Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unfavorable changes in the apartment market, changing economic conditions, the impact of inflation/deflation on rental rates and property operating expenses, expectations concerning availability of capital and the stabilization of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments, redevelopments and lease-ups on schedule, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, expectations on occupancy levels and rental rates, expectations concerning joint ventures 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:

	·		general economic conditions;

	·		unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates;

	·		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 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;

	·		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 and other laws affecting our business.

A discussion of these and other factors affecting our business and prospects is set forth in Part I, Item 1A. Risk Factors. We encourage investors to review these risk factors.

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on the consolidated financial statements and the accompanying notes for the years ended December 31, 2017, 2016 and 2015 of each of UDR, Inc. and United Domination Realty, L.P.

UDR, Inc.:

Business Overview

We are a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, disposes of, and manages multifamily apartment communities. We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include the Operating Partnership and the DownREIT Partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the Company,” or “UDR” refer collectively to UDR, Inc., its subsidiaries and its consolidated joint ventures.

At December 31, 2017, our consolidated real estate portfolio included 127 communities in 11 states plus the District of Columbia totaling 39,998 apartment homes, and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 29 communities with 7,286 apartment homes.

At December 31, 2017, the Company was developing two wholly-owned communities with a total of 1,101 apartment homes, 300 of which have been completed, and two unconsolidated joint venture communities with a total of 533 apartment homes, none of which have been completed. The Company was not redeveloping any communities as of December 31, 2017.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations as well as involves some degree of uncertainty. Estimates are prepared based on management’s assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Significant Accounting Policies, to the Notes to the UDR, Inc. Consolidated Financial Statements included in this Report.

Cost Capitalization

In conformity with GAAP, we capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.

In addition to construction costs, we capitalize costs directly related to the predevelopment, development, and redevelopment of a capital project, which include, but are not limited to, interest, real estate taxes, insurance, and allocated development and redevelopment overhead related to support costs for personnel working on the capital projects. We use our professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. As each home in a capital project is completed and becomes available for lease-up, the Company ceases capitalization on the related portion. The costs capitalized are reported on the Consolidated Balance Sheets as Total Real Estate Owned, Net of Accumulated Depreciation. Amounts capitalized during the years ended December 31, 2017, 2016, and 2015 were $27.4 million, $24.4 million, and $22.4 million, respectively.

Investment in Unconsolidated Entities

We may enter into various joint venture agreements and/or partnerships with unrelated third parties to hold or develop real estate assets. We must determine for each of these ventures whether to consolidate the entity or account for our investment under the equity method of accounting. We determine whether to consolidate a joint venture or partnership based on our rights and obligations under the venture agreement, applying the applicable accounting guidance. The application of the rules in evaluating the accounting treatment for each joint venture or partnership is complex and requires substantial management judgment. We evaluate our accounting for investments on a regular basis including when a significant change in the design of an entity occurs. Throughout our financial statements, and in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we use the term “joint venture” or “partnership” when referring to investments in entities in which we do not have a 100% ownership interest.

We continually evaluate our investments in unconsolidated joint ventures when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. The amount of loss recognized is the excess of the investment’s carrying amount over its estimated fair value. If we believe that the decline in fair value is temporary, no impairment is recorded. The aforementioned factors are taken as a whole by management in determining the valuation of our investment property. Should the actual results differ from management’s judgment, the valuation could be negatively affected and may result in a negative impact to our Consolidated Financial Statements.

Impairment of Long-Lived Assets

We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based primarily upon unobservable inputs (defined as Level 3 inputs in the fair value hierarchy) related to rental rates, operating costs, growth rates, discount rates, capitalization rates, industry trends and reference to market rates and transactions.

Real Estate Investment Properties

We purchase real estate investment properties from time to time and record the fair value to various components, such as land, buildings, and intangibles related to in-place leases, based on the fair value of each component. In making estimates of fair values for purposes of allocating purchase price, we utilize various sources, including independent appraisals, our own analysis of recently acquired and existing comparable properties in our portfolio and other market data. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the

fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining average contractual lease period.

REIT Status

We are a Maryland corporation that has elected to be treated for federal income tax purposes as a REIT. A REIT is a legal entity that holds interests in real estate and is required by the Code to meet a number of organizational and operational requirements, including a requirement that a REIT must distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. If we were to fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at the regular corporate rates and may not be able to qualify as a REIT for four years. Based on the net earnings reported for the year ended December 31, 2017 in our Consolidated Statements of Operations, we would have incurred federal and state GAAP income taxes if we had failed to qualify as a REIT.

Summary of Real Estate Portfolio by Geographic Market

The following table summarizes our market information by major geographic markets as of and for the year ended December 31, 2017.


		As of December 31, 2017					Year Ended December 31, 2017
			Percentage		Total				Monthly		Net
	Number of	Number of	of Total		Carrying		Average		Income per		Operating
	Apartment	Apartment	Carrying		Value (in		Physical		Occupied		Income
Same-Store Communities	Communities	Homes	Value		thousands)		Occupancy		Home (a)		(in thousands)
West Region
San Francisco, CA	10	2,558	7.2	%	$	732,102	96.7	%	$	3,414	$	77,162
Orange County, CA	10	3,251	8.5	%		864,555	95.9	%		2,360		67,734
Seattle, WA	10	2,014	5.5	%		557,788	96.7	%		2,123		35,808
Los Angeles, CA	4	1,225	4.4	%		451,322	95.7	%		2,709		28,601
Monterey Peninsula, CA	7	1,565	1.7	%		172,854	96.8	%		1,641		22,443
Other Southern California	2	654	1.0	%		106,020	96.0	%		1,804		10,089
Portland, OR	2	476	0.5	%		48,317	97.2	%		1,542		6,425
Mid-Atlantic Region
Metropolitan D.C.	21	7,551	19.1	%		1,940,773	97.1	%		1,988		120,160
Richmond, VA	4	1,358	1.4	%		145,970	97.6	%		1,290		15,523
Baltimore, MD	3	720	1.5	%		150,168	96.6	%		1,691		9,944
Northeast Region
New York, NY	4	1,945	12.8	%		1,302,795	97.7	%		4,333		67,242
Boston, MA	5	1,548	5.5	%		562,967	96.3	%		2,958		39,231
Southeast Region
Orlando, FL	9	2,500	2.2	%		219,764	96.9	%		1,260		25,822
Nashville, TN	8	2,260	2.0	%		206,572	96.7	%		1,255		23,740
Tampa, FL	7	2,287	2.5	%		251,247	97.0	%		1,344		23,916
Other Florida	1	636	0.8	%		84,519	96.3	%		1,517		7,248
Southwest Region
Dallas, TX	6	2,040	2.0	%		202,393	96.5	%		1,226		18,376
Austin, TX	3	883	0.9	%		89,681	97.1	%		1,363		8,079
Total/Average Same-Store Communities	116	35,471	79.5	%		8,089,807	96.8	%	$	2,064		607,543
Non-Mature, Commercial Properties & Other	11	4,227	14.7	%		1,494,909						91,255
Total Real Estate Held for Investment	127	39,698	94.2	%		9,584,716						698,798
Real Estate Under Development (b)	—	300	5.8	%		592,490						(295)
Total Real Estate Owned	127	39,998	100.0	%		10,177,206					$	698,503
Total Accumulated Depreciation						(3,330,166)
Total Real Estate Owned, Net of Accumulated Depreciation					$	6,847,040

	(a)		Monthly Income per Occupied Home represents total monthly revenues divided by the average physical number of occupied apartment homes in our Same-Store portfolio.

	(b)		As of December 31, 2017, the Company was developing two wholly-owned communities with a total of 1,101 apartment homes, 300 of which have been 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 to January 1, 2016 and held as of December 31, 2017. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the communities are not classified as held for disposition at year end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.

Our Non-Mature 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, 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 unsecured revolving credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we repositioned our portfolio.

We expect to meet our short-term liquidity requirements generally through net cash provided by 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 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 the Securities 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.

On January 23, 2017, the Company entered into an unsecured commercial paper program. Under the terms of the program, the Company may issue unsecured commercial paper up to a maximum aggregate amount outstanding of $500 million. The notes are sold under customary terms in the United States commercial paper market and rank pari passu with all of the Company’s other unsecured indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership. As of December 31, 2017, we had $300.0 million of unsecured commercial paper outstanding, for one month terms, at a weighted average annualized rate of 1.96%.

On June 16, 2017, the Company issued $300 million of 3.50% senior unsecured medium-term notes due July 1, 2027. Interest is payable semi-annually in arrears on January 1 and July 1 of each year, beginning on January 1, 2018. The notes were priced at 99.764% of the principal amount at issuance. The Company used the net proceeds for general corporate purposes, including the repayment of outstanding indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership.

On July 31, 2017, the Company entered into an ATM sales agreement under which the Company may offer and sell up to 20 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 in April 2017, which had replaced the prior at-the-market equity offering program entered into in April

During the year ended December 31, 2017, the Company did not sell any shares of common stock through the new continuous equity program or the prior ATM program.

On December 13, 2017, the Company issued $300 million of 3.50% senior unsecured medium-term notes due January 15, 2028. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018. The notes were priced at 99.601% of the principal amount at issuance. The Company used the net proceeds for the repayment of debt, including funding the redemption of senior unsecured medium-term notes due in June 2018, and for general corporate purposes. The notes are fully and unconditionally guaranteed by the Operating Partnership.

Future Capital Needs

Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, 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 2018, we have approximately $33.7 million of secured debt maturing, inclusive of principal amortization, and $300.0 million of unsecured debt maturing, comprised solely of unsecured commercial paper. We anticipate repaying that 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.

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 years ended December 31, 2017, 2016, and 2015.

Operating Activities

For the year ended December 31, 2017, Net cash provided by/(used in) operating activities was $519.2 million compared to $536.9 million for 2016. The decrease in cash flow from operating activities was primarily due to a decrease in cash from return on investment in unconsolidated joint ventures, partially offset by improved net operating income, primarily driven by revenue growth at communities, and changes in operating assets and liabilities.

For the year ended December 31, 2016, Net cash provided by/(used in) operating activities was $536.9 million compared to $458.6 million for 2015. The increase in cash flow from operating activities was primarily due to improved net operating income, primarily driven by revenue growth at communities, and an increase in cash from return on investment in unconsolidated joint ventures, partially offset by changes in operating assets and liabilities.

Investing Activities

For the year ended December 31, 2017, Net cash provided by/(used in) investing activities was $(407.4) million compared to $(112.3) million for 2016. The increase in cash used in investing activities was primarily due to a decrease in proceeds from the sale of real estate assets, an increase in investment in unconsolidated joint ventures, and an increase in spend on consolidated development projects, capital expenditures and major renovations, partially offset by a decrease in the acquisition of real estate assets and an increase in distributions received from unconsolidated joint ventures.

For the year ended December 31, 2016, Net cash provided by/(used in) investing activities was $(112.3) million compared to $(265.5) million for 2015. The decrease in cash used in investing activities was primarily due to a decrease in the acquisition of real estate assets, a decrease in investment in unconsolidated joint ventures, an increase in distributions received from unconsolidated joint ventures and a decrease in capital expenditures and major renovations, partially offset by an increase in spend on consolidated development projects and a decrease in proceeds from the sale of real estate assets.

Acquisitions

In October 2017, the Company acquired an operating community located in Denver, Colorado with a total of 218 apartment homes and 17,000 square feet of retail space for a purchase price of approximately $141.5 million. The

Company consolidated the operating community and accounted for the consolidation as a business combination. As a result of the consolidation, the Company increased its real estate assets owned by $139.0 million, recorded approximately $2.5 million of in-place lease intangibles and recorded a gain on consolidation of approximately $14.8 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations. The acquisition will be fully or partially funded with tax-deferred like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986 (“Section 1031 exchanges”). Prior to acquiring the community, the Company had provided $93.5 million as a participating loan investment to the third-party developer and was entitled to receive, in addition to repayment of principal and interest, contingent interest equal to 50% of the sum of the amount the property was sold for less construction and closing costs, which equaled approximately $14.9 million. The Company had previously accounted for its participating loan investment as an unconsolidated joint venture.

In January 2017, the Company exercised its fixed-price option to purchase its joint venture partner’s ownership interest in a 244 home operating community in Seattle, Washington, thereby increasing its ownership interest from 49% to 100%, for a cash purchase price of approximately $66.0 million. 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. As a result of the consolidation, the Company increased its real estate owned by approximately $97.0 million, recorded approximately $1.7 million of in-place lease intangibles and recorded a gain on consolidation of $12.2 million, which is included in Income/(loss) from unconsolidated entities on the Consolidated Statements of Operations.

In November 2016, the Company acquired an operating community in Redmond, Washington with 177 apartment homes for approximately $70.5 million, which was funded with tax-deferred Section 1031 exchanges.

In October 2016, the Company increased its ownership from 50% to 100% in two operating communities located in Bellevue, Washington with a total of 331 apartment homes for approximately $70.3 million in cash, which was funded with tax-deferred Section 1031 exchanges, and the assumption of an incremental $37.9 million of secured debt with a weighted average interest rate of 3.67%. As a result, the Company consolidated the operating communities. The Company had previously accounted for its 50% ownership interest as an unconsolidated joint venture. We accounted for the consolidation as a business combination resulting in a gain on consolidation of approximately $36.4 million.

In August 2016, the Company increased its ownership interest from 5% to 100% in a parcel of land in Dublin, California for a purchase price of approximately $8.5 million. As a result, the Company consolidated the parcel of land. UDR had previously accounted for its 5% interest in the parcel of land as an unconsolidated joint venture. We accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased our real estate owned by $8.9 million.

In June 2016, the Company increased its ownership interest from 50% to 100% in a parcel of land in Los Angeles, California for a purchase price of approximately $20.1 million. As a result, the Company consolidated the parcel of land. UDR had previously accounted for its 50% interest in the parcel of land as an unconsolidated joint venture. We accounted for the consolidation as an asset acquisition resulting in no gain or loss upon consolidation and increased our real estate owned by $31.1 million. Subsequent to the acquisition, the Company entered into a triple-net operating ground lease for the parcel of land at market terms with a third-party developer. The lessee plans to construct a multi-family community on the parcel of land. The ground lease provides the ground lessee with options to buy the fee interest in the parcel of land. The lease term is 49 years plus two 25‑year extension options, does not transfer ownership to the lessee, and does not include a bargain purchase option.

In October 2015, the Company completed the acquisition of six Washington, D.C. area properties from Home Properties, L.P., a New York limited partnership (“Home OP”), for $900.6 million, which was comprised of $564.8 million of DownREIT Units in the newly formed DownREIT Partnership issued at $35 per unit (a total of 16.1 million units), the assumption of $89.3 million of debt, $221.0 million of reverse Section 1031 exchanges, and $25.5 million of cash. In addition, the Company issued approximately 14.0 million shares of its Series F Preferred Stock to former limited partners of Home OP, which had the right to subscribe for one share of Series F Preferred Stock for each DownREIT Unit issued in connection with the acquisitions.

Of the six properties acquired from Home OP, four were acquired through the DownREIT Partnership, one was acquired by the Company through a reverse Section 1031 exchange and one was acquired by the Operating Partnership through a reverse Section 1031 exchange.

In February 2015, the Company acquired an office building in Highlands Ranch, Colorado, for consideration of approximately $24.0 million, which was comprised of assumed debt. The Company’s corporate offices, as well as other leased office space, are located in the acquired office building. The building consists of approximately 120,000 square feet. All existing leases were assumed by the Company at the time of the acquisition.

Dispositions

In December 2017, the Company sold two operating communities with a total of 218 apartment homes in Orange County, California and Carlsbad, California for gross proceeds of $69.0 million, resulting in net proceeds of $68.0 million and a gain of $41.3 million.

In February 2017, the Company sold a parcel of land in Richmond, Virginia for gross proceeds of $3.5 million, resulting in net proceeds of $3.3 million and a gain of $2.1 million.

In November 2016, the Company sold seven operating communities with a total of 1,402 apartment homes in Baltimore, Maryland and an operating community with 380 apartment homes in Dallas, Texas for gross proceeds of $284.6 million, resulting in net proceeds of $280.5 million and a gain, net of tax, of $200.5 million. A portion of the proceeds was designated for tax-deferred Section 1031 exchanges.

In May 2016, the Company sold a retail center in Bellevue, Washington for gross proceeds of $45.4 million, resulting in net proceeds of $44.1 million and a gain, net of tax, of $7.3 million. A portion of the proceeds was designated for tax-deferred Section 1031 exchanges.

In March 2016, the Company sold its 95% ownership interest in two parcels of land in Santa Monica, California for gross proceeds of $24.0 million, resulting in net proceeds of $22.0 million and a gain, net of tax, of $3.1 million.

During the year ended December 31, 2015, the Company sold 12 communities with a total of 2,735 apartment homes for gross proceeds of $408.7 million, resulting in net proceeds of $387.7 million and a gain of $251.7 million. A portion of the sale proceeds was designated for tax-deferred Section 1031 exchanges for a 2014 acquisition and the October 2015 acquisitions.

We plan to continue to pursue our strategy of exiting markets where long-term growth prospects are limited and redeploying capital to primary locations in markets we believe will provide the best investment returns.

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 year ended December 31, 2017, total capital expenditures of $105.9 million or $2,667 per stabilized home, which in aggregate include recurring capital expenditures and major renovations, were spent across our portfolio, excluding development and commercial properties, as compared to $112.9 million or $2,786 per stabilized home for the prior year.

The decrease in total capital expenditures was primarily due to:

	·		a decrease of 27.8%, or $5.9 million, in major renovations, primarily due to lower redevelopment spend; and

	·		a decrease of 13.0%, or $1.6 million, in turnover capital expenditures.

The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development and commercial properties, for the years ended December 31, 2017 and 2016 (dollars in thousands):


							Per Home
	Year Ended December 31,						Year Ended December 31,
	2017		2016		% Change		2017		2016		% Change
Turnover capital expenditures	$	10,905	$	12,532	(13.0)	%	$	275	$	309	(11.0)	%
Asset preservation expenditures		35,129		34,725	1.2	%		885		856	3.4	%
Total recurring capital expenditures		46,034		47,257	(2.6)	%		1,160		1,166	(0.5)	%
Revenue-enhancing improvements		44,467		44,414	0.1	%		1,120		1,095	2.3	%
Major renovations (a)		15,370		21,274	(27.8)	%		387		525	(26.2)	%
Total capital expenditures	$	105,871	$	112,945	(6.3)	%	$	2,667	$	2,786	(4.3)	%
Repair and maintenance expense	$	33,704	$	33,859	(0.5)	%	$	849	$	835	1.7	%
Average home count (b)		39,692		40,543	(2.1)	%

	(a) Major renovations include major structural changes and/or architectural revisions to existing buildings.

	(b) 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. Actual capital spending is impacted by the net change in capital expenditure accruals.

We intend to continue to selectively add revenue-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.

Consolidated Real Estate Under Development and Redevelopment

At December 31, 2017, our development pipeline for two wholly-owned communities totaled 1,101 homes, 300 of which have been completed, with a budget of $716.5 million, in which we have a carrying value of $592.5 million. The communities are estimated to be completed during the first quarter of 2018 and the first quarter of 2019. During 2017, we incurred $248.5 million for development costs, an increase of $70.2 million from our 2016 level of $178.3 million.

At December 31, 2017, the Company was not redeveloping any communities.

During the year ended December 31, 2017, we incurred $15.4 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings, a decrease of $5.9 million from our 2016 level of $21.3 million.

Unconsolidated Joint Ventures and Partnerships

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 year ended December 31, 2017:

	·		we made investments totaling $123.8 million in our unconsolidated joint ventures;

	·		our proportionate share of the net income/(loss) of the joint ventures and partnerships was $31.3 million;

	·		our investment in unconsolidated joint ventures decreased by $140.5 million due to the acquisition of 100% interest in two operating communities previously held as unconsolidated entities, partially offset by capital contributions; and

	·		we received distributions of $120.7 million, of which $4.4 million were operating cash flows and $116.3 million were investing cash flows.

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 year ended December 31, 2017 and 2016.

Financing Activities

For the years ended December 31, 2017, 2016 and 2015, Net cash provided by/(used in) financing activities was $(111.8) million, $(429.3) million and $(201.6) million, respectively.

The following significant financing activities occurred during the year ended December 31, 2017:

	·		issued $300 million of 3.50% senior unsecured medium-term notes due July 1, 2027, for net proceeds of approximately $296.9 million;

	·		issued $300 million of 3.50% senior unsecured medium-term notes due January 15, 2028, for net proceeds of approximately $296.9 million;

	·		net proceeds of $300.0 million under our unsecured commercial paper program;

	·		repaid $326.3 million of secured debt;

	·		redeemed $300.0 million of 4.25% unsecured medium-term notes due June 2018 prior to maturity; and

	·		paid distributions of $327.8 million to our common stockholders.

The following significant financing activities occurred during the year ended December 31, 2016:

	·		issued $300 million of 2.95% senior unsecured medium-term notes due September 1, 2026;

	·		repaid $375.3 million of secured debt and $11.8 million of unsecured debt;

	·		repaid $83.3 million of 5.25% unsecured medium-term notes due January 2016;

	·		issued $50.0 million of secured debt;

	·		repaid $128.7 million under the Company’s unsecured revolving credit facility, net of borrowings;

	·		sold 5,000,000 shares of common stock for aggregate net proceeds of approximately $173.2 million at a price per share of $34.73; and

	·		paid distributions of $308.9 million to our common stockholders.

The following significant financing activities occurred during the year ended December 31, 2015:

	·		repaid $194.0 million of secured debt;

	·		repaid $325.2 million of 5.25% unsecured medium-term notes due January 2015;

	·		entered into a $350.0 million senior unsecured term loan facility due January 2021, which replaced the Company’s $250 million term loan and $100 million term loan that were scheduled to mature in June 2018;

	·		entered into a new $1.1 billion revolving credit facility with a maturity date in January 2020, exclusive of options to extend, which replaced the prior $900 million revolving credit facility that was scheduled to mature in December 2017;

	·		issued $300.0 million of 4.00% senior unsecured medium-term notes due October 1, 2025;

	·		sold 6,339,636 shares of common stock for aggregate net proceeds of approximately $210.0 million after deducting related expenses;

	·		net repayments of $2.5 million under the Company’s $1.1 billion unsecured revolving credit facility; and

	·		paid distributions of $283.2 million to our common stockholders.

Credit Facilities and Commercial Paper Program

We have two secured credit facilities with Fannie Mae with an aggregate commitment of $314.9 million, all of which was outstanding as of December 31, 2017. The Fannie Mae credit facilities mature at various dates from December 2018 through July 2020 and bear interest at floating and fixed rates. At December 31, 2017, $285.8 million of the outstanding balance was fixed and had a weighted average interest rate of 4.86% and the remaining balance of $29.0 million had a weighted average variable rate of 2.92%. During the year ended December 31, 2017, the Company prepaid $275.3 million of its secured credit facilities with borrowings under the Company’s unsecured commercial paper program and proceeds from the issuance of senior unsecured medium-term notes.

The Company has a $1.1 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $350.0 million unsecured term loan facility (the “Term Loan Facility”). The credit agreement for these facilities allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan Facility to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from any one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2020, with two six-month extension options, subject to certain conditions. The Term Loan Facility has a scheduled maturity date of January 29, 2021.

Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 90 basis points and a facility fee of 15 basis points, and the Term Loan Facility has an interest rate equal to LIBOR plus a margin of 95 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 85 to 155 basis points, the facility fee ranges from 12.5 to 30 basis points, and the margin under the Term Loan Facility ranges from 90 to 175 basis points.

As of December 31, 2017, we had no outstanding borrowings under the Revolving Credit Facility, leaving $1.1 billion of unused capacity (excluding $3.3 million of letters of credit at December 31, 2017), and $350.0 million of outstanding borrowings under the Term Loan Facility.

We have a working capital credit facility, which provides for a $75 million unsecured revolving credit facility (the “Working Capital Credit Facility”) with a scheduled maturity date of January 1, 2019. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin ranges from 85 to 155 basis points. In February 2018, we amended the working capital credit facility to extend the scheduled maturity date to January 2021. The maximum borrowing capacity and interest rate were unchanged by the amendment.

As of December 31, 2017, we had $21.8 million of outstanding borrowings under the Working Capital Credit Facility, leaving $53.2 million of unused capacity.

The Fannie Mae credit facilities and the bank revolving credit facilities are subject to customary financial covenants and limitations, all of which were in compliance with at December 31, 2017.

On January 23, 2017, we entered into 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 in the United States commercial paper market and rank pari passu with all of our other unsecured indebtedness. The notes are fully and unconditionally guaranteed by the Operating Partnership. As of December 31, 2017, we had issued $300.0 million of commercial paper, for one month terms, at a weighted average annualized rate of 1.96%, leaving $200.0 million of unused capacity.

Interest Rate Risk

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 $480.5 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2017. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $5.5 million based on the average balance outstanding during the year.

These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. 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 13, Derivatives and Hedging Activities, in the Notes to the UDR Consolidated Financial Statements included in this Report for additional discussion of derivate instruments.

A presentation of cash flow metrics based on GAAP is as follows (dollars in thousands):


	Year Ended December 31,
	2017		2016		2015
Net cash provided by/(used in) operating activities	$	519,152	$	536,929	$	458,627
Net cash provided by/(used in) investing activities		(407,441)		(112,277)		(265,461)
Net cash provided by/(used in) financing activities		(111,785)		(429,282)		(201,648)

Results of Operations

The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015.

Net Income/(Loss) Attributable to Common Stockholders

2017 -vs- 2016

Net income/(loss) attributable to common stockholders was $117.9 million ($0.44 per diluted share) for the year ended December 31, 2017, as compared to $289.0 million ($1.08 per diluted share) for the comparable period in the prior year. The decrease resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

	·		gains, net of tax, of $43.4 million on the sale of a parcel of land in Richmond, Virginia and the sale of two operating communities with a total of 218 apartment homes in Orange County, California and Carlsbad, California, during the year ended December 31, 2017, as compared to gains, net of tax, of $210.9 million on the sale of eight operating communities with a total of 1,782 apartment homes, a retail center and the Company’s 95% interest in two land parcels during the year ended December 31, 2016;

	·		an increase in depreciation expense of $10.4 million primarily due to homes delivered from our development and redevelopment communities and communities acquired in 2017 and 2016, partially offset by a decrease from sold communities and fully depreciated assets; and

	·		a decrease in income from unconsolidated entities of $21.0 million primarily due to:

	· during the year ended December 31, 2017, total gains on consolidation of $27.0 million from the purchase of two previously unconsolidated operating communities in Seattle, Washington from our West Coast Development Joint Venture and Denver, Colorado from our Development Capital Program, and net losses during the lease-up of development joint ventures.

As compared to:

	· during the year ended December 31, 2016, the disposition of three operating communities by the UDR/MetLife II joint venture, which resulted in gains of $47.7 million for the Company and a casualty gain of $3.8 million as a result of insurance proceeds related to a 2015 event.

This was partially offset by:

	·		an increase in total property NOI of $25.4 million primarily due to higher revenue per occupied home and NOI from communities acquired in 2017 and 2016 or redeveloped in 2017 and 2016, partially offset by a decrease from sold communities.

2016 -vs- 2015

Net income/(loss) attributable to common stockholders was $289.0 million ($1.08 per diluted share) for the year ended December 31, 2016 as compared to net income of $336.7 million ($1.29 per diluted share) for the prior year. The decrease resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

	·		gains, net of tax, of $210.9 million on the sale of eight operating communities with a total of 1,782 apartment homes, a retail center and the Company’s 95% interest in two land parcels during the year ended December 31, 2016, compared to gains, net of tax, of $251.7 million on the sale of 12 operating communities with a total of 2,735 apartment homes during the year ended December 31, 2015;

	·		an increase in depreciation expense of $45.0 million due to homes delivered from our development and redevelopment communities and communities acquired in 2016 and 2015, partially offset by a decrease from sold communities and fully depreciated assets;

	·		a decrease in joint venture management and other fees of $11.3 million primarily due to the promote and fee income of $10.0 million recognized in connection with the sale of the Texas Joint Venture in 2015; and

	·		a decrease in income from unconsolidated entities of $10.1 million primarily due to the sale of three operating communities by the UDR/MetLife II joint venture, which resulted in gains of $47.7 million for the Company, and a casualty gain of $3.8 million, as a result of insurance proceeds related to a September 2015 event received during the year ended December 31, 2016, as compared to the sale of the eight communities held by the Texas Joint Venture, which resulted in a gain of $59.4 million, during the year ended December 31, 2015.

This was partially offset by:

	·		an increase in total property NOI of $59.2 million primarily due to higher revenue per occupied home, NOI from the homes placed in service related to development and redevelopment projects completed in 2016 and 2015 and communities acquired in 2016 and 2015, partially offset by a decrease from sold communities.

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 2.75% 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.

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 to UDR, Inc. below.

The following table summarizes the operating performance of our total property NOI for each of the periods presented (dollars in thousands):


	Year Ended						Year Ended
	December 31, (a)						December 31, (b)
	2017		2016		% Change		2016		2015		% Change
Same-Store Communities:
Same-Store rental income	$	850,065	$	819,962	3.7	%	$	725,414	$	686,589	5.7	%
Same-Store operating expense (c)		(242,522)		(234,385)	3.5	%		(207,857)		(200,473)	3.7	%
Same-Store NOI		607,543		585,577	3.8	%		517,557		486,116	6.5	%

Non-Mature Communities/Other NOI:
Stabilized, non-mature communities NOI (d)		61,002		47,711	27.9	%		84,310		33,367	152.7	%
Acquired communities NOI		5,783		—	—	%		2,441		—	—	%
Redevelopment communities NOI		4,021		4,270	(5.8)	%		36,743		37,682	(2.5)	%
Development communities NOI		(295)		(436)	(32.3)	%		(436)		(114)	282.5	%
Non-residential/other NOI		17,081		16,244	5.2	%		16,026		15,666	2.3	%
Sold and held for disposition communities NOI		3,368		19,719	(82.9)	%		16,444		41,152	(60.0)	%
Total Non-Mature Communities/Other NOI		90,960		87,508	3.9	%		155,528		127,753	21.7	%
Total property NOI	$	698,503	$	673,085	3.8	%	$	673,085	$	613,869	9.6	%

	(a) Same-Store consists of 35,471 apartment homes.

	(b) Same-Store consists of 31,930 apartment homes.

	(c) Excludes depreciation, amortization, and property management expenses.

	(d) Represents non-mature communities that have achieved 90% occupancy for three 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 to UDR, Inc. to total property NOI for the periods presented (dollars in thousands):


	Year Ended December 31,
	2017		2016		2015
Net income/(loss) attributable to UDR, Inc.	$	121,558	$	292,718	$	340,383
Joint venture management and other fees		(11,482)		(11,400)		(22,710)
Property management		27,068		26,083		23,978
Other operating expenses		9,060		7,649		9,708
Real estate depreciation and amortization		430,054		419,615		374,598
General and administrative		48,566		49,761		59,690
Casualty-related charges/(recoveries), net		4,335		732		2,335
Other depreciation and amortization		6,408		6,023		6,679
(Income)/loss from unconsolidated entities		(31,257)		(52,234)		(62,329)
Interest expense		128,711		123,031		121,875
Interest income and other (income)/expense, net		(1,971)		(1,930)		(1,551)
Tax provision/(benefit), net		(240)		(3,774)		(3,886)
(Gain)/loss on sale of real estate owned, net of tax		(43,404)		(210,851)		(251,677)
Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership		10,933		27,282		16,773
Net income/(loss) attributable to noncontrolling interests		164		380		3
Total property NOI	$	698,503	$	673,085	$	613,869

Same-Store Communities

2017 -vs- 2016

Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2016 and held on December 31, 2017) consisted of 35,471 apartment homes and provided 87.0% of our total NOI for the year ended December 31, 2017.

NOI for our Same-Store Community properties increased 3.8%, or $22.0 million, for the year ended December 31, 2017 compared to the same period in 2016. The increase in property NOI was attributable to a 3.7%, or $30.1 million, increase in property rental income, which was partially offset by a 3.5%, or $8.1 million, increase in operating expenses. The increase in property income was primarily driven by a 2.5%, or $19.7 million, increase in rental rates and a 11.2%, or $7.4 million, increase in reimbursement and fee income. Physical occupancy increased 0.2% to 96.8% and total monthly income per occupied home increased 3.5% to $2,064.

The increase in operating expenses was primarily driven by a 7.1%, or $6.2 million, increase in real estate taxes, which was primarily due to higher assessed valuations.

As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property net operating income divided by property rental income) increased to 71.5% for the year ended December 31, 2017 as compared to 71.4% for the comparable period in 2016.

2016 -vs- 2015

Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2015 and held on December 31, 2016) consisted of 31,930 apartment homes and provided 76.9% of our total NOI for the year ended December 31, 2016.

NOI for our Same-Store Community properties increased 6.5%, or $31.4 million, for the year ended December 31, 2016 compared to the same period in 2015. The increase in property NOI was primarily attributable to a 5.7%, or $38.8 million, increase in property rental income, which was partially offset by a 3.7%, or $7.4 million, increase in operating expenses. The increase in property income was primarily driven by a 5.5%, or $35.9 million, increase in rental rates and a 6.5%, or $3.6 million, increase in reimbursement and fee income. Physical occupancy was unchanged at 96.7% and total monthly income per occupied home increased by 5.6% to $1,958.

The increase in operating expenses was primarily driven by a 9.2%, or $6.5 million, increase in real estate taxes, which was primarily due to higher assessed valuations and lower appeal refunds.

As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property net operating income divided by property rental income) increased to 71.3% for the year ended December 31, 2016 as compared to 70.8% for 2015.

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.

2017 -vs- 2016

The remaining 13.0%, or $91.0 million, of our total NOI during the year ended December 31, 2017 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 3.9%, or $3.5 million, for the year ended December 31, 2017 as compared to the same period in 2016. The increase was primarily attributable to a $13.3 million increase in NOI from stabilized, non-mature communities, a $5.8 million increase in NOI from acquired communities and a $0.8 million increase in non-residential/other NOI, partially offset by a $16.4 million decrease in NOI from sold communities.

2016 -vs- 2015

The remaining $155.5 million, or 23.1%, of our total NOI for the year ended December 31, 2016 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 21.7%, or $27.8 million, for the year ended December 31, 2016 compared to 2015. The increase was primarily attributable to a $41.0 million increase in NOI from acquired communities and an $11.2 million increase from developed and redeveloped communities completed in 2016 and 2015, which was partially offset by a $24.7 million decrease in NOI of from communities sold or held for disposition in 2016 and 2015.

Joint Venture Management and Other Fees

For the years ended December 31, 2016 and 2015, we recognized income from joint venture management and other fees of $11.4 million and $22.7 million, respectively. The decreased income in 2016 as compared to 2015 was attributable to the promote and fee income of $10.0 million recognized in connection with the sale of the Texas Joint Venture in 2015.

Real Estate Depreciation and Amortization

For the year ended December 31, 2017, real estate depreciation and amortization increased 2.5%, or $10.4 million, as compared to 2016. The increase was primarily due to homes delivered from our development and redevelopment communities and communities acquired in 2017 and 2016, partially offset by a decrease from sold communities and fully depreciated assets.

For the year ended December 31, 2016, real estate depreciation and amortization increased 12.0%, or $45.0 million, as compared to 2015. The increase was primarily due to homes delivered from our development and redevelopment communities and communities acquired in 2016 and 2015, partially offset by a decrease from sold communities and fully depreciated assets.

General and Administrative

For the year ended December 31, 2016, general and administrative expense decreased 16.6%, or $9.9 million, from 2015. The decrease was primarily due to a decrease in bonus expense and stock-based compensation expense for awards under the long-term incentive plan of $6.2 million, primarily due to the departure of our prior Chief Financial Officer in 2016 and outperformance in 2015, a decrease in long-term incentive plan transition costs of $2.6 million and a decrease in acquisition costs of $1.9 million, which was partially offset by an increase in salaries and benefits.

Income/(Loss) from Unconsolidated Entities

For the years ended December 31, 2017 and 2016, we recognized income/(loss) from unconsolidated entities of $31.3 million and $52.2 million, respectively. The decrease of $20.9 million was primarily due to:

	·		the sale of two communities out of the West Coast Development joint venture, which resulted in gains of $7.6 million for the Company; and

	·		the Company’s purchase of 100% interest in two previously unconsolidated operating communities, which resulted in gains of $27.0 million for the Company during the year ended December 31, 2017.

As compared to:

	·		the sale of three operating communities by the UDR/MetLife II joint venture during the year ended December 31, 2016, which resulted in gains of $47.7 million for the Company and a casualty gain of $3.8 million as a result of insurance proceeds related to a 2015 event.

For the years ended December 31, 2016 and 2015, we recognized income/(loss) from unconsolidated entities of $52.2 million and $62.3 million, respectively. The decrease of $10.1 million was primarily due to:

	·		the sale of three operating communities by the UDR/MetLife II joint venture during the year ended December 31, 2016, which resulted in gains of $47.7 million for the Company and a casualty gain of $3.8 million as a result of insurance proceeds related to a 2015 event.

As compared to:

	·		the sale of the eight communities held by the Texas Joint Venture, which resulted in a gain of $59.4 million, during the year ended December 31, 2015.

Interest Expense

For the years ended December 31, 2017 and 2016, we recognized interest expense of $128.8 million and $123.0 million, respectively. The increase in 2017 as compared to 2016 of $5.8 million was primarily due to the early pay off of secured debt during 2017, resulting in prepayment costs.

Tax (Provision)/Benefit, Net

Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date.

The Company recognized a Tax (provision)/benefit, net of $0.3 million and $3.8 million for the years ended December 31, 2017 and 2016, respectively.

The decrease for 2017 as compared to 2016 was primarily attributable to the conversion of certain TRS entities into REITs in 2016 and a one-time tax benefit of $1.1 million related to the recording of previously reserved receivables for REIT AMT credits that became refundable under the Tax Cuts and Jobs Act of 2017.

Gain/(Loss) on Sale of Real Estate Owned, Net of Tax

During the year ended December 31, 2017, the Company recognized a gain, net of tax, of $43.4 million on the sale of a parcel on land in Richmond, Virginia and two operating communities in Orange County, California and Carlsbad, California.

During the year ended December 31, 2016, the Company sold eight operating communities with a total of 1,782 apartment homes, a retail center, and its 95% interest in two land parcels, resulting in a gain, net of tax, of $210.9 million.

During the year ended December 31, 2015, the Company sold 12 operating communities with a total of 2,735 apartment homes, resulting in a gain, net of tax, of $251.7 million.

Noncontrolling Interest

For the years ended December 31, 2017, 2016 and 2015, we recognized net income attributable to redeemable noncontrolling interests in the Operating Partnership and the DownREIT Partnership of $10.9 million, $27.3 million, and $16.8 million, respectively. The decrease in 2017 as compared to 2016 is primarily attributable to the noncontrolling interest’s share of gains on sale associated with the dispositions made in 2016. The increase in 2016 as compared to 2015 is primarily attributable to the number of partnership units held by third-party noncontrolling interest holders as a result of the formation of the DownREIT Partnership in October 2015.

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 year ended December 31, 2017.

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.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2017 (dollars in thousands):


	Payments Due by Period
Contractual Obligations	2018		2019-2020		2021-2022		Thereafter		Total
Long-term debt obligations	$	333,670	$	836,938	$	752,274	$	1,761,489	$	3,684,371
Interest on debt obligations (a)		125,885		223,391		148,227		213,087		710,590
Letters of credit		3,301		—		—		—		3,301
Unfunded commitments on:
Development projects (b)		18,871		105,139		—		—		124,010
Unconsolidated joint ventures (b) (c)		22,076		—		—		—		22,076
Operating lease obligations:
Operating space		76		152		32		—		260
Ground leases (d)		5,629		11,258		11,258		335,207		363,352
	$	509,508	$	1,176,878	$	911,791	$	2,309,783	$	4,907,960

	(a)		Interest payments on variable rate debt instruments are based on each debt instrument’s respective year-end interest rate at December 31, 2017.

	(b)		Any unfunded costs at December 31, 2017 are shown in the year of estimated completion.

	(c)		Represents UDR’s proportionate share of expected remaining costs to complete the developments.

	(d)		For purposes of our ground lease contracts, the Company uses the minimum lease payment, if stated in the agreement. For ground lease agreements where there is a reset provision based on the communities appraised value or consumer price index but does not include a specified minimum lease payment, the Company uses the current rent over the remainder of the lease term.

During 2017, we incurred gross interest costs of $147.3 million, of which $18.6 million was capitalized.

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 or of investments in non-consolidated investees that are driven by measurable decreases in the fair value of depreciable real estate held by the investee, gains or losses from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for noncontrolling interests, unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s (“NAREIT”) definition issued in April 2002. 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.

We consider FFO a useful metric for investors as we use FFO in evaluating property acquisitions and our operating performance, and believe that FFO should be considered along with, but not as an alternative to, net income

and cash flow as a measure of our activities in accordance with 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 attributable to common stockholders and unitholders is defined as FFO excluding the impact of acquisition-related costs and other non-comparable items including, but not limited to, prepayment costs/benefits associated with early debt retirement, gains or losses on sales of non-depreciable property and marketable securities, deferred tax valuation allowance increases and decreases, casualty-related expenses and recoveries, severance costs and legal costs.

Management believes that FFO as Adjusted 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. FFO as Adjusted 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 FFO as Adjusted. However, other REITs may use different methodologies for calculating FFO as Adjusted or similar FFO measures and, accordingly, our FFO as Adjusted may not always be comparable to FFO as Adjusted or similar FFO measures calculated by other REITs. FFO as Adjusted 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 FFO as Adjusted 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 FFO as Adjusted.

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 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, FFO as Adjusted, and AFFO for the years ended December 31, 2017, 2016, and 2015 (dollars in thousands):


	Year Ended December 31,
	2017		2016		2015
Net income/(loss) attributable to common stockholders	$	117,850	$	289,001	$	336,661
Real estate depreciation and amortization		430,054		419,615		374,598
Noncontrolling interests		11,097		27,662		16,776
Real estate depreciation and amortization on unconsolidated joint ventures		57,102		47,832		38,652
Net gain on the sale of unconsolidated depreciable property		(35,363)		(47,848)		(59,445)
Net gain on the sale of depreciable real estate owned		(41,824)		(209,166)		(251,677)
Funds from operations (“FFO”) attributable to common stockholders and unitholders, basic	$	538,916	$	527,096	$	455,565
Distribution to preferred stockholders — Series E (Convertible)		3,708		3,717		3,722
FFO attributable to common stockholders and unitholders, diluted	$	542,624	$	530,813	$	459,287
Income/(loss) per weighted average common share - diluted	$	0.44	$	1.08	$	1.29
FFO per common share and unit, basic	$	1.85	$	1.81	$	1.68
FFO per common share and unit, diluted	$	1.83	$	1.80	$	1.66
Weighted average number of common shares and OP/DownREIT Units outstanding — basic		291,845		290,516		271,616
Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted		296,672		295,469		276,699

Impact of adjustments to FFO:
Acquisition-related costs/(fees)	$	371	$	213	$	2,126
Acquisition-related costs/(fees) on unconsolidated joint ventures		—		—		1,460
Costs/(benefit) associated with debt extinguishment and other		9,212		1,729		—
Texas joint venture promote and disposition fee income		—		—		(10,005)
Long-term incentive plan transition costs		—		898		3,537
Net gain on the sale of non-depreciable real estate owned		(1,580)		(1,685)		—
Legal claims, net of tax		—		(480)		705
Net loss on sale of unconsolidated land		—		1,016		—
Severance costs and other restructuring expense		624		871		—
Tax benefit associated with the conversion of certain TRS entities into REITs		—		(2,436)		—
Casualty-related (recoveries)/charges, net		4,504		732		2,335
Casualty-related (recoveries)/charges, on unconsolidated joint ventures, net		(881)		(3,752)		2,474
	$	12,250	$	(2,894)	$	2,632
FFO as Adjusted attributable to common stockholders and unitholders, diluted	$	554,874	$	527,919	$	461,919

FFO as Adjusted per common share and unit, diluted	$	1.87	$	1.79	$	1.67

Recurring capital expenditures		(46,034)		(47,257)		(45,467)
AFFO attributable to common stockholders and unitholders, diluted	$	508,840	$	480,662	$	416,452

AFFO per common share and unit, diluted	$	1.72	$	1.63	$	1.51

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 years ended December 31, 2017, 2016, and 2015 (shares in thousands):


	Year Ended December 31,
	2017	2016	2015
Weighted average number of common shares and OP/DownREIT Units outstanding — basic	291,845	290,516	271,616
Weighted average number of OP/DownREIT Units outstanding	(24,821)	(25,130)	(12,947)
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations	267,024	265,386	258,669

Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted	296,672	295,469	276,699
Weighted average number of OP/DownREIT Units outstanding	(24,821)	(25,130)	(12,947)
Weighted average number of Series E preferred shares outstanding	(3,021)	(3,028)	—
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations	268,830	267,311	263,752

UNITED DOMINION REALTY, L.P.:

Business Overview

United Dominion Realty, L.P. (the “Operating Partnership” or “UDR, L.P.”) is a Delaware limited partnership formed in February 2004 and organized pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act. The Operating Partnership is the successor-in-interest to United Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations on November 4, 1995. Our sole general partner is UDR, Inc., a Maryland corporation (“UDR” or the “General Partner”), which conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership. At December 31, 2017, the Operating Partnership’s real estate portfolio included 53 communities located in nine states and the District of Columbia with a total of 16,698 apartment homes.

As of December 31, 2017, UDR owned 110,883 units of our general partnership interests and 174,126,805 units of our limited partnership interests (the “OP Units”), or approximately 95.0% of our outstanding OP Units. By virtue of its ownership of our OP Units and being our sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this section of this Report to the Operating Partnership or “we,” “us” or “our” refer to UDR, L.P. together with its consolidated subsidiaries, and all references in this section to “UDR” or the “General Partner” refer solely to UDR, 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 a Virginia corporation and changed its state of incorporation from Virginia to Maryland in June 2003. At December 31, 2017, the General Partner’s consolidated real estate portfolio included 127 communities located in 11 states and the District of Columbia with a total of 39,998 apartment homes. In addition, the General Partner had an ownership interest in 29 communities with 7,286 completed apartment homes through unconsolidated operating communities.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations as well as involves some degree of uncertainty. Estimates are prepared based on management’s assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required. A discussion of our significant accounting policies, including further discussion of the accounting policies described below, can be found in Note 2, Significant Accounting Policies, to the Notes to the Operating Partnership’s Consolidated Financial Statements included in this Report.

Cost Capitalization

In addition to construction costs, we capitalize costs directly related to the predevelopment, development, and redevelopment of a capital project, which include, but are not limited to, interest, real estate taxes, insurance, and allocated development and redevelopment overhead related to support costs for personnel working on the capital projects. We use our professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred. These costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. As each home in a capital project is completed and becomes available for lease-up, the Operating Partnership ceases capitalization on the related portion. The costs capitalized are reported on the Consolidated Balance Sheets as Total real estate owned, net of accumulated depreciation. Amounts capitalized during the years ended December 31, 2017, 2016, and 2015, were $0.5 million, $0.8 million, and $0.9 million, respectively.

Investment in Unconsolidated Entities

Impairment of Long-Lived Assets

We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based primarily upon unobservable inputs related to rental rates, operating costs, growth rates, discount rates, capitalization rates, industry trends and reference to market rates and transactions.

Real Estate Investment Properties

for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining average contractual lease period.

Summary of Real Estate Portfolio by Geographic Market

The following table summarizes our market information by major geographic markets as of and for the year ended December 31, 2017.


		As of December 31, 2017					Year Ended December 31, 2017
			Percentage		Total				Monthly		Net
	Number of	Number of	of Total		Carrying		Average		Income per		Operating
	Apartment	Apartment	Carrying		Value (in		Physical		Occupied		Income
Same-Store Communities	Communities	Homes	Value		thousands)		Occupancy		Home (a)		(in thousands)
West Region
San Francisco, CA	8	1,992	12.3	%	$	470,310	96.8	%	$	3,056	$	55,258
Orange County, CA	5	1,936	12.6	%		479,922	96.0	%		2,317		39,465
Seattle, WA	5	932	5.8	%		223,080	96.8	%		1,934		14,958
Los Angeles, CA	2	344	3.0	%		113,853	95.7	%		2,579		7,254
Monterey Peninsula, CA	7	1,565	4.5	%		172,854	96.8	%		1,641		22,443
Other Southern California	1	414	1.9	%		72,985	96.0	%		1,918		6,768
Portland, OR	2	476	1.3	%		48,317	97.2	%		1,542		6,425
Mid-Atlantic Region
Metropolitan D.C.	6	2,068	14.5	%		552,822	97.2	%		2,057		33,756
Baltimore, MD	2	540	2.7	%		103,028	96.7	%		1,502		6,536
Northeast Region
New York, NY	2	996	15.8	%		606,114	97.6	%		3,916		34,202
Boston, MA	1	387	1.9	%		71,653	96.8	%		1,971		6,322
Southeast Region
Nashville, TN	6	1,612	3.8	%		144,785	96.4	%		1,231		16,521
Tampa, FL	2	942	2.8	%		105,506	97.5	%		1,404		10,412
Other Florida	1	636	2.2	%		84,519	96.3	%		1,517		7,249
Total/Average Same-Store Communities	50	14,840	85.1	%		3,249,748	96.7	%	$	2,114		267,569
Non-Mature, Commercial Properties & Other	3	1,858	14.9	%		567,208						39,272
Total Real Estate Owned	53	16,698	100.0	%		3,816,956					$	306,841
Total Accumulated Depreciation						(1,543,652)
Total Real Estate Owned, Net of Accumulated Depreciation					$	2,273,304

	(a)		Monthly Income per Occupied Home represents total monthly revenues divided by 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 to January 1, 2016 and held as of December 31, 2017. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the communities are not held for disposition at year end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.

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 unsecured credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we repositioned our portfolio.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings 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 borrowings and the disposition of properties. We believe that our net cash provided by operations and borrowings will continue to be adequate to meet both operating requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, and borrowings owed by us under the General Partner’s credit agreements.

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 our General Partner’s credit agreements, and to a lesser extent, from cash flows provided by operating activities.

As of December 31, 2017, the Operating Partnership does not have any secured debt maturing in 2018.

Statements of Cash Flows

Operating Activities

For the year ended December 31, 2017, Net cash provided by/(used in) operating activities was $234.5 million compared to $228.7 million for 2016. The increase in cash flow from operating activities was primarily due to improved operating income, primarily driven by revenue growth at communities.

For the year ended December 31, 2016, Net cash provided by/(used in) operating activities was $228.7 million compared to $226.8 million for 2015. The increase in cash flow from operating activities was primarily due to improved operating income, primarily driven by revenue growth at communities.

Investing Activities

For the year ended December 31, 2017, Net cash provided by/(used in) investing activities was $(106.1) million compared to $(9.5) million for 2016. The increase in cash used in investing activities was primarily due to the acquisition of an operating community partially offset by the disposition of two operating communities.

For the year ended December 31, 2016, Net cash provided by/(used in) investing activities was $(9.5) million compared to $23.6 million for 2015. The decrease in cash provided by investing activities was primarily due to a decrease in proceeds from dispositions, partially offset by increased distributions received from unconsolidated entities and acquisitions of real estate assets in 2015.

Acquisitions

During the year ended December 31, 2017, the Operating Partnership acquired an operating community located in Denver, Colorado with a total of 218 apartment homes and 17,000 square feet of retail space for a purchase price of approximately $141.5 million. The acquisition will be fully or partially funded with Section 1031 exchanges.

The Operating Partnership did not have any acquisitions during the year ended December 31, 2016.

In October 2015, the Operating Partnership acquired one community in Alexandria, Virginia with 421 apartment homes for a purchase price of $142.0 million.

Dispositions

In December 2017, the Operating Partnership sold two operating communities with a total of 218 apartment homes in Orange County, California and Carlsbad, California for gross proceeds of $69.0 million, resulting in net proceeds of $68.0 million and a gain of $41.3 million.

During the year ended December 31, 2016, the Operating Partnership sold two operating communities in the Baltimore, Maryland market with a total of 276 apartment homes for gross proceeds of $45.3 million, resulting in net proceeds of $44.6 million and a gain, net of tax, of $33.2 million.

In connection with the formation of the DownREIT Partnership in October 2015, the Operating Partnership contributed seven operating communities to the DownREIT Partnership. The Operating Partnership recorded its contribution to the DownREIT Partnership at book value and consequently deferred a gain of $296.4 million. As a result of the contribution, the Operating Partnership gave up its controlling interest and deconsolidated the seven operating communities. The Operating Partnership accounts for its investment in the DownREIT Partnership under the equity method of accounting.

During the year ended December 31, 2015, the Operating Partnership sold five communities with a total of 1,149 apartment homes for gross proceeds of $250.9 million, resulting in net proceeds of $232.4 million and a gain, net of tax, of $133.5 million. A portion of the sale proceeds was designated for tax-deferred Section 1031 exchanges for one of the October 2015 acquisitions from Home OP. Additionally, the Operating Partnership recognized a gain of $24.6 million, which was previously deferred, in connection with the sale of the communities held by the Texas joint venture.

Financing Activities

For the year ended December 31, 2017, Net cash provided by/(used in) financing activities was $(128.8) million compared to $(221.5) million for 2016. The decrease in cash used in financing activities was primarily due to an increase in advances from the General Partner, partially offset by the early repayment of debt maturing in December 2018, July 2020, and July 2023.

For the year ended December 31, 2016, Net cash provided by/(used in) financing activities was $(221.5) million compared to $(247.7) million for 2015. The decrease in cash used in financing activities was primarily due to a decrease in advances to the General Partner and a decrease in payoffs of secured debt, partially offset by a decrease in proceeds from the issuance of secured debt.

Credit Facilities

As of December 31, 2017, an aggregate commitment of $133.2 million of the General Partner’s secured credit facilities with Fannie Mae was owed by the Operating Partnership based on the ownership of the assets securing the debt. The entire commitment was outstanding at December 31, 2017. The portions of the Fannie Mae credit facilities owed by the Operating Partnership mature at various dates from October 2019 through December 2019 and bear interest at fixed rates. At December 31, 2017, the entire outstanding balance was fixed and had a weighted average interest rate of 5.28%.

The Operating Partnership is a 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, $300 million of medium-term notes due October 2020, a $350 million term loan facility due January 2021, $400 million of medium-term notes due January 2022, $300 million of medium-term notes due July 2024, $300 million of medium-term notes due October 2025, $300 million of medium-term notes due September 2026, $300 million of medium-term notes due July 2027 and $300 million of medium-term notes due January 2028. As of December 31, 2017 and 2016, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $300.0 million and $0, respectively, outstanding under its unsecured commercial paper program.

The credit facilities are subject to customary financial covenants and limitations.

Interest Rate Risk

We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between

changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had $27.0 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2017. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $0.3 million based on the average balance at December 31, 2017.

These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.

The General Partner also utilizes derivative financial instruments owed by the Operating Partnership to manage interest rate risk and generally designates these financial instruments as cash flow hedges. See Note 8, Derivatives and Hedging Activities, in the Notes to the Operating 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):


	Year Ended December 31,
	2017		2016		2015
Net cash provided by/(used in) operating activities	$	234,463	$	228,682	$	226,765
Net cash provided by/(used in) investing activities		(106,080)		(9,546)		23,583
Net cash provided by/(used in) financing activities		(128,846)		(221,483)		(247,747)

Results of Operations

The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for the years ended December 31, 2017, 2016, and 2015.

Net Income/(Loss) Attributable to OP Unitholders

2017 -vs- 2016

Net income attributable to OP unitholders was $106.3 million ($0.58 per diluted OP Unit) for the year ended December 31, 2017 as compared to net income of $77.8 million ($0.42 per diluted OP Unit) for the comparable period in the prior year. The increase in net income attributable to OP unitholders resulted primarily from the following items, which are discussed in further detail elsewhere within this Report:

	·		an increase of $9.7 million in total property NOI primarily due to higher revenue per occupied home;

	·		during the year ended December 31, 2017, the Operating Partnership sold two operating communities in Orange County, California and Carlsbad, California with a total of 218 apartment homes, resulting in gains of $41.3 million, as compared to gains on the sale of real estate owned of $33.2 million during the year ended December 31, 2016; and

	·		losses from unconsolidated entities of $19.3 million for the year ended December 31, 2017 as compared to $37.4 million for the year ended December 31, 2016, primarily due to a reduction in depreciation and amortization at the DownREIT Partnership.

This was partially offset by:

	·		an increase in real estate depreciation and amortization expense of $5.4 million primarily due to acquisitions in 2017 and homes delivered from our redevelopment property.

2016 -vs- 2015

Net income/(loss) attributable to OP unitholders was $77.8 million ($0.42 per diluted OP Unit) for the year ended December 31, 2016 as compared to $213.3 million ($1.16 per diluted OP Unit) for 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:

	·		during the year ended December 31, 2016, the Operating Partnership sold two operating communities in Baltimore, Maryland with a total of 276 apartment homes, resulting in a gain of $33.2 million, as compared to a gain on the sale of real estate owned of $158.1 million during the year ended December 31, 2015;

	·		losses from unconsolidated entities of $37.4 million for the year ended December 31, 2016, as compared to $4.7 million for the prior year, as a result of the formation of the DownREIT Partnership in the fourth quarter of 2015; and

	·		a decrease in total property NOI of $20.5 million primarily due to fewer consolidated apartment homes as a result of the deconsolidation of communities contributed to the DownREIT Partnership during 2015.

This was partially offset by:

	·		a decrease in real estate depreciation and amortization expense of $22.7 million primarily due to the deconsolidation of communities contributed to the DownREIT Partnership in the fourth quarter of 2015;

	·		a decrease in interest expense of $10.3 million primarily due to the deconsolidation of debt balances related to communities contributed to the DownREIT Partnership; and

	·		a decrease in general and administrative expense of $8.2 million due to lower expense allocations by the General Partner, primarily due to a decrease in its bonus expense and stock-based compensation expense for awards under its long-term incentive plan, primarily due to the departure of its prior Chief Financial Officer in 2016, and outperformance in 2015.

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 the Operating 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.

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.

The following table summarizes the operating performance of our total portfolio for the years ended December 31, 2017, 2016, and 2015 (dollars in thousands):


	Year Ended						Year Ended
	December 31, (a)				%		December 31, (b)				%
	2017		2016		Change		2016		2015		Change
Same-Store Communities:
Same-Store rental income	$	364,158	$	349,425	4.2	%	$	322,968	$	303,190	6.5	%
Same-Store operating expense (c)		(96,589)		(92,542)	4.4	%		(85,436)		(81,438)	4.9	%
Same-Store NOI		267,569		256,883	4.2	%		237,532		221,752	7.1	%

Non-Mature Communities/Other NOI:
Stabilized, non-mature communities NOI (d)		29,566		28,312	4.4	%		22,849		14,307	59.7	%
Acquired communities NOI		1,180		—	—	%		—		—	—
Redeveloped communities NOI		—		—	—	%		28,312		28,120	0.7	%
Non-residential/other NOI		5,153		6,052	(14.9)	%		5,829		6,844	(14.8)	%
Sold and held for disposition communities NOI		3,373		5,874	(42.6)	%		2,599		46,574	(94.4)	%
Total Non-Mature Communities/Other NOI		39,272		40,238	(2.4)	%		59,589		95,845	(37.8)	%
Total property NOI	$	306,841	$	297,121	3.3	%	$	297,121	$	317,597	(6.4)	%

	(a)		Same-Store consists of 14,840 apartment homes.

	(b)		Same-Store consists of 14,001 apartment homes.

	(c)		Excludes depreciation, amortization, and property management expenses.

	(d)		Represents non-mature communities that have achieved 90% occupancy for three 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 to OP unitholders to total property NOI for the years ended December 31, 2017, 2016 and 2015 (dollars in thousands):


	Year Ended December 31,
	2017		2016		2015
Net income/(loss) attributable to OP unitholders	$	106,307	$	77,818	$	213,301
Property management		11,533		11,122		12,111
Other operating expenses		6,833		6,059		5,923
Real estate depreciation and amortization		152,473		147,074		169,784
General and administrative		17,875		18,808		27,016
Casualty-related charges/(recoveries), net		1,922		484		843
(Income)/loss from unconsolidated entities		19,256		37,425		4,659
Interest expense		30,366		30,067		40,321
(Gain)/loss on sale of real estate owned		(41,272)		(33,180)		(158,123)
Net income/(loss) attributable to noncontrolling interests		1,548		1,444		1,762
Total property NOI	$	306,841	$	297,121	$	317,597

Same-Store Communities

2017 -vs- 2016

Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2016 and held as of December 31, 2017) consisted of 14,840 apartment homes and provided 87.2% of our total NOI for the year ended December 31, 2017.

NOI for our Same-Store Community properties increased 4.2%, or $10.7 million, for the year ended December 31, 2017 compared to 2016. The increase in property NOI was primarily attributable to a 4.2%, or $14.7 million, increase in property rental income, which was partial offset by a 4.4%, or $4.0 million, increase in operating expenses. The increase in revenues was primarily driven by a 3.0%, or $9.9 million, increase in rental rates and a 11.6%, or $3.3 million, increase in reimbursement and fee income. Physical occupancy increased 0.1% to 96.7% and total income per occupied home increased 4.1% to $2,114 for the year ended December 31, 2017 compared to 2016.

The increase in property operating expenses was primarily driven by a 10.0% or $3.1 million increase in real estate taxes, which was primarily due to higher assessed valuations.

The operating margin (property net operating income divided by property rental income) was 73.5% for both years ended December 31, 2017 and 2016.

2016 -vs- 2015

Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2015 and held as of December 31, 2016) consisted of 14,001 apartment homes and provided 79.9% of our total NOI for the year ended December 31, 2016.

NOI for our Same-Store Community properties increased 7.1% or $15.8 million for the year ended December 31, 2016 compared to 2015. The increase in property NOI was primarily attributable to a 6.5% or $19.8 million increase in property rental income, which was partial offset by a 4.9% or $4.0 million increase in operating expenses. The increase in revenues was primarily driven by a 6.6% or $19.0 million increase in rental rates. Physical occupancy decreased 0.2% to 96.6% and total income per occupied home increased 6.6% to $1,989 for the year ended December 31, 2016 compared to 2015.

The increase in property operating expenses was primarily driven by a 10.4% or $2.6 million increase in real estate taxes, which was primarily due to higher assessed valuations and lower appeal refunds.

The operating margin (property net operating income divided by property rental income) increased to 73.5% for the year ended December 31, 2016 as compared to 73.1% for 2015.

Non-Mature Communities/Other

The Operating Partnership’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 the non-apartment components of mixed use properties.

2017 -vs- 2016

The remaining 12.8%, or $39.3 million, of our total NOI during the year ended December 31, 2017 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 2.4%, or $1.0 million, for the year ended December 31, 2017 compared to 2016. The decrease was primarily driven by a decrease in NOI of $2.5 million from sold communities, which was partially offset by an increase in NOI of $1.2 million from acquired communities.

2016 -vs- 2015

The remaining 20.1%, or $59.6 million, of our total NOI during the year ended December 31, 2016 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 37.8%, or $36.3 million, for the year ended December 31, 2016 compared to 2015. The decrease was primarily driven by a decrease in NOI of $44.0 million from sold communities, which was partially offset by an increase in NOI of $8.5 million from stabilized, non-mature communities.

Real Estate Depreciation and Amortization

For the year ended December 31, 2017, real estate depreciation and amortization increased by 3.7% or $5.4 million as compared to 2016. The increase was primarily due to acquisitions during 2017 and homes delivered from our redevelopment property.

For the year ended December 31, 2016, real estate depreciation and amortization decreased by 13.4% or $22.7 million as compared to 2015. The decrease was primarily due to the deconsolidation of communities contributed to the DownREIT Partnership in October 2015, partially offset by homes delivered from our development and redevelopment properties.

General and Administrative

For the year ended December 31, 2016, general and administrative expense decreased by 30.4% or $8.2 million as compared to 2015. The decrease was due to lower general and administrative expense allocations by the General Partner, primarily due to a decrease in its bonus expense and stock-based compensation expense for awards under its long-term incentive plan, primarily due to the departure of its prior Chief Financial Officer in 2016, and outperformance in 2015, as well as lower allocations due to the deconsolidation of communities contributed to the DownREIT Partnership in October 2015.

Income/(Loss) in Unconsolidated Entities

For the year ended December 31, 2017 and 2016, income/(loss) from unconsolidated entities was $(19.3) million and $(37.4) million, respectively. The decrease in loss from unconsolidated entities as compared to the prior year was primarily attributable to a reduction in depreciation and amortization at the DownREIT Partnership.

For the year ended December 31, 2016 and 2015, income/(loss) from unconsolidated entities of $(37.4) million and $(4.7) million, respectively, was attributable to the Operating Partnership’s ownership interest in the DownREIT Partnership, which was formed in October 2015. The change was primarily attributable to depreciation expense for a full year in 2016.

Interest Expense

For the year ended December 31, 2016, interest expense decreased by 25.4% or $10.3 million as compared to 2015, which was primarily due to lower loan balances as a result of seven communities, and their related debt, being deconsolidated in October 2015 in connection with the formation of the DownREIT Partnership.

Gain/(Loss) on the Sale of Real Estate Owned

During the year ended December 31, 2017, the Operating Partnership sold two operating communities in Orange County, California and Carlsbad, California with a total of 218 apartment homes, resulting in a gain of $41.3 million.

During the year ended December 31, 2016, the Operating Partnership sold two operating communities in Baltimore, Maryland with a total of 276 apartment homes, resulting in a gain of $33.2 million.

During the year ended December 31, 2015, the Operating Partnership sold five communities with a total of 1,149 apartment homes, resulting in a gain of $133.5 million. A portion of the sale proceeds was designated for a Section 1031 exchange for one of the October 2015 acquisitions from Home OP. Additionally, the Operating Partnership recognized a gain of $24.6 million, which was previously deferred, in connection with the sale of the communities held by the Texas joint venture.

Inflation

Off-Balance Sheet Arrangements

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2017 (dollars in thousands):


	Payments Due by Period
Contractual Obligations	2018		2019-2020		2021-2022		Thereafter		Total
Long-term debt obligations	$	—	$	133,205	$	—	$	27,000	$	160,205
Interest on debt obligations (a)		7,498		6,722		925		4,267		19,412
Operating lease obligations — ground leases (b)		5,629		11,258		11,258		335,207		363,352
	$	13,127	$	151,185	$	12,183	$	366,474	$	542,969

	(a)		Interest payments on variable rate debt instruments are based on each debt instrument’s respective year-end interest rate at December 31, 2017.

	(b)		For purposes of our ground lease contracts, the Operating Partnership uses the minimum lease payment, if stated in the agreement. For ground lease agreements where there is a reset provision based on the communities appraised value or consumer price index but does not include a specified minimum lease payment, the Operating Partnership uses the current rent over the remainder of the lease term.

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