Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, rental expense growth and expected or potential impacts of the novel coronavirus disease ("COVID-19") pandemic. Words such as "expects," "anticipates," "intends," "plans," "likely," "will," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, the impact of the COVID-19 pandemic and measures intended to prevent its spread or address its effects, unfavorable changes in the apartment market, changing economic conditions, the impact of inflation/deflation on rental rates and property operating expenses, expectations concerning the availability of capital and the stability of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments and redevelopments, delays in completing lease-ups on schedule or at expected rent and occupancy levels, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, expectations on occupancy levels and rental rates, expectations concerning joint ventures and partnerships with third parties, expectations that automation will help grow net operating income, and expectations on annualized net operating income.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
? the impact of the COVID-19 pandemic and measures intended to prevent its spread
or address its effects;
? general economic conditions;
unfavorable changes in apartment market and economic conditions that could
? adversely affect occupancy levels and rental rates, including as a result of
COVID-19;
? the failure of acquisitions to achieve anticipated results;
? possible difficulty in selling apartment communities;
? competitive factors that may limit our ability to lease apartment homes or
increase or maintain rents;
? insufficient cash flow that could affect our debt financing and create
refinancing risk;
? failure to generate sufficient revenue, which could impair our debt service
payments and distributions to stockholders;
? development and construction risks that may impact our profitability;
? potential damage from natural disasters, including hurricanes and other
weather-related events, which could result in substantial costs to us;
? risks from climate change that impacts our properties or operations;
? risks from extraordinary losses for which we may not have insurance or adequate
reserves;
risks from cybersecurity breaches of our information technology systems and the
? information technology systems of our third party vendors and other third
parties;
? uninsured losses due to insurance deductibles, self-insurance retention,
uninsured claims or casualties, or losses in excess of applicable coverage;
? delays in completing developments and lease-ups on schedule;
? our failure to succeed in new markets;
risks that third parties
? projects in which we have an interest, including mezzanine borrowers, joint
venture partners or other investors, do not perform as expected;
68 Table of Contents
? changing interest rates, which could increase interest costs and affect the
market price of our securities;
? potential liability for environmental contamination, which could result in
substantial costs to us;
? the imposition of federal taxes if we fail to qualify as a REIT under the Code
in any taxable year;
our internal control over financial reporting may not be considered effective
? which could result in a loss of investor confidence in our financial reports,
and in turn have an adverse effect on our stock price; and
? changes in real estate laws, tax laws, rent control or stabilization laws or
other laws affecting our business.
A discussion of these and other factors affecting our business and prospects is set forth in Part II, Item 1A. Risk Factors. We encourage investors to review these risk factors. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
COVID-19 Update
OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. The pandemic has led governments and other authorities around the world, including federal, state and local authorities inthe United States , to impose measures intended to control its spread, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place or similar orders. While operations in certain areas have been allowed to fully or partially re-open, many areas are experiencing new closures subsequent to re-opening and no assurance can be given that such closures will not continue to occur. Our headquarters and all of our properties and our corporate offices are located in areas that are or have been subject to shelter-in-place orders and restrictions on the types of businesses that may continue to operate. These orders and restrictions and other impacts of the COVID-19 pandemic have adversely affected, and could continue to adversely affect, the ability of our residents and retail and commercial tenants to pay their rent. It is still uncertain how various programs adopted by the federal government and state and local governments have impacted, and may continue to impact, the ability of our residents and retail and commercial tenants to pay their rent. The governmental actions intended to prevent the spread of COVID-19 have also caused us to reduce staffing at certain of our locations, and have impacted, and may continue to impact, our ability to conduct our business in the ordinary course. Further, a number of the jurisdictions in which we operate have adopted, and may extend, eviction moratoriums, either directly or indirectly (such as through direction to law enforcement or courts not to serve notices or take actions related to eviction), which have negatively impacted, and may continue to negatively impact, our ability to remove residents or retail and commercial tenantswho are not paying their rent and our ability to rent their units or other space to new residents or retail and commercial tenants, respectively. In addition, certain jurisdictions have restricted our ability to charge certain fees, including fees for late payment of rent. We have received, and continue to receive, more requests from our residents and retail and commercial tenants for assistance with respect to paying rent than we have historically received. In response, we have instituted a number of initiatives to assist residents and other tenants, including rent deferrals, payment plans, and waiving late payment fees when appropriate. We also have experienced a decrease in resident move-outs and turnover on an annualized basis. With respect to leasing activities, while inquiries from potential residents have decreased, our percentage of leases entered into with a prospective tenant has increased. During the three months endedJune 30, 2020 , the Company performed an analysis in accordance with the ASC 842, Leases, guidance to assess the collectibility of its operating lease receivables in light of the COVID-19 pandemic. This analysis included an assessment of collectibility of current and future rents and whether those lease payments were no longer probable of collection. In accordance with the leases guidance, if lease payments are no longer deemed to be probable
over the life of the 69 Table of Contents
lease contract, we recognize revenue only when cash is received, and all existing contractual operating lease receivables and straight-line lease receivables are reserved.
As a result of its analysis, the Company reserved approximately$5.5 million of multifamily tenant lease receivables and approximately$3.5 million of retail tenant lease receivables (inclusive of$2.9 million of reserves on straight-line lease receivables) for its wholly-owned communities and communities held by joint ventures. In aggregate, the reserve is reflected as an$8.5 million reduction to Rental income and a$0.5 million reduction to Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations for the three months endedJune 30, 2020 . The impact to deferred leasing commissions was not material.
The Company did not recognize any other adjustments to the carrying amounts of
assets or asset impairment charges due to the COVID-19 pandemic for the six
months ended
As ofJuly 24, 2020 , we had collected 98.6%, 97.6% and 96.2% of billed monthly rents for our multifamily residents for April, May and June, respectively. July cash rents received are consistent with those for April, May and June at corresponding times of prior months. Over the last several years, we have worked to consistently strengthen our balance sheet and improve our liquidity profile, which we believe positions us well to weather the current economic and market challenges. The extent of the COVID-19 pandemic's effect on our operational and financial performance, however, will depend on future developments, including the duration, spread and intensity of the pandemic and the duration of government measures to mitigate the pandemic, all of which are uncertain and difficult to predict. Given this uncertainty, we cannot predict the effect on future periods, but the adverse impact on our future financial condition, results of operations, and cash flows could be material. The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on the consolidated financial statements for the three and six months endedJune 30, 2020 and 2019, of each ofUDR, Inc. andUnited Domination Realty ,
L.P.UDR, Inc. : Business Overview We are a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, disposes of, and manages multifamily apartment communities. We were formed in 1972 as aVirginia corporation. InJune 2003 , we changed our state of incorporation fromVirginia toMaryland . Our subsidiaries include theOperating Partnership and theDownREIT Partnership . Unless the context otherwise requires, all references in this Report to "we," "us," "our," "the Company," or "UDR" refer collectively toUDR, Inc. , its subsidiaries and its consolidated joint ventures. AtJune 30, 2020 , our consolidated real estate portfolio included 148 communities in 13 states plus theDistrict of Columbia totaling 47,371 apartment homes. In addition, we have an ownership interest in 5,134 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships, including 2,004 apartment homes owned by entities in which we hold preferred equity investments.The Same-Store Community apartment home population for the three and six months endedJune 30, 2020 , was 39,020 and 37,910, respectively. 70 Table of Contents
The following table summarizes our market information by major geographic
markets as of and for the three and six months ended
Three Months Ended Six Months Ended June 30, 2020 June 30, 2020 June 30, 2020 Percentage Total Monthly Monthly Number of Number of of Total Carrying Average Income per Average Income per Apartment Apartment Carrying Value (in Physical Occupied Physical Occupied Same-Store Communities Communities Homes Value thousands) Occupancy Home (a) Occupancy Home (a)West Region Orange County, CA 11 4,820 9.9 %$ 1,257,424 96.0 % $ 2,330 96.6 %$ 2,357 San Francisco, CA 11 2,751 6.9 % 880,914 92.9 % 3,646 94.7 % 3,700 Seattle, WA 14 2,725 7.4 % 946,127 96.6 % 2,463 97.1 % 2,522 Los Angeles, CA 4 1,225 3.6 % 459,917 95.8 % 2,793 96.4 % 2,867 Monterey Peninsula, CA 7 1,565 1.4 % 183,797 96.8 % 1,918 96.3 % 1,936 Other Southern California 2 654 0.9 % 110,416 96.8 % 2,026 96.9 % 2,036 Portland, OR 2 476 0.4 % 51,330 97.3 % 1,624 97.1 % 1,633 Mid-Atlantic Region Metropolitan D.C. 21 7,799 16.1 % 2,056,263 96.9 % 2,075 97.2 % 2,100 Richmond, VA 4 1,358 1.2 % 152,583 97.4 % 1,414 97.3 % 1,411 Baltimore, MD 3 720 1.2 % 154,828 98.1 % 1,700 97.7 % 1,713 Northeast Region Boston, MA 4 1,388 3.7 % 467,644 94.7 % 2,772 95.3 % 2,865 New York, NY 4 1,640 9.1 % 1,167,474 92.6 % 4,291 95.3 % 4,490 Southeast Region Orlando, FL 9 2,500 1.9 % 236,598 97.2 % 1,398 96.6 % 1,408 Tampa, FL 8 2,668 2.9 % 366,493 96.8 % 1,513 96.8 % 1,470 Nashville, TN 8 2,260 1.7 % 222,058 97.9 % 1,362 97.8 % 1,361 Other Florida 1 636 0.7 % 88,108 97.5 % 1,604 96.9 % 1,632 Southwest Region Dallas, TX 7 2,345 2.3 % 292,031 97.5 % 1,364 97.5 % 1,377 Austin, TX 4 1,272 1.3 % 169,019 97.8 % 1,522 97.7 % 1,536 Denver, CO 1 218 1.1 % 144,751 92.9 % 3,079 92.6 % 3,112 Total/Average Same-Store Communities 125 39,020 73.7 % 9,407,775 96.3 % $ 2,247 96.7 %$ 2,174 Non-Mature, Commercial Properties & Other 23 8,292 25.3 % 3,236,076 Total Real Estate Held for Investment 148 47,312 99.0 % 12,643,851 Real Estate Under Development (b) - 59 1.0 % 131,788 Total Real Estate Owned 148 47,371 100.0 % 12,775,639 Total Accumulated Depreciation (4,372,524) Total Real Estate Owned, Net of Accumulated Depreciation$ 8,403,115
Monthly Income per Occupied Home represents total monthly revenues divided by (a) the average physical number of occupied apartment homes in our Same-Store
portfolio.
As of
completed.
We report in two segments: Same-Store Communities and Non-Mature Communities/Other.
Our Same-Store Communities segment represents those communities acquired, developed, and stabilized prior toApril 1, 2019 (for quarter-to-date comparison) andJanuary 1, 2019 (for year-to-date comparison) and held as ofJune 30, 2020 . These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the communities are not classified as held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. Our Non-Mature Communities/Other segment represents those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties. 71
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Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, sales of properties, borrowings under our credit agreements, and/or the issuance of debt and/or equity securities. Our primary source of liquidity is our cash flow from operations, as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes, and borrowings under our credit agreements. We routinely use our working capital credit facility, our unsecured revolving credit facility and issuances of commercial paper to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we continue to execute on maintaining a diversified portfolio. We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through net cash provided by property operations, secured and unsecured borrowings, the issuance of debt or equity securities, and/or the disposition of properties. We believe that our net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings under credit agreements, the issuance of debt or equity securities, and/or dispositions of properties. We have a shelf registration statement filed with theSecurities and Exchange Commission , or "SEC ," which provides for the issuance of common stock, preferred stock, depositary shares, debt securities, guarantees of debt securities, warrants, subscription rights, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of issuance. InJuly 2017 , the Company entered into an ATM sales agreement under which the Company may offer and sell up to 20.0 million shares of its common stock, from time to time, to or through its sales agents and may enter into separate forward sales agreements to or through its forward purchasers. Upon entering into the ATM sales agreement, the Company simultaneously terminated the sales agreement for its prior at-the-market equity offering program, which was entered into inApril 2017 , which replaced the prior at-the-market equity offering program entered into inApril 2012 . During the six months endedJune 30, 2020 , the Company did not sell any shares of common stock through its ATM program. As ofJune 30, 2020 , we had 11.7 million shares of common stock available for future issuance under the ATM program, including an aggregate of 2.1 million shares subject to the forward sales agreements described below. During the six months endedJune 30, 2020 , the Company entered into forward sales agreements under its ATM program for a total of 2.1 million shares of common stock at a weighted average initial forward price per share of$49.56 . The initial forward price per share to be received by the Company upon settlement will be determined on the applicable settlement date based on adjustments made to the initial forward price to reflect the then-current federal funds rate and the amount of dividends paid to holders of UDR common stock over the term of the forward sales agreement. As ofJune 30, 2020 , no shares under the forward sales agreement have been settled. The final date by which shares sold under the forward sales agreements must be settled range betweenFebruary 12, 2021 andMarch 3, 2021 . See Note 8, Income/(Loss) per Share, in the Notes to the UDR Consolidated Financial Statements included in this Report for additional discussion of forward sales agreements. InFebruary 2020 , the Company issued$200.0 million of 3.20% senior unsecured medium-term notes due 2030. Interest is payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, beginning onJuly 15, 2020 . The notes were priced at 105.660% of the principal amount at issuance. This was a further issuance of the 2030 notes, and form a single series with, the$300.0 million aggregate principal amount of the Company's 3.20% notes due 2030 that were issued inJuly 2019 and the$100.0 million aggregate principal amount of the Company's 3.20% notes due 2030 that were issued inOctober 2019 . As of the completion of the offering, the aggregate principal amount of outstanding 2030 notes was$600.0 million . OnJuly 14, 2020 , the Company announced that it commenced a cash tender offer for any and all of its outstanding 3.75% unsecured medium-term notes dueJuly 2024 (the "2024 Notes"). Pursuant to the tender offer, onJuly 21, 2020 , the Company completed the purchase of$116.9 million aggregate principal amount of the 2024 Notes, or 39.0% of the$300.0 million aggregate principal amount of the 2024 Notes. The tender offer consideration was$1,101.92 for each$1,000 principal amount of the 2024 Notes, plus accrued and unpaid interest to, but not including,July 21, 2020 . 72 Table of Contents OnJuly 21, 2020 , the Company issued$400.0 million of 2.10% senior unsecured medium-term notes dueAugust 1, 2032 . Interest is payable semi-annually in arrears onFebruary 1 andAugust 1 . The notes were priced at 99.894% of the principal amount at issuance. The Company used or will use a portion of the net proceeds to fund the purchase of the 2024 Notes accepted pursuant to the tender offer described above and to prepay$245.8 million of 4.64% secured debt due in 2023. The combined prepayment and make-whole amounts for the purchase of the 2024 Notes and the prepayment of the secured debt due in 2023, inclusive of the acceleration of fair market value adjustments originally recorded on secured debt assumed in property acquisitions, totaled approximately$24.0 million .
Future Capital Needs
Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, unsecured commercial paper, proceeds from the issuance of equity or debt securities, sales of properties, joint ventures, and, to a lesser extent, from cash flows provided by property operations. Acquisition activity in strategic markets may be funded through joint ventures, by the reinvestment of proceeds from the sale of properties, through the issuance of equity or debt securities, the issuance of operating partnership units and the assumption or placement of secured and/or unsecured debt. During the remainder of 2020, we have approximately$83.8 million of secured debt maturing, inclusive of principal amortization, and$185.0 million of unsecured debt maturing, comprised solely of unsecured commercial paper. We anticipate repaying the remaining debt with cash flow from our operations, proceeds from debt or equity offerings, proceeds from dispositions of properties, or from borrowings under our credit agreements and our unsecured commercial paper program. InJune 2020 , the Company executed a rate lock agreement to refinance a 4.35% fixed rate mortgage note payable due inNovember 2020 with a balance of$79.5 million atJune 30, 2020 with a$160.9 million , 2.62% fixed rate mortgage note payable due in 2031. The Company expects to close on the refinancing transaction during the third quarter of 2020. The incremental proceeds are anticipated to be used to reduce the Company's borrowings under its unsecured commercial paper program.
InJuly 2020 , the entire$185.0 million of outstanding unsecured commercial paper as ofJune 30, 2020 was repaid at maturity with additional proceeds of unsecured commercial paper with maturity dates in July andAugust 2020 . As ofJuly 27, 2020 , we had no borrowings outstanding under the Revolving Credit Facility, leaving$1.1 billion of unused capacity (excluding$2.9 million of letters of credit), and we had$17.2 million outstanding under the Working Capital Credit Facility, leaving$57.8 million of unused capacity.
Critical Accounting Policies and Estimates and New Accounting Pronouncements
Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, (3) real estate investment properties, and (4) revenue recognition. Our critical accounting policies are described in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in UDR's Annual Report on Form 10-K, filed with theSEC onFebruary 18, 2020 . There have been no significant changes in our critical accounting policies from those reported in our Form 10-K filed with theSEC onFebruary 18, 2020 . With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
Statements of Cash Flows
The following discussion explains the changes in Net cash provided by/(used in) operating activities, Net cash provided by/(used in) investing activities, and Net cash provided by/(used in) financing activities that are presented in our Consolidated Statements of Cash Flows for the six months endedJune 30, 2020 and 2019. Operating Activities
For the six months endedJune 30, 2020 , our Net cash provided by/(used in) operating activities was$317.0 million , compared to$286.4 million for the comparable period in 2019. The increase in cash flow from operating activities was primarily due to improved net operating income, primarily driven by revenue growth at communities and net operating income from communities acquired in 2020 and 2019, and by changes in operating assets and liabilities. 73 Table of Contents Investing Activities For the six months endedJune 30, 2020 , Net cash provided by/(used in) investing activities was$(161.9) million , compared to$(806.0) million for the comparable period in 2019. The decrease in cash used in investing activities was primarily due to the decrease in acquisitions made during the current period, an increase in proceeds from sales of real estate investments and a decrease in investments in unconsolidated joint ventures, partially offset by an increase in spend for development of real estate assets and a decrease in distributions received from unconsolidated joint ventures.
Acquisitions
InJanuary 2020 , the Company acquired a 294 apartment home operating community located inTampa, Florida for approximately$85.2 million . The Company increased its real estate assets owned by approximately$83.1 million and recorded approximately$2.1 million of in-place lease intangibles. InJanuary 2020 , the Company increased its ownership interest from 49% to 100% in a 276 apartment home operating community located inHillsboro, Oregon , for a cash purchase price of approximately$21.6 million . In connection with the acquisition, the Company repaid approximately$35.6 million of joint venture construction financing. As a result, the Company consolidated the operating community. The Company had previously accounted for its 49% ownership interest as a preferred equity investment in an unconsolidated joint venture (see Note 5, Joint Ventures and Partnerships). The Company accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased its real estate assets owned by approximately$67.8 million and recorded approximately$1.7 million of in-place lease intangibles. Dispositions InMay 2020 , the Company sold an operating community located inBellevue, Washington with a total of 71 apartment homes for gross proceeds of$49.7 million , resulting in a gain of approximately$29.6 million . The sale was partially financed by the Company through the issuance of a promissory note totaling$4.0 million and due inFebruary 2021 . (See Note 2, Significant Accounting Policies for further discussion.) The proceeds were designated for a tax-deferred Section 1031 exchange that were used to pay a portion of the purchase price for an acquisition of an operating community inTampa, Florida , inJanuary 2020 .
In
Capital Expenditures
We capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred. For the six months endedJune 30, 2020 , total capital expenditures of$65.3 million , or$1,374 per stabilized home, which in aggregate include recurring capital expenditures and major renovations, were spent across our portfolio, excluding development, as compared to$70.2 million , or$1,733 per stabilized home, for the comparable period in 2019. 74
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The decrease in total capital expenditures was primarily due to:
a decrease of
? 2019 for our operations platform, which includes smart home installations in
certain of our properties; partially offset by:
an increase of 19.2%, or
? major structural changes and/or architectural revisions to existing buildings;
and
? an increase of 8.7%, or
include asset preservation and turnover related expenditures.
The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, for the six months endedJune 30, 2020 and 2019 (dollars in thousands): Per Home Six Months Ended June 30, Six Months Ended June 30, 2020 2019 % Change 2020 2019 % Change
Turnover capital expenditures$ 5,330 $ 4,789 11.3 %$ 112 $ 118 (5.1) % Asset preservation expenditures 16,383 15,179 7.9 % 345 375 (8.0) % Total recurring capital expenditures 21,713 19,968 8.7 % 457 493 (7.3) % NOI enhancing improvements (a) 16,302 16,640 (2.0) %
343 411 (16.5) % Major renovations (b) 20,797 17,440 19.2 % 438 431 1.6 % Operations platform 6,467 16,130 (59.9) % 136 398 (65.8) %
Total capital expenditures$ 65,279 $ 70,178 (7.0) %$ 1,374 $ 1,733 (20.7) % Repair and maintenance expense$ 26,475 $ 19,396 36.5 %$ 557 $ 479 16.3 % Average home count (c) 47,490 40,509 17.2 %
(a) NOI enhancing improvements are expenditures that result in increased income
generation or decreased expense growth.
(b) Major renovations include major structural changes and/or architectural
revisions to existing buildings.
(c) Average number of homes is calculated based on the number of homes
outstanding at the end of each month.
The above table includes amounts capitalized during the year. Cash paid for capital expenditures is impacted by the net change in related accruals.
We intend to continue to selectively add NOI enhancing improvements, which we believe will provide a return on investment in excess of our cost of capital. Our objective in redeveloping a community is twofold: we aim to meaningfully grow rental rates while also achieving cap rate compression through asset quality improvement.
AtJune 30, 2020 , our development pipeline consisted of three wholly-owned communities totaling 878 apartment homes, 59 of which have been completed, with a budget of$278.5 million , in which we have a gross carrying value of$131.8 million . The remaining homes are estimated to be completed between the first quarter of 2021 and the second quarter of 2022. AtJune 30, 2020 , the Company was redeveloping two communities, located inNew York, New York andBoston, Massachusetts , which are expected to be completed in the third quarter of 2020 and the second quarter of 2021, respectively. The redevelopments include the renovation of building exteriors, corridors, and common area amenities as well as individual apartment homes. During the six months endedJune 30, 2020 , we incurred$20.8 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings, an increase of$3.4 million compared to the six months endedJune 30, 2019 . 75 Table of Contents
The Company recognizes income or losses from our investments in unconsolidated joint ventures and partnerships consisting of our proportionate share of the net income or losses of the joint ventures and partnerships. In addition, we may earn fees for providing management services to the communities held by the unconsolidated joint ventures and partnerships. The Company's Investment in and advances to unconsolidated joint ventures and partnerships, net, are accounted for under the equity method of accounting. For the six months endedJune 30, 2020 :
we made investments totaling
? ventures, including contributions of
investments under our Developer Capital Program, which earn preferred returns
ranging from 8.5% to 9.0%;
? our proportionate share of the net income/(loss) of the joint ventures and
partnerships was
? we received distributions of
cash flows and
We evaluate our investments in unconsolidated joint ventures and partnerships when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. The Company did not recognize any other-than-temporary impairments in the value of its investments in unconsolidated joint ventures or partnerships during the six months endedJune 30, 2020 and 2019.
Financing Activities
For the six months ended
The following significant financing activities occurred during the six months
ended
? issued
15, 2030, for net proceeds of approximately
? net repayment of
? repayment of
? payment of
Credit Facilities and Commercial Paper Program
UDR had one secured credit facility with
The Company has a$1.1 billion unsecured revolving credit facility and a$350.0 million unsecured term loan. The Credit Agreement for these facilities allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to$2.0 billion , subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date ofJanuary 31, 2023 , with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date ofSeptember 30, 2023 . Based on the Company's current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points and a facility fee of 15 basis points, and the Term Loan has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company's credit rating, the margin under the Revolving Credit Facility ranges from 75 to 145 basis points, the facility fee ranges from 10 to 30 basis points, and the margin under the Term Loan ranges from 80 to 165 basis points. 76
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As ofJune 30, 2020 , we had no outstanding borrowings under the Revolving Credit Facility, leaving$1.1 billion of unused capacity (excluding$2.9 million of letters of credit atJune 30, 2020 ), and$350.0 million of outstanding borrowings under the Term Loan. We have a working capital credit facility, which provides for a$75 million unsecured revolving credit facility (the "Working Capital Credit Facility") with a previously scheduled maturity date ofJanuary 15, 2021 . InJuly 2020 , the Company extended its working capital credit facility maturity date fromJanuary 15, 2021 toJanuary 14, 2022 . Based on the Company's current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points. Depending on the Company's credit rating, the margin ranges from 75 to 145 basis points.
As of
The bank revolving credit facilities and the term loan are subject to customary financial covenants and limitations, all of which we were in compliance with atJune 30, 2020 . We have an unsecured commercial paper program. Under the terms of the program, we may issue unsecured commercial paper up to a maximum aggregate amount outstanding of$500 million . The notes are sold under customary terms inthe United States commercial paper market and rank pari passu with all of our other unsecured indebtedness. The notes are fully and unconditionally guaranteed by theOperating Partnership . As ofJune 30, 2020 , we had issued$185.0 million of commercial paper, for one month terms, at a weighted average annualized rate of 0.45%, leaving$315.0 million of unused capacity. InJuly 2020 , the entire$185.0 million of outstanding unsecured commercial paper as ofJune 30, 2020 was repaid at maturity with additional proceeds of unsecured commercial paper with maturity dates in July andAugust 2020 .
Interest Rate Risk
We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets and operations. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had$264.2 million in variable rate debt that is not subject to interest rate swap contracts as ofJune 30, 2020 . If market interest rates for variable rate debt increased by 100 basis points, our interest expense for the six months endedJune 30, 2020 would increase by$2.1 million based on the average balance outstanding during the period. These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. This analysis does not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure. The Company also utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges. See Note 11, Derivatives and Hedging Activities, in the Notes to the UDR Consolidated Financial Statements included in this Report for additional discussion of derivative instruments. A presentation of cash flow metrics based on GAAP is as follows (dollars in thousands): Six Months EndedJune 30, 2020 2019
Net cash provided by/(used in) operating activities
286,421
Net cash provided by/(used in) investing activities (161,894) (805,993) Net cash provided by/(used in) financing activities (165,536)
334,704 Results of Operations
The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the three and six months endedJune 30, 2020 and 2019. 77
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Net Income/(Loss) Attributable to Common Stockholders
Net income/(loss) attributable to common stockholders was$56.7 million ($0.19 per diluted share) for the three months endedJune 30, 2020 , as compared to$34.6 million ($0.12 per diluted share) for the comparable period in the prior year. The increase resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
gains of
?
land in
and
an increase in total property NOI of
? additional operating communities, including those acquired in 2020 and 2019,
partially offset by an approximately
multifamily tenant lease receivables.
This was partially offset by:
an increase in depreciation expense of
? communities acquired in 2020 and 2019, partially offset by a decrease from
fully depreciated assets; and
? an increase in interest expense of
debt balances.
Net income/(loss) attributable to common stockholders was$60.9 million ($0.21 per diluted share) for the six months endedJune 30, 2020 , as compared to$58.1 million ($0.21 per diluted share) for the comparable period in the prior year. The increase resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
gains of
?
30, 2020, as compared to a gain of
in
an increase in total property NOI of
? revenue per occupied home and NOI from additional operating communities,
including those acquired in 2020 and 2019, partially offset by an approximately
This was partially offset by:
an increase in depreciation expense of
? communities acquired in 2020 and 2019, partially offset by a decrease from
fully depreciated assets;
? an increase in interest expense of
average debt balances; and
a decrease in interest income and other income/(expense), net of
? primarily attributable to an
prepayment of a note to a multifamily technology company in 2019.
Apartment Community Operations
Our net income results are primarily from NOI generated from the operation of our apartment communities. The Company defines NOI, which is a non-GAAP financial measure, as rental income less direct property rental expenses. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI is property management expense which is calculated as 2.875% of property revenue to cover the regional supervision and accounting costs related to consolidated property operations and land rent. Management considers NOI a useful metric for investors as it is a more meaningful representation of a community's continuing operating performance than net income as it is prior to corporate-level expense allocations, general and administrative costs, capital structure and depreciation and amortization. 78
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Although the Company considers NOI a useful measure of operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities as determined in accordance with GAAP. NOI excludes several income and expense categories as detailed in the reconciliation of NOI to Net income/(loss) attributable toUDR, Inc. below.
The following table summarizes the operating performance of our total property NOI for each of the periods presented (dollars in thousands):
Three Months Ended Six Months Ended June 30, (a) June 30, (b) 2020 2019 % Change 2020 2019 % Change Same-Store Communities: Same-Store rental income$ 241,950 $ 247,424 (2.2) %$ 478,340 $ 477,169 0.2 % Same-Store operating expense (c) (71,418) (68,946) 3.6 %
(138,471) (134,226) 3.2 % Same-Store NOI 170,532 178,478 (4.5) % 339,869 342,943 (0.9) % Non-Mature Communities/Other NOI: Stabilized, non-mature communities NOI (d) 33,762 10,640 217.3 % 79,206 27,109 192.2 % Acquired communities NOI 1,794 - NM * 3,188 - NM * Redevelopment communities NOI 4,444 4,912 (9.5) % 9,370 10,144 (7.6) % Development communities NOI (65) - NM * (105) - NM * Non-residential/other NOI 1,230 3,496 (64.8) % 4,001 4,824 (17.1) % Sold and held for disposition communities NOI 556 2,209 (74.8) % 2,189 4,398 (50.2) % Total Non-Mature Communities/Other NOI 41,721 21,257 96.3 % 97,849 46,475 110.5 % Total property NOI$ 212,253 $ 199,735 6.3 %$ 437,718 $ 389,418 12.4 % * Not meaningful
(a) Same-Store consists of 39,020 apartment homes.
(b) Same-Store consists of 37,910 apartment homes.
(c) Excludes depreciation, amortization, and property management expenses.
Represents non-mature communities that have achieved 90% occupancy for three (d) consecutive months but do not meet the criteria to be included in Same-Store
Communities. The following table is our reconciliation of Net income/(loss) attributable toUDR, Inc. to total property NOI for the periods presented (dollars in thousands): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019
Net income/(loss) attributable to UDR, Inc.$ 57,771 $ 35,619 $ 62,992 $ 60,122 Joint venture management and other fees (1,274) (2,845)
(2,662) (5,596) Property management 8,797 8,006 18,000 15,709 Other operating expenses 6,100 2,735 11,066 8,381
Real estate depreciation and amortization 155,056 117,934 310,532 230,402 General and administrative 10,971 12,338 25,949 24,805 Casualty-related charges/(recoveries), net 102 246 1,353 246 Other depreciation and amortization 2,027 1,678 4,052 3,334 (Gain)/loss on sale of real estate owned (61,303) (5,282) (61,303) (5,282) (Income)/loss from unconsolidated entities (8,021) (6,625) (11,388) (6,674) Interest expense 38,597 34,417 77,914 67,959 Interest income and other (income)/expense, net (2,421) (1,310) (5,121) (11,123) Tax provision/(benefit), net 1,526 125 1,690 2,337 Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership 4,291 2,652 4,604 4,709 Net income/(loss) attributable to noncontrolling interests 34 47 40 89 Total property NOI$ 212,253 $ 199,735 $ 437,718 $ 389,418 79 Table of Contents Same-Store Communities OurSame-Store Community properties, those acquired, developed, and stabilized prior toApril 1, 2019 (for the quarter-to-date comparison) andJanuary 1, 2019 (for the year-to-date comparison) and held onJune 30, 2020 , consisted of 39,020 and 37,910 apartment homes and provided 80.3% and 77.6% of our total NOI for the three and six months endedJune 30, 2020 , respectively.
Three Months Ended
NOI for ourSame-Store Community properties decreased 4.5%, or$7.9 million , for the three months endedJune 30, 2020 compared to the same period in 2019. The decrease in property NOI was attributable to a 2.2%, or$5.5 million , decrease in property rental income and a 3.6%, or$2.5 million , increase in operating expenses. The decrease in property rental income was primarily driven by a$4.1 million increase in our reserve on multifamily tenant lease receivables, an increase of$1.6 million in rent concessions and a decrease of 3.4%, or$0.9 million , in reimbursement and ancillary and fee income, partially offset by a 0.8%, or$1.7 million , increase in rental rates. Physical occupancy decreased by 0.6% to 96.3% and total monthly income per occupied home decreased 4.4% to$2,247 . The increase in operating expenses was primarily driven by an 8.1%, or$2.3 million , increase in real estate taxes, which was primarily due to higher assessed valuations, and a 7.8%, or$0.8 million , increase in repair and maintenance expense due to the increased use of third party vendors, partially offset by a 6.2%, or$0.9 million , decrease in personnel expense as a result of fewer employees. The operating margin (property net operating income divided by property rental income) was 70.5% and 72.1% for the three months endedJune 30, 2020 and 2019, respectively.
Six Months Ended
NOI for ourSame-Store Community properties decreased 0.9%, or$3.1 million , for the six months endedJune 30, 2020 compared to the same period in 2019. The decrease in property NOI was attributable to a 3.2%, or 4.2 million, increase in operating expense, partially offset by a 0.2%, or$1.2 million , increase in property rental income. The increase in property rental income was primarily driven by a 1.7%, or$7.4 million , increase in rental rates and a 0.5%, or$0.3 million , increase in reimbursement and ancillary and fee income, partially offset by a$4.0 million increase in our reserve on multifamily tenant lease receivables and an increase of$1.7 million in rent concessions. Physical occupancy decreased by 0.2% to 96.7% and total monthly income per occupied home increased 0.4% to$2,174 . The increase in operating expenses was primarily driven by a 6.8%, or$3.8 million , increase in real estate taxes, which was primarily due to higher assessed valuations, and a 9.1%, or$1.7 million , increase in repair and maintenance expense due to the increased use of third party vendors, partially offset by a 7.4%, or$2.0 million , decrease in personnel expense as a result of fewer employees. The operating margin (property net operating income divided by property rental income) was 71.1% and 71.9% for the six months endedJune 30, 2020 and 2019, respectively. Non-Mature Communities/Other
UDR's Non-Mature Communities/Other represent those communities that do not meet the criteria to be included in Same-Store Communities, which include communities recently developed or acquired, redevelopment properties, sold or held for disposition properties, and non-apartment components of mixed use properties.
Three Months Ended
The remaining 19.7%, or$41.7 million , of our total NOI during the three months endedJune 30, 2020 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 96.3%, or$20.5 million , for the three months endedJune 30, 2020 as compared to the same period in 2019. The increase was primarily attributable to a$23.1 million increase in stabilized, non-mature communities NOI and a$1.8 million increase in acquired communities, partially offset by a$2.3 million decrease in NOI from non-residential/other. 80 Table of Contents
Six Months Ended
The remaining 22.4%, or$97.8 million , of our total NOI during the six months endedJune 30, 2020 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 110.5%, or$51.4 million , for the six months endedJune 30, 2020 as compared to the same period in 2019. The increase was primarily attributable to a$52.1 million increase in stabilized, non-mature communities NOI and a$3.2 million increase in acquired communities, partially offset by a$2.2 million decrease in NOI from sold and held for disposition communities.
Real estate depreciation and amortization
For the three months endedJune 30, 2020 and 2019, the Company recognized real estate depreciation and amortization of$155.1 million and$117.9 million , respectively. The increase in 2020 as compared to 2019 was primarily attributable to communities acquired in 2020 and 2019, partially offset by a decrease from fully depreciated assets. For the six months endedJune 30, 2020 and 2019, the Company recognized real estate depreciation and amortization of$310.5 million and$230.4 million , respectively. The increase in 2020 as compared to 2019 was primarily attributable to communities acquired in 2020 and 2019, partially offset by a decrease from fully depreciated assets.
Gain/(Loss) on sale of real estate owned
During the three and six months endedJune 30, 2020 , the Company recognized gains of$61.3 million from the sale of two operating communities located inKirkland, Washington andBellevue, Washington . During the three and six months endedJune 30, 2019 , the Company recognized a gain of$5.3 million on the sale of a parcel of land inLos Angeles, California .
Interest expense
For the three months endedJune 30, 2020 and 2019, the Company recognized interest expense of$38.6 million and$34.4 million , respectively. The increase in 2020 as compared to 2019 was primarily attributable to higher average debt balances. For the six months endedJune 30, 2020 and 2019, the Company recognized interest expense of$77.9 million and$68.0 million , respectively. The increase in 2020 as compared to 2019 was primarily attributable to higher average debt balances.
Interest income and other income/(expense), net
For the six months endedJune 30, 2020 and 2019, we recognized interest income and other income/(expense), net of$5.1 million and$11.1 million , respectively. The decrease in 2020 as compared to 2019 was primarily attributable to an$8.5 million promoted interest earned on the prepayment of a note to a multifamily technology company in 2019. Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and material costs, the majority of our apartment leases have initial terms of 12 months or less, which generally enables us to compensate for any inflationary effects by increasing rental rates on our apartment homes. Although an extreme escalation in costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the three and six months endedJune 30, 2020 .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material. 81
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Funds from Operations, Funds from Operations as Adjusted, and Adjusted Funds from Operations
Funds from Operations Funds from operations ("FFO") attributable to common stockholders and unitholders is defined as Net income/(loss) attributable to common stockholders (computed in accordance with GAAP), excluding impairment write-downs of depreciable real estate related to the main business of the Company or of investments in non-consolidated investees that are directly attributable to decreases in the fair value of depreciable real estate held by the investee, gains and losses from sales of depreciable real estate related to the main business of the Company and income taxes directly associated with those gains and losses, plus real estate depreciation and amortization, and after adjustments for noncontrolling interests, and the Company's share of unconsolidated partnerships and joint ventures. This definition conforms with theNational Association of Real Estate Investment Trust's ("Nareit") definition issued inApril 2002 and restated inNovember 2018 . Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, Nareit created FFO as a supplemental measure of a REIT's operating performance. In the computation of diluted FFO, if OP Units, DownREIT Units, unvested restricted stock, unvested LTIP Units, stock options, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive, they are included in the diluted share count. Management considers FFO a useful metric for investors as the Company uses FFO in evaluating property acquisitions and its operating performance, and believes that FFO should be considered along with, but not as an alternative to, net income and cash flow as a measure of the Company's activities in accordance with GAAP. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of funds available to fund our cash needs.
Funds from Operations as Adjusted
FFO as Adjusted ("FFOA") attributable to common stockholders and unitholders is defined as FFO excluding the impact of non-comparable items including, but not limited to, acquisition-related costs, prepayment costs/benefits associated with early debt retirement, impairment write-downs or gains and losses on sales of real estate or other assets incidental to the main business of the Company and income taxes directly associated with those gains and losses, casualty-related expenses and recoveries, severance costs and legal and other costs. Management believes that FFOA is useful supplemental information regarding our operating performance as it provides a consistent comparison of our operating performance across time periods and allows investors to more easily compare our operating results with other REITs. FFOA is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to FFOA. However, other REITs may use different methodologies for calculating FFOA or similar FFO measures and, accordingly, our FFOA may not always be comparable to FFOA or similar FFO measures calculated by other REITs. FFOA should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity.
Adjusted Funds from Operations
Adjusted FFO ("AFFO") attributable to common stockholders and unitholders is defined as FFOA less recurring capital expenditures on consolidated communities that are necessary to help preserve the value of and maintain functionality at our communities. Therefore, management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company's operational performance than FFO or FFOA. AFFO is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to AFFO. Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs. However, other REITs may use different methodologies for calculating AFFO and, accordingly, our AFFO may not always be comparable to AFFO calculated by other REITs. AFFO should not be considered as an alternative to net income/(loss) (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from 82
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operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.
The following table outlines our reconciliation of Net income/(loss)
attributable to common stockholders to FFO, FFOA, and AFFO for the three and six
months ended
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income/(loss) attributable to common stockholders$ 56,709 $ 34,588 $ 60,864 $ 58,080 Real estate depreciation and amortization 155,056 117,934 310,532 230,402 Noncontrolling interests 4,325 2,699 4,644 4,798 Real estate depreciation and amortization on unconsolidated joint ventures 8,745 15,211 17,561 30,885 Net gain on the sale of unconsolidated depreciable property - (5,251) - (5,251) Net gain on the sale of depreciable real estate owned (61,303) - (61,303) - FFO attributable to common stockholders and unitholders, basic$ 163,532 $ 165,181 $ 332,298 $ 318,914 Distributions to preferred stockholders - Series E (Convertible) 1,062 1,031 2,128 2,042 FFO attributable to common stockholders and unitholders, diluted$ 164,594 $ 166,212 $ 334,426 $ 320,956 Income/(loss) per weighted average common share, diluted$ 0.19 $ 0.12 $ 0.21 $ 0.21 FFO per weighted average common share and unit, basic$ 0.52 $ 0.54 $ 1.05 $ 1.05 FFO per weighted average common share and unit, diluted$ 0.51 $ 0.54 $ 1.04 $ 1.05 Weighted average number of common shares and OP/DownREIT Units outstanding - basic 317,096 304,696 316,891 302,998 Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding - diluted 320,426 308,322
320,372 306,596
Impact of adjustments to FFO: Promoted interest on settlement of note receivable, net of tax - - $ -$ (6,482) Legal and other costs 1,586 - 2,344 3,660 Net gain on the sale of non-depreciable real estate owned - (5,282) - (5,282) Unrealized (gain)/loss on unconsolidated technology investments, net of tax (3,334) - (3,302) (229) Severance costs and other restructuring expense - - 1,642 - Casualty-related charges/(recoveries), net 249 246 1,648 261 Casualty-related charges/(recoveries) on unconsolidated joint ventures, net - 81 31 227$ (1,499) $ (4,955) $ 2,363 $ (7,845) FFOA attributable to common stockholders and unitholders, diluted$ 163,095 $ 161,257
FFOA per weighted average common share and unit, diluted$ 0.51 $ 0.52
Recurring capital expenditures (12,504) (12,750) (21,713) (19,968) AFFO attributable to common stockholders and unitholders, diluted$ 150,591 $ 148,507
AFFO per weighted average common share and unit, diluted$ 0.47 $ 0.48 $ 0.98 $ 0.96 83 Table of Contents
The following table is our reconciliation of FFO share information to weighted
average common shares outstanding, basic and diluted, reflected on the UDR
Consolidated Statements of Operations for the three and six months ended
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Weighted average number of common shares and OP/DownREIT Units outstanding - basic 317,096 304,696 316,891 302,998 Weighted average number of OP/DownREIT Units outstanding (22,386) (22,736) (22,307) (23,504) Weighted average number of common shares outstanding - basic per the Consolidated Statements of Operations 294,710 281,960
294,584 279,494
Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding - diluted 320,426 308,322 320,372 306,596 Weighted average number of OP/DownREIT Units outstanding (22,386) (22,736) (22,307) (23,504) Weighted average number of Series E Cumulative Convertible Preferred shares outstanding (2,953) (3,011) (2,982) (3,011) Weighted average number of common shares outstanding - diluted per the Consolidated Statements of Operations 295,087 282,575 295,083 280,081
Business Overview
United Dominion Realty, L.P. (the "Operating Partnership" or "UDR, L.P. ") is aDelaware limited partnership formed inFebruary 2004 and organized pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act.The Operating Partnership is the successor-in-interest toUnited Dominion Realty, L.P. , a limited partnership formed under the laws ofVirginia , which commenced operations onNovember 4, 1995 . Our sole general partner isUDR, Inc. , aMaryland corporation ("UDR" or the "General Partner"), which conducts a substantial amount of its business and holds a substantial amount of its assets through theOperating Partnership . AtJune 30, 2020 , theOperating Partnership's real estate portfolio included 52 communities located in nine states and theDistrict of Columbia with a total of 16,434 apartment homes. As ofJune 30, 2020 , UDR owned 0.1 million units of our general partnership interests and 176.1 million units of our limited partnership interests (the "OP Units"), or approximately 95.3% of our outstanding OP Units. By virtue of its ownership of our OP Units and being our sole general partner, UDR has the ability to control all of the day-to-day operations of theOperating Partnership . Unless otherwise indicated or unless the context requires otherwise, all references in this section of this Report to theOperating Partnership or "we," "us" or "our" refer toUDR, L.P. together with its consolidated subsidiaries, and all references in this section to "UDR" or the "General Partner" refer solely toUDR, Inc. UDR is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities. The General Partner was formed in 1972 as aVirginia corporation and changed its state of incorporation fromVirginia toMaryland inJune 2003 . AtJune 30, 2020 , the General Partner's consolidated real estate portfolio included 148 communities located in 13 states and theDistrict of Columbia with a total of 47,371 apartment homes. In addition, the General Partner had an ownership interest in 5,134 completed or to-be-completed apartment homes through unconsolidated joint ventures or partnerships, including 2,004 apartment homes owned by entities in which we hold preferred equity investments.
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The following table summarizes our market information by major geographic
markets as of and for the three and six months ended
Three Months Ended Six Months Ended June 30, 2020 June 30, 2020 June 30, 2020 Percentage Total Monthly Monthly Number of Number of of Total Carrying Average Income per Average Income per Apartment Apartment Carrying Value (in Physical Occupied Physical Occupied Same-Store Communities Communities Homes Value thousands) Occupancy Home (a) Occupancy Home (a)West Region Orange County, CA 5 3,119 19.2 %$ 749,975 96.1 % $ 2,277 96.7 %$ 2,302 San Francisco, CA 9 2,185 15.7 % 613,490 93.7 % 3,283 95.1 % 3,336 Seattle, WA 5 932 5.9 % 231,486 97.1 % 2,074 97.2 % 2,111 Los Angeles, CA 2 344 3.0 % 117,293 97.2 % 2,725 96.8 % 2,790 Monterey Peninsula, CA 7 1,565 4.7 % 183,797 96.8 % 1,918 96.3 % 1,936 Other Southern California 1 414 2.0 % 76,030 96.6 % 2,116 96.9 % 2,135 Portland, OR 2 476 1.3 % 51,330 97.3 % 1,624 97.1 % 1,633 Mid-Atlantic Region Metropolitan D.C. 6 2,068 14.5 % 566,250 95.7 % 2,122 96.3 % 2,156 Baltimore, MD 2 540 2.8 % 106,982 98.1 % 1,535 97.5 % 1,544 Northeast Region New York, NY 1 503 8.6 % 334,012 91.5 % 3,716 95.4 % 3,861 Boston, MA 1 387 1.9 % 75,230 96.3 % 2,050 95.4 % 2,095 Southeast Region Tampa, FL 2 942 2.9 % 111,603 97.5 % 1,525 97.6 % 1,536 Nashville, TN 6 1,612 4.0 % 156,295 97.9 % 1,334 97.7 % 1,335 Other Florida 1 636 2.3 % 88,108 97.5 % 1,604 96.9 % 1,632 Southwest Region Denver, CO 1 218 3.7 % 144,751 92.9 % 3,079 92.6 % 3,112 Total/Average Same-Store Communities 51 15,941 92.5 % 3,606,632 96.1 % $ 2,183 96.5 %$ 2,219 Non-Mature, Commercial Properties & Other 1 493 7.5 % 292,078 Total Real Estate Owned 52 16,434 100.0 % 3,898,710 Total Accumulated Depreciation (1,867,071) Total Real Estate Owned, Net of Accumulated Depreciation$ 2,031,639
Monthly Income per Occupied Home represents total monthly revenues divided by (a) the average physical number of occupied apartment homes in our Same-Store
portfolio.
We report in two segments: Same-Store Communities and Non-Mature Communities/Other.
Our Same-Store Communities segment represents those communities acquired, developed, and stabilized prior toApril 1, 2019 (for quarter-to-date comparison) andJanuary 1, 2019 (for year-to-date comparison) and held as ofJune 30, 2020 . These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior period, there is no plan to conduct substantial redevelopment activities, and the communities are not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. Our Non-Mature Communities/Other segment represents those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity.The Operating Partnership's primary source of liquidity is cash flow from operations, as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes, and borrowings owed by us under the General Partner's credit agreements. The General Partner will routinely use its working capital credit facility, its unsecured revolving credit facility and issuances of commercial paper to temporarily fund 85
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certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we continue to execute on maintaining a diversified portfolio. We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings owed by us under the General Partner's credit agreements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities and potential property acquisitions through net cash provided by property operations, borrowings and the disposition of properties. We believe that our net cash provided by property operations and borrowings will continue to be adequate to meet both operating requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings owed by us under the General Partner's credit agreements, and the disposition of properties.
Future Capital Needs
Future capital expenditures are expected to be funded with proceeds from the issuance of secured debt or unsecured debt, sales of properties, borrowings owed by us under ourGeneral Partner's credit agreements, and to a lesser extent, from cash flows provided by operating activities.
As of
Critical Accounting Policies and Estimates and New Accounting Pronouncements
Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, (3) real estate investment properties, and (4) revenue recognition. Our critical accounting policies are described in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in theOperating Partnership's Annual Report on Form 10-K, filed with theSEC onFebruary 18, 2020 . There have been no significant changes in our critical accounting policies from those reported. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
Statements of Cash Flows
The following discussion explains the changes in Net cash provided by/(used in) operating activities, Net cash provided by/(used in) investing activities, and Net cash provided by/(used in) financing activities that are presented in our Consolidated Statements of Cash Flows for the six months endedJune 30, 2020 and 2019. Operating Activities For the six months endedJune 30, 2020 , Net cash provided by/(used in) operating activities was$117.8 million compared to$126.4 million for the comparable period in 2019. The decrease in cash flow from operating activities was primarily due to changes in operating assets and liabilities and a decrease in net operating income, primarily driven by a reserve recorded in 2020 on our multifamily tenant lease receivables.
Investing Activities
For the six months endedJune 30, 2020 , Net cash provided by/(used in) investing activities was$(13.2) million compared to$(19.6) million for the comparable period in 2019. The decrease in cash used in investing activities was primarily due to a decrease in capital expenditures during the six months endedJune 30, 2020 , as compared to the same period in 2019. 86
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Acquisitions and Dispositions
Financing Activities
For the six months endedJune 30, 2020 and 2019, our Net cash provided by/(used in) financing activities was$(104.0) million compared to$(106.3) million for the comparable period of 2019. The decrease in cash used in financing activities was primarily due to a decrease in repayments of notes payable to the General Partner, partially offset by an increase in distributions paid to partnership unitholders. Guarantor on Unsecured DebtThe Operating Partnership is the guarantor on the General Partner's unsecured revolving credit facility with an aggregate borrowing capacity of$1.1 billion , an unsecured commercial paper program with an aggregate borrowing capacity of$500 million , a$350 million term loan dueSeptember 2023 ,$300 million of medium-term notes dueJuly 2024 ,$300 million of medium-term notes dueOctober 2025 ,$300 million of medium-term notes dueSeptember 2026 ,$300 million of medium-term notes dueJuly 2027 ,$300 million of medium-term notes dueJanuary 2028 ,$300 million of medium-term notes dueJanuary 2029 ,$600 million of medium-term notes dueJanuary 2030 ,$400 million of medium-term notes dueAugust 2031 , and$300 million of medium-term notes dueNovember 2034 . As ofJune 30, 2020 andDecember 31, 2019 , the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had$185.0 million and$300.0 million , respectively, outstanding under its unsecured commercial paper program.
The credit facilities are subject to customary financial covenants and limitations.
OnJuly 14, 2020 , the General Partner announced that it commenced a cash tender offer for any and all of its outstanding 3.75% unsecured medium-term notes dueJuly 2024 (the "2024 Notes"), which theOperating Partnership guarantees. Pursuant to the tender offer, onJuly 21, 2020 , the General Partner completed the purchase of$116.9 million aggregate principal amount of the 2024 Notes, or 39.0% of the$300.0 million aggregate principal amount of the 2024 Notes. The tender offer consideration was$1,101.92 for each$1,000 principal amount of the 2024 Notes, plus accrued and unpaid interest to, but not including,July 21, 2020 . OnJuly 21, 2020 , the General Partner issued$400.0 million of 2.10% senior unsecured medium-term notes dueAugust 1, 2032 . Interest is payable semi-annually in arrears onFebruary 1 andAugust 1 . The notes were priced at 99.894% of the principal amount at issuance. The General Partner used or will use a portion of the net proceeds to fund the purchase of the 2024 Notes accepted pursuant to the tender offer described above and to prepay$245.8 million of 4.64% secured debt due in 2023.The Operating Partnership is the guarantor of this debt. The combined prepayment and make-whole amounts for the purchase of the 2024 Notes and the prepayment of the secured debt due in 2023, inclusive of the acceleration of fair market value adjustments originally recorded on secured debt assumed in property acquisitions, totaled approximately$24.0 million . Interest Rate Risk We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had$27.0 million in variable rate debt that is not subject to interest rate swap contracts as ofJune 30, 2020 . If market interest rates for variable rate debt increased by 100 basis points, our interest expense for the six months endedJune 30, 2020 would increase by$0.1 million based on the average balance outstanding during the period. These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such amount, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure. 87 Table of Contents
The General Partner also utilizes derivative financial instruments owed by theOperating Partnership to manage interest rate risk and generally designates these financial instruments as cash flow hedges. See Note 9, Derivatives and Hedging Activities, in the Notes to theOperating Partnership's Consolidated Financial Statements for additional discussion of derivative instruments. A presentation of cash flow metrics based on GAAP is as follows (dollars in thousands): Six Months EndedJune 30, 2020 2019
Net cash provided by/(used in) operating activities
126,407
Net cash provided by/(used in) investing activities (13,204)
(19,599)
Net cash provided by/(used in) financing activities (104,043) (106,322)
Results of Operations The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the three and six months endedJune 30, 2020 and 2019.
Net Income/(Loss) Attributable to OP Unitholders
Net income attributable to OP unitholders was$19.4 million ($0.10 per diluted OP Unit) for the three months endedJune 30, 2020 , as compared to net income of$27.4 million ($0.15 per diluted OP Unit) for the comparable period in the prior year. The decrease in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:
a decrease in total property NOI of
? approximately
receivables and an increase in rent concessions given to tenants; and
? an increase in other operating expenses of
higher ground lease expense.
Net income attributable to OP unitholders was$43.5 million ($0.24 per diluted OP Unit) for the six months endedJune 30, 2020 , as compared to net income of$51.3 million ($0.28 per diluted OP Unit) for the comparable period in the prior year. The decrease in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:
a decrease in total property NOI of
? approximately
receivables and an increase in rent concessions given to tenants; and
? an increase in other operating expenses of
higher ground lease expense.
Apartment Community Operations
Our net income results primarily from NOI generated from the operation of our apartment communities.The Operating Partnership defines NOI, which is a non-GAAP financial measure, as rental income less direct property rental expenses. Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. Rental expenses include real estate taxes, insurance, personnel, utilities, repairs and maintenance, administrative and marketing. Excluded from NOI are property management costs, which are theOperating Partnership's allocable share of costs incurred by the General Partner for shared services of corporate level property management employees and related support functions and costs. Management considers NOI a useful metric for investors as it is a more meaningful representation of a community's continuing operating performance than net income as it is prior to corporate-level expense allocations, general and administrative costs, capital structure and depreciation and amortization. Although we consider NOI a useful measure of operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities as determined in accordance with GAAP. NOI excludes several income and expense categories as detailed in the reconciliation of NOI to Net income/(loss) attributable to OP unitholders below. 88
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The following table summarizes the operating performance of our total property NOI for the three and six months endedJune 30, 2020 and 2019 (dollars in thousands): Three Months Ended Six Months Ended June 30, (a) % June 30, (a) % 2020 2019 Change 2020 2019 Change Same-Store Communities: Same-Store rental income$ 100,322 $ 103,048 (2.6) %$ 204,799 $ 204,500 0.1 % Same-Store operating expense (b) (27,030) (26,045) 3.8 % (54,367) (52,377) 3.8 % Same-Store NOI 73,292 77,003
(4.8) % 150,432 152,123 (1.1) %
Non-Mature Communities/Other NOI: Redevelopment communities NOI 2,990 3,451 (13.4) % 6,441 6,998 (8.0) % Non-residential/other NOI (1,158) 1,226 (194.5) % (194) 1,698 (111.4) % Total Non-Mature Communities/Other NOI 1,832 4,677 (60.8) % 6,247 8,696 (28.2) % Total property NOI$ 75,124 $ 81,680 (8.0) %$ 156,679 $ 160,819 (2.6) %
(a) Same-Store consists of 15,941 apartment homes.
(b) Excludes depreciation, amortization, and property management expenses.
The following table is our reconciliation of Net income/(loss) attributable to
OP unitholders to total property NOI for the three and six months ended
Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net income/(loss) attributable to OP unitholders$ 19,373 $ 27,394 $ 43,491 $ 51,340 Property management 3,024 3,308 6,249 6,287 Other operating expenses 3,837 2,422 7,696 4,822
Real estate depreciation and amortization 35,430 34,921 70,730 69,575 General and administrative 3,951 4,151 9,259 8,812 Casualty-related charges/(recoveries), net 190 (81) 188 (81) (Income)/loss from unconsolidated entities 1,661 1,794 3,422 4,534 Interest expense 7,170 7,355 14,634 14,726 Net income/(loss) attributable to noncontrolling interests 488 416 1,010 804 Total property NOI$ 75,124 $ 81,680 $ 156,679 $ 160,819 Same-Store Communities OurSame-Store Community properties, those acquired, developed, and stabilized prior toApril 1, 2019 (for quarter-to-date comparison) andJanuary 1, 2019 (for year-to-date comparison) and held as ofJune 30, 2020 , consisted of 15,941 apartment homes for both periods and provided 97.6% and 96.0% of our total NOI for the three and six months endedJune 30, 2020 , respectively.
Three Months Ended
NOI for ourSame-Store Community properties decreased 4.8%, or$3.7 million , for the three months endedJune 30, 2020 compared to the same period in 2019. The decrease in property NOI was primarily attributable to a 2.6%, or$2.7 million , decrease in property rental income and a 3.8%, or$1.0 million , increase in operating expenses. The decrease in property rental income was primarily driven by a$2.0 million increase in our reserve on multifamily tenant lease receivables, a$0.6 million increase in rent concessions and a decrease of$0.6 million in reimbursement and ancillary and fee income, partially offset by a 0.7%, or$0.7 million , increase in rental rates. Physical occupancy decreased 0.7% to 96.1% and total monthly income per occupied home decreased 2.0% to$2,183 . The increase in operating expenses was primarily driven by a 9.3%, or$0.9 million , increase in real estate taxes, which was primarily due to higher assessed valuations and a 9.4%, or$0.4 million , increase in repair and maintenance expense due to the increased use of third party vendors, partially offset by an 8.2%, or$0.5 million , decrease in personnel expense as a result of fewer employees. 89 Table of Contents The operating margin (property net operating income divided by property rental income) was 73.1% and 74.7% for the three months endedJune 30, 2020 and 2019, respectively.
Six Months Ended
NOI for ourSame-Store Community properties decreased 1.1%, or$1.7 million , for the six months endedJune 30, 2020 compared to the same period in 2019. The decrease in property NOI was primarily attributable to a 3.8%, or$2.0 million , increase in operating expenses, which was partially offset by a 0.1%, or$0.3 million , increase in property rental income. The increase in property rental income was primarily driven by a 1.8%, or$3.2 million , increase in rental rates and a 0.4%, or$0.1 million , increase in reimbursement and ancillary and fee income, partially offset by a$2.1 million increase in our reserve on multifamily tenant lease receivables and a$0.6 million increase in rent concessions. Physical occupancy decreased 0.2% to 96.5% and total monthly income per occupied home increased 0.4% to$2,219 . The increase in operating expenses was primarily driven by a 7.8%, or$1.5 million , increase in real estate taxes, which was primarily due to higher assessed valuations and a 10.6%, or$0.8 million , increase in repair and maintenance expense due to the increased use of third party vendors, partially offset by an 7.6%, or$0.9 million , decrease in personnel expense as a result of fewer employees. The operating margin (property net operating income divided by property rental income) was 73.5% and 74.4% for the six months endedJune 30, 2020 and 2019, respectively. Non-Mature Communities/Other
Three Months Ended
The remaining 2.4%, or$1.8 million , of our total NOI during the three months endedJune 30, 2020 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 60.8%, or$2.8 million , for the three months endedJune 30, 2020 , compared to the same period in 2019. The decrease was primarily attributable to a$2.4 million decrease in NOI from non-residential/other primarily due to a reserve on retail tenant lease receivables, including reserves on straight-line lease receivables, and a$0.5 million decrease in NOI from redevelopment communities.
Six Months Ended
The remaining 4.0%, or$6.2 million , of our total NOI during the six months endedJune 30, 2020 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 28.2%, or$2.4 million , for the six months endedJune 30, 2020 , compared to the same period in 2019. The decrease was primarily attributable to a$1.9 million decrease in NOI from non-residential/other primarily due to a reserve on retail tenant lease receivables, including reserves on straight-line lease receivables, and a$0.6 million decrease in NOI from redevelopment communities.
Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results of operations as a result of wage pressures and increases in utilities and material costs, the majority of our apartment leases have initial terms of 12 months or less, which generally enables us to compensate for any inflationary effects by increasing rental rates on our apartment homes. Although an extreme escalation in costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the three and six months endedJune 30, 2020 .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material. 90
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