UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 1-10524

UDR, Inc.

Maryland (State or other jurisdiction of incorporation of organization)		54-0857512 (I.R.S. Employer Identification No.)

1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)

(720) 283-6120
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of April 29, 2010, was 162,170,878.

 

 

UDR, Inc.

INDEX

		PAGE
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009 (audited)			3
Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited)			4
Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)			5
Consolidated Statements of Stockholders’ Equity and Comprehensive Income/(Loss) for the three months ended March 31, 2010 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 3. Defaults Upon Senior Securities			52
Item 4. (Removed and Reserved)			52
Item 5. Other Information			52
Item 6. Exhibits			52
Signatures			53
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

UDR, Inc.

		March 31,				December 31,
		2010				2009
		(unaudited)				(audited)
ASSETS
Real estate owned:
Real estate held for investment		$	6,115,026			$	5,995,290
Less: accumulated depreciation			(1,414,593	)			(1,350,067	)
			4,700,433				4,645,223
Real estate under development (net of accumulated depreciation of $1,464 and $1,226)			237,923				318,531
Total real estate owned, net of accumulated depreciation			4,938,356				4,963,754
Cash and cash equivalents			19,920				5,985
Marketable securities			37,992				37,650
Restricted cash			8,642				8,879
Deferred financing costs, net			26,710				26,601
Notes receivable			7,800				7,800
Investment in unconsolidated joint ventures			13,241				14,126
Other assets			63,055				67,822
Total assets		$	5,115,716			$	5,132,617
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt		$	1,945,065			$	1,989,434
Unsecured debt			1,469,013				1,437,155
Real estate taxes payable			16,895				16,976
Accrued interest payable			20,098				19,146
Security deposits and prepaid rent			30,223				31,798
Distributions payable			32,000				30,857
Deferred gains on the sale of depreciable property			28,822				28,826
Accounts payable, accrued expenses, and other liabilities			56,449				80,685
Total liabilities			3,598,565				3,634,877
Redeemable non-controlling interests in operating partnership			105,229				98,758
Stockholders’ equity
Preferred stock, no par value; 50,000,000 shares authorized
2,803,812 shares of 8.00% Series E Cumulative Convertible issued and outstanding (2,803,812 shares at December 31, 2009)			46,571				46,571
3,432,962 shares of 6.75% Series G Cumulative Redeemable issued and outstanding (3,432,962 shares at December 31, 2009)			85,824				85,824
Common stock, $0.01 par value; 250,000,000 shares authorized
161,369,435 shares issued and outstanding (155,465,482 shares at December 31, 2009)			1,614				1,555
Additional paid-in capital			2,027,966				1,948,669
Distributions in excess of net income			(752,226	)			(687,180	)
Accumulated other comprehensive (loss) income			(1,403	)			2
Total UDR, Inc. stockholders’ equity			1,408,346				1,395,441
Non-controlling interest			3,576				3,541
Total equity			1,411,922				1,398,982
Total liabilities and stockholders’ equity		$	5,115,716			$	5,132,617

See accompanying notes to consolidated financial statements.

UDR, Inc.

		Three Months Ended
		March 31,
		2010				2009
		(unaudited)				(unaudited)
REVENUES
Rental income		$	151,629			$	150,615
Non-property income:
Other income			3,320				5,024
Total Revenues			154,949				155,639
EXPENSES
Rental expenses:
Real estate taxes and insurance			19,601				20,020
Personnel			13,533				12,633
Utilities			8,710				8,367
Repair and maintenance			7,912				7,209
Administrative and marketing			3,850				3,333
Property management			4,170				4,142
Other operating expenses			1,485				1,654
Real estate depreciation and amortization			72,207				68,985
Interest
Expense incurred			35,899				36,509
Net gain on debt extinguishment			—				(7,113	)
Amortization of convertible debt premium			967				1,296
Hurricane related expenses			—				241
General and administrative			9,575				9,456
Other depreciation and amortization			1,223				1,394
Total Expenses			179,132				168,126
Loss from operations			(24,183	)			(12,487	)
Loss from unconsolidated entities			(737	)			(717	)
Tax expense for taxable REIT subsidiary			(65	)			(51	)
Loss from continuing operations			(24,985	)			(13,255	)
Loss from discontinued operations			(41	)			(168	)
Consolidated net loss			(25,026	)			(13,423	)
Net loss attributable to non-controlling interests			970				794
Net loss attributable to UDR, Inc.			(24,056	)			(12,629	)
Distributions to preferred stockholders — Series E (Convertible)			(931	)			(931	)
Distributions to preferred stockholders — Series G			(1,448	)			(1,869	)
Net loss attributable to common stockholders		$	(26,435	)		$	(15,429	)
Earnings per weighted average common share — basic and diluted:
Loss from continuing operations attributable to common stockholders		$	(0.17	)		$	(0.11	)
Loss from discontinued operations		$	0.00			$	0.00
Net loss attributable to common stockholders		$	(0.17	)		$	(0.11	)
Common distributions declared per share		$	0.180			$	0.305
Weighted average number of common shares outstanding — basic and diluted			156,131				144,176

See accompanying notes to consolidated financial statements.

UDR, Inc.

		Three Months Ended March 31,
		2010				2009
		(unaudited)				(unaudited)
Operating Activities
Consolidated net loss		$	(25,026	)		$	(13,423	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			73,430				70,379
Net (loss)/gain on the sale of depreciable property			41				168
Gains on debt extinguishment			—				(7,113	)
Write off of bad debt			674				915
Write off of note receivable and other assets			—				439
Loss from unconsolidated entities			737				717
Amortization of deferred financing costs and other			2,094				1,243
Amortization of deferred compensation			2,898				2,339
Amortization of convertible debt discount			967				1,296
Prepayments on income taxes			502				414
Changes in operating assets and liabilities:
Increase in operating assets			2,044				11,051
(Decrease)/increase in operating liabilities			(16,851	)			3,132
Net cash provided by operating activities			41,510				71,557
Investing Activities
Payments related to the buyout of joint venture partner			(16,141	)			—
Development of real estate assets			(28,565	)			(53,583	)
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement			(10,907	)			(10,269	)
Capital expenditures — non-real estate assets			(1,936	)			(3,343	)
Investment in unconsolidated joint ventures			(148	)			(1,084	)
Distributions received from unconsolidated joint venture			328				—
Purchase of marketable securities			—				(30,936	)
Net cash used in investing activities			(57,369	)			(99,215	)
Financing Activities
Payments on secured debt			(72,357	)			(15,196	)
Proceeds from the issuance of secured debt			28,052				269,969
Proceeds from the issuance of unsecured debt			149,190				—
Payments on unsecured debt			(50,000	)			(200,031	)
Net (repayment)/proceeds of revolving bank debt			(68,300	)			51,100
Payment of financing costs			(1,766	)			(3,330	)
Issuance of common and restricted stock, net			3,442				(335	)
Proceeds from the issuance of common shares through public offering, net			73,310				—
Distributions paid to non-controlling interests			(1,344	)			(4,404	)
Distributions paid to preferred stockholders			(2,379	)			(2,800	)
Distributions paid to common stockholders			(28,054	)			(42,125	)
Repurchase of common stock			—				(798	)
Net cash provided by financing activities			29,794				52,050
Net increase in cash and cash equivalents			13,935				24,392
Cash and cash equivalents, beginning of period			5,985				12,740
Cash and cash equivalents, end of period		$	19,920			$	37,132
Supplemental Information:
Interest paid during the year, net of amounts capitalized		$	38,429			$	39,376
Non-cash transactions:
Conversion of operating partnership non-controlling interests to common stock (41,804 in 2010 and 110,631 shares in 2009)			215				4,225
Payment of Special Dividend through the issuance of 11,358,042 shares of common stock			—				132,787
Issuance of restricted stock awards			15				3
Retirement of fully depreciated assets			7,183				—

See accompanying notes to consolidated financial statements.

UDR, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME/(LOSS)
(In thousands, except per share data)
(Unaudited)

																										Accumulated
																						Distributions in				Other				Non-
		Preferred Stock								Common Stock								Paid-in				Excess of				Comprehensive				controlling
		Shares				Amount				Shares				Amount				Capital				Net Income				Income/(Loss)				interest				Total
Balance, December 31, 2009			6,236,774			$	132,395				155,465,482			$	1,555			$	1,948,669			$	(687,180	)		$	2			$	3,541			$	1,398,982
Comprehensive income (loss)
Net loss			—				—				—				—				—				(24,056	)			—				35				(24,021	)
Other comprehensive income (loss)
Change in fair value of marketable securities			—				—				—				—				—				—				(224	)			—				(224	)
Unrealized gain on derivative financial instruments			—				—				—				—				—				—				(1,234	)			—				(1,234	)
Allocation to redeemable non-controllable interests			—				—				—				—				—				—				53				—				53
Comprehensive income (loss)																							(24,056	)			(1,405	)			35				(25,426	)
Issuance of common and restricted shares			—				—				1,524,638				15				5,816				—				—				—				5,831
Issuance of common shares through public offering			—				—				4,358,753				44				73,266																73,310
Adjustment for conversion of non-controlling interests of unitholders in operating partnerships			—				—				20,562				—				215				—				—				—				215
Common stock distributions declared ($0.18 per share)			—				—				—				—				—				(29,117	)			—				—				(29,117	)
Preferred stock distributions declared-Series E ($0.322 per share)			—				—				—				—				—				(931	)			—				—				(931	)
Preferred stock distributions declared-Series G ($0.421875 per share)			—				—				—				—				—				(1,448	)			—				—				(1,448	)
Adjustment to reflect redeemable non-controlling redemption value			—				—				—				—				—				(9,494	)			—				—				(9,494	)
Balance, March 31, 2010			6,236,774			$	132,395				161,369,435			$	1,614			$	2,027,966			$	(752,226	)		$	(1,403	)		$	3,576			$	1,411,922

See accompanying notes to consolidated financial statements.

UDR, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. CONSOLIDATION AND BASIS OF PRESENTATION

Consolidation and Basis of Presentation

UDR, Inc., collectively with our consolidated subsidiaries (“we”, “our”, “us”, “the Company” or “UDR”) is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. The accompanying consolidated financial statements include the accounts of UDR and its subsidiaries, including United Dominion Realty, L.P. (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”). As of March 31, 2010, there were 179,863,065 units in the Operating Partnership outstanding, of which 173,897,719 units or 96.7% were owned by UDR and 5,965,346 units or 3.3% were owned by limited partners. As of March 31, 2010, UDR owned 100% of the 6,264,460 units outstanding in Heritage OP. The consolidated financial statements of UDR include the non-controlling interests of the unitholders in the Operating Partnership. The consolidated financial statements of UDR include the non-controlling interests of the unitholders in the Heritage OP prior to UDR’s ownership of 100% of the units outstanding in Heritage OP.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of March 31, 2010, and results of operations for the three months ended March 31, 2010 and 2009 have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes appearing in UDR’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 25, 2010.

The accompanying interim unaudited consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

The Company evaluated subsequent events through the date its financial statements were issued. No recognized or non-recognized subsequent events were noted.

2. SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies

Real Estate Sales

For sales transactions meeting the requirements for full accrual profit recognition, such as the Company no longer having continuing involvement in the property, we remove the related assets and liabilities from our consolidated balance sheet and record the gain or loss in the period the transaction closes. For sale transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting.

Sales of real estate to entities in which we retain or otherwise own an interest are accounted for as partial sales. If all other requirements for recognizing profit under the full accrual method have been satisfied and no other forms of continuing involvement are present, we recognize profit proportionate to the interest of the buyer in the real estate and defer the gain on the interest we retain in the real estate. The Company will recognize any deferred gain when the property is then sold to a third party. In transactions accounted by us as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, we recognize profit only to the extent that proceeds from the sale of the majority equity interest exceed costs related to the entire property.

Redeemable non-controlling interests in operating partnerships

Interests in operating partnerships held by limited partners are represented by operating partnership units (“OP Units”). The income is allocated to holders of OP Units based upon net income available to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to non-controlling interests in accordance with the terms of the individual partnership agreements.

Limited partners have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the limited partnership agreement of the Operating Partnership (the “Partnership Agreement”)), provided that such OP Units have been outstanding for at least one year. UDR, as the general partner of the Operating Partnership may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of the Company for each OP Unit), as defined in the Partnership Agreement. Accordingly, the Company records the OP Units outside of permanent equity and reports the OP Units at their redemption value at each balance sheet date.

Marketable Securities

Marketable securities represent publicly traded debt securities and are classified as “available for sale” and carried at fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity. Declines in the value of public and private investments that management determines are other than temporary are recorded as a provision for loss on investments. The amortization of any discount and interest income are recorded in “Other Income” on the Consolidated Statements of Operations.

Investment in Unconsolidated Joint Ventures

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 in unconsolidated entities. 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.

Income Taxes

Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, no provision for federal income taxes has been provided for at UDR. Historically, the Company has generally incurred only state and local income, excise and franchise taxes. UDR elected for certain consolidated subsidiaries to be treated as Taxable REIT Subsidiaries (“TRS”), primarily those engaged in condominium conversion and development activities.

Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date. The Company’s deferred tax assets are generally the result of differing depreciable lives on capitalized assets and timing of expense recognition for certain accrued liabilities. As of March 31, 2010, UDR has recorded a net current liability of $2.3 million and a deferred tax asset of approximately $6.6 million and recorded income tax expense of $65,000 for the three months ended March 31, 2010.

Effective January 1, 2007, the Company adopted guidance which defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

The Company recognizes its tax positions and evaluates them using a two-step process. First, we determine whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Then the Company will determine the amount of benefit to recognize and record the amount that is more likely than not to be realized upon ultimate settlement.

UDR had no unrecognized tax benefit, accrued interest or penalties at March 31, 2010. UDR and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years 2005 — 2009 remain open to examination by the major taxing jurisdictions to which we are subject. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in income tax expense.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) Topic 810, Consolidation (originally issued as Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. (“FIN”) 46(R)”), which (1) addresses the effects of eliminating the qualifying special-purpose entity concept from ASC 860, Transfers and Servicing (formerly SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”), and (2) responds to concerns about the application of certain key provisions of ASC 810, Consolidation (formerly FIN 46(R), “Consolidation of Variable Interest Entities”), including concerns over the transparency of enterprises’ involvement with variable interest entities. ASC 810 is effective for calendar yearend companies beginning on January 1, 2010. The Company adopted this standard for the interim period ended March 31, 2010. There was no impact on the Company’s financial position, results of operations, cash flows, or disclosures.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment provides for more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. ASU No. 2010-06 is effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. See Note 9, “Fair Value of Derivatives and Financial Instruments”.

3. REAL ESTATE OWNED

Real estate assets owned by the Company consist of income producing operating properties, properties under development, land held for future development and properties deemed as held for sale. As of March 31, 2010 the Company owned and consolidated 167 communities in 10 states plus the District of Columbia totaling 46,357 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of March 31, 2010 and December 31, 2009 (dollar amounts in thousands):

		March 31, 2010				December 31, 2009
Land		$	1,672,972			$	1,635,401
Depreciable property — held and used:
Building and improvements			4,184,962				4,111,254
Furniture, fixtures and equipment			257,092				248,635
Under development:
Land			48,653				65,525
Construction in progress			190,734				254,232
Real estate owned		$	6,354,413			$	6,315,047
Accumulated depreciation			(1,416,057	)			(1,351,293	)
Real estate owned, net		$	4,938,356			$	4,963,754

4. DISCONTINUED OPERATIONS

Discontinued operations represent properties that UDR has either sold or which management believes meet the criteria to be classified as held for sale. In order to be classified as held for sale and reported as discontinued operations, a property’s operations and cash flows have or will be divested to a third party by the Company whereby UDR will not have any significant continuing involvement in the ownership or operation of the property after the sale or disposition. The results of operations of the property are presented as discontinued operations for all periods presented and do not impact the net earnings reported by the Company. Once a property is deemed as held for sale, depreciation is no longer recorded. However, if the Company determines that the property no longer meets the criteria of held for sale, the Company will recapture any unrecorded depreciation for the property. The assets and liabilities of properties deemed as held for sale are presented separately on the Consolidated Balance Sheets. Properties deemed as held for sale are reported at the lower of their carrying amount or their estimated fair value less the costs to sell the assets.

UDR did not dispose of any communities during the three months ended March 31, 2010 and 2009, nor did we have any classified as held for disposition at March 31, 2010 and 2009. The only activity related to discontinued operations during the three months ended March 31, 2010 and 2009 was “net loss on the sale of depreciable property, excluding RE3” of $41,000 and $168,000, respectively.

5. JOINT VENTURES

UDR has entered into joint ventures with unrelated third parties that are either consolidated and included in real estate owned on our Consolidated Balance Sheets or are accounted for under the equity method of accounting, which are not consolidated and are included in investment in unconsolidated joint ventures on our Consolidated Balance Sheets. The Company consolidates an entity in which we own less than 100% when we have the power to direct the activities of the entity that most significantly affect the entity’s economic performance. In addition, the Company consolidates any joint venture in which we are the general partner or managing member and the third party partner or member does not have the ability to substantively participate in the decision-making process nor the ability to remove us as general partner or managing member, without cause.

UDR’s joint ventures are funded with a combination of debt and equity. Our losses are limited to our investment and the Company does not guarantee any debt (issued by our unconsolidated joint ventures), capital payout or other obligations associated with our joint venture portfolio. The Company guarantees 100% of the debt issued by one of our consolidated joint ventures for which our equity ownership percentage is 98%.

Consolidated Joint Ventures

UDR is a partner with an unaffiliated third party in a joint venture (“989 Elements”) which owns and operates a 23-story, 166 home high-rise apartment community in the central business district of Bellevue, Washington. On December 30, 2009, UDR entered into an agreement with our partner to purchase its 49% interest in 989 Elements for $7.7 million. Concurrently, our partner resigned as managing member and appointed UDR as managing member. In addition, our partner relinquished its voting rights and approval rights and its ability to substantively participate in the decision-making process of the joint venture resulting in the consolidation of the joint venture. The joint venture assets and liabilities were recorded at fair value. The fair value of the assets was $55.0 million ($54.8 million of real estate owned and $200,000 of current assets) and the fair value of liabilities was $34.1 million ($33.4 million of a construction loan, net of fair market value adjustment of $1.6 million and $700,000 of current liabilities) at the consolidation date. On December 31, 2009, the Company repaid the outstanding balance of $35.0 million on the construction loan held by 989 Elements. In March 2010, the Company paid $7.7 million and acquired our partner’s 49% interest in the joint venture. At closing of the agreement and at March 31, 2010, the Company interest in 989 Elements was 98%.

UDR is a partner with an unaffiliated third party in a joint venture (“Elements Too”) which owns and operates a 274 home apartment community in the central business district of Bellevue, Washington. Construction began in the fourth quarter of 2006 and was completed in the first quarter of 2010. On October 16, 2009, our partner resigned as managing member and appointed UDR as managing member. In addition, our partner relinquished its voting rights and approval rights and its ability to substantively participate in the decision-making process of the joint venture resulting in the consolidation of the joint venture. The joint venture assets and liabilities were recorded at fair value. Prior to consolidation, our equity investment in Elements Too was $24.4 million (net of an $11.0 million equity loss discussed below) at October 16, 2009. The fair value of the assets was $100.3 million ($99.5 million of real estate owned and $814,000 of current assets) and the fair value of liabilities was $75.6 million ($70.5 million of a construction loan, $917,000 of a derivative instrument, and $4.2 million of current liabilities). On December 30, 2009, UDR entered into an agreement with our partner to purchase its 49% interest in Elements Too for $3.2 million. In March 2010, the Company paid the outstanding balance of $3.2 million and acquired our partner’s 49% interest in the joint venture. During the three months ended March 31, 2010, the Company repaid the outstanding balance of $70.5 million on the construction loan held by Elements Too.

UDR is a partner with an unaffiliated third party in a joint venture (“Bellevue”) which owns an operating retail site in Bellevue, Washington. The Company initially planned to develop a 430 home high rise apartment building with ground floor retail on an existing operating retail center. However, during the year ended December 31, 2009, the joint venture decided to continue to operate the retail property as opposed to developing a high rise apartment building on the site. On December 30, 2009, UDR entered into an agreement with our partner to purchase its 49% interest in Bellevue for $5.2 million. In addition, our partner resigned as managing member and appointed UDR as managing member. Concurrent with its resignation, our partner relinquished its voting rights and approval rights and its ability to substantively participate in the decision-making process of the joint venture resulting in the consolidation of the joint venture at fair value. Prior to consolidation, our equity investment in Bellevue was $5.0 million (net of a $5.0 million equity loss discussed below). The fair value of the assets was $33.0 million ($32.8 million of real estate owned and $211,000 of current assets) and the fair value of liabilities was $23.0 million ($22.3 million of a mortgage payable, $506,000 of a derivative instrument, and $213,000 of current liabilities). In March 2010, the Company paid $5.2 million and acquired our partner’s 49% interest in the joint venture. At closing of the agreement and at March 31, 2010, the Company’s interest in Bellevue was 98%.

The activities and accounts of these joint ventures are included in the Company’s consolidated financial position as of March 31, 2010 and December 31, 2009 and consolidated results of operations and cash flows for the three months ended March 31, 2010.

Unconsolidated Joint Ventures

The Company recognizes earnings or losses from our investments in unconsolidated joint ventures consisting of our proportionate share of the net earnings or loss of the joint venture. In addition, we may earn fees for providing management and development services to the unconsolidated joint ventures. As of March 31, 2010, UDR had investments in the following unconsolidated joint ventures which are accounted for under the equity method of accounting.

In August 2009, UDR and an unaffiliated third party, Kuwait Finance House, formed a jointed venture for the investment of up to $450.0 million in multifamily properties located in key, high barrier to entry markets. The partners will contribute equity of $180.0 million of which the Company’s maximum equity will be 30% or $54.0 million when fully invested. At closing and at March 31 2010, the Company owned 30%. Our investment at March 31, 2010 and December 31, 2009 was $382,000 and $242,000, respectively. At March 31, 2010 and December 31, 2009, the joint venture did not own any multifamily properties.

In November 2007, UDR and an unaffiliated third party formed a joint venture which owns and operates 10 operating properties located in Texas (3,992 homes). UDR contributed cash and property equal to 20% of the fair value of the properties. The unaffiliated member contributed cash equal to 80% of the fair value of the properties comprising the joint venture, which was then used to purchase the nine operating properties from UDR. Our initial investment was $20.4 million. Our investment at March 31, 2010 and December 31, 2009 was $12.9 million and $13.9 million, respectively.

We evaluate our investments in unconsolidated joint ventures when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. During the three months ended March 31, 2010, the Company did not recognize any other-than-temporary decreases in the value of its investments in unconsolidated joint ventures.

Summary financial information relating to 100% of all the unconsolidated joint ventures operations (not just our proportionate share), is presented below for the three months ended March 31, (dollars in thousands):

		2010				2009 (a)
Revenues		$	10,003			$	11,520
Real estate depreciation and amortization			5,043				5,155
Net loss			(3,614	)			(2,886	)

The combined summary balance sheets relating to 100% of all the unconsolidated joint ventures (not just our proportionate share) is presented below as of March 31, 2010 and December 31, 2009, (dollars in thousands):

		March 31,				December 31,
		2010				2009
As of March 31, 2010 and December 31, 2009:
Real estate, net		$	316,092			$	320,786
Total assets			323,310				332,694
Amount due to UDR			630				779
Third party debt			254,000				254,000
Total liabilities			260,117				265,091
Equity			63,193				67,603

As of March 31, 2010, the Company had deferred profit from the sale of properties of $28.8 million, which the Company will not recognize until the underlying property is sold to a third party. The Company recognized $391,000 and $474,000 of management fees for our involvement in the joint ventures for the three months ended March 31, 2010 and 2009, respectively.

The Company may, in the future, make additional capital contributions to certain of our joint ventures should additional capital contributions be necessary to fund development costs or operating shortfalls.

6. SECURED DEBT

Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. For purposes of classification of the following table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively established the interest rate for the underlying debt instrument. Secured debt on continuing operations, which encumbers $3.0 billion or 47% of UDR’s real estate owned based upon book value ($3.4 billion or 53% of UDR’s real estate owned is unencumbered) consists of the following as of March 31, 2010 (dollars in thousands):

										2010
		Principal Outstanding								Weighted				Weighted				Number of
		March 31,				December 31,				Average				Average				Communities
		2010				2009				Interest Rate				Years to Maturity				Encumbered
Fixed Rate Debt
Mortgage notes payable		$	341,907			$	506,203				5.08	%			2.7				10
Tax-exempt secured notes payable			13,325				13,325				5.30	%			20.9				1
Fannie Mae credit facilities			949,288				949,971				5.40	%			6.8				14
Total fixed rate secured debt			1,304,520				1,469,499				5.32	%			5.9				25
Variable Rate Debt
Mortgage notes payable			353,094				243,810				2.23	%			2.4				14
Tax-exempt secured note payable			27,000				27,000				1.15	%			20.0				1
Fannie Mae credit facilities			260,451				249,125				1.64	%			5.9				35
Total variable rate secured debt			640,545				519,935				1.93	%			4.6				50
Total secured debt		$	1,945,065			$	1,989,434				4.21	%			5.5				75

UDR entered into secured revolving credit facilities with Fannie Mae with an aggregate commitment of $1.4 billion at March 31, 2010. The Fannie Mae credit facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and certain variable rate facilities can be extended for an additional five years at our option. We have $949.3 million of the funded balance fixed at a weighted average interest rate of 5.4% and the remaining balance on these facilities is currently at a weighted average variable rate of 1.6%.

		March 31, 2010				December 31, 2009
		(dollar amounts in thousands)
Borrowings outstanding		$	1,209,739			$	1,199,096
Weighted average borrowings during the period ended			1,202,444				1,033,658
Maximum daily borrowings during the period ended			1,209,739				1,199,322
Weighted average interest rate during the period ended			4.6	%			4.6	%
Weighted average interest rate at the end of the period			4.6	%			4.6	%

The Company will from time to time acquire properties subject to fixed rate debt instruments. In those situations, management will record the secured debt at its estimated fair value and amortize any difference between the fair value and par to interest expense over the life of the underlying debt instrument. The unamortized fair market adjustment was a net discount of $979,000 and $987,000 at March 31, 2010 and December 31, 2009, respectively.

Fixed Rate Debt

Mortgage notes payable. Fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2010 through June 2016 and carry interest rates ranging from 2.66% to 6.84%. Mortgage notes payable includes debt associated with development activities.

Tax-exempt secured notes payable. Fixed rate mortgage notes payable that secure tax-exempt housing bond issues mature in March 2031 and carry an interest rate of 5.30%. Interest on these notes is payable in semi-annual installments.

Secured credit facilities. At March 31, 2010, UDR’s fixed rate secured credit facilities consisted of $949.3 million on a $1.4 billion aggregate commitment under five revolving secured credit facilities with Fannie Mae (the Company also owes $260.5 million under the variable rate component of this credit facility). The Fannie Mae credit facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and certain variable rate facilities can be extended for an additional five years at our option. As of March 31, 2010, the fixed rate Fannie Mae credit facilities had a weighted average fixed rate of interest of 5.40%.

Variable Rate Debt

Mortgage notes payable. Variable rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2010 through April 2016. The mortgage notes payable are based on LIBOR plus basis points, which translate into interest rates ranging from 0.91% to 5.25% at March 31, 2010.

Tax-exempt secured note payable. The variable rate mortgage note payable that secures tax-exempt housing bond issue matures in March 2030. Interest on this note is payable in monthly installments. The variable mortgage note has an interest rate of 1.15% as of March 31, 2010.

Secured credit facilities. The variable rate secured credit facilities consisted of $260.5 million outstanding on the Fannie Mae credit facilities. As of March 31, 2010, the variable rate Fannie Mae credit facilities had a weighted average floating rate of interest of 1.64%.

The aggregate maturities, including amortizing principal payments, of our secured debt due during each of the next five calendar years and thereafter are as follows (dollars in thousands):

		Fixed												Variable
		Mortgage				Tax Exempt				Credit				Mortgage				Tax Exempt				Credit
		Notes				Notes Payable				Facilities				Notes				Notes Payable				Facilities				Total
2010		$	49,944			$	—			$	1,970			$	113,211			$	—			$	—			$	165,125
2011			103,460				—				52,808				73,272				—				39,513				269,053
2012			56,791				—				177,944				50,498				—				59,529				344,762
2013			61,390				—				38,631				38,522				—				—				138,543
2014			—				—				3,328				1,115				—				—				4,443
Thereafter			70,322				13,325				674,607				76,476				27,000				161,409				1,023,139
Total		$	341,907			$	13,325			$	949,288			$	353,094			$	27,000			$	260,451			$	1,945,065

7. UNSECURED DEBT

A summary of unsecured debt as of March 31, 2010 and December 31, 2009 is as follows (dollars in thousands):

		March 31,				December 31,
		2010				2009
Commercial Banks
Borrowings outstanding under an unsecured credit facility due July 2012 (a)		$	121,000			$	189,300
Senior Unsecured Notes
3.90% Medium-Term Notes due March 2010 (includes premium of $34)			—				50,034
3.625% Convertible Senior Notes due September 2011 (net of discount of $2,883 and $3,351) (b), (g)			123,452				122,984
5.00% Medium-Term Notes due January 2012			100,000				100,000
3.72% Term Notes due July 2012 (c)			100,000				100,000
6.05% Medium-Term Notes due June 2013			122,500				122,500
5.13% Medium-Term Notes due January 2014 (d)			184,000				184,000
5.50% Medium-Term Notes due April 2014 (net of discount of $277 and $295) (d)			128,223				128,205
5.25% Medium-Term Notes due January 2015 (includes net discount of $615 and premium $177) (d), (e)			324,560				175,352
5.25% Medium-Term Notes due January 2016 (d)			83,260				83,260
8.50% Debentures due September 2024			15,644				15,644
4.00% Convertible Senior Notes due December 2035 (net of discount of $1,416 and $1,916) (f), (g)			166,334				165,834
Other			40				42
			1,348,013				1,247,855
		$	1,469,013			$	1,437,155

The following is a summary of short-term bank borrowings under UDR’s bank credit facility at March 31, 2010 and December 31, 2009 (dollars in thousands):

		March 31,				December 31,
		2010				2009
Total revolving credit facility		$	600,000			$	600,000
Borrowings outstanding at end of period (1)			121,000				189,300
Weighted average daily borrowings during the period ended			165,468				83,875
Maximum daily borrowings during the period ended			296,700				279,400
Weighted average interest rate during the period ended			0.7	%			0.9	%
Weighted average interest rate at the end of the period			0.7	%			0.7	%

The convertible notes are convertible at the option of the holder, and as such are presented as if the holder will convert the debt instrument at the earliest available date. The aggregate maturities of unsecured debt for the five years subsequent to March 31, 2010 are as follows (dollars in thousands):

		Bank				Unsecured
		Lines				Debt				Total
2010		$	—			$	—			$	—
2011 (a)			—				289,594				289,594
2012			121,000				199,808				320,808
2013			—				122,308				122,308
2014			—				312,353				312,353
Thereafter			—				423,950				423,950
		$	121,000			$	1,348,013			$	1,469,013

Our debt instruments contain covenants that we were in compliance with at March 31, 2010.

8. LOSS PER SHARE

Basic loss per common share is computed based upon the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed based upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents such as the non-vested restricted stock awards.

The following table sets forth the computation of basic and diluted loss per share for the periods presented (amounts in thousands, except per share data):

		Three months ended
		March 31,
		2010				2009
Numerator for loss per share — basic and diluted:
Net loss attributable to common stockholders		$	(26,435	)		$	(15,429	)
Denominator for loss per share — basic and diluted:
Weighted average common shares outstanding			157,192				145,543
Non-vested restricted stock awards			(1,061	)			(1,367	)
Denominator for basic and diluted loss per share			156,131				144,176
Loss per share — basic and diluted		$	(0.17	)		$	(0.11	)

The effect of the conversion of the operating partnership units, convertible preferred stock, convertible debt, stock options and restricted stock is not dilutive and is therefore not included in the above calculations as the Company reported a loss from continuing operations.

If the operating partnership units were converted to common stock, the additional weighted average common shares outstanding for the three months ended March 31, 2010 and 2009, would be 5,975,967 and 7,854,830.

The effect of the conversion of the Series E Out-Performance Partnership Shares (the Series E Out-Performance Program terminated on December 31, 2009) is not dilutive for the quarter ended March 31, 2009 and is not included in the above calculations as the Company reported a loss from continuing operations.

If the convertible preferred stock were converted to common stock, the additional shares of common stock outstanding for the three months ended March 31, 2010 and 2009 would be 3,035,548 weighted average common shares.

If the stock options and unvested restricted stock were converted to common stock, the additional weighted average common shares outstanding for the three months ended March 31, 2010 and 2009 would be 1,514,041 and 18,037 weighted average common shares, respectively.

9. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS

Fair value is based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level valuation hierarchy prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•

Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of March 31, 2010 and December 31, 2009 are summarized as follows (dollars in thousands):

						Fair Value at March 31, 2010 Using
						Quoted Prices in Active Markets				Significant
						for Identical				Other				Significant
						Assets or				Observable				Unobservable
						Liabilities				Inputs				Inputs
		March 31, 2010				(Level 1)				(Level 2)				(Level 3)
Description:
Available-for-sale debt securities- Corporate debt		$	37,992			$	37,992			$	—			$	—
Derivatives- Interest rate contracts (c)			831				—				831				—
Total assets		$	38,823			$	37,992			$	831			$	—
Derivatives- Interest rate contracts (c)		$	6,035			$	—			$	6,035			$	—
Contingent purchase consideration (d)			6,037				—				—				6,037
Secured debt instruments- fixed rate: (a)
Mortgage notes payable			353,968				—				—				353,968
Tax-exempt secured notes payable			14,917				—				—				14,917
Fannie Mae credit facilities			964,641				—				—				964,641
Secured debt instruments- variable rate: (a)
Mortgage notes payable			353,094				—				—				353,094
Tax-exempt secured notes payable			27,000				—				—				27,000
Fannie Mae credit facilities			260,451				—				—				260,451
Unsecured debt instruments: (b)
Commercial bank			121,000				—				—				121,000
Senior Unsecured Notes			1,356,984				—				—				1,356,984
Total liabilities		$	3,464,127			$	—			$	6,035			$	3,458,092

						Fair Value at December 31, 2009 Using
						Quoted Prices in Active Markets				Significant
						for Identical				Other				Significant
						Assets or				Observable				Unobservable
						Liabilities				Inputs				Inputs
		December 31, 2009				(Level 1)				(Level 2)				(Level 3)
Description:
Available-for-sale debt securities- Corporate debt		$	37,650			$	37,650			$	—			$	—
Derivatives- Interest rate contracts (c)			2,294				—				2,294				—
Total assets		$	39,944			$	37,650			$	2,294			$	—
Derivatives- Interest rate contracts (c)		$	5,947			$	—			$	5,947			$	—
Secured debt instruments- fixed rate: (a)
Mortgage notes payable			516,578				—				—				516,578
Tax-exempt secured notes payable			13,540				—				—				13,540
Fannie Mae credit facilities			952,468				—				—				952,468
Secured debt instruments- variable rate: (a)
Mortgage notes payable			243,810				—				—				243,810
Tax-exempt secured notes payable			27,000				—				—				27,000
Fannie Mae credit facilities			249,125				—				—				249,125
Unsecured debt instruments: (b)
Commercial bank			189,300				—				—				—
Senior Unsecured Notes			1,236,515				—				—				1,236,515
Total liabilities		$	3,434,283			$	—			$	5,947			$	3,239,036

The fair value of the corporate debt securities is determined by Level 1 inputs which utilize quoted prices in active markets where we have the ability to access values for identical assets.

The amortized cost, gross unrealized gains and fair value of the Company’s investments at March 31, 2010 and December 31, 2009 are as follows (dollars in thousands):

		March 31,				December 31,
		2010				2009
Corporate debt securities- U.S.:
Amortized cost		$	33,632			$	33,066
Gross unrealized gains			4,360				4,584
Estimated fair value (net carrying amount)		$	37,992			$	37,650

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2010 and 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

At March 31, 2010, the fair values of cash and cash equivalents, restricted cash, notes receivable, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

We estimate the fair value of our debt instruments by discounting the remaining cash flows of the debt instrument at a discount rate equal to the replacement market credit spread plus the corresponding treasury yields. Factors considered in determining a replacement market credit spread include general market conditions, borrower specific credit spreads, time remaining to maturity, loan-to-value ratios and collateral quality (Level 3).

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

The Company did not recognize any other-than-temporary decrease in the value of its other investments in unconsolidated joint ventures during the three months ended March 31, 2010 and 2009. 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. Based on the significance of the unobservable inputs, we classify these fair value measurements within Level 3 of the valuation hierarchy.

After determining an other-than-temporary decrease in the value of an equity method has occurred, we estimate the fair value of our investment by estimating the proceeds we would receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs reflect management’s best estimate of what market participants would use in pricing the investment giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture asset. The inputs and assumptions utilized to estimate the future cash flows of the underlying asset are based upon the Company’s evaluation of the economy, market trends, operating results, and other factors, including judgments regarding costs to complete any construction activities, lease up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate the projected cash flows at the disposition, and discount rates.

10. DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in “Accumulated Other Comprehensive Income/(Loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2010 and 2009, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2010 and 2009, the Company recorded less than $1,000 of ineffectiveness in earnings attributable to reset date and index mismatches between the derivative and the hedged item, and the fair value of interest rate swaps that were not zero at inception of the hedging relationship.

Amounts reported in “Accumulated Other Comprehensive Income/(Loss)” related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $5.3 million will be reclassified as an increase to interest expense.

As of March 31, 2010, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):

		Number of
Interest Rate Derivative		Instruments				Notional
Interest rate swaps			11			$	327,344
Interest rate caps			2			$	113,909

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in a loss of $317,000 and $55,000 for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollar amounts in thousands):

		Number of
Product		Instruments				Notional
Interest rate caps			4			$	244,787

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (amounts in thousands).

		Asset Derivatives												Liability Derivatives
						Fair Value at:												Fair Value at:
		Balance				March 31,				December 31,				Balance				March 31,				December 31,
		Sheet Location				2010				2009				Sheet Location				2010				2009
Derivatives designated as hedging instruments:
Interest Rate Products		Other Assets				$	436			$	1,348			Other Liabilities				$	6,035			$	5,282
Total derivatives designated as hedging instruments						$	436			$	1,348							$	6,035			$	5,282
Derivatives not designated as hedging instruments:
Interest Rate Products		Other Assets				$	395			$	946			Other Liabilities				$	—			$	665
Total derivatives not designated as hedging instruments						$	395			$	946							$	—			$	665

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (dollar amounts in thousands):

														Location of Gain or				Amount of Gain or
														(Loss) Recognized in Income on				(Loss) Recognized in Income on
						Location of Gain				Amount of Gain or				Derivative (Ineffective Portion				Derivative (Ineffective Portion
		Amount of Loss				Reclassified from				(Loss) Reclassified				and Amount				and Amount
Derivatives in Cash		Recognized in OCI				Accumulated OCI				from Accumulated				Excluded from				Excluded from
Flow Hedging		on Derivative				into Income				OCI into Income				Effectiveness				Effectiveness
Relationships		(Effective Portion)				(Effective Portion)				(Effective Portion)				Testing)				Testing)
For the three months ended March 31, 2010:
Interest Rate Products		$	(3,314	)		Interest expense				$	2,080			Other expense				$	—
Total		$	(3,314	)						$	2,080							$	—
For the three months ended March 31, 2009:
Interest Rate Products		$	(2,493	)		Interest expense				$	(2,646	)		Other expense				$	—
Total		$	(2,493	)						$	(2,646	)						$	—