UDR

UDR, Inc. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

UDR, Inc. is a self-administered Real Estate Investment Trust (REIT) that owns, acquires, renovates, develops, and manages apartment communities nationwide. As of June 30, 2009, the portfolio consisted of 162 communities with 44,701 apartment homes across 10 states and the District of Columbia. This report covers the quarterly and six-month periods ended June 30, 2009.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Volatility: The company reported a net loss of $24.7 million for the six months ended June 30, 2009, compared to net income of $723.0 million in the prior year. This drastic shift is primarily due to a significant reduction in gains from the sale of depreciable property. In 2008, the company sold 85 communities, generating substantial gains; no communities were sold in the first half of 2009.
• Operating Performance: Despite the net loss, core operating performance remained stable. Net Operating Income (NOI) for same communities decreased slightly by 1.0% in the quarter but increased 0.4% for the six-month period. Physical occupancy for same communities improved to 95.7% in Q2 2009 from 94.8% in Q2 2008.
• Debt Management: The company actively managed its capital structure, repurchasing $238.9 million of unsecured debt for $222.3 million, resulting in a $9.8 million gain on extinguishment. Total debt decreased slightly due to these repurchases and maturities.
• Capital Expenditures: Total capital expenditures decreased 42.3% to $40.2 million for the six months ended June 30, 2009, compared to $69.6 million in 2008, reflecting the reduced portfolio size following 2008 dispositions.

Guidance, Outlook, and Risks

• Outlook: Management expects to meet short-term liquidity requirements through operating cash flows and credit facilities. Long-term needs will be met through secured/unsecured borrowings, property dispositions, and equity/debt issuances. No significant disposition activity is expected for the remainder of 2009.
• Development: The company has a development pipeline of 2,207 homes with a budget of $359.5 million. Approximately $97.8 million was invested in development during the first half of 2009.
• Risks: Key risks include unfavorable apartment market conditions affecting occupancy and rental rates, refinancing risk on maturing debt, and potential disruptions in financial markets affecting access to capital. The company also faces risks related to development costs and construction delays.
• Subsequent Event: On August 4, 2009, the company announced a tender offer for its 8.50% Debentures due 2024, offering $1,010 per $1,000 principal amount for early tender.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the 2008 net income was driven by one-time gains from the sale of 85 communities, which are not recurring in 2009.
• Liquidity Position: Review the cash balance of $5.0 million against the $123.3 million of secured debt maturing in the remainder of 2009 to assess refinancing needs.
• FFO vs. Net Income: Analyze Funds from Operations (FFO) of $108.7 million as a more stable indicator of ongoing operational performance compared to GAAP net loss.
• Debt Repurchase Gains: Confirm the $9.8 million gain on debt extinguishment and its classification as a reduction of interest expense.
• Occupancy Trends: Monitor the 95.7% physical occupancy rate for same communities to ensure stability in the face of economic downturns.