UDR

UDR, Inc. Q1 2007 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007. UDR, Inc. is a self-administered Real Estate Investment Trust (REIT) that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. As of the reporting date, the portfolio consisted of 244 communities with 70,325 apartment homes across major U.S. markets, with a weighted average physical occupancy of 92.7%.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Surge: Net income increased significantly to $31.8 million from $12.0 million, driven primarily by a $26.2 million increase in gains from the sale of depreciable property (discontinued operations).
• Operating Performance: Property operating income increased 2.9% to $115.4 million. Same-community operating income rose 6.9%, fueled by a 5.1% increase in rental rates, partially offset by a 0.9% decline in physical occupancy.
• Capital Expenditures: Total capital improvements increased to $50.0 million ($726 per home), with a notable 112.1% increase in major renovations ($18.6 million) compared to the prior year.
• Debt Structure: Total debt increased by approximately $130 million. The company issued $150 million in new 5.50% senior unsecured notes due April 2014 and repaid $92.3 million of unsecured debt and $1.2 million of secured debt.
• Investing Activities: Net cash used in investing activities jumped to $98.5 million from $21.0 million, reflecting $60.6 million in acquisitions and $17.3 million in development spending, partially offset by $59.1 million in proceeds from property sales.

Outlook, Risks, and Management Commentary

• Strategy: Management continues to focus on exiting markets with limited long-term growth prospects and redeploying capital into high-growth markets, specifically Southern California, Florida, and the Metropolitan Washington DC area.
• Liquidity: The company maintains a $500 million unsecured revolving credit facility (with $363.9 million unused) and $860 million in secured Fannie Mae facilities (with $168.2 million unused). Management expects operating cash flows to be adequate for operations and distributions.
• Development Pipeline: Estimated costs to complete wholly owned development projects are $47.6 million, while unconsolidated joint venture projects have an estimated cost to complete of $164.8 million.
• Risks: Key risks include unfavorable changes in apartment market conditions affecting occupancy and rents, refinancing risk on maturing debt, construction cost overruns, and the potential failure to qualify as a REIT. The company also faces exposure to variable interest rates on approximately $525 million of debt.
• Unusual Items: The significant net income is heavily influenced by discontinued operations (gains on sales). Excluding these gains, continuing operations resulted in a loss before minority interests of $8.8 million.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Funds from Operations (FFO) and continuing operations income, as net income is skewed by one-time property sale gains.
• Debt Maturities: Review the schedule of debt maturities, noting approximately $81 million in secured and $75.5 million in unsecured debt maturing in the remainder of 2007.
• Occupancy Trends: Monitor the 0.9% decline in same-community physical occupancy and the 1.6% decline in total portfolio occupancy to assess demand stability.
• Capital Allocation: Assess the return on investment for the $50 million in capital expenditures, particularly the heavy focus on major renovations versus revenue-enhancing improvements.
• Joint Venture Exposure: Review the terms and financial status of unconsolidated joint ventures, which represent significant future capital commitments ($164.8 million).