share
249,917

 
221,500

Net(loss)/income attributable to common stockholders
$
0.00

 
$
0.37

The effect of the conversion of the OP Units, convertible preferred stock, 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 attributable to common stockholders.


18
Table of Contents
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



The following table sets forth the additional shares of Common Stock outstanding by equity instrument if converted to Common Stock for each of the three months ended March 31, 2013 and 2012:

 
 
Three Months Ended March 31,
 
 
2013
 
2012
OP Units
 
9,381,025

 
9,421,302

Preferred Stock
 
3,035,548

 
3,035,548

Stock options and unvested restricted stock
 
1,293,358

 
1,958,716


8. NONCONTROLLING INTERESTS
Redeemable noncontrolling interests in operating partnership
Interests in the Operating Partnership 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 noncontrolling 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 Amended and Restated Agreement of Limited Partnership of the Operating Partnership (the “Operating 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 Operating 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):
Redeemable noncontrolling interests in the Operating Partnership, December 31, 2012
$
223,418

Mark to market adjustment to redeemable noncontrolling interests in the Operating Partnership
6,144

Conversion of OP Units to Common Stock
(1,649
)
Net loss attributable to redeemable noncontrolling interests in the Operating Partnership
(45
)
Distributions to redeemable noncontrolling interests in the Operating Partnership
(2,360
)
Allocation of other comprehensive income
87

Redeemable noncontrolling interests in the Operating Partnership, March 31, 2013
$
225,595


The following sets forth net income/(loss) attributable to common stockholders and transfers from redeemable noncontrolling interests in the Operating Partnership for the following periods (dollars in thousands):
 
 
March 31,
 
 
2013
 
2012
Net (loss)/income attributable to common stockholders
 
$
(1,199
)
 
$
80,848

Conversion of OP units to UDR Common Stock
 
1,649

 
—

Change in equity from net (loss)/income attributable to common stockholders and conversion of OP units to UDR Common Stock
 
$
450

 
80,848


19
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



Noncontrolling interests
Noncontrolling 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. During the three months ended March 31, 2013 and 2012, net income attributable to noncontrolling interests was $4,000 and $52,000.

9. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS
Fair value is based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
•
Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of March 31, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):
 
 
 
 
 
Fair Value at March 31, 2013, Using
 
Total Carrying Amount in Financial Position at March 31, 2013
 
Fair Value Estimate at March 31, 2013
 
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description:
 
 
 
 
 
 
 
 
 
Notes receivable (a)
$
66,193

 
$
67,172

 
$
—

 
$
—

 
$
67,172

Total assets
$
66,193

 
$
67,172

 
$
—

 
$
—

 
$
67,172

 
 
 
 
 
 
 
 
 
 
Derivatives- Interest rate contracts (b)
$
9,224

 
$
9,224

 
$
—

 
$
9,224

 
$
—

Secured debt instruments- fixed rate: (c)
 
 
 
 
 
 
 
 
 
Mortgage notes payable
453,076

 
487,297

 
—

 
—

 
487,297

Fannie Mae credit facilities
629,063

 
681,792

 
—

 
—

 
681,792

Secured debt instruments- variable rate: (c)
 
 
 
 
 
 
 
 
 
Mortgage notes payable
37,415

 
37,415

 
—

 
—

 
37,415

Tax-exempt secured notes payable
94,700

 
94,700

 
—

 
—

 
94,700

Fannie Mae credit facilities
211,409

 
211,409

 
—

 
—

 
211,409

Unsecured debt instruments: (c)
 
 
 
 
 
 
 
 
 
Commercial bank
170,000

 
170,000

 
—

 
—

 
170,000

Senior unsecured notes
1,903,444

 
2,050,809

 
—

 
—

 
2,050,809

Total liabilities
$
3,508,331

 
$
3,742,646

 
$
—

 
$
9,224

 
$
3,733,422

 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests (d)
$
225,595

 
$
225,595

 
$
—

 
$
225,595

 
$
—


20
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



 
 
 
 
 
Fair Value at December 31, 2012, Using
 
Total Carrying Amount in Financial Position at December 31, 2012
 
Fair Value Estimate at December 31, 2012
 
Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
 
 
 
Description:
 
 
 
 
 
 
 
 
 
Notes receivable (a)
$
64,006

 
$
64,930

 
$
—

 
$
—

 
$
64,930

Derivatives- Interest rate contracts (b)
2

 
2

 
—

 
2

 
—

Total assets
$
64,008

 
$
64,932

 
$
—

 
$
2

 
$
64,930

 
 
 
 
 
 
 
 
 
 
Derivatives- Interest rate contracts (b)
$
11,022

 
$
11,022

 
$
—

 
$
11,022

 
$
—

Secured debt instruments- fixed rate: (c)
 
 
 
 
 
 
 
 
 
Mortgage notes payable
455,533

 
494,728

 
—

 
—

 
494,728

Fannie Mae credit facilities
631,078

 
689,295

 
—

 
—

 
689,295

Secured debt instruments- variable rate: (c)
 
 
 

 
 

 
 
 
 

Mortgage notes payable
37,415

 
37,415

 
—

 
—

 
37,415

Tax-exempt secured notes payable
94,700

 
94,700

 
—

 
—

 
94,700

Fannie Mae credit facilities
211,409

 
211,409

 
—

 
—

 
211,409

Unsecured debt instruments: (c)
 
 
 
 
 
 
 
 
 
Commercial bank
76,000

 
76,000

 
—

 
—

 
76,000

Senior unsecured notes
1,903,198

 
2,039,736

 
—

 
—

 
2,039,736

Total liabilities
$
3,420,355

 
$
3,654,305

 
$
—

 
$
11,022

 
$
3,643,283

 
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests (d)
$
223,418

 
$
223,418

 
$
—

 
$
223,418

 
$
—


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

There were no transfers into or out of each of the levels of the fair value hierarchy.
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

21
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2013 and December 31, 2012, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. In conjunction with the FASB's fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Redeemable noncontrolling interests in the Operating Partnership have a redemption feature and are marked to their redemption value. The redemption value is based on the fair value of the Company’s common stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s common stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable noncontrolling interests in the Operating Partnership are classified as Level 2.
Financial Instruments Not Carried at Fair Value
At March 31, 2013, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.
We estimate the fair value of our notes receivable and debt instruments by discounting the remaining cash flows of the debt instrument at a discount rate equal to the replacement market credit spread plus the corresponding treasury yields. Factors considered in determining a replacement market credit spread include general market conditions, borrower specific credit spreads, time remaining to maturity, loan-to-value ratios and collateral quality, where applicable (Level 3).
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair value. Our estimates of fair value represent our best estimate based upon Level 3 inputs such as industry trends and reference to market rates and transactions.
We consider various factors to determine if a decrease in the value of our investment in and advances to unconsolidated joint ventures, net is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. Based on the significance of the unobservable inputs, we classify these fair value measurements within Level 3 of the valuation hierarchy. The Company did not incur any other-than-temporary decrease in the value of its investments in unconsolidated joint ventures during the three months ended March 31, 2013 and December 31, 2012, respectively.
After determining an other-than-temporary decrease in the value of an equity method investment has occurred, we estimate the fair value of our investment by estimating the proceeds we would receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs reflect management’s best estimate of what market participants would use in pricing the investment giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture assets. The inputs and assumptions utilized to estimate the future cash flows of the underlying assets are based upon the Company’s evaluation of the economy, market trends, operating results, and other factors, including judgments regarding costs to complete any construction activities, lease up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate the projected cash flows at the disposition, and discount rates.


22
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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



10. 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 through the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in “Accumulated other comprehensive loss, net” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2013 and 2012, 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, 2013 and 2012, the Company recorded less than a  $1,000 loss from 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 loss, net” related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Through March 31, 2014, the Company estimates that an additional $6.2 million will be reclassified as an increase to interest expense.
As of March 31, 2013, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):
Interest Rate Derivative
 
Number of Instruments
 
Notional
Interest rate swaps
 
13

 
$
509,787

Interest rate caps
 
5

 
274,291

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 a (loss)/gain of $(2,000) and $298,000 for the three months ended March 31, 2013 and 2012, respectively.
As of March 31, 2013, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollar amounts in thousands):
Product
 
Number of Instruments
 
Notional
Interest rate caps
 
2

 
$
155,197


23
Table of Contents
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



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, 2013 and December 31, 2012 (amounts in thousands):
 
Asset Derivatives
 
Liability Derivatives
 
 
 
Fair Value at:
 
 
 
Fair Value at:
 
Balance
Sheet Location
 
March 31,
2013
 
December 31,
2012
 
Balance
Sheet Location
 
March 31,
2013
 
December 31,
2012
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
Other assets
 
$
—

 
$
2

 
Other liabilities
 
$
9,224

 
$
11,022

Total
 
 
$
—

 
$
2

 
 
 
$
9,224

 
$
11,022

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

 
$
—

 
Other liabilities
 
$
—

 
$
—

Total
 
 
$
—

 
$
—

 
 
 
$
—

 
$
—


24
Table of Contents
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



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, 2013 and 2012 (dollar amounts in thousands):
 
 
Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)
 
Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Derivatives in Cash Flow Hedging Relationships
 
2013
 
2012
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended March 31,
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
$
(92
)
 
$
(1,959
)
 
 
 
$
(1,937
)
 
$
(1,855
)
 
 
 
$
—

 
$
—

Total
 
$
(92
)
 
$
(1,959
)
 
Interest expense
 
$
(1,937
)
 
$
(1,855
)
 
Interest expense
 
$
—

 
$
—


Derivatives Not Designated as Hedging Instruments
 
Location of Gain or (Loss) Recognized in Income on Derivative
 
Amount of Gain or (Loss) Recognized in Income on Derivative
2013
 
2012
 
 
 
 
 
 
 
For the Three Months Ended March 31,
 
 
 
 
 
 
Interest rate products
 
Interest and other income, net
 
$
(2
)
 
$
298

Total
 
 
 
$
(2
)
 
$
298


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. At March 31, 2013 and December 31, 2012, no cash collateral was posted or required to be posted by the Company or by a counterparty.
The Company also has an agreement with a derivative counterparty that incorporates the loan and financial covenant provisions of the Company’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with these covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

25
Table of Contents
UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)
MARCH 31, 2013



The Company has certain agreements with some of it's derivative counterparties that contain a provision where in the event of default by the Company or the counterparty, the right of setoff may be exercised. Any amount payable to one party by the other party may be reduced by its setoff against any amounts payable by the other party. Events that give rise to default by either party may include, but are not limited to, the failure to pay or deliver payment under the derivative contract, the failure to comply with or perform under the derivative agreement, bankruptcy, a merger without assumption of the derivative agreement, or in a merger, a surviving entity's creditworthiness is materially weaker than the original party to the derivative agreement.
As of March 31, 2013, 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 $9.9 million. As of March 31, 2013, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at March 31, 2013, it would have been required to settle its obligations under the agreements at their termination value of $9.9 million.
The Company has elected not to offset derivative positions in the consolidated financial statements. The tables below present the effect on its financial position had the Company made the election to offset its derivative positions as of March 31, 2013 and December 31, 2012:
Offsetting of Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Consolidated Balance Sheets
 
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Consolidated Balance Sheets