UDR(UDR) - 2023 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the Company's unaudited consolidated financial statements for the three months ended March 31, 2023, and 2022, including balance sheets, statements of operations, comprehensive income, changes in equity, and cash flows, along with detailed notes explaining accounting policies and financial instrument disclosures Consolidated Balance Sheets The Consolidated Balance Sheets show a slight decrease in total assets and equity, while total liabilities increased from December 31, 2022, to March 31, 2023, with real estate held for investment, net, seeing a modest increase | Metric | Dec 31, 2022 (audited) (in thousands) | Mar 31, 2023 (unaudited) (in thousands) | Change (in thousands) | | :--------------------------------- | :------------------------------------ | :------------------------------------ | :-------------------- | | Total assets | $11,038,470 | $10,967,700 | $(70,770) | | Real estate held for investment, net | $9,603,723 | $9,639,264 | $35,541 | | Total liabilities | $6,100,325 | $6,144,939 | $44,614 | | Total equity | $4,098,295 | $3,921,109 | $(177,186) | Consolidated Statements of Operations The Consolidated Statements of Operations reflect strong year-over-year growth for the three months ended March 31, 2023, with significant increases in total revenues, operating income, and net income attributable to common stockholders | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Total revenues | $357,266 | $399,549 | $42,283 | 11.8% | | Total operating expenses | $309,376 | $333,366 | $23,990 | 7.8% | | Operating income | $47,890 | $66,184 | $18,294 | 38.2% | | Net income/(loss) attributable to UDR, Inc. | $13,705 | $30,964 | $17,259 | 126.0% | | Net income/(loss) attributable to common stockholders | $12,613 | $29,781 | $17,168 | 136.1% | | Basic EPS | $0.04 | $0.09 | $0.05 | 125.0% | | Diluted EPS | $0.04 | $0.09 | $0.05 | 125.0% | Consolidated Statements of Comprehensive Income/(Loss) The Consolidated Statements of Comprehensive Income/(Loss) show a substantial increase in comprehensive income attributable to UDR, Inc. for the three months ended March 31, 2023, despite a negative shift in other comprehensive income related to derivative instruments | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Net income/(loss) | $14,603 | $32,925 | $18,322 | 125.5% | | Other comprehensive income/(loss) | $7,580 | $(1,642) | $(9,222) | -121.7% | | Comprehensive income/(loss) attributable to UDR, Inc. | $20,771 | $29,443 | $8,672 | 41.7% | Consolidated Statements of Changes in Equity The Consolidated Statements of Changes in Equity indicate a decrease in total equity from December 31, 2022, to March 31, 2023, primarily influenced by common stock distributions and adjustments to redeemable noncontrolling interests, partially offset by net income | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | | :-------------------------------------- | :-------------------------- | :-------------------------- | | Balance at period start | $4,098,295 | $4,098,295 | | Net income/(loss) attributable to UDR, Inc. | N/A | $30,964 | | Common stock distributions declared | N/A | $(138,318) | | Balance at period end | N/A | $3,921,109 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows show an increase in cash provided by operating activities but a larger increase in cash used in investing activities, leading to a net decrease in cash, cash equivalents, and restricted cash for the three months ended March 31, 2023 | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Net cash provided by/(used in) operating activities | $161,020 | $168,015 | $6,995 | 4.3% | | Net cash provided by/(used in) investing activities | $(86,811) | $(117,340) | $(30,529) | 35.2% | | Net cash provided by/(used in) financing activities | $(75,700) | $(51,659) | $24,041 | -31.7% | | Net increase/(decrease) in cash, cash equivalents, and restricted cash | $(1,491) | $(984) | $507 | -34.0% | Notes to Consolidated Financial Statements These notes provide comprehensive disclosures for the consolidated financial statements, detailing accounting policies, real estate assets, debt, equity, and other financial instruments, offering crucial context for the reported figures Note 1. BASIS OF PRESENTATION UDR, Inc. is a self-administered REIT focused on apartment communities, with a consolidated portfolio of 166 communities and additional interests through joint ventures, and its interim financial statements adhere to SEC and GAAP standards - UDR, Inc. is a self-administered real estate investment trust (REIT) that owns, operates, acquires, renovates, develops, redevelops, and manages apartment communities in targeted markets across the United States[16] - As of March 31, 2023, the Company's consolidated apartment portfolio comprised 166 communities with 55,159 apartment homes in 21 markets[16] - The Company also holds ownership interests in 9,099 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships[16] Note 2. SIGNIFICANT ACCOUNTING POLICIES This note details UDR's key accounting policies, including consolidation principles, real estate sales gain recognition, credit loss allowances, notes receivable, comprehensive income, income taxes, forward sales agreements, and lease receivables Principles of Consolidation The Company consolidates entities based on control, either through the variable interest entity (VIE) model or the voting model, ensuring all significant intercompany accounts are eliminated - The Company consolidates an entity when it has control to direct the activities of a Variable Interest Entity (VIE) and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE[25] - Under the voting model, the Company consolidates an entity when it controls the entity through ownership of a majority voting interest[25] Real Estate Sales Gain Recognition Gain or loss on real estate sales is recognized when control transfers, with partial sales and sales to joint ventures accounted for at fair value - For sale transactions resulting in a transfer of a controlling financial interest, the Company derecognizes related assets and liabilities and records the gain or loss when control occurs[26] - Partial sales resulting in a change in control are accounted for at fair value, recognizing a full gain or loss on the partial interest sold[27] - Sales of real estate to joint ventures or other noncontrolled investees are accounted for at fair value, recognizing a full gain or loss in the period of contribution[28] Allowance for Credit Losses The Company applies the CECL impairment model to financial assets, estimating expected credit losses over the contractual life, and recorded net credit recoveries/(losses) of $(0.1) million for Q1 2023 - The Company accounts for allowance for credit losses under the current expected credit loss ("CECL") impairment model for its financial assets, excluding operating lease receivables[30] - Net credit recoveries/(losses) were $(0.1) million for the three months ended March 31, 2023, compared to less than $0.1 million for the same period in 2022[31] Notes Receivable Notes receivable, net, increased to $71.1 million at March 31, 2023, with interest income from these notes rising to $1.6 million for Q1 2023 | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Notes Receivable, net | $54,707 | $71,125 | $16,418 | | Allowance for credit losses | $(275) | $(357) | $(82) | - The Company recognized $1.6 million of interest income from notes receivable for the three months ended March 31, 2023, an increase from $0.7 million in the comparable period of 2022[39] Comprehensive Income/(Loss) Comprehensive income includes net income and other comprehensive income/(loss) primarily from derivative instruments designated as cash flow hedges, with related allocations to noncontrolling interests - Other comprehensive income/(loss) primarily consisted of gain/(loss) on derivative instruments designated as cash flow hedges[40] - The allocation of other comprehensive income/(loss) to redeemable noncontrolling interests was $(0.1) million for Q1 2023, compared to $0.5 million for Q1 2022[40] Income Taxes As a REIT, UDR generally has no federal income tax provision, but accounts for its Taxable REIT Subsidiaries (TRS) using the asset and liability method, recognizing deferred taxes and amortizing federal investment tax credits - UDR, as a REIT, generally does not provide for federal income taxes, incurring only state and local excise and franchise taxes[41] - The net deferred tax asset/(liability) was $(0.7) million at March 31, 2023, compared to $(0.8) million at December 31, 2022[42] - Federal investment tax credits (ITC) are accounted for under the deferral method, amortized as a tax benefit over the book life of qualifying depreciable property[45] Forward Sales Agreements The Company uses forward sales agreements for future common stock issuance, accounting for them as equity and reflecting them in diluted EPS calculations using the treasury stock method, with no shares sold through the ATM program in Q1 2023 - The Company utilizes forward sales agreements for the future issuance of its common stock, which are accounted for as equity[49][50] - Shares issuable upon settlement of forward sales agreements are reflected in diluted income/(loss) per share calculations using the treasury stock method[52] - No shares of common stock were sold through the Company's ATM program during the three months ended March 31, 2023, with 14.0 million shares remaining available for future issuance[111] Lease Receivables An analysis of lease collectibility under ASC 842 led to a $2.3 million increase in Rental income and a $0.2 million increase in Income/(loss) from unconsolidated entities for Q1 2023, due to adjustments in multifamily and retail tenant lease receivables reserves - The Company reduced its reserve for multifamily tenant lease receivables by approximately $6.1 million and increased its reserve for retail tenant lease receivables by approximately $4.4 million[54] - In aggregate, the net reduction in reserve resulted in a $2.3 million increase to Rental income and a $0.2 million increase to Income/(loss) from unconsolidated entities for the three months ended March 31, 2023[54] Note 3. REAL ESTATE OWNED This note details UDR's real estate assets, including 166 consolidated communities, and outlines changes from acquisitions, dispositions, and capitalization of development costs, with no impairment losses reported - As of March 31, 2023, the Company owned and consolidated 166 communities totaling 55,159 apartment homes[55] | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Real estate owned | $15,570,072 | $15,642,370 | $72,298 | | Accumulated depreciation | $(5,762,501) | $(5,926,651) | $(164,150) | | Real estate owned, net | $9,807,571 | $9,715,719 | $(91,852) | Acquisitions No new acquisitions occurred in Q1 2023, except for UDR taking title to a 136-apartment home community in San Francisco through a foreclosure proceeding from a consolidated joint venture - The Company did not have any acquisitions during the three months ended March 31, 2023, other than taking title to a 136-apartment home operating community in San Francisco, California, through a foreclosure proceeding[56] Dispositions In January 2023, UDR sold the retail component of a development community in Washington D.C. for approximately $14.4 million, resulting in a minimal gain - In January 2023, the Company sold the retail component of a development community located in Washington D.C. for gross proceeds of approximately $14.4 million[57] - The sale resulted in an estimated gain of less than $0.1 million[57] Other Activity UDR capitalizes predevelopment, development, and redevelopment costs, including interest and real estate taxes, with total capitalized interest decreasing to $2.2 million in Q1 2023, and no impairment losses recognized - Capitalized predevelopment, development, and redevelopment costs (excluding direct costs and capitalized interest) were $4.5 million for Q1 2023, down from $5.4 million for Q1 2022[58] - Total capitalized interest was $2.2 million for Q1 2023, down from $3.2 million for Q1 2022[58] - The Company did not recognize any impairments in the value of its long-lived assets during the three months ended March 31, 2023 and 2022[61] Note 4. VARIABLE INTEREST ENTITIES The Operating Partnership and DownREIT Partnership are classified as Variable Interest Entities (VIEs) and are consolidated by UDR, which acts as the primary beneficiary due to its control and economic interests - The Operating Partnership and DownREIT Partnership are determined to be Variable Interest Entities (VIEs) because limited partners lack substantive kick-out and participating rights[64] - UDR consolidates these VIEs as the primary beneficiary, given its role as the sole general partner and its power to direct activities and absorb significant losses or receive significant benefits[64] Note 5. JOINT VENTURES AND PARTNERSHIPS UDR engages in joint ventures and partnerships, classifying them as consolidated or unconsolidated (equity method), with the Company's investment in unconsolidated entities slightly decreasing, while income and management fees from these entities increased year-over-year Consolidated joint venture A 136-apartment home community in San Francisco, previously a consolidated joint venture, became a wholly-owned community in February 2023 through a foreclosure proceeding - A 136-apartment home community in San Francisco, previously owned by a consolidated joint venture, became a wholly-owned community in February 2023 through a foreclosure proceeding[67] Unconsolidated joint ventures and partnerships UDR's net investment in unconsolidated joint ventures slightly decreased to $751.4 million at March 31, 2023, with income from these entities increasing significantly to $9.7 million for Q1 2023, and management fees also rising | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Change (in thousands) | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Investment in and advances to unconsolidated joint ventures, net | $754,446 | $751,387 | $(3,059) | | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Income/(loss) from unconsolidated entities | $5,412 | $9,707 | $4,295 | 79.4% | | Joint venture management and other fees | $1,085 | $1,242 | $157 | 14.5% | - No other-than-temporary impairments were incurred in the value of investments in unconsolidated joint ventures during the three months ended March 31, 2023 and 2022[75] Note 6. LEASES This note details UDR's lease accounting, covering ground leases as a lessee (operating leases) and apartment, retail, and commercial space leases as a lessor, including associated assets, liabilities, and revenue recognition Lessee - Ground Leases UDR has six ground leases classified as operating leases, with a weighted average remaining term of 42.4 years, and operating lease right-of-use assets and liabilities were $193.2 million and $188.4 million, respectively, at March 31, 2023 - Operating lease right-of-use assets were $193.2 million at March 31, 2023, and operating lease liabilities were $188.4 million[78] - The weighted average remaining lease term for ground leases was 42.4 years at March 31, 2023, with a weighted average discount rate of 5.0%[79] - Total operating lease expense was $3.320 million for the three months ended March 31, 2023, a slight decrease from $3.337 million in the prior year[81] Lessor - Apartment Home, Retail and Commercial Space Leases UDR leases apartment homes (typically 12-month terms) and retail/commercial spaces (5-15 year terms), with total future minimum lease payments for retail and commercial leases at $169.2 million as of March 31, 2023, and variable percentage rents increasing year-over-year - Apartment home leases generally have initial terms of 12 months or less, while retail and commercial space leases typically range from 5 to 15 years[83] - Retail and commercial space leases represent approximately 1% to 2% of total lease revenue[83] - Total future minimum lease payments from retail and commercial leases were $169.2 million as of March 31, 2023[83] - Variable percentage rents increased to $0.7 million for Q1 2023, from $0.3 million for Q1 2022[84] Note 7. SECURED AND UNSECURED DEBT, NET UDR's total debt, net, increased to $5.58 billion at March 31, 2023, with secured debt at $1.05 billion (3.43% weighted average rate, 5.3 years to maturity) and unsecured debt at $4.53 billion (3.25% weighted average rate, 6.5 years to maturity), and the Company remained in compliance with all debt covenants | Debt Type | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | Weighted Average Rate (Mar 31, 2023) | Weighted Average Years to Maturity (Mar 31, 2023) | | :---------------- | :-------------------------- | :-------------------------- | :----------------------------------- | :------------------------------------------------ | | Secured Debt, net | $1,052,281 | $1,051,000 | 3.43% | 5.3 | | Unsecured Debt, net | $4,435,022 | $4,525,963 | 3.25% | 6.5 | | Total Debt, net | $5,487,303 | $5,576,963 | 3.25% | 6.3 | | Year | Total Debt (in thousands) | | :-------- | :------------------------ | | 2023 | $405,952 | | 2024 | $126,162 | | 2025 | $174,793 | | 2026 | $352,744 | | 2027 | $652,860 | | 2028 | $462,310 | | 2029 | $491,986 | | 2030 | $762,010 | | 2031 | $760,930 | | 2032 | $427,000 | | Thereafter| $950,000 | - The Company was in compliance with the covenants of its debt instruments at March 31, 2023[109] Note 8. INCOME/(LOSS) PER SHARE Basic and diluted EPS both increased to $0.09 for Q1 2023, up from $0.04 in Q1 2022, driven by higher net income attributable to common stockholders and an increase in weighted average common shares outstanding | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Income/(loss) attributable to common stockholders | $12,613 | $29,781 | $17,168 | 136.1% | | Basic EPS | $0.04 | $0.09 | $0.05 | 125.0% | | Diluted EPS | $0.04 | $0.09 | $0.05 | 125.0% | | Weighted average common shares outstanding (Basic) | 318,009 | 328,789 | 10,780 | 3.4% | | Weighted average common shares outstanding (Diluted) | 319,680 | 329,421 | 9,741 | 3.0% | Note 9. NONCONTROLLING INTERESTS This note distinguishes between redeemable noncontrolling interests (OP Units and DownREIT Units), which are marked to redemption value, and non-redeemable noncontrolling interests, presented as part of equity Redeemable Noncontrolling Interests in the Operating Partnership and DownREIT Partnership Redeemable noncontrolling interests, primarily OP Units and DownREIT Units, increased to $901.7 million at March 31, 2023, due to a mark-to-market adjustment and net income attributable to these interests - Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership increased from $839.9 million at December 31, 2022, to $901.7 million at March 31, 2023[118] - A mark-to-market adjustment of $67.7 million was applied to these interests during Q1 2023[118] Noncontrolling Interests Noncontrolling interests, representing non-redeemable interests in consolidated affiliates, remained less than $(0.1) million for both Q1 2023 and Q1 2022 - Net (income)/loss attributable to noncontrolling interests was less than $(0.1) million for both the three months ended March 31, 2023, and 2022[121] Note 10. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS This note outlines the fair value hierarchy (Level 1, 2, 3) for financial instruments, where notes receivable are Level 3, equity securities are Level 1, derivatives are Level 2, and redeemable noncontrolling interests are also classified as Level 2 - The fair value hierarchy consists of three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1 prices), and Level 3 (unobservable inputs)[123] - At March 31, 2023, notes receivable, net, had a fair value of $73.9 million (Level 3), equity securities were $17.4 million (Level 1), and derivatives (interest rate contracts) were $13.3 million (Level 2)[123] - Redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership are classified as Level 2 due to their valuation being based on the fair value of the Company's common stock[133] Note 11. DERIVATIVES AND HEDGING ACTIVITY UDR uses interest rate swaps and caps as cash flow hedges to manage interest rate risk, with fair value changes recorded in accumulated other comprehensive income, and the Company had $369.9 million in notional value of outstanding derivatives at March 31, 2023 Risk Management Objective of Using Derivatives UDR uses derivative financial instruments to manage economic risks, including interest rate, liquidity, and credit risk, primarily to stabilize interest expense and manage exposures from future cash flows[135] Cash Flow Hedges of Interest Rate Risk UDR uses interest rate swaps and caps as cash flow hedges for variable-rate debt, with fair value changes recorded in Accumulated other comprehensive income/(loss), and as of March 31, 2023, $369.9 million in notional value of derivatives were outstanding, with an estimated $6.1 million reclassified to interest expense by March 31, 2024 - As of March 31, 2023, the Company had outstanding interest rate derivatives with a total notional value of $369.9 million designated as cash flow hedges[141] - An estimated $6.1 million will be reclassified as a decrease to Interest expense from Accumulated other comprehensive income/(loss) through March 31, 2024[140] - The fair value of interest rate products (asset derivatives) was $13.3 million at March 31, 2023, down from $15.3 million at December 31, 2022[142] Credit-risk-related Contingent Features Derivative agreements include provisions for default if underlying indebtedness is accelerated and allow for the right of setoff in the event of default by either party - Agreements with derivative counterparties contain provisions for default on derivative obligations if repayment of underlying indebtedness is accelerated due to the Company's default[144] - Certain agreements include a right of setoff, allowing amounts payable to one party to be reduced by amounts payable by the other party in the event of default[145] Tabular Disclosure of Offsetting Derivatives The Company has elected not to offset derivative positions on its consolidated financial statements, with gross recognized derivative assets totaling $13.3 million at March 31, 2023 - The Company has elected not to offset derivative positions on the consolidated financial statements[146] - Gross amounts of recognized derivative assets were $13.3 million at March 31, 2023[146] Note 12. STOCK BASED COMPENSATION Stock-based compensation expense, including awards to non-employee directors, increased to $8.2 million for the three months ended March 31, 2023, from $6.4 million in the prior year - Stock-based compensation expense, net of capitalization, was $8.2 million for the three months ended March 31, 2023, an increase from $6.4 million in the comparable period of 2022[148] Note 13. COMMITMENTS AND CONTINGENCIES This note outlines UDR's remaining commitments for real estate development and technology investments, totaling $220.3 million, and addresses ongoing legal proceedings, which are not expected to have a material adverse effect Commitments UDR's total remaining commitments at March 31, 2023, were $220.3 million, including $111.0 million for wholly-owned development, $57.3 million for redevelopment, and $51.9 million for real estate technology investments | Commitment Type | UDR's Remaining Commitment (in thousands) | | :---------------------------------- | :---------------------------------------- | | Wholly-owned — under development | $111,045 | | Wholly-owned — redevelopment | $57,289 | | Other unconsolidated investments: | | | Real estate technology investments | $51,922 | | Total | $220,256 | Litigation and Legal Matters The Company is involved in various legal proceedings and claims in the ordinary course of business, but management believes the ultimate liability will not have a material adverse effect on its financial condition, results of operations, or cash flows - The Company is subject to various legal proceedings and claims arising in the ordinary course of business[151] - Management believes that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on the Company's financial condition, results of operations, or cash flows[151] Note 14. REPORTABLE SEGMENTS UDR operates in two reportable segments: Same-Store Communities and Non-Mature Communities/Other, with performance assessed using rental income and Net Operating Income (NOI), and the note also details the Company's principal revenue streams - UDR's Chief Operating Decision Maker uses rental income and Net Operating Income ("NOI") as primary financial measures to assess the performance of its reportable operating segments[153] - The two reportable segments are Same-Store Communities (acquired, developed, and stabilized prior to January 1, 2022) and Non-Mature Communities/Other (not meeting Same-Store criteria)[154][157] - No single tenant or related group of tenants contributed 10% or more of UDR's total revenues during the three months ended March 31, 2023 and 2022[158] Lease Revenue Lease revenue from apartment homes and retail/residential leases is recognized on an accrual basis, straight-line over the noncancellable lease term, and includes pass-through revenue and common area maintenance reimbursements - Lease revenue related to leases is recognized on an accrual basis when due from residents or tenants, on a straight-line basis over the noncancellable lease term[158] - Lease revenue includes all pass-through revenue from retail and residential leases and common area maintenance reimbursements from retail leases[159] Other Revenue Other revenue is generated from services provided by the Company to its retail and residential tenants and other unrelated third parties, recognized as performance obligations are satisfied - Other revenue is generated by services provided by the Company to its retail and residential tenants and other unrelated third parties[160] - Revenue is recognized when the Company satisfies a performance obligation by providing the services specified in a contract to the customer, generally as earned[160] Joint venture management and other fees Joint venture management and other fees are revenue from management services charged to equity method joint ventures, recognized monthly as services are provided and not allocated to specific reportable segments - Joint venture management and other fees consist of management fees charged to equity method joint ventures per contractual agreements and other fees[161] - Joint venture fee revenue is recognized monthly as management services are provided and the fees are earned, or upon a transaction where the Company earns a fee[161] - These fees are not allocable to a specific reportable segment or segments[161] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's comprehensive analysis of UDR's financial performance and condition for Q1 2023, covering forward-looking statements, business overview, liquidity, capital resources, critical accounting policies, cash flows, and detailed results of operations, including key non-GAAP metrics like FFO, FFOA, and AFFO Forward-Looking Statements The report contains forward-looking statements regarding UDR's future performance, including property activities, capital raising, and rent growth, which are subject to various risks such as market conditions, inflation, and competition, potentially causing actual results to differ materially - This Report contains forward-looking statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, rental expense growth and expected or potential impacts of the novel coronavirus disease ("COVID-19") pandemic[170] - Factors such as general market and economic conditions, the impact of inflation/deflation, unfavorable changes in apartment market conditions, and competitive factors could cause future results to differ materially[171] - The Company expressly disclaims any obligation to update or revise any forward-looking statement, except as required by law[175] Business Overview UDR is a self-administered REIT that owns, operates, and develops multifamily apartment communities, with a consolidated portfolio of 166 communities totaling 55,159 apartment homes as of March 31, 2023, and a significant portion of NOI generated from key geographic markets - UDR is a self-administered real estate investment trust (REIT) that owns, operates, acquires, renovates, develops, redevelops, disposes of, and manages multifamily apartment communities in targeted markets in the United States[176] - As of March 31, 2023, the consolidated real estate portfolio included 166 communities totaling 55,159 apartment homes[177] - Approximately 72.3% of total NOI for the three months ended March 31, 2023, was generated from communities in Metropolitan D.C., Boston, Orange County, San Francisco Bay Area, New York, Dallas, Seattle, and Tampa[271] Liquidity and Capital Resources UDR manages its liquidity through operating cash flows, property sales, and borrowings, expecting to meet short-term needs via property operations and credit facilities, and long-term needs through various financing activities and dispositions, with a shelf registration statement in place for future capital market access - The Company's primary sources of liquidity are cash flow from operations, sales of properties, and borrowings under credit agreements[184] - Short-term liquidity requirements are expected to be met through net cash from property operations and borrowings under credit agreements and the unsecured commercial paper program[185] - A shelf registration statement is filed with the SEC to facilitate future financing activities in the public capital markets[186] - As of March 31, 2023, 14.0 million shares of common stock were available for future issuance under the ATM program, with no shares sold during Q1 2023[187] Future Capital Needs Future development, redevelopment, and acquisition expenditures will be funded through various sources, including credit facilities, equity/debt issuance, and property sales, with $1.0 million in secured debt and $405.0 million in unsecured commercial paper maturing for the remainder of 2023 - Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, unsecured commercial paper, proceeds from equity or debt securities, property sales, and joint ventures[189] - For the remainder of 2023, the Company has approximately $1.0 million of secured debt and $405.0 million of unsecured debt (comprised solely of unsecured commercial paper) maturing[190] - The Company does not have any off-balance sheet arrangements that are material[191] Guarantor Subsidiary Summarized Financial Information Summarized financial information for United Dominion Realty, L.P. (the Operating Partnership), which fully guarantees certain UDR debt securities, shows a slight decrease in total assets and net income for Q1 2023 compared to Q1 2022 - The Operating Partnership fully and unconditionally guarantees payment of principal, premium, and interest for certain of UDR's outstanding debt securities[193][195] | Metric | Dec 31, 2022 (in thousands) | Mar 31, 2023 (in thousands) | | :---------------- | :-------------------------- | :-------------------------- | | Total assets | $2,616,000 | $2,584,859 | | Total liabilities | $1,658,443 | $1,676,102 | | Total capital | $957,557 | $908,757 | | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :------------ | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Total revenue | $120,798 | $134,055 | $13,257 | 11.0% | | Net income/(loss) | $30,173 | $27,929 | $(2,244) | -7.4% | Critical Accounting Policies and Estimates and New Accounting Pronouncements UDR's critical accounting policies, including those for capital expenditures, asset impairment, real estate investments, and revenue recognition, remain unchanged from the 2022 Annual Report on Form 10-K - Critical accounting policies include capital expenditures, impairment of long-lived assets, real estate investment properties, and revenue recognition[200] - There have been no significant changes in critical accounting policies from those reported in the Annual Report on Form 10-K filed on February 13, 2023[201] Statements of Cash Flows This section analyzes changes in cash flows for Q1 2023, where operating activities provided more cash, but investing activities used significantly more, primarily due to increased capital expenditures and reduced joint venture distributions, while financing activities used less cash year-over-year Operating Activities Net cash provided by operating activities increased by 4.3% to $168.0 million for Q1 2023, driven by higher net operating income from increased revenue per occupied home and additional operating communities - Net cash provided by operating activities was $168.0 million for the three months ended March 31, 2023, an increase from $161.0 million in the comparable period of 2022 (4.3% increase)[203] - The increase was primarily due to higher net operating income, driven by higher revenue per occupied home and NOI from additional operating communities[203] Investing Activities Net cash used in investing activities increased by 35.2% to $(117.3) million for Q1 2023, primarily due to higher capital expenditures, decreased distributions from unconsolidated joint ventures, and increased net issuance of notes receivable - Net cash used in investing activities was $(117.3) million for the three months ended March 31, 2023, compared to $(86.8) million for the comparable period in 2022 (35.2% increase in cash used)[204] - The increase in cash used was primarily due to an increase in capital expenditures, a decrease in distributions received from unconsolidated joint ventures, and an increase from the net issuance of notes receivable[204] Acquisitions No new acquisitions occurred in Q1 2023, except for UDR taking title to a 136-apartment home community in San Francisco through a foreclosure proceeding from a consolidated joint venture - The Company did not have any acquisitions during the three months ended March 31, 2023, other than taking title to a 136-apartment home operating community in San Francisco, California, through a foreclosure proceeding[205] Dispositions In January 2023, UDR sold the retail component of a development community in Washington D.C. for approximately $14.4 million, resulting in a minimal gain - In January 2023, the Company sold the retail component of a development community located in Washington D.C. for gross proceeds of approximately $14.4 million[207] - The sale resulted in an estimated gain of less than $0.1 million[207] Capital Expenditures Total capital expenditures increased by 50.3% to $55.0 million for Q1 2023, primarily driven by a 66.5% increase in major renovations and a 76.7% increase in NOI-enhancing improvements | Capital Expenditure Type | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | % Change | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | :------- | | Turnover capital expenditures | $3,321 | $3,746 | 12.8% | | Asset preservation expenditures | $8,058 | $7,875 | (2.3)% | | NOI enhancing improvements | $8,354 | $14,763 | 76.7% | | Major renovations | $16,423 | $27,349 | 66.5% | | Operations platform | $452 | $1,276 | 182.3% | | Total capital expenditures | $36,608 | $55,009 | 50.3% | - The increase in total capital expenditures was primarily due to a 66.5% increase in major renovations and a 76.7% increase in NOI enhancing improvements[214] Consolidated Real Estate Under Development and Redevelopment UDR's development pipeline includes two wholly-owned communities with 415 apartment homes, budgeted at $187.5 million, with an estimated completion in Q2 2024, and no substantial redevelopment activities were underway at March 31, 2023 - At March 31, 2023, the development pipeline consisted of two wholly-owned communities totaling 415 apartment homes, with a budget of $187.5 million[213] - The remaining homes are estimated to be completed during the second quarter of 2024[213] - The Company had no communities at which it was conducting substantial redevelopment activities at March 31, 2023[216] Unconsolidated Joint Ventures and Partnerships In Q1 2023, UDR invested $1.8 million in unconsolidated joint ventures, recognized $9.7 million in net income, and received $7.4 million in cash distributions, with no other-than-temporary impairments recognized - The Company made investments totaling $1.8 million in its unconsolidated joint ventures and partnerships during Q1 2023[222] - UDR's proportionate share of the net income/(loss) of the joint ventures and partnerships was $9.7 million for Q1 2023[222] - Cash distributions received from unconsolidated joint ventures and partnerships totaled $7.4 million, comprising $4.3 million from operating cash flows and $3.1 million from investing cash flows[222] Financing Activities Net cash used in financing activities decreased to $(51.7) million for Q1 2023, with key activities including $105.0 million net proceeds from commercial paper, $(14.2) million net repayment of revolving bank debt, and $(125.1) million in common stockholder distributions - Net cash provided by/(used in) financing activities was $(51.7) million for the three months ended March 31, 2023, compared to $(75.7) million for the comparable period of 2022[219] - Significant financing activities in Q1 2023 included net proceeds of $105.0 million on the unsecured commercial paper program, net repayment of $14.2 million on revolving bank debt, and payment of $125.1 million of distributions to common stockholders[223] Credit Facilities and Commercial Paper Program UDR has a $1.3 billion unsecured revolving credit facility (unused capacity $1.3 billion), a $350.0 million unsecured term loan (fully drawn), a $75.0 million working capital credit facility ($13.8 million outstanding), and a $700.0 million commercial paper program ($405.0 million issued at 5.14% weighted average rate) - The Company has a $1.3 billion unsecured revolving credit facility (maturity January 31, 2026) and a $350.0 million unsecured term loan (maturity January 31, 2027)[220] - As of March 31, 2023, there were no outstanding borrowings under the Revolving Credit Facility ($1.3 billion unused capacity) and $350.0 million outstanding under the Term Loan[222] - The Company has a $75.0 million unsecured working capital credit facility (maturity January 12, 2024), with $13.8 million outstanding at March 31, 2023[224][225] - The unsecured commercial paper program has a maximum aggregate amount of $700.0 million, with $405.0 million issued at March 31, 2023, at a weighted average annualized rate of 5.14%[226] Interest Rate Risk UDR is exposed to interest rate risk from its $445.8 million in variable rate debt, where a 100 basis point increase in rates would raise Q1 2023 interest expense by $1.5 million, and derivatives are used to manage this risk - The Company had $445.8 million in variable rate debt outstanding as of March 31, 2023, representing approximately 8.0% of total outstanding indebtedness[335] - A hypothetical 100 basis point increase in market interest rates for variable rate debt would increase interest expense for Q1 2023 by $1.5 million[227] - The Company utilizes derivative financial instruments, generally designated as cash flow hedges, to manage interest rate risk[229] Results of Operations UDR's results of operations for Q1 2023 show a significant increase in net income attributable to common stockholders, driven by higher property NOI and income from unconsolidated entities, despite increased interest and depreciation expenses, with the report also detailing segment performance and the impact of inflation Net Income/(Loss) Attributable to Common Stockholders Net income attributable to common stockholders surged to $29.8 million ($0.09 diluted EPS) for Q1 2023, up from $12.6 million ($0.04 diluted EPS) in Q1 2022, primarily due to increased property NOI and income from unconsolidated entities, partially offset by higher expenses - Net income attributable to common stockholders was $29.8 million ($0.09 per diluted share) for Q1 2023, compared to $12.6 million ($0.04 per diluted share) for Q1 2022[232] - The increase was primarily due to a $31.6 million increase in total property NOI and a $4.3 million increase in income from unconsolidated entities[236] - This was partially offset by a $7.8 million increase in interest expense, a $5.7 million increase in depreciation expense, and a $4.9 million increase in casualty-related charges[236] Apartment Community Operations Net Operating Income (NOI), a non-GAAP measure, is defined as rental income less direct property rental expenses and is considered a useful metric for investors to assess a community's continuing operating performance, excluding corporate-level allocations - NOI is defined as rental income less direct property rental expenses, excluding property management expense and land rent[233] - Management considers NOI a useful metric for investors as it represents a community's continuing operating performance prior to corporate-level expense allocations, general and administrative costs, capital structure, and depreciation and amortization[234] Same-Store Communities Same-Store Communities, comprising 53,173 apartment homes, generated 96.4% of total NOI for Q1 2023, with NOI increasing by 9.5% year-over-year, driven by an 8.2% rise in rental income (primarily from a 10.2% increase in rental rates), partially offset by a 5.1% increase in operating expenses - Same-Store Community properties, consisting of 53,173 apartment homes, provided 96.4% of total NOI for the three months ended March 31, 2023[239] | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | Same-Store rental income | $350,768 | $379,379 | $28,611 | 8.2% | | Same-Store operating expense| $(108,228) | $(113,694) | $(5,466) | 5.1% | | Same-Store NOI | $242,540 | $265,685 | $23,145 | 9.5% | - The increase in property rental income was primarily driven by a 10.2% increase in rental rates[240] - Operating expenses increased by 5.1%, primarily due to a 15.0% increase in repair and maintenance and a 15.5% increase in utilities[241] Non-Mature Communities/Other NOI from Non-Mature Communities/Other significantly increased by 604.8% to $9.8 million for Q1 2023, primarily due to development communities becoming stabilized and changes in straight-line rent - Non-Mature Communities/Other generated 3.6% ($9.8 million) of total NOI during the three months ended March 31, 2023[244] - NOI from Non-Mature Communities/Other increased by 604.8% ($8.4 million) for Q1 2023 compared to the same period in 2022[244] - The increase was primarily attributable to a $5.0 million increase in stabilized, non-mature communities NOI and a $3.3 million increase in non-residential/other NOI[244] Real estate depreciation and amortization Real estate depreciation and amortization increased by 3.5% to $169.3 million for Q1 2023, mainly due to development communities completed in 2023 and 2022, partially offset by fully depreciated assets - Real estate depreciation and amortization was $169.3 million for Q1 2023, up from $163.6 million for Q1 2022 (3.5% increase)[245] - The increase was primarily attributable to development communities completed in 2023 and 2022, partially offset by assets that became fully depreciated[245] Income/(loss) from unconsolidated entities Income from unconsolidated entities increased by 79.4% to $9.7 million for Q1 2023, driven by investment income from RETV I and preferred equity investments, partially offset by a prior year gain from a DCP community sale - Income from unconsolidated entities was $9.7 million for Q1 2023, up from $5.4 million for Q1 2022 (79.4% increase)[246] - The increase was primarily attributable to $1.5 million of investment income from RETV I (compared to a $(10.1) million loss in Q1 2022) and an increase in income from preferred equity investments[246] - This was partially offset by $10.6 million of net variable upside participation recorded on the sale of a DCP community for Q1 2022[246] Interest expense Interest expense increased by 21.7% to $43.7 million for Q1 2023, primarily due to higher debt balances and an increase in average interest rates - Interest expense was $43.7 million for Q1 2023, up from $35.9 million for Q1 2022 (21.7% increase)[247] - The increase was primarily due to higher debt balances and an increase in average interest rates[247] Casualty-related charges/(recoveries), net Casualty-related charges, net, increased by $4.9 million to $4.2 million for Q1 2023, primarily due to damages caused by various winter storms - Casualty-related charges/(recoveries), net, were $4.2 million for Q1 2023, compared to $(0.8) million for Q1 2022[248] - The $4.9 million increase was primarily due to casualty-related charges recorded as a result of damages caused by various winter storms in Q1 2023[248] Inflation Inflation impacts UDR's operating expenses (wages, utilities, maintenance) and interest costs, however, the short-term nature of apartment leases allows for rent increases to largely offset these effects, resulting in no material impact on Q1 2023 results - Inflation primarily impacts UDR's results of operations through wage pressures and increases in utilities and repair and maintenance costs[249] - The majority of apartment leases have initial terms of 12 months or less, enabling the Company to compensate for inflationary effects by increasing rents[249] - Inflation did not have a material impact on the Company's results for the three months ended March 31, 2023[249] Funds from Operations, Funds from Operations as Adjusted, and Adjusted Funds from Operations This section defines and reconciles the non-GAAP financial measures FFO, FFOA, and AFFO, which are used by management and investors to evaluate REIT operating performance and provide consistent comparisons across periods Funds from Operations FFO attributable to common stockholders and unitholders (basic) increased by 12.8% to $208.5 million for Q1 2023, with diluted FFO per share rising by 9.3% to $0.59 - Funds from Operations ("FFO") attributable to common stockholders and unitholders (basic) increased by 12.8% to $208.5 million for Q1 2023, from $184.8 million in Q1 2022[259] - FFO per weighted average common share and unit (diluted) increased by 9.3% to $0.59 for Q1 2023, from $0.54 in Q1 2022[259] | Metric | 3 Months Ended Mar 31, 2022 (in thousands) | 3 Months Ended Mar 31, 2023 (in thousands) | YoY Change (in thousands) | YoY Change (%) | | :-------------------------------------- | :----------------------------------------- | :----------------------------------------- | :------------------------ | :------------- | | FFO attributable to common stockholders and unitholders, basic | $184,757 | $208,526 | $23,769 | 12.9% | | FFO per weighted average common share and unit, diluted | $0.54 | $0.59 | $0.0