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 the availability of capital and the stability of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments and redevelopments, delays in completing lease-ups on schedule or at expected rent and occupancy levels, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, expectations on occupancy levels and rental rates, expectations concerning joint ventures and partnerships with third parties, expectations that automation will help grow net operating income, and expectations on annualized net operating income.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

	·		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;

	·		risks that third parties who have an interest in or are otherwise involved in projects in which we have an interest, including mezzanine borrowers, joint ventures or other investors, do not perform as expected;

	·		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 for the years ended December 31, 2018, 2017 and 2016 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, 2018, our consolidated real estate portfolio included 127 communities in 11 states plus the District of Columbia totaling 39,931 apartment homes, and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 32 communities with 8,112 apartment homes.

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, 2018, 2017, and 2016 were $18.1 million, $27.4 million, and $24.4 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, 2018 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, 2018

				December 31, 2018							Year Ended December 31, 2018
						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
Orange County, CA		10		4,434		11.0	%	$	1,123,626		96.2	%	$	2,302		$	91,463
San Francisco, CA		11		2,751		8.5	%		865,010		96.7	%		3,560			86,159
Seattle, WA		14		2,593		8.7	%		889,283		96.6	%		2,423			51,882
Los Angeles, CA		4		1,225		4.5	%		454,304		96.2	%		2,812			29,462
Monterey Peninsula, CA		7		1,565		1.7	%		177,689		96.8	%		1,770			24,859
Other Southern California		2		654		1.1	%		107,144		96.5	%		1,896			10,747
Portland, OR		2		476		0.5	%		49,113		96.6	%		1,576			6,526
Mid-Atlantic Region
Metropolitan D.C.		21		7,798		19.8	%		2,017,115		97.4	%		2,031			127,994
Richmond, VA		4		1,358		1.5	%		148,231		97.9	%		1,335			16,039
Baltimore, MD		3		720		1.5	%		152,023		96.2	%		1,689			9,637
Northeast Region
New York, NY		4		1,945		12.8	%		1,307,371		97.9	%		4,335			64,798
Boston, MA		5		1,548		5.6	%		567,245		96.6	%		3,063			41,200
Southeast Region
Orlando, FL		9		2,500		2.2	%		225,723		96.8	%		1,344			27,690
Tampa, FL		7		2,287		2.5	%		256,747		97.2	%		1,402			25,187
Nashville, TN		8		2,260		2.1	%		211,365		96.5	%		1,301			24,583
Other Florida		1		636		0.8	%		85,475		96.5	%		1,595			7,760
Southwest Region
Dallas, TX		6		2,040		2.0	%		206,465		96.7	%		1,253			18,244
Austin, TX		3		883		0.9	%		91,216		97.5	%		1,361			8,164
Total/Average Same-Store Communities		121		37,673		87.7	%		8,935,145		96.9	%	$	2,145			672,394
Non-Mature, Commercial Properties & Other		6		2,258		12.3	%		1,261,014								59,721
Total Real Estate Owned		127		39,931		100.0	%		10,196,159							$	732,115
Total Accumulated Depreciation									(3,654,160)
Total Real Estate Owned, Net of Accumulated Depreciation								$	6,541,999

	(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, 2017 and held as of December 31, 2018. 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 continue to excute on maintaining a diversified portfolio.

We expect to meet our short-term liquidity requirements generally through net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through net cash provided by property operations, secured and unsecured borrowings, the issuance of debt or equity securities, and/or the disposition of properties. We believe that our net cash provided by property operations and borrowings under our credit agreements and our unsecured commercial paper program will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings under credit agreements, the issuance of debt or equity securities, and/or dispositions of properties.

We have a shelf registration statement filed with 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.

In July 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 2012. During the year ended December 31, 2018, the Company did not sell any shares of common stock through its ATM program.

In February 2018, the Company amended its working capital credit facility, which provides for a $75 million unsecured revolving credit facility (the “Working Capital Credit Facility”), to extend the scheduled maturity date from January 1, 2019 to January 15, 2021. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points. Depending on the Company’s credit rating, the margin ranges from 75 to 145 basis points. In September 2018, the Company further amended the Working Capital Credit Facility to lower the margin to the ranges disclosed above, which are consistent with the margins for the $1.1 billion unsecured revolving credit facility described below.

During the year ended December 31, 2018, the Company repurchased 593,373 shares of its common stock at a weighted average price per share of $33.69, for total consideration of approximately $20.0 million under its share repurchase program.

In September 2018, the Company entered into a $1.1 billion unsecured revolving credit facility (the “Revolving Credit Facility”) and a $350.0 million unsecured term loan (the “Term Loan”). The credit agreement for these facilities (the “Credit Agreement”) allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2023, with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date of September 30, 2023.

The Credit Agreement amended and restated the Company’s prior credit agreement, which provided for: (i) a $1.1 billion revolving credit facility scheduled to mature in January 2020 and (ii) a $350.0 million term loan scheduled to mature in January 2021. The prior credit agreement allowed the total commitments under the revolving credit facility and total borrowings under the term loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions.

In October 2018, the Company issued $300.0 million of 4.40% senior unsecured medium-term notes due January 26, 2029. The effective rate of the notes is 4.27% after the effect of a cash flow hedge. Interest is payable semi-annually in arrears on January 26 and July 26 of each year, beginning on January 26, 2019. The notes were priced at

99.998% of the principal amount at issuance. The Company used the net proceeds for the repayment of debt, including $195.8 million of the outstanding balance under the Fannie Mae credit facilities, and for general corporate purposes.

In December 2018, the Company sold 7,150,000 shares of its common stock for aggregate gross proceeds of approximately $300.2 million at a price per share of $41.98. Aggregate net proceeds from the sale, after deducting the underwriting discount and offering-related expenses, were approximately $299.8 million, which will be used for planned acquisitions of assets, working capital and general corporate purposes.

Future Capital Needs

Future development and redevelopment expenditures may be funded through unsecured or secured credit facilities, unsecured commercial paper, proceeds from the issuance of equity or debt securities, sales of properties, joint ventures, and, to a lesser extent, from cash flows provided by property operations. Acquisition activity in strategic markets may be funded through joint ventures, by the reinvestment of proceeds from the sale of properties, through the issuance of equity or debt securities, the issuance of operating partnership units and the assumption or placement of secured and/or unsecured debt.

During 2019, we have approximately $71.5 million of secured debt maturing, inclusive of principal amortization, and $101.1 million of unsecured debt maturing, comprised solely of unsecured commercial paper. We prepaid $195.8 million of secured debt previously due in 2019 with proceeds from the senior unsecured medium-term notes issued in October 2018 and anticipate repaying the remaining debt with cash flow from our operations, proceeds from debt or equity offerings, proceeds from dispositions of properties, or from borrowings under our credit agreements and our unsecured commercial paper program.

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, 2018, 2017, and 2016.

Operating Activities

For the year ended December 31, 2018, Net cash provided by/(used in) operating activities was $560.7 million compared to $518.9 million for 2017. The increase in cash flow from operating activities was primarily due to improved net operating income, primarily driven by revenue growth at communities, and changes in operating assets and liabilities.

For the year ended December 31, 2017, Net cash provided by/(used in) operating activities was $518.9 million compared to $536.6 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.

Investing Activities

For the year ended December 31, 2018, Net cash provided by/(used in) investing activities was $(113.5) million compared to $(407.4) million for 2017. The decrease in cash used in investing activities was primarily due to an increase in proceeds from the sale of real estate assets and decreases in the acquisition of real estate assets, investments in unconsolidated joint ventures, development of real estate assets, capital expenditures and other major improvements and distributions received from unconsolidated joint ventures, partially offset by an increase in issuances of notes receivable.

For the year ended December 31, 2017, Net cash provided by/(used in) investing activities was $(407.4) million compared to $(112.7) 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.

Acquisitions

During the year ended December 31, 2018, the Company did not have any acquisitions of real estate.

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 was 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.

Dispositions

In December 2018, the Company sold an operating community in Fairfax, Virginia with a total of 604 apartment homes for gross proceeds of $160.0 million, resulting in a gain of $65.9 million.

In February 2018, the Company sold an operating community in Orange County, California with a total of 264 apartment homes for gross proceeds of $90.5 million, resulting in a gain of $70.3 million. The proceeds were designated for a tax-deferred Section 1031 exchange that were used to pay a portion of the purchase price for an acquisition in October 2017.

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 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 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 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 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 a gain, net of tax, of $3.1 million.

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, 2018, total capital expenditures of $112.6 million or $2,857 per stabilized home, which in aggregate include recurring capital expenditures and major renovations, were spent across our portfolio, excluding development, as compared to $105.9 million or $2,667 per stabilized home for the prior year.

The increase in total capital expenditures was primarily due to:

	·		an increase of 48.2%, or $7.4 million, in major renovations, which include major structural changes and/or architectural revisions to existing buildings; and

	·		an increase of 2.2%, or $0.8 million, in asset preservation expenditures, such as building interiors, building exteriors, and landscaping and grounds.

This was partially offset by:

	·		a decrease of 3.5%, or $1.6 million, in revenue-enhancing improvements, such as kitchen and bath remodels and upgrades to common areas.

The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, for the years ended December 31, 2018 and 2017 (dollars in thousands):

										Per Home
		Year Ended December 31,								Year Ended December 31,
		2018			2017			% Change		2018			2017			% Change
Turnover capital expenditures		$	11,009		$	10,905		1.0	%	$	279		$	275		1.5	%
Asset preservation expenditures			35,906			35,129		2.2	%		911			885		2.9	%
Total recurring capital expenditures			46,915			46,034		1.9	%		1,190			1,160		2.6	%
Revenue-enhancing improvements			42,905			44,467		(3.5)	%		1,089			1,120		(2.8)	%
Major renovations (a)			22,774			15,370		48.2	%		578			387		49.3	%
Total capital expenditures		$	112,594		$	105,871		6.4	%	$	2,857		$	2,667		7.1	%
Repair and maintenance expense		$	35,273		$	33,704		4.7	%	$	895		$	849		5.4	%
Average home count (b)			39,406			39,692		(0.7)	%

	(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

At December 31, 2018, no communities were under development. During 2018, we incurred $150.2 million for development costs, a decrease of $98.3 million as compared to costs incurred in 2017 of $248.5 million.

During the year ended December 31, 2018, the Company completed the development of two communities, located in Huntington Beach, California and Boston, Massachusetts, with a total of 1,101 apartment homes.

At December 31, 2018, the Company was not redeveloping any communities.

During the year ended December 31, 2018, we incurred $22.8 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings, an increase of $7.4 million as compared to $15.4 million incurred in 2017.

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, 2018:

	·		two developments held by unconsolidated joint ventures were completed in Los Angeles, California and Addison, Texas with a total of 533 apartment homes;

	·		we made investments totaling $112.0 million in our unconsolidated joint ventures;

	·		our proportionate share of the net income/(loss) of the joint ventures and partnerships was $(5.1) million;

	·		we received distributions of $46.9 million, of which $4.2 million were operating cash flows and $42.7 million were investing cash flows; and

	·		we contributed $120.7 million to seven unconsolidated investments under our Developer Capital Program, which earn preferred returns ranging between 8.0% to 12.5%.

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 years ended December 31, 2018 and 2017.

Financing Activities

For the years ended December 31, 2018, 2017 and 2016, Net cash provided by/(used in) financing activities was $(260.1) million, $(111.8) million and $(429.3) million, respectively.

The following significant financing activities occurred during the year ended December 31, 2018:

	·		issuance of $300.0 million of 4.40% senior unsecured medium-term notes due January 26, 2029 (4.27% effective rate after the effect of a cash flow hedge) for net proceeds of approximately $300.0 million;

	·		net repayment of $198.9 million on our unsecured commercial paper program;

	·		net repayment of $21.8 million on the Company’s unsecured revolving credit facilities;

	·		repayment of $279.2 million of secured debt;

	·		issuance of $80.0 million of secured debt;

	·		sale of 7,150,000 shares of common stock for aggregate net proceeds of $299.8 million at a price per share of $41.98;

	·		repurchase of common shares for approximately $20.0 million; and

	·		payment of distributions of $342.2 million to our common stockholders.

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

	·		issuance of $300.0 million of 3.50% senior unsecured medium-term notes due July 1, 2027, for net proceeds of approximately $296.9 million;

	·		issuance of $300.0 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;

	·		repayment of $326.3 million of secured debt;

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

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

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

	·		issuance of $300.0 million of 2.95% senior unsecured medium-term notes due September 1, 2026;

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

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

	·		issuance of $50.0 million of secured debt;

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

	·		sale of 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

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

Credit Facilities and Commercial Paper Program

UDR had one secured credit facility with Fannie Mae with a commitment of $90.0 million at December 31, 2018. The Fannie Mae credit facility matures in July 2020 and bears interest at a fixed rate of 3.95%.

During the year ended December 31, 2018, the Company prepaid $29.0 million of its variable rate secured credit facilities with proceeds from the refinance of a mortgage note payable and prepaid $195.8 million of its fixed rate secured credit facilities with proceeds from the issuance of senior unsecured medium-term notes.

In September 2018, the Company entered into a $1.1 billion unsecured revolving credit facility and a $350.0 million unsecured term loan. The Credit Agreement for these facilities allows the total commitments under the Revolving Credit Facility and the total borrowings under the Term Loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions, including obtaining commitments from one or more lenders. The Revolving Credit Facility has a scheduled maturity date of January 31, 2023, with two six-month extension options, subject to certain conditions. The Term Loan has a scheduled maturity date of September 30, 2023.

The Credit Agreement amended and restated the Company’s prior credit agreement, which provided for: (i) a $1.1 billion revolving credit facility scheduled to mature in January 2020 and (ii) a $350.0 million term loan scheduled to mature in January 2021. The prior credit agreement allowed the total commitments under the revolving credit facility and total borrowings under the term loan to be increased to an aggregate maximum amount of up to $2.0 billion, subject to certain conditions.

Based on the Company’s current credit rating, the Revolving Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points and a facility fee of 15 basis points, and the Term Loan has an interest rate equal to LIBOR plus a margin of 90 basis points. Depending on the Company’s credit rating, the margin under the Revolving Credit Facility ranges from 75 to 145 basis points, the facility fee ranges from 10 to 30 basis points, and the margin under the Term Loan ranges from 80 to 165 basis points.

As of December 31, 2018, 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, 2018), and $350.0 million of outstanding borrowings under the Term Loan.

We have a working capital credit facility, which provides for a $75 million unsecured revolving credit facility (the “Working Capital Credit Facility”) with a scheduled maturity date of January 15, 2021. Based on the Company’s current credit rating, the Working Capital Credit Facility has an interest rate equal to LIBOR plus a margin of 82.5 basis points. Depending on the Company’s credit rating, the margin ranges from 75 to 145 basis points. In February 2018, we amended the Working Capital Credit Facility to extend the scheduled maturity date from January 1, 2019 to January 15, 2021. In September 2018, the Company further amended the Working Capital Credit Facility to lower the margin to the ranges disclosed above, which are consistent with the margins for the $1.1 billion unsecured revolving credit facility described above.

As of December 31, 2018, we had less than $0.1 million of outstanding borrowings under the Working Capital Credit Facility, leaving $75.0 million of unused capacity.

The Fannie Mae credit facility, the bank revolving credit facilities and the term loan are subject to customary financial covenants and limitations, all of which we were in compliance with at December 31, 2018.

We have an unsecured commercial paper program. Under the terms of the program, we may issue unsecured commercial paper up to a maximum aggregate amount outstanding of $500 million. The notes are sold under customary terms 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, 2018, we had issued $101.1 million of commercial paper, for one month terms, at a weighted average annualized rate of 2.90%, leaving $398.9 million of unused capacity.

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 $230.8 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2018. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $5.4 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,
		2018			2017			2016
Net cash provided by/(used in) operating activities		$	560,676		$	518,915		$	536,568
Net cash provided by/(used in) investing activities			(113,548)			(407,406)			(112,720)
Net cash provided by/(used in) financing activities			(260,067)			(111,785)			(429,282)

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, 2018, 2017 and 2016.

Net Income/(Loss) Attributable to Common Stockholders

2018 -vs- 2017

Net income/(loss) attributable to common stockholders was $199.2 million ($0.74 per diluted share) for the year ended December 31, 2018, as compared to $117.9 million ($0.44 per diluted share) for the comparable period in the prior year. The increase resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

	·		gains of $136.2 million on the sale of two operating communities with a total of 868 apartment homes in Huntington Beach, California and Fairfax, Virginia, during the year ended December 31, 2018, as compared to gains 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; and

	·		an increase in total property NOI of $33.6 million primarily due to higher revenue per occupied home and NOI from communities acquired in 2017, redeveloped in 2017 or recently developed, partially offset by a decrease from sold communities.

This was partially offset by:

	·		a decrease in income from unconsolidated entities of $36.3 million primarily due to gains on sale or consolidation of $35.4 million from the purchase or sale of previously unconsolidated operating communities in Seattle, Washington and Anaheim, California from our West Coast Development Joint

Venture and Denver, Colorado from our Development Capital Program during the year ended December 31, 2017.

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 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 of $226.2 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 sale or consolidation of $35.4 million from the purchase or sale of previously unconsolidated operating communities in Seattle, Washington and Anaheim, California from our West Coast Development Joint Venture and Denver, Colorado from our Development Capital Program.

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.

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)
		2018			2017			% Change		2017			2016			% Change
Same-Store Communities:
Same-Store rental income		$	939,726		$	908,361		3.5	%	$	850,065		$	819,962		3.7	%
Same-Store operating expense (c)			(267,332)			(257,919)		3.6	%		(242,522)			(234,385)		3.5	%
Same-Store NOI			672,394			650,442		3.4	%		607,543			585,577		3.8	%
Non-Mature Communities/Other NOI:
Stabilized, non-mature communities NOI (d)			18,427			13,767		33.8	%		61,002			47,711		27.9	%
Acquired communities NOI			—			—		—	%		5,783			—		—	%
Redevelopment communities NOI			—			—		—	%		4,021			4,270		(5.8)	%
Development communities NOI			11,221			(295)		NM	*		(295)			(436)		(32.3)	%
Non-residential/other NOI			20,530			16,640		23.4	%		17,081			16,244		5.2	%
Sold and held for disposition communities NOI			9,543			17,949		(46.8)	%		3,368			19,719		(82.9)	%
Total Non-Mature Communities/Other NOI			59,721			48,061		24.3	%		90,960			87,508		3.9	%
Total property NOI		$	732,115		$	698,503		4.8	%	$	698,503		$	673,085		3.8	%

*Not meaningful

	(a)		Same-Store consists of 37,673 apartment homes.

	(b)		Same-Store consists of 35,471 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,
		2018			2017			2016
Net income/(loss) attributable to UDR, Inc.		$	203,106		$	121,558		$	292,718
Joint venture management and other fees			(11,754)			(11,482)			(11,400)
Property management			28,465			27,068			26,083
Other operating expenses			12,100			9,060			7,649
Real estate depreciation and amortization			429,006			430,054			419,615
General and administrative			46,983			48,566			49,761
Casualty-related charges/(recoveries), net			2,121			4,335			732
Other depreciation and amortization			6,673			6,408			6,023
(Income)/loss from unconsolidated entities			5,055			(31,257)			(52,234)
Interest expense			134,168			128,711			123,031
Interest income and other (income)/expense, net			(6,735)			(1,971)			(1,930)
(Gain)/loss on sale of real estate owned			(136,197)			(43,404)			(226,199)
Tax provision/(benefit), net			688			(240)			11,574
Net income/(loss) attributable to redeemable noncontrolling interests in the Operating Partnership and DownREIT Partnership			18,215			10,933			27,282
Net income/(loss) attributable to noncontrolling interests			221			164			380
Total property NOI		$	732,115		$	698,503		$	673,085

Same-Store Communities

2018 -vs- 2017

Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2017 and held on December 31, 2018) consisted of 37,673 apartment homes and provided 91.8% of our total NOI for the year ended December 31, 2018.

NOI for our Same-Store Community properties increased 3.4%, or $22.0 million, for the year ended December 31, 2018 compared to the same period in 2017. The increase in property NOI was attributable to a 3.5%, or $31.4 million, increase in property rental income, which was partially offset by a 3.6%, or $9.4 million, increase in operating expenses. The increase in property income was primarily driven by a 2.1%, or $17.6 million, increase in rental rates and an 11.5%, or $9.6 million, increase in reimbursements and ancillary and fee income. Physical occupancy increased 0.2% to 96.9% and total monthly income per occupied home increased 3.3% to $2,145.

The increase in operating expenses was primarily driven by a 9.1%, or $9.1 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 71.6% for both the years ended December 31, 2018 and 2017.

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 an 11.2%, or $7.4 million, increase in reimbursements and ancillary 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.

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 2016.

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.

2018 -vs- 2017

The remaining 8.2%, or $59.7 million, of our total NOI during the year ended December 31, 2018 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other increased by 24.3%, or $11.7 million, for the year ended December 31, 2018 as compared to the same period in 2017. The increase was primarily attributable to an $11.5 million increase in NOI from development communities, a $4.6 million increase in NOI from stabilized, non-mature communities, and a $3.9 million increase in non-residential/other NOI, partially offset by a $8.4 million decrease in NOI from sold and held for disposition communities.

2017 -vs- 2016

The remaining 13.0%, or $91.0 million, of our total NOI for 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 and held for disposition communities.

Income/(Loss) from Unconsolidated Entities

For the years ended December 31, 2018 and 2017, we recognized income/(loss) from unconsolidated entities of $(5.1) million and $31.3 million, respectively. The decrease of $36.3 million was primarily due to:

	·		no acquisitions or dispositions from the Company’s unconsolidated entities during the year ended December 31, 2018.

As compared to:

	·		gains for the Company of $35.4 million on the sale of two communities out of the West Coast Development joint venture and the purchase and consolidation of 100% interest in two previously unconsolidated operating communities during the year ended December 31, 2017.

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:

	·		gains for the Company of $35.4 million on the sale of two communities out of the West Coast Development joint venture and the purchase and consolidation of 100% interest in two previously unconsolidated operating communities 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.

Gain/(Loss) on Sale of Real Estate Owned

During the year ended December 31, 2018, the Company recognized gains of $136.2 million on the sale of two operating communities in Huntington Beach, California, and Fairfax, Virginia.

During the year ended December 31, 2017, the Company recognized gains 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 gains of $226.2 million.

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, 2018.

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, 2018 (dollars in thousands):

		Payments Due by Period
Contractual Obligations		2019			2020-2021			2022-2023			Thereafter			Total
Long-term debt obligations		$	172,637		$	499,209		$	792,402		$	2,100,244		$	3,564,492
Interest on debt obligations (a)			126,439			225,993			172,969			231,334			756,735
Letters of credit			3,265			—			—			—			3,265
Operating lease obligations:
Operating space			76			108			—			—			184
Ground leases (b)			4,901			9,802			9,802			313,918			338,423
		$	307,318		$	735,112		$	975,173		$	2,645,496		$	4,663,099

	(a)		Interest payments on variable rate debt instruments are based on each debt instrument’s respective year-end interest rate at December 31, 2018.

	(b)		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 rent reset provision based on fair market value or changes in the 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 2018, we incurred gross interest costs of $144.8 million, of which $10.6 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 (“FFOA”) 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 charges and recoveries, severance costs and legal costs.

Management believes that FFOA is useful supplemental information regarding our operating performance as it provides a consistent comparison of our operating performance across time periods and allows investors to more easily compare our operating results with other REITs. FFOA is not intended to represent cash flow or liquidity for the period,

and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to FFOA. However, other REITs may use different methodologies for calculating FFOA or similar FFO measures and, accordingly, our FFOA may not always be comparable to FFOA or similar FFO measures calculated by other REITs. FFOA should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity.

Adjusted Funds from Operations

Adjusted FFO (“AFFO”) attributable to common stockholders and unitholders is defined as FFOA less recurring capital expenditures on consolidated communities that are necessary to help preserve the value of and maintain functionality at our communities. Therefore, management considers AFFO a useful supplemental performance metric for investors as it is more indicative of the Company’s operational performance than FFO or FFOA.

AFFO is not intended to represent cash flow or liquidity for the period, and is only intended to provide an additional measure of our operating performance. We believe that Net income/(loss) attributable to common stockholders is the most directly comparable GAAP financial measure to AFFO. Management believes that AFFO is a widely recognized measure of the operations of REITs, and presenting AFFO will enable investors to assess our performance in comparison to other REITs. However, other REITs may use different methodologies for calculating AFFO and, accordingly, our AFFO may not always be comparable to AFFO calculated by other REITs. AFFO should not be considered as an alternative to net income/(loss) (determined in accordance with GAAP) as an indication of financial performance, or as an alternative to cash flows from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.

The following table outlines our reconciliation of Net income/(loss) attributable to common stockholders to FFO, FFOA, and AFFO for the years ended December 31, 2018, 2017, and 2016 (dollars in thousands):

		Year Ended December 31,
		2018			2017			2016
Net income/(loss) attributable to common stockholders		$	199,238		$	117,850		$	289,001
Real estate depreciation and amortization			429,006			430,054			419,615
Noncontrolling interests			18,436			11,097			27,662
Real estate depreciation and amortization on unconsolidated joint ventures			61,871			57,102			47,832
Cumulative effect of change in accounting principle (a)			(2,100)			—			—
Net gain on the sale of unconsolidated depreciable property			—			(35,363)			(47,848)
Net gain on the sale of depreciable real estate owned			(136,197)			(41,824)			(209,166)
FFO attributable to common stockholders and unitholders, basic		$	570,254		$	538,916		$	527,096
Distribution to preferred stockholders — Series E (Convertible)			3,868			3,708			3,717
FFO attributable to common stockholders and unitholders, diluted		$	574,122		$	542,624		$	530,813
Income/(loss) per weighted average common share - diluted		$	0.74		$	0.44		$	1.08
FFO per weighted average common share and unit, basic		$	1.95		$	1.85		$	1.81
FFO per weighted average common share and unit, diluted		$	1.93		$	1.83		$	1.80
Weighted average number of common shares and OP/DownREIT Units outstanding — basic			292,727			291,845			290,516
Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted			297,042			296,672			295,469
Impact of adjustments to FFO:
Costs/(benefit) associated with debt extinguishment and other		$	3,299		$	9,212		$	1,729
Costs/(benefit) associated with debt extinguishment and other on unconsolidated joint ventures			177			—			—
Acquisition-related costs/(fees)			—			371			213
Long-term incentive plan transition costs			—			—			898
Net gain on the sale of non-depreciable real estate owned			—			(1,580)			(1,685)
Legal and other costs			1,622			—			(480)
Net loss on sale of unconsolidated land			—			—			1,016
Severance costs and other restructuring expense			114			624			871
Tax benefit associated with the conversion of certain TRS entities into REITs			—			—			(2,436)
Casualty-related charges/(recoveries), net			2,364			4,504			732
Casualty-related charges/(recoveries) on unconsolidated joint ventures, net			—			(881)			(3,752)
		$	7,576		$	12,250		$	(2,894)
FFOA attributable to common stockholders and unitholders, diluted		$	581,698		$	554,874		$	527,919
FFOA per weighted average common share and unit, diluted		$	1.96		$	1.87		$	1.79
Recurring capital expenditures			(46,915)			(46,034)			(47,257)
AFFO attributable to common stockholders and unitholders, diluted		$	534,783		$	508,840		$	480,662
AFFO per weighted average common share and unit, diluted		$	1.80		$	1.72		$	1.63

(a) During the year ended December 31, 2018, the Company recorded a gain of $2.1 million as a result of measuring an investment in equity securities subject to updated accounting guidance effective for the Company on January 1, 2018. As the investment does not have a readily determinable fair value, the Company elected the measurement alternative under which the investment is measured at cost, less any impairment, plus or minus changes resulting from observable price changes for an identical or similar investment of the same issuer.

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, 2018, 2017, and 2016 (shares in thousands):

		Year Ended December 31,
		2018		2017		2016
Weighted average number of common shares and OP/DownREIT Units outstanding — basic		292,727		291,845		290,516
Weighted average number of OP/DownREIT Units outstanding		(24,548)		(24,821)		(25,130)
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations		268,179		267,024		265,386
Weighted average number of common shares, OP/DownREIT Units, and common stock equivalents outstanding — diluted		297,042		296,672		295,469
Weighted average number of OP/DownREIT Units outstanding		(24,548)		(24,821)		(25,130)
Weighted average number of Series E preferred shares outstanding		(3,011)		(3,021)		(3,028)
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations		269,483		268,830		267,311

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, 2018, the Operating Partnership’s real estate portfolio included 52 communities located in nine states and the District of Columbia with a total of 16,434 apartment homes.

As of December 31, 2018, UDR owned 110,883 units of our general partnership interests and 174,137,816 units of our limited partnership interests (the “OP Units”), or approximately 94.8% 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, 2018, the General Partner’s consolidated real estate portfolio included 127 communities located in 11 states and the District of Columbia with a total of 39,931 apartment homes. In addition, the General Partner had an ownership interest in 32 communities with 8,112 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 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 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, 2018, 2017, and 2016 were less than $0.1 million, $0.5 million, and $0.8 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 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.

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, 2018

				December 31, 2018							Year Ended December 31, 2018
						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
Orange County, CA		5		3,119		19.4	%	$	737,372		96.4	%	$	2,239		$	62,391
San Francisco, CA		9		2,185		15.8	%		601,924		96.6	%		3,233			63,169
Seattle, WA		5		932		5.9	%		226,065		96.4	%		2,046			15,587
Los Angeles, CA		2		344		3.0	%		114,896		96.2	%		2,713			7,963
Monterey Peninsula, CA		7		1,565		4.7	%		177,689		96.8	%		1,770			24,859
Other Southern California		1		414		2.0	%		73,948		96.2	%		2,010			7,169
Portland, OR		2		476		1.3	%		49,113		96.6	%		1,576			6,526
Mid-Atlantic Region
Metropolitan D.C.		6		2,068		14.6	%		558,399		97.5	%		2,106			35,297
Baltimore, MD		2		540		2.7	%		104,684		96.4	%		1,514			6,345
Northeast Region
New York, NY		2		996		16.0	%		609,071		97.8	%		3,887			32,717
Boston, MA		1		387		1.9	%		72,882		97.0	%		2,070			6,739
Southeast Region
Tampa, FL		2		942		2.8	%		106,909		97.7	%		1,473			11,058
Nashville, TN		6		1,612		3.9	%		148,339		96.3	%		1,282			17,130
Other Florida		1		636		2.2	%		85,474		96.5	%		1,595			7,760
Total/Average Same-Store Communities		51		16,216		96.2	%		3,666,765		96.8	%	$	2,194		$	304,710
Non-Mature, Commercial Properties & Other		1		218		3.8	%		145,220								12,670
Total Real Estate Owned		52		16,434		100.0	%		3,811,985							$	317,380
Total Accumulated Depreciation									(1,658,161)
Total Real Estate Owned, Net of Accumulated Depreciation								$	2,153,824

	(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, 2017 and held as of December 31, 2018. 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.

Our Non-Mature Communities/Other segment represents those communities that do not meet the criteria to be included in Same-Store Communities, including, but not limited to, recently acquired, developed and redeveloped communities, and the non-apartment components of mixed use properties.

Liquidity and Capital Resources

Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. The Operating Partnership’s primary source of liquidity is cash flow from operations as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes and borrowings owed by us under the General Partner’s credit agreements. The General Partner will routinely use its 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 continue to excute on maintaining a diversified portfolio.

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

Future Capital Needs

Future capital expenditures are expected to be funded with proceeds from the issuance of secured debt or unsecured debt, sales of properties, borrowings owed by us under our General Partner’s credit agreements, and to a lesser extent, from cash flows provided by operating activities.

As of December 31, 2018, the Operating Partnership does not have any secured debt maturing in 2019.

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, 2018, 2017, and 2016.

Operating Activities

For the year ended December 31, 2018, Net cash provided by/(used in) operating activities was $255.7 million compared to $235.3 million for 2017. The increase in cash flow from operating activities was primarily due to improved operating income, primarily driven by revenue growth at communities, and changes in operating assets and liabilities.

For the year ended December 31, 2017, Net cash provided by/(used in) operating activities was $235.3 million compared to $228.9 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, and changes in operating assets and liabilities.

Investing Activities

For the year ended December 31, 2018, Net cash provided by/(used in) investing activities was $71.7 million compared to $(106.0) million for 2017. The increase in cash provided by investing activities was primarily due to increased proceeds received from the sale of an operating community and a commercial office building and decreased cash used for the acquisition of real estate in 2018.

For the year ended December 31, 2017, Net cash provided by/(used in) investing activities was $(106.0) 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 in 2017.

Acquisitions

During the year ended December 31, 2018, the Operating Partnership did not have any acquisitions of real estate.

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 was funded with Section 1031 exchanges.

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

Dispositions

In December 2018, the Operating Partnership sold a commercial office building in Fairfax, Virginia for gross proceeds of $9.3 million, resulting in a gain of $5.2 million.

In February 2018, the Operating Partnership sold an operating community in Orange County, California with a total of 264 apartment homes for gross proceeds of $90.5 million, resulting in a gain of $70.3 million. The proceeds were designated for a tax-deferred Section 1031 exchange that were used to pay a portion of the purchase price for an acquisition in October 2017.

During the year ended December 31, 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 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 a gain, net of tax, of $33.2 million.

Financing Activities

For the year ended December 31, 2018, Net cash provided by/(used in) financing activities was $(326.5) million compared to $(128.8) million for 2017. The increase in cash used in financing activities was primarily due to an increase in advances to the General Partner, partially offset by a decrease in payments on secured debt and an increase in issuance of notes payable to the General Partner.

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.

Credit Facilities

During the year ended December 31, 2018, $133.2 million of funds borrowed under the Fannie Mae credit facilities and owed by the Operating Partnership were prepaid. The Operating Partnership incurred prepayment costs of $1.8 million during the year ended December 31, 2018, which were included in Interest expense on the Consolidated Statements of Operations.

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, $400 million of medium-term notes due January 2022, a $350 million term loan due September 2023, $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, $300 million of medium-term notes due January 2028, and $300 million of medium-term notes due January 2029. As of December 31, 2018 and 2017, the General Partner did not have an outstanding balance under the unsecured revolving credit facility and had $101.1 million and $300.0 million, respectively, outstanding under its unsecured commercial paper program.

On October 26, 2018, the General Partner issued $300.0 million of 4.40% senior unsecured medium-term notes due January 26, 2029 (4.27% effective rate after the effect of a cash flow hedge). The General Partner used the net

proceeds for the repayment of debt, including all of the Fannie Mae credit facilities allocated to the Operating Partnership, and for general corporate purposes. The Operating Partnership is a guarantor of this debt.

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, 2018. 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, 2018.

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,
		2018			2017			2016
Net cash provided by/(used in) operating activities		$	255,668		$	235,257		$	228,941
Net cash provided by/(used in) investing activities			71,683			(105,989)			(9,455)
Net cash provided by/(used in) financing activities			(326,535)			(128,846)			(221,483)

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, 2018, 2017, and 2016.

Net Income/(Loss) Attributable to OP Unitholders

2018 -vs- 2017

Net income/(loss) attributable to OP unitholders was $229.8 million ($1.25 per diluted OP Unit) for the year ended December 31, 2018 as compared to net income of $106.3 million ($0.58 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:

	·		gains of $75.5 million on the sale of an operating community in Orange County, California with a total of 264 apartment homes and a commercial office building in Fairfax, Virginia, as compared to gains of $41.3 million on the sale of two operating communities with a total of 218 homes during the year ended December 31, 2017;

	·		income from unconsolidated entities of $43.5 million for the year ended December 31, 2018 as compared to losses of $19.3 million for the year ended December 31, 2017, primarily due to the sale of an operating community held in the DownREIT Partnership;

	·		an increase in total property NOI of $10.5 million primarily due to higher revenue per occupied home, partially offset by a decrease from sold communities;

	·		a decrease in real estate depreciation and amortization expense of $9.0 million primarily due to the sale of an operating community and a commercial office building in 2018 and fully depreciated assets; and

	·		a decrease in interest expense of $7.5 million due to lower debt balances as a result of the prepayment of debt during the year ended December 31, 2018 and higher prepayment penalties incurred during the year ended December 31, 2017.

2017 -vs- 2016

Net income/(loss) 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.

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.

Management considers NOI a useful metric for investors as it is a more meaningful representation of a community’s continuing operating performance than net income as it is prior to corporate-level expense allocations, general and administrative costs, capital structure and depreciation and amortization.

Although we consider NOI a useful measure of operating performance, NOI should not be considered an alternative to net income or net cash flow from operating activities as determined in accordance with GAAP. NOI excludes several income and expense categories as detailed in the reconciliation of NOI to Net income/(loss) attributable to OP unitholders below.

The following table summarizes the operating performance of our total property NOI for each of the periods presented:

		Year Ended								Year Ended
		December 31, (a)						%		December 31, (b)						%
		2018			2017			Change		2017			2016			Change
Same-Store Communities:
Same-Store rental income		$	413,081		$	398,144		3.8	%	$	364,158		$	349,425		4.2	%
Same-Store operating expense (c)			(108,371)			(105,917)		2.3	%		(96,589)			(92,542)		4.4	%
Same-Store NOI			304,710			292,227		4.3	%		267,569			256,883		4.2	%
Non-Mature Communities/Other NOI:
Stabilized, non-mature communities NOI (d)			11,759			9,219		27.6	%		29,566			28,312		4.4	%
Acquired communities NOI			—			—		—	%		1,180			—		—
Non-residential/other NOI			—			—		—	%		5,153			6,052		(14.9)	%
Sold and held for disposition communities NOI			911			5,395		(83.1)	%		3,373			5,874		(42.6)	%
Total Non-Mature Communities/Other NOI			12,670			14,614		(13.3)	%		39,272			40,238		(2.4)	%
Total property NOI		$	317,380		$	306,841		3.4	%	$	306,841		$	297,121		3.3	%

	(a)		Same-Store consists of 16,216 apartment homes.

	(b)		Same-Store consists of 14,840 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, 2018, 2017 and 2016 (dollars in thousands):

		Year Ended December 31,
		2018			2017			2016
Net income/(loss) attributable to OP unitholders		$	229,763		$	106,307		$	77,818
Property management			11,878			11,533			11,122
Other operating expenses			8,864			6,833			6,059
Real estate depreciation and amortization			143,481			152,473			147,074
General and administrative			16,889			17,875			18,808
Casualty-related charges/(recoveries), net			951			1,922			484
(Income)/loss from unconsolidated entities			(43,496)			19,256			37,425
Interest expense			22,835			30,366			30,067
(Gain)/loss on sale of real estate owned			(75,507)			(41,272)			(33,180)
Net income/(loss) attributable to noncontrolling interests			1,722			1,548			1,444
Total property NOI		$	317,380		$	306,841		$	297,121

Same-Store Communities

2018 -vs- 2017

Our Same-Store Community properties (those acquired, developed, and stabilized prior to January 1, 2017 and held as of December 31, 2018) consisted of 16,216 apartment homes and provided 96.0% of our total NOI for the year ended December 31, 2018.

NOI for our Same-Store Community properties increased 4.3%, or $12.5 million, for the year ended December 31, 2018 compared to 2017. The increase in property NOI was primarily attributable to a 3.8%, or $14.9 million, increase in property rental income, which was partially offset by a 2.3%, or $2.5 million, increase in operating expenses. The increase in property income was primarily driven by a 2.3%, or $8.7 million, increase in rental rates and an 11.1%, or $4.2 million, increase in reimbursements and ancillary and fee income. Physical occupancy increased 0.2% to 96.8% and total income per occupied home increased 3.5 % to $2,194.

The increase in operating expenses was primarily driven by a 6.6%, or $2.5 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 73.8% and 73.4% for the years ended December 31, 2018 and 2017, respectively.

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 the same period in 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 property income 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 reimbursements and ancillary and fee income. Physical occupancy increased 0.1% to 96.7% and total income per occupied home increased 4.1% to $2,114.

The increase in 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.

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.

2018 -vs- 2017

The remaining 4.0%, or $12.7 million, of our total NOI during the year ended December 31, 2018 was generated from our Non-Mature Communities/Other. NOI from Non-Mature Communities/Other decreased 13.3%, or $1.9 million, for the year ended December 31, 2018 as compared to the same period in 2017. The decrease was primarily driven by a decrease in NOI of $4.5 million from sold communities, which was partially offset by an increase in NOI of $2.5 million from stabilized, nonmature communities.

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 as compared to the same period in 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.

Real Estate Depreciation and Amortization

For the year ended December 31, 2018, real estate depreciation and amortization decreased by 5.9% or $9.0 million as compared to the same period in 2017. The decrease was primarily due to the sale of an operating community and a commercial office building in 2018 and fully depreciated assets.

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.

Income/(Loss) in Unconsolidated Entities

For the years ended December 31, 2018 and 2017, we recognized income/(loss) from unconsolidated entities of $43.5 million and $(19.3) million, respectively. The increase in income from unconsolidated entities as compared to the prior year was primarily attributable to the sale of an operating community held in the DownREIT Partnership.

For the years ended December 31, 2017 and 2016, we recognized income/(loss) from unconsolidated entities of $(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 as a result of fully depreciated assets.

Interest Expense

For the year ended December 31, 2018, interest expense decreased by 24.8% or $7.5 million as compared to 2017, which was primarily due to lower debt balances as a result of the prepayment of debt during the year ended December 31, 2018 and higher prepayment penalties incurred during the year ended December 31, 2017.

Gain/(Loss) on Sale of Real Estate Owned

During the year ended December 31, 2018, the Operating Partnership recognized total gains of $75.5 million on the sale of an operating community in Orange County, California with a total of 264 apartment homes and a commercial office building in Fairfax, Virginia.

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.

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, 2018.

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, 2018 (dollars in thousands):

		Payments Due by Period
Contractual Obligations		2019			2020-2021			2022-2023			Thereafter			Total
Long-term debt obligations		$	—		$	—		$	—		$	27,000		$	27,000
Interest on debt obligations (a)			655			1,310			1,310			5,385			8,660
Operating lease obligations — ground leases (b)			4,901			9,802			9,802			313,918			338,423
		$	5,556		$	11,112		$	11,112		$	346,303		$	374,083

	(a)		Interest payments on variable rate debt instruments are based on each debt instrument’s respective year-end interest rate at December 31, 2018.

	(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 rent reset provision based on fair market value or changes in the 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.