Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
OR
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o |
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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.
(Exact name of registrant as specified in its charter)
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Maryland
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54-0857512 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation of organization)
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Identification No.) |
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
(720) 283-6120
(Registrants 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 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller
reporting company) |
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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 issuers common stock, $0.01 par value, outstanding
as of August 1, 2008, was 128,031,119.
Item 1. FINANCIAL STATEMENTS
UDR, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
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June 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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ASSETS |
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Real estate owned: |
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Real estate held for investment |
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$ |
4,977,957 |
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$ |
4,129,460 |
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Less: accumulated depreciation |
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(935,369 |
) |
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(821,991 |
) |
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4,042,588 |
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3,307,469 |
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Real estate
under development
(net of accumulated depreciation of $511 and $963) |
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327,564 |
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343,768 |
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Real estate
held for disposition
(net of accumulated depreciation of $12,876 and $548,805) |
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45,019 |
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929,545 |
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Total real estate owned, net of accumulated depreciation |
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4,415,171 |
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4,580,782 |
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Cash and cash equivalents |
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1,412 |
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3,219 |
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Restricted cash |
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8,515 |
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6,295 |
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Deferred financing costs, net |
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32,308 |
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34,136 |
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Notes receivable |
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224,776 |
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12,655 |
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Investment in unconsolidated joint ventures |
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48,177 |
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48,264 |
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Funds held in escrow from IRC Section 1031 exchanges pending
the acquisition of real estate |
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231,795 |
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56,217 |
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Other assets |
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71,812 |
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54,636 |
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Other assets real estate held for disposition |
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2,180 |
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4,917 |
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Total assets |
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$ |
5,036,146 |
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$ |
4,801,121 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Secured debt |
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$ |
1,206,817 |
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$ |
910,611 |
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Secured debt real estate held for disposition |
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227,325 |
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Unsecured debt |
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2,012,727 |
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2,364,740 |
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Real estate taxes payable |
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16,246 |
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8,808 |
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Accrued interest payable |
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23,736 |
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27,999 |
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Security deposits and prepaid rent |
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28,270 |
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21,897 |
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Distributions payable |
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47,548 |
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49,152 |
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Deferred gains on the sale of depreciable property |
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28,814 |
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28,690 |
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Accounts payable, accrued expenses, and other liabilities |
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36,928 |
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51,989 |
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Other liabilities real estate held for disposition |
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2,147 |
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28,468 |
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Total liabilities |
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3,403,233 |
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3,719,679 |
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Minority interests |
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103,656 |
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62,049 |
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Stockholders equity |
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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, 2007) |
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46,571 |
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46,571 |
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5,400,000 shares of 6.75% Series G Cumulative Redeemable issued
and outstanding (5,400,000 shares at December 31, 2007) |
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135,000 |
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135,000 |
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Common stock, $0.01 par value; 250,000,000 shares authorized
128,320,888 shares issued and outstanding (133,317,706 shares
at December 31, 2007) |
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1,283 |
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1,333 |
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Additional paid-in capital |
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1,494,239 |
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1,620,541 |
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Distributions in excess of net income |
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(148,608 |
) |
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(783,238 |
) |
Accumulated other comprehensive income/(loss), net |
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772 |
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(814 |
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Total stockholders equity |
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1,529,257 |
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1,019,393 |
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Total liabilities and stockholders equity |
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$ |
5,036,146 |
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$ |
4,801,121 |
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See accompanying notes to consolidated financial statements.
3
UDR, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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REVENUES |
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Rental income |
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$ |
138,834 |
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$ |
123,689 |
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$ |
264,399 |
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$ |
245,095 |
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Non-property income: |
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Other income |
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9,324 |
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3,546 |
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14,842 |
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8,558 |
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Total revenues |
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148,158 |
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127,235 |
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279,241 |
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253,653 |
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EXPENSES |
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Rental expenses: |
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Real estate taxes and insurance |
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15,785 |
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15,139 |
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29,284 |
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29,623 |
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Personnel |
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11,890 |
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10,441 |
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23,532 |
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21,558 |
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Utilities |
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6,705 |
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5,296 |
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13,684 |
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12,314 |
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Repair and maintenance |
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7,363 |
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6,590 |
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14,059 |
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13,124 |
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Administrative and marketing |
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3,279 |
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3,265 |
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6,517 |
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6,315 |
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Property management |
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3,818 |
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3,401 |
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7,271 |
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6,740 |
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Other operating expenses |
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1,020 |
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314 |
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2,024 |
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625 |
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Real estate depreciation and amortization |
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62,507 |
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47,730 |
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114,942 |
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92,200 |
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Interest (net of gains on debt extinguishment of $1.2 million, $0,
$6.3 million and $0, respectively) |
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36,706 |
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38,230 |
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72,497 |
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77,956 |
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General and administrative |
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9,931 |
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9,670 |
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19,700 |
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19,562 |
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Other depreciation and amortization |
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944 |
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802 |
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1,873 |
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1,524 |
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159,948 |
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140,878 |
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305,383 |
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281,541 |
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Loss before minority interests and discontinued operations |
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(11,790 |
) |
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(13,643 |
) |
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(26,142 |
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(27,888 |
) |
Minority interests of outside partnerships |
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(38 |
) |
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(37 |
) |
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(97 |
) |
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(67 |
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Minority interests of unitholders in operating partnerships |
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468 |
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1,103 |
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1,594 |
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2,137 |
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Loss before discontinued operations, net of minority interests |
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(11,360 |
) |
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(12,577 |
) |
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(24,645 |
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(25,818 |
) |
Income from discontinued operations, net of minority interests |
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12,225 |
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19,273 |
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750,769 |
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64,347 |
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Net income |
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865 |
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6,696 |
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726,124 |
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38,529 |
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Distributions to preferred stockholders Series B |
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(1,908 |
) |
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(4,819 |
) |
Distributions to preferred stockholders Series E (Convertible) |
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(931 |
) |
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(931 |
) |
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(1,862 |
) |
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(1,862 |
) |
Distributions to preferred stockholders Series G |
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(2,278 |
) |
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(785 |
) |
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(4,556 |
) |
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(785 |
) |
Premium on preferred stock repurchases |
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(2,261 |
) |
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(2,261 |
) |
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Net (loss)/income available to common stockholders |
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$ |
(2,344 |
) |
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$ |
811 |
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$ |
719,706 |
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$ |
28,802 |
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(Loss)/earnings per weighted average common share basic and diluted: |
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Loss from continuing operations available to common stockholders,
net of minority interests |
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$ |
(0.12 |
) |
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$ |
(0.13 |
) |
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$ |
(0.24 |
) |
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$ |
(0.27 |
) |
Income from discontinued operations, net of minority interests |
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$ |
0.10 |
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$ |
0.14 |
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$ |
5.80 |
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$ |
0.48 |
|
Net (loss)/income available to common stockholders |
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$ |
(0.02 |
) |
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$ |
0.01 |
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$ |
5.56 |
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$ |
0.21 |
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Common distributions declared per share |
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$ |
0.3300 |
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$ |
0.3300 |
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$ |
0.6600 |
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$ |
0.6600 |
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Weighted average number of common shares outstanding basic |
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127,436 |
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134,727 |
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|
129,550 |
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|
134,620 |
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Weighted average number of common shares outstanding diluted |
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127,436 |
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134,727 |
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|
129,550 |
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|
134,620 |
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See
accompanying notes to consolidated financial statements.
4
UDR, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
(Unaudited)
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Six Months Ended June 30, |
|
2008 |
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2007 |
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Operating Activities |
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Net income |
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$ |
726,124 |
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$ |
38,529 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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116,815 |
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|
130,264 |
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Net gains on the sale of depreciable property |
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(780,212 |
) |
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(50,452 |
) |
Net gains on the sale of land |
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(183 |
) |
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Minority interests |
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|
49,256 |
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|
1,764 |
|
Amortization of deferred financing costs and other |
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|
4,763 |
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3,711 |
|
Amortization of deferred compensation |
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3,534 |
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(Refunds)/prepayments on income taxes |
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(4,170 |
) |
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|
4,441 |
|
Changes in operating assets and liabilities: |
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Decrease in operating assets |
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|
2,660 |
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|
3,194 |
|
Decrease in operating liabilities |
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(37,226 |
) |
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(13,512 |
) |
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Net cash provided by operating activities |
|
|
81,361 |
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|
117,939 |
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Investing Activities |
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Proceeds from sales of real estate investments, net |
|
|
1,474,484 |
|
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|
125,171 |
|
Repayment of note receivable |
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|
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|
4,000 |
|
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures |
|
|
(642,046 |
) |
|
|
(123,568 |
) |
Development of real estate assets |
|
|
(58,640 |
) |
|
|
(42,826 |
) |
Capital expenditures and other major improvements real estate assets, net of escrow reimbursement |
|
|
(69,608 |
) |
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|
(104,214 |
) |
Capital expenditures non-real estate assets |
|
|
(8,938 |
) |
|
|
(2,407 |
) |
Investment in unconsolidated joint venture |
|
|
87 |
|
|
|
(3,280 |
) |
Purchase deposits on pending real estate acquisitions |
|
|
(5,978 |
) |
|
|
(3,052 |
) |
Issuance of notes receivable |
|
|
(12,121 |
) |
|
|
|
|
Increase in funds held in escrow from IRC Section 1031 exchanges pending the acquisition of real estate |
|
|
(175,578 |
) |
|
|
(25,780 |
) |
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities |
|
|
501,662 |
|
|
|
(175,956 |
) |
|
|
|
|
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|
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|
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Financing Activities |
|
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|
Payments on secured debt |
|
|
(74,050 |
) |
|
|
(45,666 |
) |
Proceeds from the issuance of unsecured debt |
|
|
240,000 |
|
|
|
150,000 |
|
Proceeds from the issuance of secured debt |
|
|
74,204 |
|
|
|
66,948 |
|
Payments on unsecured debt |
|
|
(302,413 |
) |
|
|
(92,255 |
) |
Net (repayment)/proceeds of revolving bank debt |
|
|
(289,600 |
) |
|
|
121,700 |
|
Payment of financing costs |
|
|
(2,338 |
) |
|
|
(5,142 |
) |
Proceeds from the issuance of common stock |
|
|
717 |
|
|
|
918 |
|
Proceeds from the issuance of Series G preferred stock |
|
|
|
|
|
|
135,000 |
|
Payment of preferred stock issuance costs |
|
|
|
|
|
|
(4,252 |
) |
(Repayment)/proceeds from the investment of performance based programs, net |
|
|
(745 |
) |
|
|
87 |
|
Distributions paid to minority interests |
|
|
(5,993 |
) |
|
|
(6,308 |
) |
Distributions paid to preferred stockholders |
|
|
(6,418 |
) |
|
|
(7,653 |
) |
Distributions paid to common stockholders |
|
|
(86,680 |
) |
|
|
(87,027 |
) |
Repurchase of common stock |
|
|
(131,514 |
) |
|
|
(32,148 |
) |
Redemption of Series B preferred stock |
|
|
|
|
|
|
(135,400 |
) |
|
|
|
|
|
|
|
Net cash (used in)/provided by financing activities |
|
|
(584,830 |
) |
|
|
58,802 |
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents |
|
|
(1,807 |
) |
|
|
785 |
|
Cash and cash equivalents, beginning of period |
|
|
3,219 |
|
|
|
2,143 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
1,412 |
|
|
$ |
2,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Interest paid during the period |
|
$ |
84,772 |
|
|
$ |
97,869 |
|
Non-cash transactions: |
|
|
|
|
|
|
|
|
Conversion of operating partnership minority
interests to common stock
(99,241 shares in 2008 and 510,264 shares in 2007) |
|
|
1,327 |
|
|
|
8,572 |
|
Issuance of restricted stock awards |
|
|
4,736 |
|
|
|
2 |
|
Issuance of note receivable upon the disposition of
real estate |
|
|
200,000 |
|
|
|
|
|
Secured debt assumed with the acquisition of
properties, net of fair value adjustment |
|
|
68,728 |
|
|
|
72,680 |
|
See accompanying notes to consolidated financial statements.
5
UDR, Inc.
CONSOLIDATED STATEMENT
OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in |
|
|
Other |
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid-in |
|
|
Excess of |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Net Income |
|
|
Income/(Loss) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
8,203,812 |
|
|
$ |
181,571 |
|
|
|
133,317,706 |
|
|
$ |
1,333 |
|
|
$ |
1,620,541 |
|
|
$ |
(783,238 |
) |
|
$ |
(814 |
) |
|
$ |
1,019,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
726,124 |
|
|
|
|
|
|
|
726,124 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized income on derivative financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,586 |
|
|
|
1,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
726,124 |
|
|
|
1,586 |
|
|
|
727,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common and restricted shares |
|
|
|
|
|
|
|
|
|
|
503,641 |
|
|
|
5 |
|
|
|
3,830 |
|
|
|
|
|
|
|
|
|
|
|
3,835 |
|
Purchase of common shares |
|
|
|
|
|
|
|
|
|
|
(5,599,700 |
) |
|
|
(56 |
) |
|
|
(131,458 |
) |
|
|
|
|
|
|
|
|
|
|
(131,514 |
) |
Adjustment for conversion of minority interests
of unitholders in operating partnerships |
|
|
|
|
|
|
|
|
|
|
99,241 |
|
|
|
1 |
|
|
|
1,326 |
|
|
|
|
|
|
|
|
|
|
|
1,327 |
|
Common stock distributions declared ($0.6600 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(85,076 |
) |
|
|
|
|
|
|
(85,076 |
) |
Preferred stock distributions declared-Series E ($0.6600 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,862 |
) |
|
|
|
|
|
|
(1,862 |
) |
Preferred stock distributions declared-Series G ($0.8437 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,556 |
) |
|
|
|
|
|
|
(4,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
|
8,203,812 |
|
|
$ |
181,571 |
|
|
|
128,320,888 |
|
|
$ |
1,283 |
|
|
$ |
1,494,239 |
|
|
$ |
(148,608 |
) |
|
$ |
772 |
|
|
$ |
1,529,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
6
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
1. CONSOLIDATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES
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 June 30, 2008, there were 166,163,186 units in the Operating Partnership outstanding, of which
157,605,718 units or 95% were owned by UDR and 8,557,468 units or 5% were owned by limited
partners. As of June 30, 2008, there were 5,542,200 units in the Heritage OP outstanding, of
which 5,228,898 units or 94% were owned by UDR and 313,302 units or 6% were owned by limited
partners. The consolidated financial statements of UDR include the minority interests of the
unitholders in the Operating Partnership and the 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 June 30, 2008, and results of operations for the three and six months ended June
30, 2008 and 2007 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 UDRs
Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and
Exchange Commission on February 26, 2008.
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 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.
Accounting Policies
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) relating to the Companys developer, RE3 and condominium conversion
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.
7
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
The Companys 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 June 30, 2008, UDR has recorded a current and deferred tax asset of
approximately $13.2 million and recorded income tax benefit, which is reflected in other income on
the Companys interim unaudited Consolidated Statements of Operations of $3.6 million and $4.9
million, respectively for the three and six months ended June 30, 2008.
UDR adopted the Financial Accounting Standards Board (FASB) Interpretation 48, Accounting
for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109 (FIN 48), on January
1, 2007. FIN 48 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting for interim periods, disclosure and transition.
The Company recognizes our 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 of the benefit that is more likely than not to
be realized upon ultimate settlement.
As a result of the implementation of FIN 48, UDR recognized no material adjustments to
liabilities related to unrecognized income tax benefits. At the adoption date, UDRs TRS had
$538,000 of net unrecognized tax benefits, which would favorably impact our effective tax rate if
recognized. During the three months ended June 30, 2008, due to the Company no longer meeting the
measurement criteria the liability was reversed. As such, UDR had no unrecognized tax benefits,
accrued interest or penalties. UDR and its subsidiaries are subject to U.S. federal income tax as
well as income tax of multiple state jurisdictions. The tax years 2004 2007 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.
Real Estate Sales
The Company accounts for sales of real estate in accordance with FASB Statement of Financial
Accounting Standards (SFAS) No. 66, Accounting for
Sales of Real Estate (SFAS 66). 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 sales 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 outside interest in the buyer and will defer the gain on the interest
we retain. 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.
8
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157), that
became effective for our fiscal year beginning January 1, 2008. SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with GAAP and expands disclosures
about fair value measurement. SFAS 157 applies to other accounting pronouncements that require or
permit fair value measurements but does not require any new fair value measurements. In February
2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157
(FSP 157-2), that delays the effective date of SFAS 157s fair value measurement requirements for
nonfinancial assets and liabilities that are not required or permitted to be measured at fair value
on a recurring basis. The adoption of SFAS 157 for financial assets and liabilities, as of January
1, 2008, did not have a material impact on our financial position or operations. Fair value
measurements identified in FSP 157-2 will be effective for our fiscal year beginning January 1,
2009. We are currently assessing the impact of FSP 157-2 for nonfinancial assets and liabilities
on our consolidated financial position and results of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), that became effective for our fiscal year beginning
January 1, 2008. SFAS 159 allows an entity to elect to measure certain financial instruments at
fair value. If this irrevocable election is made, an entity may apply SFAS 159 on an instrument by
instrument basis with a few exceptions and report any change in the fair value of the instrument in
earnings. The Company opted to not adopt SFAS 159.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires
enhanced disclosures related to derivatives and hedging activities. SFAS 161 will require
disclosures relating to: (i) how and why an entity uses derivative instruments; (ii) how derivative
instruments and related hedge items are accounted for under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities; and (iii) how derivative instruments and related
hedged items affect an entitys financial position, financial performance and cash flows. SFAS 161
must be applied prospectively and will be effective for our fiscal year beginning January 1, 2009,
although early adoption is allowed. We are currently assessing what impact the adoption of SFAS
161 will have on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141R, Business Combinations, (SFAS 141R). SFAS
141R establishes principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination, recognizing assets acquired and
liabilities assumed arising from contingencies, and determining what information to disclose to
enable users of the financial statement to evaluate the nature and financial effects of the
business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008.
We are currently assessing what impact the adoption of SFAS 141R will have on our consolidated
financial position and results of operations.
In December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 amends Accounting Research Bulletin 51, Consolidated
Financial Statements to establish accounting and reporting standards for the non-controlling
(minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that
a non-controlling interest in a subsidiary should be reported as equity in the consolidated
financial statements. Consolidated net income should include the net income for both the parent and
the non-controlling interest with disclosure of both amounts on the consolidated statement of
operations. The calculation of earnings per share will continue to be based on income amounts
attributable to the parent. SFAS 160 is effective for fiscal years beginning after December 15,
2008. We are currently assessing what impact the adoption of SFAS 160 will have on our
consolidated financial position and results of operations.
9
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
In May 2008, the FASB issued FASB Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (APB 14-1). APB 14-1 requires entities
that
issued certain convertible debt instruments that may be settled or partially settled in cash
on conversion to separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the entitys nonconvertible debt borrowing
rate. APB 14-1 requires that an entity determine the estimated fair value of a similar debt
instrument as of the date of the issuance without the conversion feature but inclusive of any other
embedded features such as puts and calls and assign that value to the debt component of the
instrument, which would result in a discount being recorded. The debt would subsequently be
accreted to its par value over its expected life using the market rate at the date of issuance.
The residual value between the initial proceeds and the value allocated to the debt would be
reflected in equity as additional paid in capital. APB 14-1 is effective for fiscal years
beginning after December 15, 2008 and would be applied retrospectively to both new and existing
convertible instruments. We are currently assessing what impact the adoption of APB 14-1 will have
on our financial position and results of operations.
2. REAL ESTATE
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 June 30, 2008, the Company owned and consolidated 156 communities in 10 states plus
the District of Columbia totaling 43,045 apartment homes. The following table summarizes the
carrying amounts for our real estate owned (at cost) as of June 30, 2008 and December 31, 2007
(dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
Land |
|
$ |
1,337,238 |
|
|
$ |
1,129,730 |
|
Depreciable property held for investment |
|
|
|
|
|
|
|
|
Building and improvements |
|
|
3,446,316 |
|
|
|
2,830,894 |
|
Furniture, fixtures and equipment |
|
|
194,403 |
|
|
|
168,836 |
|
Under development |
|
|
|
|
|
|
|
|
Land |
|
|
193,796 |
|
|
|
227,357 |
|
Construction in progress |
|
|
134,279 |
|
|
|
117,374 |
|
Held for disposition |
|
|
|
|
|
|
|
|
Land |
|
|
14,576 |
|
|
|
249,130 |
|
Building and improvements |
|
|
40,227 |
|
|
|
1,094,908 |
|
Furniture, fixtures and equipment |
|
|
3,092 |
|
|
|
134,312 |
|
|
|
|
|
|
|
|
Real estate owned |
|
$ |
5,363,927 |
|
|
$ |
5,952,541 |
|
Accumulated depreciation |
|
|
(948,756 |
) |
|
|
(1,371,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned, net |
|
$ |
4,415,171 |
|
|
$ |
4,580,782 |
|
|
|
|
|
|
|
|
10
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
The following table summarizes the Companys real estate community acquisitions for the six
months ended June 30, 2008 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase |
|
Market |
|
Acquisition Date |
|
|
Units |
|
|
Price (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orlando, FL |
|
January 2008 |
|
|
371 |
|
|
$ |
50,132 |
|
Baltimore, MD |
|
March 2008 |
|
|
264 |
|
|
|
57,690 |
|
Metro D.C. |
|
March 2008 |
|
|
241 |
|
|
|
85,000 |
|
San Francisco, CA |
|
March 2008 |
|
|
193 |
|
|
|
115,000 |
|
Metro D.C. |
|
March 2008 |
|
|
606 |
|
|
|
138,378 |
(b) |
Dallas, TX |
|
March 2008 |
|
|
1,043 |
|
|
|
118,500 |
|
Orange County, CA |
|
May 2008 |
|
|
296 |
|
|
|
87,320 |
|
Seattle, WA |
|
May 2008 |
|
|
220 |
|
|
|
38,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,234 |
|
|
$ |
690,020 |
|
|
|
|
(a) |
|
The purchase price is the contractual amount paid by UDR to the seller and does not
include any costs that the Company incurred as a result of the acquisition of the property. |
|
(b) |
|
The purchase price does not include the $5.9 million allocated to the commercial space
acquired in the transaction. |
The purchase prices of certain recent acquisitions were allocated to land; buildings and
improvements; furniture, fixtures and equipment; and intangible assets based on preliminary
estimates and are subject to change as we obtain more complete information.
The Company continues to reinvest proceeds from dispositions (see Note 3 Discontinued
Operations). As of June 30, 2008, the Company had entered into binding agreements for the
following real estate assets (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Purchase |
|
|
|
Properties/Parcels |
|
|
Units |
|
|
Price |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating properties |
|
|
2 |
|
|
|
485 |
|
|
$ |
159,472 |
|
|
|
|
|
|
|
|
|
|
|
3. DISCONTINUED OPERATIONS
Discontinued operations represent properties that UDR has either sold or which management
believes meets the criteria to be classified as held for sale. In order to be classified as
discontinued operations, a propertys 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.
11
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
For the six months ended June 30, 2008, UDR sold 85 communities, one parcel of land, and 42
condominiums from two communities with a total of 640 condominiums. UDR recognized after-tax
gains for financial reporting purposes of $780.4 million on these sales. At June 30, 2008, UDR had
one community with a total of 144 apartment homes and a net book value of $4.7 million, a
commercial property with a net book value of $1.7 million, and two communities with a total of 537
condominiums and a net book value of $38.6 million included in real estate held for disposition.
For the six months ended June 30, 2007, UDR sold three communities and 22 condominiums from one
community with a total of 320 condominiums, and one parcel of land. We recognized after-tax gains
for financial reporting purposes of $43.2 million on these sales. The results of operations for
these properties are classified on the
Consolidated Statements of Operations in the line item titled Income from discontinued
operations, net of minority interests for the three and six months ended June 30, 2008 and 2007.
In
conjunction with the sale of the 85 properties during 2008, UDR received a note in the amount
of $200 million. The note matures on March 31, 2014, may be pre-paid fourteen months from the date
of the note, bears interest at a fixed rate of 7.5% per annum and is secured by a pledge and
security agreement and a guarantee from the buyers parent company.
UDR has elected TRS status for certain of its corporate subsidiaries, primarily those engaged
in condominium conversion and development activities. For the three months ended June 30, 2008 and
2007, UDR recognized an income tax benefit of $3.7 million and a tax provision of $60,000
respectively and a tax benefit of $5.1 million and
$4.2 million for the six months ended June 30, 2008 and 2007,
respectively. Of the balance, UDR allocated an income tax benefit of $35,000 and an income tax
provision of $3.5 million, respectively for the three months ended June 30, 2008 and 2007 and an
income tax benefit of $161,000 and an income tax provision of $3.6 million for the six months ended
June 30, 2008 and 2007, respectively to discontinued operations.
12
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
The income attributable to discontinued operations is summarized as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
1,707 |
|
|
$ |
61,835 |
|
|
$ |
41,713 |
|
|
$ |
123,881 |
|
Non-property income |
|
|
|
|
|
|
|
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,707 |
|
|
|
61,835 |
|
|
|
41,896 |
|
|
|
123,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expenses |
|
|
1,614 |
|
|
|
24,647 |
|
|
|
16,817 |
|
|
|
49,964 |
|
Property management fee |
|
|
47 |
|
|
|
1,701 |
|
|
|
1,147 |
|
|
|
3,406 |
|
Real estate depreciation |
|
|
|
|
|
|
16,587 |
|
|
|
|
|
|
|
36,277 |
|
Interest |
|
|
37 |
|
|
|
4,528 |
|
|
|
2,616 |
|
|
|
8,996 |
|
Other expenses |
|
|
6 |
|
|
|
133 |
|
|
|
6 |
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,704 |
|
|
|
47,596 |
|
|
|
20,586 |
|
|
|
98,908 |
|
Income before net gain on the sale of depreciable
property and minority interests |
|
|
3 |
|
|
|
14,239 |
|
|
|
21,310 |
|
|
|
24,973 |
|
Net gain on
the sale of depreciable property, excluding RE3 |
|
|
13,027 |
|
|
|
2,762 |
|
|
|
780,989 |
|
|
|
39,819 |
|
RE3 gain/(loss) on sale of real estate, net of tax |
|
|
39 |
|
|
|
3,376 |
|
|
|
(777 |
) |
|
|
3,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests |
|
|
13,069 |
|
|
|
20,377 |
|
|
|
801,522 |
|
|
|
68,181 |
|
Minority interests on income from discontinued
operations |
|
|
(844 |
) |
|
|
(1,104 |
) |
|
|
(50,753 |
) |
|
|
(3,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of
minority interests |
|
$ |
12,225 |
|
|
$ |
19,273 |
|
|
$ |
750,769 |
|
|
$ |
64,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. JOINT VENTURES
UDR has entered into joint ventures with unrelated third parties for real estate assets 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 included in
investment in unconsolidated joint ventures on our Consolidated Balance Sheets. The Company will
consolidate an
entity in which we own less than 100% but control the joint venture as well as any variable
interest entity where we are the primary beneficiary. In addition, the Company will consolidate
any joint venture in which we are the general partner or managing member and the third party does
not have the ability to substantively participate in the decision making process nor do they have
the ability to remove us as general partner or managing member, respectively without cause.
Consolidated Development Joint Venture
In June 2006, we completed the formation of a development joint venture that will invest
approximately $138 million to develop one apartment community with 298 apartment homes in Marina
del Rey, California. UDR is the financial partner and is responsible for funding the costs of
development, which will result in the Company receiving a preferred return ranging from 7% to 8.5%
depending on the operating results of the joint venture before our partner receives a 50%
participation in the returns of the entity. Our initial investment was $27 million with the project
currently expected to be completed in the third quarter of 2008. Our investment in the joint
venture as of June 30, 2008 was $27.6 million with the consolidated joint venture having incurred
$136.5 million of costs.
13
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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 earn fees for providing management and development services to the unconsolidated
joint ventures. As of June 30, 2008, UDR had investments in the following unconsolidated
development joint ventures which are accounted for under the equity method of accounting:
UDR is a partner in a joint venture to develop a site in Bellevue, Washington. At closing, we
owned 49% of the project that involves building a 430 home high rise apartment building with ground
floor retail. Our initial investment was $5.7 million. The project is currently expected to be
completed in the fourth quarter of 2010. Our investment at June 30, 2008 and December 31, 2007
was $9.8 million and $8.1 million, respectively.
UDR is a partner in a joint venture which will develop 274 apartment homes in the central
business district of Bellevue, Washington. Construction began in the fourth quarter of 2006 and is
scheduled for completion in the second quarter of 2009. At closing, we owned 49% of the project.
Our initial investment was $10.0 million. Our investment at June 30, 2008 and December 31, 2007
was $9.0 million and $8.9 million, respectively.
In January 2007, UDR and an unaffiliated third party formed a joint venture which owns and
operates a recently completed 23-story, 166 apartment home high rise community in the central
business district of Bellevue, Washington. At closing, UDR owned 49% of the project (subject to a
$34 million mortgage). Our initial investment was $11.8 million. Our investment at June 30, 2008
and December 31, 2007 was $10.8 million and $11.2 million, respectively.
In November 2007, UDR and an unaffiliated third party formed a joint venture which owns and
operates various properties located in Texas. On the closing date, UDR sold nine operating
properties, consisting of 3,690 units, and contributed one property under development to the joint
venture. The property under development will have 302 units and is expected to be completed in the
third quarter of 2008. 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 venture, which was then used to purchase the nine operating properties
from UDR. Our initial investment was $20.4 million. Our investment at June 30, 2008 and December
31, 2007 was $18.6 million and $20.1 million, respectively. In addition, at June 30, 2008 UDR had
a note receivable of $17.8 million from the joint venture which is included in Notes receivable
on the Consolidated Balance Sheet.
The operating results of the properties sold to the Texas joint venture are included as a
component of continuing operations on the Consolidated Statement of Operations as UDR will continue
to recognize significant cash flows from the disposed properties via management fees over the term
of the joint venture.
14
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
Summarized financial information relating to 100% of all the unconsolidated joint ventures
entitys operations and not just our proportionate share is presented below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30th: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
10,588 |
|
|
$ |
894 |
|
Net loss |
|
$ |
(4,521 |
) |
|
$ |
(797 |
) |
For the six months ended June 30th: |
|
|
|
|
|
|
|
|
Revenues |
|
$ |
20,905 |
|
|
$ |
1,783 |
|
Net loss |
|
$ |
(8,087 |
) |
|
$ |
(570 |
) |
As of June 30, 2008 and December 31, 2007: |
|
|
|
|
|
|
|
|
Real estate |
|
$ |
497,157 |
|
|
$ |
476,476 |
|
Total assets |
|
$ |
509,806 |
|
|
$ |
484,217 |
|
Amount due to UDR |
|
$ |
758 |
|
|
$ |
2,662 |
|
Third party debt |
|
$ |
350,847 |
|
|
$ |
324,193 |
|
Total liabilities |
|
$ |
361,940 |
|
|
$ |
329,053 |
|
Equity |
|
$ |
147,866 |
|
|
$ |
155,164 |
|
As of June 30, 2008, 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. For the three and six months ended June 30, 2008, the Company reported a loss from
unconsolidated entities of $1.0 million and $1.4 million, respectively due in large part to
depreciation.
5. SECURED DEBT
Our secured debt instruments generally feature either monthly interest and principal or
monthly interest-only payments with balloon payments due at maturity. Secured debt on continuing
and discontinued operations, which encumbers $1.8 billion or 34% of UDRs real estate owned based
upon book value ($3.5 billion or 66% of UDRs real estate owned is unencumbered) consists of the
following as of June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Number of |
|
|
|
Principal Outstanding |
|
|
Average |
|
|
Average |
|
|
Communities |
|
|
|
June 30, |
|
|
December 31, |
|
|
Interest Rate |
|
|
Years to Maturity |
|
|
Encumbered |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
Fixed Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
$ |
364,098 |
|
|
$ |
324,059 |
|
|
|
5.51 |
% |
|
|
4.1 |
|
|
|
17 |
|
Tax-exempt secured notes payable |
|
|
13,325 |
|
|
|
18,230 |
|
|
|
5.30 |
% |
|
|
22.7 |
|
|
|
1 |
|
Fannie Mae credit facilities |
|
|
581,917 |
|
|
|
583,071 |
|
|
|
5.94 |
% |
|
|
5.0 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate secured debt |
|
|
959,340 |
|
|
|
925,360 |
|
|
|
5.77 |
% |
|
|
5.0 |
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes payable |
|
|
142,964 |
|
|
|
124,023 |
|
|
|
3.14 |
% |
|
|
2.3 |
|
|
|
3 |
|
Tax-exempt secured note payable |
|
|
|
|
|
|
7,770 |
|
|
|
n/a |
|
|
|
n/a |
|
|
|
n/a |
|
Fannie Mae credit facilities |
|
|
104,513 |
|
|
|
80,783 |
|
|
|
2.89 |
% |
|
|
6.8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total variable rate secured debt |
|
|
247,477 |
|
|
|
212,576 |
|
|
|
3.03 |
% |
|
|
4.3 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total secured debt |
|
$ |
1,206,817 |
|
|
$ |
1,137,936 |
|
|
|
5.21 |
% |
|
|
4.8 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
Approximate principal payments due during each of the next five calendar years and thereafter,
as of June 30, 2008, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Fixed Rate |
|
|
Variable Rate |
|
|
Secured |
|
Year |
|
Maturities |
|
|
Maturities |
|
|
Maturities |
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
3,098 |
|
|
$ |
|
|
|
$ |
3,098 |
|
2009 |
|
|
35,740 |
|
|
|
105,549 |
|
|
|
141,289 |
|
2010 |
|
|
223,085 |
|
|
|
|
|
|
|
223,085 |
|
2011 |
|
|
111,734 |
|
|
|
39,513 |
|
|
|
151,247 |
|
2012 |
|
|
234,731 |
|
|
|
|
|
|
|
234,731 |
|
Thereafter |
|
|
350,952 |
|
|
|
102,415 |
|
|
|
453,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
959,340 |
|
|
$ |
247,477 |
|
|
$ |
1,206,817 |
|
|
|
|
|
|
|
|
|
|
|
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 an asset of $750,000 and a
liability of $1.6 million at June 30, 2008 and December 31, 2007, respectively.
6. UNSECURED DEBT
A summary of unsecured debt as of June 30, 2008 and December 31, 2007 is as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Commercial Banks |
|
|
|
|
|
|
|
|
Borrowings outstanding under an unsecured credit facility due
July 2012 (a) |
|
$ |
19,900 |
|
|
$ |
309,500 |
|
Borrowings outstanding under an unsecured term loan due
February 2010 (b) |
|
|
240,000 |
|
|
|
|
|
Senior Unsecured Notes Other |
|
|
|
|
|
|
|
|
4.50% Medium-Term Notes due March 2008 |
|
|
|
|
|
|
200,000 |
|
8.50% Monthly Income Notes due November 2008 |
|
|
29,081 |
|
|
|
29,081 |
|
4.25% Medium-Term Notes due January 2009 |
|
|
50,000 |
|
|
|
50,000 |
|
6.50% Notes due June 2009 |
|
|
200,000 |
|
|
|
200,000 |
|
3.90% Medium-Term Notes due March 2010 |
|
|
50,000 |
|
|
|
50,000 |
|
3.625% Convertible Senior Notes due September 2011(c) |
|
|
250,000 |
|
|
|
250,000 |
|
5.00% Medium-Term Notes due January 2012 |
|
|
100,000 |
|
|
|
100,000 |
|
6.05% Medium-Term Notes due June 2013 |
|
|
125,000 |
|
|
|
125,000 |
|
5.13% Medium-Term Notes due January 2014(d) |
|
|
184,000 |
|
|
|
200,000 |
|
5.50% Medium-Term Notes due April 2014(d) |
|
|
128,500 |
|
|
|
150,000 |
|
5.25% Medium-Term Notes due January 2015(d) |
|
|
201,880 |
|
|
|
250,000 |
|
5.25% Medium-Term Notes due January 2016(d) |
|
|
83,260 |
|
|
|
100,000 |
|
8.50% Debentures due September 2024 |
|
|
54,118 |
|
|
|
54,118 |
|
4.00% Convertible Senior Notes due December 2035(e) |
|
|
250,000 |
|
|
|
250,000 |
|
Other |
|
|
153 |
|
|
|
158 |
|
|
|
|
|
|
|
|
|
|
|
1,705,992 |
|
|
|
2,008,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Notes Other |
|
|
|
|
|
|
|
|
ABAG Tax-Exempt Bonds due August 2008 |
|
|
46,700 |
|
|
|
46,700 |
|
|
|
|
|
|
|
|
|
|
Unsecured Notes Premiums & Discount |
|
|
|
|
|
|
|
|
Premium on $50 million Medium-Term Notes due March 2010 |
|
|
267 |
|
|
|
344 |
|
Premium on $250 million Medium-Term Notes due January 2015(d) |
|
|
265 |
|
|
|
343 |
|
Discount on $150 million Medium-Term Notes due April 2014(d) |
|
|
(397 |
) |
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
|
135 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Debt |
|
$ |
2,012,727 |
|
|
$ |
2,364,740 |
|
|
|
|
|
|
|
|
16
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
|
|
|
(a) |
|
UDR has a $600 million unsecured revolving credit facility that matures on July 26, 2012.
The terms of the $600 million credit facility provide that UDR has the right to increase the
credit facility to $750 million under certain circumstances. Based on UDRs current credit
ratings, the $600 million credit facility carries an interest rate equal to LIBOR plus a
spread of 47.5 basis points. Under a competitive bid feature and for so long as UDR maintains
an Investment Grade Rating, UDR has the right to bid out 50% of the commitment amount under
the $600 million credit facility and can bid out 100% of the commitment amount once per
quarter. |
|
(b) |
|
During the six months ended June 30, 2008, UDR borrowed $240 million in the form of a
two-year unsecured term loan from a consortium of banks. As of June 30, 2008, UDR had one
interest rate swap agreement associated with borrowings under the term loan with an aggregate
notional value of $200 million under which UDR pays a fixed rate of interest and receives a
variable rate of interest on the notional amount. The interest rate swap effectively changes
UDRs interest rate exposure on $200 million of these borrowings from a variable rate to a
weighted average fixed rate of approximately 3.61%. The remaining $40 million has a variable
interest rate, which was 3.31% at June 30, 2008 (see Note 8 Financial Instruments). |
|
(c) |
|
At any time on or after July 15, 2011, prior to the close of business on the second business
day prior to September 15, 2011, and also following the occurrence of certain events, the
notes become convertible at the option of the holder. Upon conversion of the notes, UDR will
deliver cash and common stock, if any, based on a daily conversion value calculated on a
proportionate basis for each trading day of the relevant 30 trading day observation period.
The initial conversion rate for each $1,000 principal amount of notes is 26.6326 shares of our
common stock, subject to adjustment under certain circumstances. In connection with the
issuance of the 3.625% convertible senior notes, UDR entered into a capped call transaction
with respect to its common stock. The convertible note and capped call transaction, both of
which expire September 2011, must be net share settled. The maximum number of shares to be
issued under the convertible notes is 6.7 million shares, subject to certain adjustment
provisions. The capped call transaction combines a purchased call option with a strike price
of $37.548 with a written call option with a strike price of $43.806. These transactions have
no effect on the terms of the 3.625% convertible senior notes. However, through the entering
of the capped call transaction, the Company effectively increased the initial conversion price
to $43.806 per share, representing a 40% conversion premium. The net cost of $12.6 million of
the capped call transaction was included in stockholders equity. |
|
(d) |
|
During the three and six months ended June 30, 2008, UDR redeemed medium term notes with a
notional amount of $35.0 million and $102.4 million for $33.8 million and $96.1 million,
respectively recognizing a gain of approximately $1.2 million and $6.3 million, respectively.
This gain was recorded as a reduction to interest expense during the period. |
|
(e) |
|
Prior to December 15, 2030, upon the occurrence of specified events, the notes become
convertible at the option of the holder into cash and, in certain circumstances, shares of
UDRs common stock at an initial conversion price of approximately 35.2988 shares per $1,000
principal amount of notes. On or after December 15, 2030, the notes will be convertible at
any time prior to the second business day prior to maturity at the option of the holder into
cash, and, in certain circumstances, shares of UDRs common stock at the above initial
conversion rate. The initial conversion rate is subject to adjustment in certain
circumstances. |
17
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
If we were to settle the convertible notes in shares at
the conversion rates specified
above, UDR would be required to issue approximately 15.5 million shares to settle the
principal component of the convertible notes. The Company believes that the conversion spread (the
amount in excess of the principal balance of the convertible notes) will be settled in cash or, at
UDRs option in our common shares. If the conversion spread becomes dilutive to our earning per
share, which occurs at $37.55 and $28.33, respectively for the convertible notes included in the
above table, we will include the shares in our computation of diluted earnings per share.
Our debt instruments contain covenants that we were in compliance with at June 30, 2008.
7. (LOSS)/EARNINGS PER SHARE
Basic earnings per common share is computed based upon the weighted average number of common
shares outstanding during the period. Diluted earnings 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 earnings per share for the
periods presented (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for (loss)/earnings per share basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(2,344 |
) |
|
$ |
811 |
|
|
$ |
719,706 |
|
|
$ |
28,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for (loss)/earnings per share basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
128,674 |
|
|
|
135,604 |
|
|
|
130,670 |
|
|
|
135,491 |
|
Non-vested restricted stock awards |
|
|
(1,238 |
) |
|
|
(877 |
) |
|
|
(1,120 |
) |
|
|
(871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted (loss)/earnings per share |
|
|
127,436 |
|
|
|
134,727 |
|
|
|
129,550 |
|
|
|
134,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/earnings per share basic and diluted |
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
$ |
5.56 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the conversion of the operating partnership units, Out-Performance
Partnership Shares, convertible preferred stock, and convertible debt, 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 of common stock outstanding for the three and six months ended June 30, 2008
and 2007, would be 8,887,670 and 8,925,405 and 7,765,772 and 7,982,809, respectively.
18
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
At June 30, 2008, if the measurement periods had ended on that date, no Series D or E
Out-Performance Partnership Shares would have been issued had each Program terminated on that date.
Accordingly, no additional operating partnership units would have been issued at that date nor are
included in the diluted earnings per share calculation (see Note 11 Commitments and
Contingencies). The Series C Out-Performance Program expired during the quarter ended June 30,
2008, with no incremental operating partnership units issued.
If the Series A Out-Performance Partnership Shares were converted to common stock, the
additional shares of common stock outstanding for the three and six months ended June 30, 2007
would be 1,627,769 and 1,627,894 weighted average common shares, respectively.
At June 30, 2007, if the measurement periods had ended on that date, no Series C, D or E
Out-Performance Partnership Shares would have been issued if each Program terminated on that date.
Accordingly, no additional operating partnership units, respectively, would have been issued had
the measurement periods ended on that date.
8. FINANCIAL INSTRUMENTS
UDR accounts for its derivative instruments in accordance with SFAS No 133 Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. At June 30, 2008, UDRs derivative financial
instruments include swap agreements on two of our unconsolidated development joint ventures in
which UDR has a 49% interest as well as two interest rate swap
agreements that are designated as cash flow hedges with variable interest rate features on UDRs term loan and variable rate secured
debt. These swaps are qualifying cash flow hedges for financial reporting purposes. For
derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss
on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings during the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item, if any, is
recognized in current earnings during the period of change.
The fair value of UDRs derivative instrument is reported on the Consolidated Balance Sheet at
its current fair value. Estimated fair values for interest rate swaps rely on prevailing market
interest rates. The fair value amount should not be viewed in isolation, but rather in relation to
the value of the underlying hedged transaction and investment and to the overall reduction in
exposure to adverse fluctuations in interest rates. The interest rate swap agreement is designated
with a portion of the principal balance and term of a specific debt obligation. The interest rate
swap involves the periodic exchange of payments over the life of the related agreement. Amounts
received or paid on the interest rate swap are recorded on an accrual basis as an adjustment to the
related interest expense of the outstanding debt based on the accrual method of accounting. The
related amounts payable to and receivable from counterparties are included in other liabilities and
other assets, respectively.
19
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
The following table presents the fair value of UDRs derivative financial instrument outstanding,
based on external market quotations, as of June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Strike |
|
Type of |
|
|
Effective |
|
|
Contract |
|
|
Fair |
|
Amount |
|
|
Rate |
|
Contract |
|
|
Date |
|
|
Maturity |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Debt Term Loan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200,000 |
|
|
2.76% |
|
swap |
|
|
3/03/08 |
|
|
|
02/01/10 |
|
|
$ |
1,256 |
|
Secured Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
94,000 |
|
|
2.59% |
|
swap |
|
|
02/15/08 |
|
|
|
11/15/08 |
|
|
$ |
19 |
|
During the three and six months ended June 30, 2008, UDR recognized $3.9 million and $1.6
million, respectively of unrealized gains on derivative financial instruments in other
comprehensive income and no income/(loss) in net income related to the ineffective portion of the
hedged instruments.
Effective January 1, 2008, UDR adopted SFAS 157, which defines fair value 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. SFAS 157
establishes a fair value
hierarchy that 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 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 Companys derivative contract is the only asset or liability that is measured and
recognized at fair value using the SFAS 157 hierarchy. The derivative contract uses the Level 2
hierarchy and is recorded in Other Assets in the Consolidated Balance Sheet for $1.3 million as of
June 30, 2008.
9. OTHER COMPREHENSIVE INCOME
Other comprehensive income consists of unrealized gains from derivative financial instruments
on our unconsolidated development joint ventures in which UDR has a 49% interest as well as
interest rate swap agreements that the Company designated as a cash flow hedge. The difference
between net income and other comprehensive income reported by the Company is due to the change in
fair value for these interest rate swaps being reflected in other
comprehensive income. Total other
comprehensive income for the three and six months ended June 30, 2008, was $3.9 million and $1.6
million, respectively. UDR had no derivative instruments outstanding during the six months ended
June 30, 2007.
20
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
10. STOCK BASED COMPENSATION
UDR accounts for stock based compensation in accordance with SFAS 123R, Share Based Payment,
which the Company adopted on January 1, 2006, utilizing the modified prospective method. During
the six months ended June 30, 2008 and 2007, we recognized $3.5 million and $3.3 million,
respectively as stock based compensation expense, which is inclusive of awards granted to our
outside directors. The amounts reported are net of $269,000 and $384,000 in 2008 and 2007,
respectively that we capitalized due to our development activities.
11. COMMITMENTS AND CONTINGENCIES
Commitments
Real Estate Under Development
UDR is committed to completing our unfunded real estate projects under development and our
development joint ventures. The following summarizes the Companys real estate commitments at June
30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Costs Incurred |
|
|
Expected Costs |
|
|
Ownership |
|
|
|
Properties |
|
|
to Date |
|
|
to Complete |
|
|
Stake |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly owned under development |
|
|
8 |
|
|
$ |
191,613 |
|
|
$ |
559,387 |
|
|
|
100 |
% |
Joint Ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated joint ventures |
|
|
1 |
|
|
|
136,462 |
|
|
|
1,538 |
|
|
|
100 |
% |
Unconsolidated joint ventures |
|
|
3 |
|
|
|
125,928 |
|
|
|
131,072 |
|
|
|
|
(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
454,003 |
|
|
$ |
691,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
see Note 4 Joint Ventures. |
UDR has entered into four contracts with third parties to purchase apartment communities upon
completion of their development, which will be recorded at that time.
Provided that the developers of the respective properties meet certain conditions, UDR will purchase these communities for an
aggregate of approximately $166 million. These apartment communities are expected to be completed
at various times between the third quarter of 2008 and the third quarter of 2010.
Contingencies
Series C Out-Performance Program
In May 2005, the stockholders of UDR approved a new Out-Performance Program and the first
series of new Out-Performance Partnership Shares under the program are the Series C Out-Performance
Units (the Series C Program) pursuant to which certain executive officers and other key employees
of UDR (the Series C Participants) were given the opportunity to invest indirectly in UDR by
purchasing interests in UDR Out-Performance III, LLC, a Delaware limited liability company (the
Series C LLC), the only asset of which is a special class of partnership units of the Operating
Partnership (Series C Out-Performance Partnership Shares or Series C OPPSs). The purchase
price for the Series C OPPSs was determined by the Compensation Committee of UDRs board of
directors to be $750,000, assuming 100% participation, and was based upon the advice of an
independent valuation expert. UDRs performance for the Series C Program was measured over the
36-month period from June 1, 2005 to May 31, 2008.
21
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
The Series C Program was designed to provide participants with the possibility of substantial
returns on their investment if the cumulative total return on UDRs common stock, as measured by
the cumulative amount of dividends paid plus share price appreciation during the measurement period
is at least the equivalent of a 36% total return, or 12% annualized (Minimum Return).
At the conclusion of the measurement period, if UDRs cumulative total return satisfied these
criteria, the Series C LLC as holder of the Series C OPPSs would receive (for the indirect benefit
of the Series C Participants as holders of interests in the Series C LLC) distributions and
allocations of income and loss from the Operating Partnership equal to the distributions and
allocations that would be received on the number of OP Units obtained by:
|
i. |
|
determining the amount by which the cumulative total return of UDRs common
stock over the measurement period exceeds the Minimum Return (such excess being the
Excess Return); |
|
|
ii. |
|
multiplying 2% of the Excess Return by UDRs market capitalization (defined
as the average number of shares outstanding over the 36-month period, including common
stock, common stock equivalents and OP Units); and |
|
|
iii. |
|
dividing the number obtained in clause (ii) by the market value of one share
of UDRs common stock on the valuation date, computed as the volume-weighted average
price per day of common stock for the 20 trading days immediately preceding the
valuation date. |
For the Series C OPPSs, the number determined pursuant to (ii) above was capped at 1% of
market capitalization.
If, on the valuation date, the cumulative total return of UDRs common stock does not meet the
Minimum Return, then the Series C Participants will forfeit their entire initial investment.
Based on the results through the end of the measurement period, May 31, 2008, no Series C
OPPSs were issued under the program.
Series D Out-Performance Program
In February 2006, the board of directors of UDR approved the Series D Out-Performance Program
(the Series D Program) pursuant to which certain executive officers of UDR (the Series D
Participants) were given the opportunity to invest indirectly in UDR by purchasing interests in
UDR Out-Performance IV, LLC, a Delaware limited liability company (the Series D LLC), the only
asset of which is a special class of partnership units of the Operating Partnership (Series D
Out-Performance Partnership Shares or Series D OPPSs). The Series D Program is part of the New
Out-Performance Program approved by UDRs stockholders in May 2005. The Series D LLC has agreed to
sell 830,000 membership units to certain members of UDRs senior management at a price of $1.00 per
unit. The aggregate purchase price of $830,000 for the Series D OPPSs, assuming 100%
participation, is based upon the advice of an independent valuation expert. The Series D Program
will measure the cumulative total return on our common stock over the 36-month period beginning
January 1, 2006 and ending December 31, 2008.
The Series D Program is designed to provide participants with the possibility of substantial
returns on their investment if the cumulative total return on UDRs common stock, as measured by
the cumulative amount of dividends paid plus share price appreciation during the measurement period
is at least the equivalent of a 36% total return, or 12% annualized (Minimum Return).
22
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
At the conclusion of the measurement period, if UDRs cumulative total return satisfies these
criteria, the Series D LLC as holder of the Series D OPPSs will receive (for the indirect benefit
of the Series D Participants as holders of interests in the Series D LLC) distributions and
allocations of income and loss from the Operating Partnership equal to the distributions and
allocations that would be received on the number of OP Units obtained by:
|
i. |
|
determining the amount by which the cumulative total return of UDRs common
stock over the measurement period exceeds the Minimum Return (such excess being the
Excess Return); |
|
|
ii. |
|
multiplying 2% of the Excess Return by UDRs market capitalization (defined
as the average number of shares outstanding over the 36-month period, including common
stock, OP Units, common stock equivalents and OP Units); and |
|
|
iii. |
|
dividing the number obtained in (ii) by the market value of one share of
UDRs common stock on the valuation date, computed as the volume-weighted average
price per day of the common stock for the 20 trading days immediately preceding the
valuation date. |
For the Series D OPPSs, the number determined pursuant to clause (ii) above is capped at 1% of
market capitalization.
If, on the valuation date, the cumulative total return of UDRs common stock does not meet the
Minimum Return, then the Series D Participants will forfeit their entire initial investment.
Based on the results through June 30, 2008, no Series D OPPSs would have been issued had the
Program terminated on that date. However, since the ultimate determination of Series D OPPSs to be
issued will not occur until December 31, 2008, and the number of Series D OPPSs is determinable
only upon future events, the financial statements do not reflect any impact for these events.
Accordingly, the contingently issuable Series D OPPSs will only be included in basic earnings per
share after the measurement period has ended and the applicable hurdle has been met. Furthermore,
the Series D OPPSs will only be included in common stock and common stock equivalents in the
calculation of diluted earnings per share after the hurdle has been met at the end of the reporting
period (if any), assuming the measurement period ended at the end of the reporting period.
Series E Out-Performance Program
In February 2007, the board of directors of UDR approved the Series E Out-Performance Program
(the Series E Program) pursuant to which certain executive officers of UDR (the Series E
Participants) were given the opportunity to invest indirectly in UDR by purchasing interests in
UDR Out-Performance V, LLC, a Delaware limited liability company (the Series E LLC), the only
asset of which is a special class of partnership units of the Operating Partnership (Series E
Out-Performance Partnership Shares or Series E OPPSs). The Series E Program is part of the New
Out-Performance Program approved by UDRs stockholders in May 2005. The Series E LLC has agreed to
sell 805,000 membership units to certain members of UDRs senior management at a price of $1.00 per
unit. The aggregate purchase price of $805,000 for the Series E OPPSs, assuming 100%
participation, is based upon the advice of an independent valuation expert. The Series E Program
will measure the cumulative total return on our common stock over the 36-month period beginning
January 1, 2007 and ending December 31, 2009.
The Series E Program is designed to provide participants with the possibility of substantial
returns on their investment if the cumulative total return on UDRs common stock, as measured by
the cumulative amount of dividends paid plus share price appreciation during the measurement period
is at least the equivalent of a 36% total return, or 12% annualized (Minimum Return).
23
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
At the conclusion of the measurement period, if UDRs cumulative total return satisfies these
criteria, the Series E LLC as holder of the Series E OPPSs will receive (for the indirect benefit
of the Series E Participants as holders of interests in the Series E LLC) distributions and
allocations of income and loss from the Operating Partnership equal to the distributions and
allocations that would be received on the number of OP Units obtained by:
|
i. |
|
determining the amount by which the cumulative total return of UDRs common
stock over the measurement period exceeds the Minimum Return (such excess being the
Excess Return); |
|
|
ii. |
|
multiplying 2% of the Excess Return by UDRs market capitalization (defined
as the average number of shares outstanding over the 36-month period, including common
stock, OP Units, common stock equivalents and OP Units); and |
|
|
iii. |
|
dividing the number obtained in (ii) by the market value of one share of
UDRs common stock on the valuation date, computed as the volume-weighted average
price per day of the common stock for the 20 trading days immediately preceding the
valuation date. |
For the Series E OPPSs, the number determined pursuant to clause (ii) above is capped at 0.5%
of market capitalization.
If, on the valuation date, the cumulative total return of UDRs common stock does not meet the
Minimum Return, then the Series E Participants will forfeit their entire initial investment.
Based on the results through June 30, 2008, no Series E OPPSs would have been issued had the
Program terminated on that date. However, since the ultimate determination of Series E OPPSs to be
issued will not occur until December 31, 2009, and the number of Series E OPPSs is determinable
only upon future events, the financial statements do not reflect any impact for these events.
Accordingly, the contingently issuable Series E OPPSs will only be included in basic earnings per
share after the measurement period has ended and the applicable hurdle has been met. Furthermore,
the Series E OPPSs will only be included in common stock and common stock equivalents in the
calculation of diluted earnings per share after the hurdle has been met at the end of the reporting
period (if any), assuming the measurement period ended at the end of the reporting period.
Litigation and Legal Matters
UDR is subject to various legal proceedings and claims arising in the ordinary course of
business. UDR cannot determine the ultimate liability with respect to such legal proceedings and
claims at this time. UDR believes that such liability, to the extent not provided for through insurance or
otherwise, will not have a material adverse effect on our financial condition, results of
operations or cash flow.
12. REPORTABLE SEGMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS
131), requires that segment disclosures present the measure(s) used by the chief operating
decision maker to decide how to allocate resources and for purposes of assessing such segments
performance. UDRs chief operating decision maker is comprised of several members of its executive
management team who use several generally accepted industry financial measures to assess the
performance of the business for our reportable operating segments.
UDR owns and operates multifamily apartment communities throughout the United States that
generate rental and other property related income through the leasing of apartment homes to a
diverse base of tenants. The primary financial measures for UDRs apartment communities are rental
income and net operating income (NOI). Rental income represents gross market rent less
adjustments for concessions, vacancy loss and bad debt. NOI is defined as total revenues less
direct property operating expenses. UDRs chief operating decision maker utilizes NOI as the key
measure of segment profit or loss.
24
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
UDRs two reportable segments are same communities and non-mature/other communities:
|
|
|
Same communities represent those communities acquired, developed, and stabilized
prior to June 30, 2007, and held as of June 30, 2008. A comparison of operating
results from the prior year is meaningful as 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 community is
not held for disposition within the current year. A community is considered to have
stabilized occupancy once it achieves 90% occupancy for at least three consecutive
months. |
|
|
|
|
Non-mature/other communities represent those communities that were acquired or
developed in 2007 and 2008, sold properties, redevelopment properties, properties
classified as real estate held for disposition, condominium conversion properties,
joint venture properties, properties managed by third parties, and the non-apartment
components of mixed use properties. |
Executive management evaluates the performance of each of our apartment communities on a same
community and non-mature/other basis, as well as individually and geographically. This is
consistent with the aggregation criteria of SFAS 131 as each of our apartment communities generally
have similar economic characteristics, facilities, services, and tenants. Therefore, UDRs
reportable segments have been aggregated by geography in a manner identical to that which is
provided to the chief operating decision maker.
All revenues are from external customers and no single tenant or related group of tenants
contributed 10% or more of UDRs total revenues during the three and six months ended June 30, 2008
and 2007.
25
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
Certain reclassifications have been made to prior year amounts to conform to current year
presentation. These reclassifications primarily represent presentation changes related to
discontinued operations as described in Note 3, Income from Discontinued Operations. The
accounting policies applicable to the operating segments described above are the same as those
described in Note 1, Summary of Significant Accounting Policies, in UDRs Annual Report on Form
10-K for the year ended December 31, 2007. The following table details rental income and NOI for
UDRs reportable segments for the three and six months ended June 30, 2008 and 2007, and reconciles
NOI to net income per the Consolidated Statement of Operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable apartment home segment rental income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Region |
|
$ |
53,848 |
|
|
$ |
50,413 |
|
|
$ |
106,470 |
|
|
$ |
99,692 |
|
Mid-Atlantic Region |
|
|
25,360 |
|
|
|
24,502 |
|
|
|
50,540 |
|
|
|
48,406 |
|
Southeastern Region |
|
|
26,558 |
|
|
|
26,565 |
|
|
|
53,274 |
|
|
|
52,805 |
|
Southwestern Region |
|
|
4,612 |
|
|
|
4,293 |
|
|
|
9,139 |
|
|
|
8,590 |
|
Non-Mature communities/Other |
|
|
30,163 |
|
|
|
79,751 |
|
|
|
86,689 |
|
|
|
159,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment and consolidated rental income |
|
$ |
140,541 |
|
|
$ |
185,524 |
|
|
$ |
306,112 |
|
|
$ |
368,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable apartment home segment NOI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Communities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Region |
|
$ |
38,256 |
|
|
$ |
34,933 |
|
|
$ |
75,490 |
|
|
$ |
68,595 |
|
Mid-Atlantic Region |
|
|
17,850 |
|
|
|
16,971 |
|
|
|
35,288 |
|
|
|
33,382 |
|
Southeastern Region |
|
|
17,203 |
|
|
|
16,739 |
|
|
|
34,372 |
|
|
|
33,359 |
|
Southwestern Region |
|
|
3,074 |
|
|
|
2,706 |
|
|
|
6,037 |
|
|
|
5,428 |
|
Non-Mature communities/Other |
|
|
17,522 |
|
|
|
48,797 |
|
|
|
51,032 |
|
|
|
95,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment and consolidated NOI |
|
|
93,905 |
|
|
|
120,146 |
|
|
|
202,219 |
|
|
|
236,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-property income |
|
|
9,324 |
|
|
|
3,546 |
|
|
|
15,025 |
|
|
|
8,558 |
|
Property management |
|
|
(3,865 |
) |
|
|
(5,102 |
) |
|
|
(8,418 |
) |
|
|
(10,146 |
) |
Other operating expenses |
|
|
(1,026 |
) |
|
|
(447 |
) |
|
|
(2,030 |
) |
|
|
(890 |
) |
Real estate depreciation and amortization |
|
|
(62,507 |
) |
|
|
(64,317 |
) |
|
|
(114,942 |
) |
|
|
(128,477 |
) |
Interest |
|
|
(36,743 |
) |
|
|
(42,758 |
) |
|
|
(75,113 |
) |
|
|
(86,952 |
) |
General and administrative |
|
|
(9,931 |
) |
|
|
(9,670 |
) |
|
|
(19,700 |
) |
|
|
(19,562 |
) |
Other depreciation and amortization |
|
|
(944 |
) |
|
|
(802 |
) |
|
|
(1,873 |
) |
|
|
(1,524 |
) |
Minority interests |
|
|
(414 |
) |
|
|
(38 |
) |
|
|
(49,256 |
) |
|
|
(1,764 |
) |
Net gain on the sale of depreciable property |
|
|
13,066 |
|
|
|
6,138 |
|
|
|
780,212 |
|
|
|
43,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
865 |
|
|
$ |
6,696 |
|
|
$ |
726,124 |
|
|
$ |
38,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
The following table details the assets of UDRs reportable segments as of June 30, 2008 and as
of December 31, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Reportable apartment home segment assets: |
|
|
|
|
|
|
|
|
Same communities: |
|
|
|
|
|
|
|
|
Western Region |
|
$ |
1,904,107 |
|
|
$ |
1,888,802 |
|
Mid-Atlantic Region |
|
|
636,668 |
|
|
|
619,307 |
|
Southeastern Region |
|
|
752,634 |
|
|
|
743,680 |
|
Southwestern Region |
|
|
150,090 |
|
|
|
148,358 |
|
Non-mature communities/Other |
|
|
1,920,428 |
|
|
|
2,552,394 |
|
|
|
|
|
|
|
|
Total segment assets |
|
|
5,363,927 |
|
|
|
5,952,541 |
|
Accumulated depreciation |
|
|
(948,756 |
) |
|
|
(1,371,759 |
) |
|
|
|
|
|
|
|
Total segment assets net book value |
|
|
4,415,171 |
|
|
|
4,580,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,412 |
|
|
|
3,219 |
|
Restricted cash |
|
|
8,515 |
|
|
|
6,295 |
|
Deferred financing costs, net |
|
|
32,308 |
|
|
|
34,136 |
|
Notes receivable |
|
|
224,776 |
|
|
|
12,655 |
|
Investment in unconsolidated joint ventures |
|
|
48,177 |
|
|
|
48,264 |
|
Funds held in escrow from IRC Section 1031 exchanges
pending
the acquisition of real estate |
|
|
231,795 |
|
|
|
56,217 |
|
Other assets |
|
|
71,812 |
|
|
|
54,636 |
|
Other assets real estate held for disposition |
|
|
2,180 |
|
|
|
4,917 |
|
|
|
|
|
|
|
|
Total consolidated
assets |
|
$ |
5,036,146 |
|
|
$ |
4,801,121 |
|
|
|
|
|
|
|
|
Capital
expenditures excluding redevelopment for the three months ended June 30, 2008 and 2007 related to our same
communities totaled $18.3 million and $17.8 million,
respectively and $32.3 million and $35.8
million for the six months ended June 30, 2008 and 2007, respectively. Capital expenditures related
to our non-mature/other communities for the three months ended
June 30, 2008 and 2007 totaled $951,000 and $21.4 million,
respectively and $7.9 million and $41.5 million for the six months ended
June 30, 2008 and 2007, respectively.
Markets included in the above geographic segments are as follows:
|
i. |
|
Western Orange Co., San Francisco, Monterey Peninsula, Los Angeles, San Diego,
Seattle, Inland Empire, Sacramento and Portland. |
|
|
ii. |
|
Mid-Atlantic Metropolitan DC, Richmond, Baltimore, Norfolk, and Other Mid-Atlantic. |
|
|
iii. |
|
Southeastern Tampa, Orlando, Nashville, Jacksonville, and Other Florida. |
|
|
iv. |
|
Southwestern Phoenix, Austin and Dallas. |
27
Item 2. MANAGEMENTS 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, 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 the 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,
unanticipated adverse business developments affecting us, or our properties, adverse changes in the
real estate markets and general and local economies and business conditions. 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.
The following factors, among others, could cause our future results to differ materially from
those expressed in the forward-looking statements:
|
|
|
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, |
|
|
|
the timing and closing of planned dispositions under agreement, |
|
|
|
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, |
|
|
|
uninsured losses due to losses in excess of applicable coverage, |
|
|
|
delays in completing developments and lease-ups on schedule, |
|
|
|
our failure to succeed in new markets, |
|
|
|
changing interest rates, which could increase interest costs and affect the market
price of our securities, |
28
|
|
|
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 Internal
Revenue 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
below in Part II, Item 1A. Risk Factors. We encourage investors to review these risks factors.
Business Overview
We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and
manages apartment communities nationwide. 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 two
operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United
Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all
references in this report to we, us, our, the company, or UDR refer collectively to UDR,
Inc. and its subsidiaries.
29
At June 30, 2008, our portfolio included 156 communities with 43,045 apartment homes
nationwide. The following table summarizes our market information by major geographic markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2008 |
|
|
June 30, 2008 |
|
|
June 30, 2008 (a) |
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
|
of Gross |
|
|
Carrying |
|
|
Average |
|
|
Total Income |
|
|
Average |
|
|
Total Income |
|
|
|
Apartment |
|
|
Apartment |
|
|
Carrying |
|
|
Value |
|
|
Physical |
|
|
per Occupied |
|
|
Physical |
|
|
per Occupied |
|
|
|
Communities |
|
|
Homes |
|
|
Value |
|
|
(in thousands) |
|
|
Occupancy |
|
|
Home (b) |
|
|
Occupancy |
|
|
Home (b) |
|
SAME COMMUNITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WESTERN REGION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orange Co., CA |
|
|
13 |
|
|
|
4,067 |
|
|
|
13.1 |
% |
|
$ |
701,458 |
|
|
|
94.7 |
% |
|
$ |
1,590 |
|
|
|
95.0 |
% |
|
$ |
1,581 |
|
San Francisco, CA |
|
|
8 |
|
|
|
1,768 |
|
|
|
5.7 |
% |
|
|
306,553 |
|
|
|
96.3 |
% |
|
|
1,829 |
|
|
|
96.3 |
% |
|
|
1,808 |
|
Monterey Peninsula, CA |
|
|
7 |
|
|
|
1,565 |
|
|
|
2.7 |
% |
|
|
147,148 |
|
|
|
97.5 |
% |
|
|
1,066 |
|
|
|
94.9 |
% |
|
|
1,033 |
|
Los Angeles, CA |
|
|
5 |
|
|
|
1,052 |
|
|
|
3.4 |
% |
|
|
184,087 |
|
|
|
95.2 |
% |
|
|
1,553 |
|
|
|
95.2 |
% |
|
|
1,545 |
|
San Diego, CA |
|
|
5 |
|
|
|
1,123 |
|
|
|
3.1 |
% |
|
|
168,802 |
|
|
|
96.0 |
% |
|
|
1,372 |
|
|
|
94.7 |
% |
|
|
1,370 |
|
Seattle, WA |
|
|
6 |
|
|
|
1,199 |
|
|
|
2.2 |
% |
|
|
117,220 |
|
|
|
94.9 |
% |
|
|
1,132 |
|
|
|
95.1 |
% |
|
|
1,125 |
|
Inland Empire, CA |
|
|
3 |
|
|
|
1,074 |
|
|
|
2.8 |
% |
|
|
148,100 |
|
|
|
93.9 |
% |
|
|
1,324 |
|
|
|
92.4 |
% |
|
|
1,168 |
|
Sacramento, CA |
|
|
2 |
|
|
|
914 |
|
|
|
1.2 |
% |
|
|
66,246 |
|
|
|
90.3 |
% |
|
|
925 |
|
|
|
88.9 |
% |
|
|
921 |
|
Portland, OR |
|
|
3 |
|
|
|
716 |
|
|
|
1.2 |
% |
|
|
64,492 |
|
|
|
94.3 |
% |
|
|
985 |
|
|
|
93.6 |
% |
|
|
978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MID-ATLANTIC REGION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metropolitan DC |
|
|
6 |
|
|
|
1,879 |
|
|
|
3.5 |
% |
|
|
185,105 |
|
|
|
96.6 |
% |
|
|
1,315 |
|
|
|
96.4 |
% |
|
|
1,311 |
|
Baltimore, MD |
|
|
6 |
|
|
|
1,958 |
|
|
|
2.8 |
% |
|
|
150,079 |
|
|
|
95.9 |
% |
|
|
1,002 |
|
|
|
95.8 |
% |
|
|
994 |
|
Richmond, VA |
|
|
8 |
|
|
|
1,556 |
|
|
|
2.8 |
% |
|
|
149,323 |
|
|
|
96.4 |
% |
|
|
1,167 |
|
|
|
96.5 |
% |
|
|
1,171 |
|
Norfolk, VA |
|
|
6 |
|
|
|
1,438 |
|
|
|
1.5 |
% |
|
|
79,001 |
|
|
|
94.7 |
% |
|
|
982 |
|
|
|
94.9 |
% |
|
|
973 |
|
Other Mid-Atlantic |
|
|
5 |
|
|
|
1,132 |
|
|
|
1.4 |
% |
|
|
73,161 |
|
|
|
93.6 |
% |
|
|
1,037 |
|
|
|
93.6 |
% |
|
|
1,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTHEASTERN REGION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tampa, FL |
|
|
9 |
|
|
|
3,081 |
|
|
|
4.2 |
% |
|
|
223,198 |
|
|
|
94.4 |
% |
|
|
956 |
|
|
|
94.5 |
% |
|
|
960 |
|
Orlando, FL |
|
|
9 |
|
|
|
2,500 |
|
|
|
3.4 |
% |
|
|
182,870 |
|
|
|
92.9 |
% |
|
|
965 |
|
|
|
92.2 |
% |
|
|
976 |
|
Nashville, TN |
|
|
7 |
|
|
|
1,874 |
|
|
|
2.5 |
% |
|
|
136,512 |
|
|
|
95.4 |
% |
|
|
877 |
|
|
|
95.6 |
% |
|
|
873 |
|
Jacksonville, FL |
|
|
4 |
|
|
|
1,557 |
|
|
|
2.2 |
% |
|
|
116,291 |
|
|
|
94.4 |
% |
|
|
875 |
|
|
|
94.7 |
% |
|
|
873 |
|
Other Florida |
|
|
3 |
|
|
|
976 |
|
|
|
1.7 |
% |
|
|
93,762 |
|
|
|
93.3 |
% |
|
|
1,071 |
|
|
|
93.6 |
% |
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SOUTHWESTERN REGION |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phoenix, AZ |
|
|
3 |
|
|
|
914 |
|
|
|
1.3 |
% |
|
|
69,127 |
|
|
|
94.6 |
% |
|
|
964 |
|
|
|
94.7 |
% |
|
|
961 |
|
Austin, TX |
|
|
1 |
|
|
|
250 |
|
|
|
0.4 |
% |
|
|
20,062 |
|
|
|
96.8 |
% |
|
|
973 |
|
|
|
96.8 |
% |
|
|
966 |
|
Dallas |
|
|
1 |
|
|
|
305 |
|
|
|
1.1 |
% |
|
|
60,902 |
|
|
|
92.8 |
% |
|
|
1,655 |
|
|
|
92.1 |
% |
|
|
1,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Average Same Communities |
|
|
120 |
|
|
|
32,898 |
|
|
|
64.2 |
% |
|
$ |
3,443,499 |
|
|
|
94.9 |
% |
|
$ |
1,179 |
|
|
|
94.7 |
% |
|
$ |
1,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Matures, Commercial Properties and Other |
|
|
31 |
|
|
|
9,102 |
|
|
|
28.6 |
% |
|
|
1,534,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Real Estate Held for Investment |
|
|
151 |
|
|
|
42,000 |
|
|
|
92.8 |
% |
|
|
4,977,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held for Disposition |
|
|
3 |
|
|
|
681 |
|
|
|
1.1 |
% |
|
|
57,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Under Development |
|
|
2 |
|
|
|
364 |
|
|
|
6.1 |
% |
|
|
328,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
156 |
|
|
|
43,045 |
|
|
|
100.0 |
% |
|
$ |
5,363,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The same community population for the six months ended June 30, 2008 includes 32,124 homes. |
|
(b) |
|
Total Income per Occupied Home represents total revenues per weighted average number of
apartment homes occupied. |
30
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through
operating cash flows, the sale or maturity of existing assets, or by the acquisition of additional
funds through capital management. Both the coordination of asset and liability maturities and
effective capital management are important to the maintenance of liquidity. 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. We routinely use our unsecured bank
credit facility to temporarily fund certain investing and financing activities prior to arranging
for longer-term financing or the issuance of equity securities. During the past several years,
proceeds from the sale of real estate have been used for both investing and financing activities as
we reposition our portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by
operations and borrowings under credit arrangements. 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 long-term secured and unsecured
borrowings, the disposition of properties, and the issuance of additional debt or equity
securities. We believe that our net cash provided by operations will continue to be adequate to
meet both operating requirements and the payment of dividends by the company in accordance with
REIT requirements in both the short- and long-term. Likewise, the budgeted expenditures for
improvements and renovations of certain properties are expected to be funded from property
operations.
We have a shelf registration statement filed with the Securities and Exchange Commission which
provides for the issuance of an indeterminate amount of common stock, preferred stock, debt
securities, warrants, 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.
Future Capital Needs
Future development expenditures are expected to be funded with proceeds from the sale of
property, with construction loans, through joint ventures, the use of our unsecured revolving
credit facility, the use of proceeds from the issuance of unsecured borrowings and to a lesser
extent, with cash flows provided by operating activities. Acquisition activity in strategic markets
is expected to be largely financed by the reinvestment of proceeds from the sale of properties and
through the issuance of equity and debt securities, the issuance of operating partnership units,
and the assumption or placement of secured and/or unsecured debt. At
June 30, 2008, we had
approximately $231.8 million in funds held in escrow from IRC Section 1031 exchanges pending the
acquisition of real estate.
During the remainder of 2008, we have approximately $3.1 million of secured debt and $75.8
million of unsecured debt maturing and we anticipate repaying that debt with proceeds from
borrowings under our secured or unsecured credit facilities, the issuance of new unsecured debt
securities or equity or from disposition proceeds.
Critical Accounting Policies and Estimates
Our critical accounting policies are those having the most impact on the reporting of our
financial condition and results and those requiring significant judgments and estimates. These
policies include those related to (1) capital expenditures, (2) impairment of long-lived assets,
and (3) real estate investment
properties. Based on the Companys repositioning initiative, management deemed our policy
surrounding real estate sales to be a critical accounting policy.
31
Real Estate Sales
The Company accounts for sales of real estate in accordance with SFAS 66. For sale
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 sales 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 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 outside interest in the buyer and will defer the gain on the interest we
retain. 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.
Our other critical accounting policies are described in more detail in the section entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2007. There have been no significant
changes in our critical accounting policies from those reported in our 2007 Annual Report on Form
10-K. With respect to these critical accounting policies, we believe that the application of
judgments and assessments is consistently applied and produces financial information that fairly
depicts the results of operations for all periods presented.
Statements of Cash Flows
The following discussion explains the changes in net cash provided by operating activities and
net cash used in investing and financing activities that are presented in our Consolidated
Statements of Cash Flows.
Operating Activities
For the six months ended June 30, 2008, our cash flow provided by operating activities was
$81.4 million compared to $117.9 million for the comparable period in 2007. The decrease in cash
flow from operating activities resulted primarily from the decrease in property net operating
income from our apartment community portfolio for the six months ended June 30, 2008. This
decrease is primarily due to the decrease in the average number of homes for the six months ended
June 30, 2008 as compared to the comparable period of 2007 (see discussion under Apartment
Community Operations).
Investing Activities
For the six months ended June 30, 2008, net cash provided by/(used in) investing activities
was $501.7 million as compared to ($176.0) million for the comparable period in 2007. Changes in
the level of investing activities from period to period reflects our strategy as it relates to our
disposition, acquisition, capital expenditure, and development programs, as well as the impact of
the capital market environment on these activities, all of which are discussed in further detail
below.
32
Acquisitions
For the six months ended June 30, 2008, we acquired eight apartment communities with 3,234
apartment homes, 38,800 square feet of commercial space and two parcels of land for an aggregate
consideration of $699.0 million. Our long-term strategic plan is to achieve greater operating
efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding
our interests in the Southern California, Northern California, Florida, Metropolitan Washington DC
and Washington State markets over the past years. During 2008, we plan to continue to channel new
investments into those markets we believe will provide the best investment returns. Markets will be
targeted based upon defined criteria including favorable job formation and low single-family home
affordability.
Capital Expenditures
In conformity with accounting principles generally accepted in the United States, we
capitalize those expenditures related to acquiring new assets, materially enhancing the value of an
existing asset, or substantially extending the useful life of an existing asset. Expenditures
necessary to maintain an existing property in ordinary operating condition are expensed as
incurred.
During the six months ended June 30, 2008, $6 million or approximately $1,675 per home was
spent on capital expenditures for all of our communities, excluding development, condominium
conversions and commercial properties. These capital improvements included turnover related
expenditures for floor coverings and appliances, other recurring capital expenditures such as
roofs, siding, parking lots, and asset preservation capital expenditures, which aggregated $13.4
million or $323 per home. In addition, revenue enhancing capital expenditures, kitchen and bath
upgrades, upgrades to HVAC equipment, and other extensive exterior/interior upgrades totaled $23.5
million or $565 per home, and major renovations totaled $32.7 million or $787 per home for the six
months ended June 30, 2008.
The following table outlines capital expenditures and repair and maintenance costs for all of
our communities, excluding real estate under development, condominium conversions and commercial
properties, for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
(dollars in thousands) |
|
|
(per home) |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
Turnover capital expenditures |
|
$ |
4,548 |
|
|
$ |
6,920 |
|
|
|
-34.3 |
% |
|
$ |
109 |
|
|
$ |
100 |
|
|
|
9.0 |
% |
Asset preservation expenditures |
|
|
8,886 |
|
|
|
11,484 |
|
|
|
-22.6 |
% |
|
|
214 |
|
|
|
166 |
|
|
|
28.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring capital expenditures |
|
|
13,434 |
|
|
|
18,404 |
|
|
|
-27.0 |
% |
|
|
323 |
|
|
|
266 |
|
|
|
21.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue enhancing improvements |
|
|
23,482 |
|
|
|
43,366 |
|
|
|
-45.9 |
% |
|
|
565 |
|
|
|
625 |
|
|
|
-9.6 |
% |
Major renovations |
|
|
32,692 |
|
|
|
42,444 |
|
|
|
-23.0 |
% |
|
|
787 |
|
|
|
612 |
|
|
|
30.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
69,608 |
|
|
$ |
104,214 |
|
|
|
-33.2 |
% |
|
$ |
1,675 |
|
|
$ |
1,503 |
|
|
|
12.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repair and maintenance expense |
|
$ |
16,700 |
|
|
$ |
20,902 |
|
|
|
-20.1 |
% |
|
$ |
402 |
|
|
$ |
301 |
|
|
|
33.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures for our communities decreased $34.6 million for the six months
ended June 30, 2008, compared to the comparable period in 2007. This decrease was primarily
attributable to the Companys ongoing repositioning of our real estate portfolio evidenced by our
disposition of 85 communities during the six months ended June 30, 2008. We believe that through
our current year acquisitions and development we will be able to reduce our capital expenditures on
a per home basis while continuing to selectively add revenue enhancing improvements which we
believe will provide a return on investment substantially in excess of our cost of capital.
Recurring capital expenditures during 2008 are currently expected to be approximately $650 per
home.
33
Development
Development activity is focused in core markets in which we have strong operations in place.
For the six months ended June 30, 2008, we invested approximately $58.6 million on wholly owned
development projects inclusive of land held for future development, an increase of $15.8 million
from the $42.8 million invested in the comparable period in 2007, as we believe that our
development endeavors will prospectively add value for the Company.
Real Estate Under Development
The following wholly owned apartments were under development as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Completed |
|
|
Cost to |
|
|
Budgeted |
|
|
Estimated |
|
|
|
|
|
|
Apartment |
|
|
Apartment |
|
|
Date |
|
|
Cost |
|
|
Cost |
|
|
Completion |
|
|
|
Homes |
|
|
Homes |
|
|
(In thousands) |
|
|
(In thousands) |
|
|
Per Home |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurelwoode |
|
|
324 |
|
|
|
180 |
|
|
$ |
21,019 |
|
|
$ |
25,000 |
|
|
$ |
77,160 |
|
|
|
3Q08 |
|
Houston, TX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vitruvian Park |
|
|
2,712 |
|
|
|
|
|
|
|
67,335 |
|
|
|
352,000 |
|
|
|
129,794 |
|
|
|
3Q12 |
|
Dallas, TX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholly
owned -
apartments |
|
|
3,036 |
|
|
|
180 |
|
|
$ |
88,354 |
|
|
$ |
377,000 |
|
|
$ |
124,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The first phase of Vitruvian Park is expected to begin delivering homes in the fourth quarter
of 2009 with Vitruvian Park being a multi-phase master planned community that has an aggregate
budgeted cost of approximately $805.0 million. The carrying value of the Vitruvian Park
development in the aggregate at June 30, 2008 was $120.3 million.
In addition, we own six sites, which the Company deems as ready for future development. These
sites have a carrying value aggregating $103.3 million at June 30, 2008. The Company also owns an
additional nine sites with an aggregate carrying value of $187.9 million that we have not commenced
development activities.
Consolidated Development Joint Ventures
In June 2006, we completed the formation of a development joint venture that will invest
approximately $138 million to develop one apartment community with 298 apartment homes in Marina
del Rey, California. UDR is the financial partner and is responsible for funding the costs of
development, which will result in the Company receiving a preferred return ranging from 7% to 8.5%
depending on the operating results of the joint venture before our partner receives a 50%
participation in the returns of the entity. Our initial investment was $27 million with the project
currently expected to be completed in the third quarter of 2008. Our investment in the joint
venture as of June 30, 2008 was $136.5 million.
The following consolidated joint venture project was under development as of June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Completed |
|
|
Cost to |
|
|
Budgeted |
|
|
Estimated |
|
|
Expected |
|
|
|
Apartment |
|
|
Apartment |
|
|
Date |
|
|
Cost |
|
|
Cost |
|
|
Completion |
|
|
|
Homes |
|
|
Homes |
|
|
(In thousands) |
|
|
(In thousands) |
|
|
Per Home |
|
|
Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jefferson at Marina
del Rey |
|
|
298 |
|
|
|
184 |
|
|
$ |
136,462 |
|
|
$ |
138,000 |
|
|
$ |
463,087 |
|
|
|
3Q08 |
|
Marina del Rey, CA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated Development Joint Ventures
In November 2007, UDR and an unaffiliated third party formed a joint venture which owns and
operates various properties located in Texas. On the closing date, UDR sold nine operating
properties, consisting of 3,690 units, and contributed one property under development to the joint
venture. The property under development will have 302 units and is expected to be completed in the
third quarter of 2008. UDR contributed cash and property equal to 20% of the fair value of the
properties. The unaffiliated partner
contributed cash equal to 80% of the fair value of the properties comprising the venture,
which was then used to purchase the nine operating properties from UDR. Our initial investment was
$20.4 million. Our investment at June 30, 2008, and
December 31, 2007 was $18.6 million and $20.1 million, respectively.
34
UDR is a partner in a joint venture to develop a site in Bellevue, Washington. At closing, we
owned 49% of the project that involves building a 430 home high rise apartment building with ground
floor retail. Our initial investment was $5.7 million. The project is currently expected to be
completed in the fourth quarter of 2010. Our investment at June 30, 2008, and December 31, 2007,
was $9.8 million and $8.1 million, respectively.
UDR is a partner in a joint venture which will develop 274 apartment homes in the central
business district of Bellevue, Washington. Construction began in the fourth quarter of 2006 and is
scheduled for completion in the second quarter of 2009. At closing, we owned 49% of the project.
Our initial investment was $10.0 million. Our investment at June 30, 2008 and December 31, 2007
was $9.0 million and $8.9 million, respectively.
The following unconsolidated joint venture projects were under development as of June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Completed |
|
|
Cost to |
|
|
Budgeted |
|
|
Estimated |
|
|
Expected |
|
|
|
Apartment |
|
|
Apartment |
|
|
Date |
|
|
Cost |
|
|
Cost |
|
|
Completion |
|
|
|
Homes |
|
|
Homes |
|
|
(In thousands) |
|
|
(In thousands) |
|
|
Per Home |
|
|
Date |
|
Lincoln Towne Square Phase II |
|
|
302 |
|
|
|
184 |
|
|
$ |
23,789 |
|
|
$ |
25,000 |
|
|
$ |
82,781 |
|
|
|
3Q08 |
|
Plano, TX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bellevue Plaza |
|
|
430 |
|
|
|
|
|
|
|
38,754 |
|
|
|
135,000 |
|
|
|
313,953 |
|
|
|
4Q10 |
|
Bellevue, WA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashwood Commons |
|
|
274 |
|
|
|
|
|
|
|
63,385 |
|
|
|
97,000 |
|
|
|
354,015 |
|
|
|
2Q09 |
|
Bellevue, WA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unconsolidated development joint ventures |
|
|
1,006 |
|
|
|
184 |
|
|
$ |
125,928 |
|
|
$ |
257,000 |
|
|
$ |
255,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposition of Investments
During the six months ended June 30, 2008, UDR sold 85 communities with a total of 25,540
apartment homes, for a gross consideration of $1.7 billion, 42 condominiums from two communities
with a total of 640 condominiums for a gross consideration of $5.1 million, and one parcel of land
for $1.6 million. We recognized after-tax gains for financial
reporting purposes of $780.4 million
on these sales. Proceeds from the sales were used primarily to reduce debt and to acquire new
communities.
In
conjunction with the sale of the 85 properties, UDR received a note in the amount of $200
million. The note matures on March 31, 2014, may be pre-paid fourteen months from the date of the
note, bears interest at a fixed rate of 7.5% per annum and is secured by a pledge and security
agreement and a guarantee from the buyers parent company.
We plan to continue to pursue our strategy of exiting markets where long-term growth prospects
are limited and redeploying capital into markets we believe will provide the best investment
returns.
Financing Activities
Net cash (used in)/provided by financing activities during the six months ended June 30, 2008,
was ($584.8) million versus $58.8 million for the comparable period in 2007. As part of the plan
to improve our balance sheet, we utilized proceeds from dispositions to pay down existing debt,
repurchase our common shares, retire our debt and purchase new properties.
35
The following is a summary of our significant financing activities for the six months ended
June 30, 2008:
|
|
|
Repaid $74.1 million of secured debt and $592.0 million of unsecured debt. The $592.0
million of unsecured debt consisted of a $289.6 million payment for the revolving credit
facility, $200
million for a medium-term note maturity and $96.1 million for the repurchase of medium-term
notes. |
|
|
|
In January 2008, our Board of Directors authorized a new 15 million share repurchase
program. This program is in addition to our already existing 10 million share repurchase
program. Under the two share repurchase programs, UDR may repurchase shares of our common
stock in open market purchases, block purchases, privately negotiated transactions or
otherwise. During the six months ended June 30, 2008, we repurchased 5,599,700 shares of
UDR common stock at an average price per share of $23.49 under our share repurchase
programs. |
|
|
|
Closed on a $240 million, two-year unsecured term loan facility. Proceeds were used to
redeem $200 million of 4.5% medium term notes that were due in March 2008, and the
remaining $40 million will be used for general corporate purposes. |
Credit Facilities
We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment
of $748.9 million. As of June 30, 2008, $686.4 million was outstanding under the Fannie Mae credit
facilities leaving $62.5 million of unused capacity. The Fannie Mae credit facilities are for an
initial term of ten years, bear interest at floating and fixed rates, and certain of the credit
facilities can be extended for an additional five years at our option. We have $581.9 million of
the funded balance fixed at a weighted average interest rate of 5.9% and the remaining balance on
these facilities is currently at a weighted average variable rate of 2.9%.
We have a $600 million unsecured revolving credit facility that matures on July 26, 2012.
Under certain circumstances, we may increase the $600 million credit facility to $750 million.
Based on our current credit rating, the $600 million credit facility carries an interest rate equal
to LIBOR plus a spread of 47.5 basis points, which represents a 10 basis point reduction to the
previous $500 million credit facility. Under a competitive bid feature and for so long as we
maintain an Investment Grade Rating, we have the right under the $600 million credit facility to
bid out 50% of the commitment amount and we can bid out 100% of the commitment amount once per
quarter. As of June 30, 2008, we had $19.9 million of borrowings outstanding under the credit
facility leaving $580.1 million of unused capacity.
The Fannie Mae credit facility and the bank revolving credit facility are subject to customary
financial covenants and limitations.
Information concerning short-term bank borrowings under our bank credit facility is summarized
in the table that follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Twelve Months Ended |
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Total revolving credit facility |
|
$ |
600,000 |
|
|
$ |
600,000 |
|
Borrowings outstanding at end of period |
|
|
19,900 |
|
|
|
309,500 |
|
Weighted average daily borrowings during the period |
|
|
135,963 |
|
|
|
222,216 |
|
Maximum daily borrowings during the period |
|
|
587,400 |
|
|
|
408,400 |
|
Weighted average interest rate during the period |
|
|
4.3 |
% |
|
|
5.6 |
% |
Weighted average interest rate at end of period |
|
|
3.1 |
% |
|
|
5.4 |
% |
Derivative Instruments
As part of UDRs overall interest rate risk management strategy, we use derivatives as a means
to fix the interest rates of variable rate debt obligations or to hedge anticipated financing
transactions. UDRs derivative transactions used for interest rate risk management includes
interest rate swaps with indexes that relate to the pricing of specific financial instrument of
UDR. We believe that we have appropriately controlled our interest rate risk through the use of
derivative instruments so that there will not be any material unintended effect on consolidated
earnings. Derivative contracts did not have a material impact on
the results of operations during the three and six months ended June 30, 2008 (see Note 8
Financial Instruments).
36
Funds from Operations
Funds from operations, or FFO, is defined as net income (computed in accordance with generally
accepted accounting principles), excluding gains (or losses) from sales of depreciable property,
plus real estate depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. We compute FFO for all periods presented in accordance with the
recommendations set forth by the National Association of Real Estate Investment Trusts (NAREIT)
April 1, 2002 White Paper. We consider 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 generally accepted
accounting principles. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily indicative of cash
available to fund cash needs.
Historical cost accounting for real estate assets in accordance with generally accepted
accounting principles 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 REIT operating performance and
defines FFO as net income (computed in accordance with accounting principles generally accepted in
the United States), excluding gains (or losses) from sales of depreciable property, premiums or
original issuance costs associated with preferred stock redemptions, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and joint ventures. The use of
FFO, combined with the required presentations, has been fundamentally beneficial, improving the
understanding of operating results of REITs among the investing public and making comparisons of
REIT operating results more meaningful. We generally consider FFO to be a useful measure for
reviewing our comparative operating and financial performance (although FFO should be reviewed in
conjunction with net income which remains the primary measure of performance) because by excluding
gains or (losses) related to sales of previously depreciated operating real estate assets and
excluding real estate asset depreciation and amortization, FFO can help one compare the operating
performance of a companys real estate between periods or as compared to different companies. We
believe that FFO is the best measure of economic profitability for real estate investment trusts.
37
The following table outlines our FFO calculation and reconciliation to generally accepted
accounting principles for the three and six months ended June 30, 2008 and 2007 (dollars and shares
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
865 |
|
|
$ |
6,696 |
|
|
$ |
726,124 |
|
|
$ |
38,529 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to preferred stockholders |
|
|
(3,209 |
) |
|
|
(3,624 |
) |
|
|
(6,418 |
) |
|
|
(7,466 |
) |
Real estate depreciation and amortization, including discontinued operations |
|
|
62,507 |
|
|
|
64,317 |
|
|
|
114,942 |
|
|
|
128,477 |
|
Minority interest, including discontinued operations |
|
|
376 |
|
|
|
1 |
|
|
|
49,159 |
|
|
|
1,697 |
|
Real estate depreciation and amortization on unconsolidated joint ventures |
|
|
1,317 |
|
|
|
693 |
|
|
|
2,062 |
|
|
|
835 |
|
Net gains on the sale of depreciable property, excluding RE3 |
|
|
(13,027 |
) |
|
|
(2,762 |
) |
|
|
(780,989 |
) |
|
|
(39,819 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations basic |
|
$ |
48,829 |
|
|
$ |
65,321 |
|
|
$ |
104,880 |
|
|
$ |
122,253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to preferred stockholders Series E (Convertible) |
|
|
931 |
|
|
|
931 |
|
|
|
1,862 |
|
|
|
1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations diluted |
|
$ |
49,760 |
|
|
$ |
66,252 |
|
|
$ |
106,742 |
|
|
$ |
124,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and OP Units outstanding basic |
|
|
136,324 |
|
|
|
142,493 |
|
|
|
138,476 |
|
|
|
142,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares and OP Units outstanding diluted |
|
|
139,853 |
|
|
|
148,114 |
|
|
|
141,948 |
|
|
|
148,623 |
|
In the computation of diluted FFO, when OP Units, out-performance partnership units,
convertible debt, unvested restricted stock, stock options, and the shares of Series E Cumulative
Convertible Preferred Stock are dilutive; they are included in the diluted share count.
RE3 is our subsidiary that focuses on development, land entitlement and short-term
hold investments. RE3 tax benefits and gain on sales, net of taxes, is defined as net
sales proceeds less a tax provision and the gross investment basis of the asset before accumulated
depreciation. We consider FFO with RE3 tax benefits and gain on sales, net of taxes, to
be a meaningful supplemental measure of performance because the short-term use of funds produce a
profit that differs from the traditional long-term investment in real estate for REITs.
38
The following table is our reconciliation of FFO share information to weighted average common
shares outstanding, basic and diluted, reflected on the Consolidated Statements of Operations for
the three and six months ended June 30 2008 and 2007 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted average number of common shares and OP units
outstanding basic |
|
|
136,324 |
|
|
|
142,493 |
|
|
|
138,476 |
|
|
|
142,603 |
|
Weighted average number of OP units outstanding |
|
|
(8,888 |
) |
|
|
(7,766 |
) |
|
|
(8,926 |
) |
|
|
(7,983 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding -
basic per the Consolidated Statements of Operations |
|
|
127,436 |
|
|
|
134,727 |
|
|
|
129,550 |
|
|
|
134,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, OP units, and
common stock equivalents outstanding diluted |
|
|
139,853 |
|
|
|
148,114 |
|
|
|
141,948 |
|
|
|
148,623 |
|
Weighted average number of OP units outstanding |
|
|
(8,888 |
) |
|
|
(7,766 |
) |
|
|
(8,926 |
) |
|
|
(7,983 |
) |
Weighted average incremental shares from assumed conversion
of stock options |
|
|
(568 |
) |
|
|
(767 |
) |
|
|
(547 |
) |
|
|
(789 |
) |
Weighted average incremental shares from unvested restricted stock |
|
|
(157 |
) |
|
|
(150 |
) |
|
|
(121 |
) |
|
|
(134 |
) |
Weighted average incremental shares from assumed conversion
of $250 million convertible debt |
|
|
|
|
|
|
(272 |
) |
|
|
|
|
|
|
(665 |
) |
Weighted average number of Series A OPPSs outstanding |
|
|
|
|
|
|
(1,628 |
) |
|
|
|
|
|
|
(1,628 |
) |
Weighted average number of Series E preferred shares outstanding |
|
|
(2,804 |
) |
|
|
(2,804 |
) |
|
|
(2,804 |
) |
|
|
(2,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding diluted
per the Consolidated Statements of Operations |
|
|
127,436 |
|
|
|
134,727 |
|
|
|
129,550 |
|
|
|
134,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO also does not represent cash generated from operating activities in accordance with
generally accepted accounting principles, and therefore should not be considered an alternative to
net cash flows from operating activities, as determined by generally accepted accounting
principles, as a measure of liquidity. Additionally, it is not necessarily indicative of cash
availability to fund cash needs.
A presentation of cash flow metrics based on generally accepted accounting principles is as
follows for the six months ended June 30, (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
81,361 |
|
|
$ |
117,939 |
|
Net cash provided by/(used in) investing activities |
|
|
501,662 |
|
|
|
(175,956 |
) |
Net cash (used in)/provided by financing activities |
|
|
(584,830 |
) |
|
|
58,802 |
|
39
Results of Operations
The following discussion includes the results of both continuing and discontinued operations
for the periods presented.
Net (Losses)/Income Available to Common Stockholders
Net loss available to common stockholders was ($2.3) million (($0.02) per diluted share) for
the three months ended June 30, 2008, versus net income of
$811,000 ($0.01 per diluted share) for
the comparable period in the prior year. The decrease for the three months ended June 30, 2008,
when compared to the same period in 2007, resulted primarily from the
following item, which is discussed in further detail elsewhere within this report:
|
|
|
a reduction in net operating income, inclusive of discontinued operations in the
current year due to the Companys significant disposition activities during 2008. The
Company is in the process of reinvesting the proceeds, which should increase net operating
income on a prospective basis. |
The reduction in net operating income was offset by the following:
|
|
|
an increase in gains on disposition due to our repositioning
program, |
|
|
|
a decrease in depreciation and amortization expense on our real estate owned due to
2008 dispositions, and |
|
|
|
a decrease in interest expense due to a reduction in corporate debt and the Company
recording a gain on extinguishment of debt on the repurchase of a portion of our
outstanding senior unsecured notes, which is presented as a reduction to interest expense. |
Net income available to common stockholders was $719.7 million ($5.56 per diluted share) for
the six months ended June 30, 2008, versus $28.8 million ($0.21 per diluted share) for the
comparable period in the prior year. The increase for the six months ended June 30, 2008, when
compared to the same period in 2007, resulted primarily from the following items, all of which are
discussed in further detail elsewhere within this report:
|
|
|
a significant increase in gains recognized from the sale of depreciable property, |
|
|
|
a decrease in real estate depreciation and amortization expense, and |
|
|
|
a decrease in interest expense. |
These increases in income were partially offset by the following:
|
|
|
a reduction in net operating income, inclusive of discontinued operations due to the
Companys dispositions, and |
|
|
|
|
an increase in minority interest expense. |
40
Apartment Community Operations
The following table summarizes the operating performance of our total apartment portfolio for
each of the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
2008 |
|
|
2007 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property rental
income |
|
$ |
140,306 |
|
|
$ |
183,769 |
|
|
|
-23.7 |
% |
|
$ |
305,994 |
|
|
$ |
366,453 |
|
|
|
-16.5 |
% |
Property operating
expense (a) |
|
|
(46,486 |
) |
|
|
(65,207 |
) |
|
|
-28.7 |
% |
|
|
(103,536 |
) |
|
|
(132,505 |
) |
|
|
-21.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property net operating
income |
|
$ |
93,820 |
|
|
$ |
118,562 |
|
|
|
-20.9 |
% |
|
$ |
202,458 |
|
|
$ |
233,948 |
|
|
|
-13.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Excludes depreciation, amortization and property management expenses. |
The following table is our reconciliation of property net operating income to net income as
reflected on the Consolidated Statements of Operations for the periods presented (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property net operating income |
|
$ |
93,820 |
|
|
$ |
118,562 |
|
|
$ |
202,458 |
|
|
$ |
233,948 |
|
Commercial operating income/(loss) |
|
|
85 |
|
|
|
1,584 |
|
|
|
(239 |
) |
|
|
2,131 |
|
Non-property income |
|
|
9,324 |
|
|
|
3,546 |
|
|
|
15,025 |
|
|
|
8,558 |
|
Real estate depreciation and amortization |
|
|
(63,451 |
) |
|
|
(65,119 |
) |
|
|
(116,815 |
) |
|
|
(130,001 |
) |
Interest |
|
|
(36,743 |
) |
|
|
(42,758 |
) |
|
|
(75,113 |
) |
|
|
(86,952 |
) |
General and administrative and property management |
|
|
(13,796 |
) |
|
|
(14,772 |
) |
|
|
(28,118 |
) |
|
|
(29,709 |
) |
Other operating expenses |
|
|
(1,026 |
) |
|
|
(447 |
) |
|
|
(2,030 |
) |
|
|
(890 |
) |
Net gain on sale of depreciable property |
|
|
13,066 |
|
|
|
6,138 |
|
|
|
780,212 |
|
|
|
43,208 |
|
Minority interests |
|
|
(414 |
) |
|
|
(38 |
) |
|
|
(49,256 |
) |
|
|
(1,764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per the Consolidated Statements of Operations |
|
$ |
865 |
|
|
$ |
6,696 |
|
|
$ |
726,124 |
|
|
$ |
38,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Same Communities
Our same communities (those communities acquired, developed, and stabilized prior to June 30,
2007, and held on June 30, 2008, which consisted of 32,898 apartment homes) provided 81% of our
property net operating income for the three months ended June 30, 2008.
For the second quarter of 2008, same community properties net operating income increased 7.1%
or $5.0 million compared to the same period in 2007. The increase in property net operating income
was primarily attributable to a 4.4% or $4.6 million increase in revenues from rental and other
income as the Company continues to increase rents per home. The increase in revenues from rental
and other income was primarily driven by a 1.7% or $1.8 million increase in rental rates, an 88.4%
or $1.8 million decrease in rental concessions, a 6.1% or $332,000 decrease in vacancy loss, and an
11.6% or $429,000 increase in reimbursement income. Physical occupancy increased
from 94.6% to 94.9% and total income per occupied home increased $48 to $1,179.
Property operating expenses decreased by 1.3% or $431,000 during the second quarter of 2008
compared to the same period in 2007. The decrease in property operating expenses was primarily
driven by a 58.0% or $1.4 million decrease in insurance expense that was partially offset by a 4.4%
or $451,000 increase in real estate taxes and a 4.4% or $362,000 increase in personnel costs.
As a result of the percentage changes in property rental income and property operating
expenses, the operating margin (property net operating income divided by property rental income)
increased to 69.2% versus 67.5% in the comparable period in the prior year.
Our same communities (those communities acquired, developed, and stabilized prior to January
1, 2007, and held on June 30, 2008, which consisted of 32,124
apartment homes) provided 73% of our
property net operating income for the six months ended June 30, 2008.
For six months ended June 30, 2008, our same community properties net operating income
increased 7.3% or $10.1 million compared to the same period in 2007. The increase in property net
operating income was primarily attributable to a 4.6% or $9.4 million increase in revenues from
rental and other income and a 1.0% or $701,000 decrease in operating expenses. The increase in
revenues from rental and other income was primarily driven by a 1.9% or $4.0 million increase in
rental rates, an 82.9% or $3.0 million decrease in rental concessions, an 8.2% or $921,000 decrease
in vacancy loss, a 29.6% or $332,000 decrease in bad debt and a 13.5% or $948,000 increase in
reimbursement income. Physical occupancy increased from 94.4% to 94.7% and total
income per occupied home increased $48 to $1,171.
The decrease in property operating expenses was primarily driven by a 63.5% or $2.5 million
decrease in insurance expense that was partially offset by a 4.0% or $795,000 increase in real
estate taxes, and a 4.3% or $710,000 increase in personnel costs.
As a result of the percentage changes in property rental income and property operating
expenses, the operating margin (property net operating income divided by property rental income)
increased to 69.0% versus 67.2% in the comparable period in the prior year.
Non-Mature Communities
The
remaining 19% or $17.5 million and 27% or $51.0 million of our property net operating
income during the three and six months ended June 30, 2008, was generated from communities that we
classify as non-mature communities. UDRs non-mature communities consist primarily of sold
properties, properties classified as real estate held for disposition, communities acquired or
developed in 2007 and 2008, redevelopment properties, and condominium properties. The largest
components of our non-mature portfolio for the three and six months ended June 30, 2008 is
represented by our sold properties and communities acquired. For the three and six months ended
June 30, 2008, acquisitions represented $11.7 million and $16.5 million, respectively of property
net operating income.
42
Real Estate Depreciation and Amortization
For the three and six months ended June 30, 2008, real estate depreciation and amortization on
both continuing and discontinued operations decreased 2.8% or $1.8 million and 10.5% or $13.5
million, respectively versus the comparable period in 2007, primarily due to the Company ceasing
depreciation on properties once they are classified as held for sale. Real estate depreciation and
amortization for the three and six months ended June 30, 2008 from continuing operations increased
31.0% or $14.8 million and 24.7% or $22.7 million, respectively versus the comparable period in
2007 primarily due to acquisitions and capital expenditures.
Interest Expense
For the three months ended June 30, 2008, interest expense on both continuing and discontinued
operations decreased 14.1% or $6.0 million versus the comparable period in 2007. This decrease is
primarily due to the Company reducing its total debt outstanding and a $1.2 million gain recognized
on debt extinguishment upon the redemption of senior unsecured notes with a notional amount of
$35.0 million.
For the six months ended June 30, 2008, interest expense on both continuing and discontinued
operations decreased 13.6% or $11.8 million versus the comparable period in 2007. This decrease is
primarily due to the Company reducing its total debt outstanding and a $6.3 million gain on debt
extinguishment recognized upon the redemption of senior unsecured notes with a notional amount of
$102.4 million.
For the six months ended June 30, 2008, the weighted average interest rate decreased from 5.3%
in 2007 to 5.0% in 2008. The decrease in the weighted average interest rate during 2008 reflects
short-term bank borrowings and variable rate debt that had lower interest rates in 2008 when
compared to the same period in 2007.
General and Administrative
For the three months ended June 30, 2008, general and administrative expenses increased
$261,000 or 2.7% versus the comparable period in 2007. For the six months ended June 30, 2008,
general and administrative expenses increased $138,000 or 0.7% versus the comparable period in
2007. The slight increases were due to a number of factors, none of which were significant.
Gains on the Sales of Depreciable Property
For the three months ended June 30, 2008, we recognized after-tax gains for financial
reporting purposes of $13.1 million versus $6.1 million for the comparable period in 2007. Changes
in the level of gains recognized from period to period reflect the changing level of our
divestiture activity from period to period, as well as the extent of gains related to specific
properties sold.
For the six months ended June 30, 2008, we recognized after-tax gains for financial reporting
purposes of $780.4 million versus $43.2 million for the comparable period in 2007. The significant
increase in gains on disposition for the six months ended June 30, 2008 is a result of the sale of
85 communities generally located in non-core markets as the Company repositions our real estate
portfolio.
Inflation
We believe that the direct effects of inflation on our operations have been immaterial. While
the impact of inflation primarily impacts our results through wage pressures, utilities and
material costs, substantially all of our leases are for a term of one year or less, which generally
enables us to compensate
for any inflationary effects by increasing rents on our apartment homes. Although an extreme
escalation in energy and food 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 six months ended June 30, 2008.
43
Off-Balance Sheet Arrangements
UDR has entered into four contracts to purchase apartment communities upon completion of their
development, which will be recorded at that time. Provided that the
developers of the respective
properties meet certain conditions, UDR will purchase these communities for an aggregate of
approximately $166 million. These apartment communities are expected to be completed at various
times between the third quarter of 2008 and the third quarter of 2010.
Other than the purchase contracts listed above, we do not have any other 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes associated with our unsecured credit facility and
other variable rate debt as well as refinancing risk on our fixed rate debt. UDRs involvement
with derivative financial instruments is limited and we do not expect to use them for trading or
other speculative purposes. UDR uses derivative instruments solely to manage its exposure to
interest rates.
See our Annual Report on Form 10-K for the year ended December 31, 2007 Item 7A.
Quantitative and Qualitative Disclosures About Market Risk for a more complete discussion of our
interest rate sensitive assets and liabilities. As of June 30, 2008, our market risk has not
changed materially from the amounts reported on our Annual Report on Form 10-K for the year ended
December 31, 2007.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2008, we carried out an evaluation, under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Our disclosure controls and
procedures are designed with the objective of ensuring that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information required to be included in
our periodic SEC reports. In addition, our Chief Executive Officer and our Chief Financial Officer
concluded that during the quarter ended June 30, 2008, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Our internal control over
financial reporting is designed with the objective of providing reasonable assurance regarding the
reliability of our financial reporting and preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
It should be noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions, regardless of how
remote. However, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective under circumstances where our disclosure controls
and procedures should reasonably be expected to operate effectively.
44
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is a party to various claims and routine litigation arising in the ordinary course
of business. We do not believe that the results of any such claims and litigation, individually or
in the aggregate, will have a material averse effect on our business, financial position or results
of operations. (see Note 11 Commitments and Contingencies).
Item 1A. RISK FACTORS
There are many factors that affect our business and our results of operations, some of which
are beyond our control. The following is a description of important factors that may cause our
actual results of operations in future periods to differ materially from those currently expected
or discussed in forward-looking statements set forth in this report relating to our financial
results, operations and business prospects. Except as required by law, we undertake no obligation
to update any such forward-looking statements to reflect events or circumstances after the date on
which it is made.
Unfavorable Changes in Apartment Market and Economic Conditions Could Adversely Affect
Occupancy Levels and Rental Rates. Market and economic conditions in the metropolitan areas in
which we operate may significantly affect our occupancy levels and rental rates and, therefore, our
profitability. Factors that may adversely affect these conditions include the following:
|
|
|
a reduction in jobs and other local economic downturns, |
|
|
|
declines in mortgage interest rates, making alternative housing more affordable, |
|
|
|
government or builder incentives which enable first time homebuyers to put little or no
money down, making alternative housing decisions easier to make, |
|
|
|
oversupply of, or reduced demand for, apartment homes, |
|
|
|
declines in household formation, and |
|
|
|
rent control or stabilization laws, or other laws regulating rental housing, which could
prevent us from raising rents to offset increases in operating costs. |
45
The strength of the United States economy has become increasingly susceptible to global events
and threats of terrorism. At the same time, productivity enhancements and the increased exportation
of labor have resulted in limited job growth despite an improving economy. Continued weakness in
job creation, or any worsening of current economic conditions, generally and in our principal
market areas, could have a material adverse effect on our occupancy levels, our rental rates and
our ability to strategically acquire and dispose of apartment communities. This may impair our
ability to satisfy our financial obligations and pay distributions to our stockholders.
New Acquisitions, Developments and Condominium Projects May Not Achieve Anticipated Results.
We intend to continue to selectively acquire apartment communities that meet our investment
criteria and to develop apartment communities for rental operations, to convert properties into
condominiums and to develop condominium projects. Our acquisition, development and condominium
activities and their success are subject to the following risks:
|
|
|
an acquired apartment community may fail to perform as we expected in analyzing our
investment, or a significant exposure related to the acquired property may go undetected
during our due diligence procedures, |
|
|
|
|
when we acquire an apartment community, we often invest additional amounts in it with the
intention of increasing profitability. These additional investments may not produce the
anticipated improvements in profitability, |
|
|
|
|
new developments may not achieve pro forma rents or occupancy levels, or problems with
construction or local building codes may delay initial occupancy dates for all or a portion
of a development community, and |
|
|
|
|
an over supply of condominiums in a given market may cause a decrease in the prices at
which we expect to sell condominium properties or cause us to be unable to sell condominium
properties. |
Possible Difficulty of Selling Apartment Communities Could Limit Operational and Financial
Flexibility. We periodically dispose of apartment communities that no longer meet our strategic
objectives, but market conditions could change and purchasers may not be willing to pay prices
acceptable to us. A weak market may limit our ability to change our portfolio promptly in response
to changing economic conditions. Furthermore, a significant portion of the proceeds from our
overall property sales may be held by intermediaries in order for some sales to qualify as
like-kind exchanges under Section 1031 of the Internal Revenue Code, so that any related capital
gain can be deferred for federal income tax purposes. As a result, we may not have immediate access
to all of the cash flow generated from our property sales. In addition, federal tax laws limit our
ability to profit on the sale of communities that we have owned for fewer than four years, and this
limitation may prevent us from selling communities when market conditions are favorable.
Increased Competition Could Limit Our Ability to Lease Apartment Homes or Increase or Maintain
Rents. Our apartment communities compete with numerous housing alternatives in attracting
residents, including other apartment communities and single-family rental homes, as well as owner
occupied single- and multi-family homes. Competitive housing in a particular area could adversely
affect our ability to lease apartment homes and increase or maintain rents.
Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are
subject to the risks normally associated with debt financing, including the risk that our operating
income and cash flow will be insufficient to make required payments of principal and interest, or
could restrict our borrowing capacity under our line of credit due to debt covenant restraints.
Sufficient cash flow may not be available to make all required principal payments and still satisfy
our distribution requirements to maintain our status as a REIT for federal income tax purposes, and
the full limits of our line of credit may not be available to us if our operating performance falls
outside the constraints of our debt covenants. Additionally, we are likely to need to refinance
substantially all of our outstanding debt as it matures. We may not be able to refinance existing
debt, or the terms of any refinancing may not be as favorable as the
terms of the existing debt, which could create pressures to sell assets or to issue additional
equity when we would otherwise not choose to do so. In addition, our failure to comply with our
debt covenants could result in a requirement to repay our indebtedness prior to its maturity, which
could have an adverse effect on our cash flow and increase our financing costs.
46
Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to
Stockholders. If our apartment communities do not generate sufficient net rental income to meet
rental expenses, our ability to make required payments of interest and principal on our debt
securities and to pay distributions to our stockholders will be adversely affected. The following
factors, among others, may affect the net rental income generated by our apartment communities:
|
|
|
the national and local economies, |
|
|
|
|
local real estate market conditions, such as an oversupply of apartment homes, |
|
|
|
|
tenants perceptions of the safety, convenience, and attractiveness of our communities
and the neighborhoods where they are located, |
|
|
|
|
our ability to provide adequate management, maintenance and insurance, |
|
|
|
|
rental expenses, including real estate taxes and utilities, |
|
|
|
|
changes in interest rates and the availability of financing, and |
|
|
|
|
changes in tax and housing laws, including the enactment of rent control laws or other
laws regulating multi-family housing. |
Expenses associated with our investment in a community, such as debt service, real estate
taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a
reduction in rental income from that community. If a community is mortgaged to secure payment of
debt and we are unable to make the mortgage payments, we could sustain a loss as a result of
foreclosure on the community or the exercise of other remedies by the mortgage holder.
Debt Level May Be Increased. Our current debt policy does not contain any limitations on the
level of debt that we may incur, although our ability to incur debt is limited by covenants in our
bank and other credit agreements. We manage our debt to be in compliance with these debt covenants,
but subject to compliance with these covenants, we may increase the amount of our debt at any time
without a concurrent improvement in our ability to service the additional debt.
Financing May Not Be Available and Could Be Dilutive. Our ability to execute our business
strategy depends on our access to an appropriate blend of debt financing, including unsecured lines
of credit and other forms of secured and unsecured debt, and equity financing, including common and
preferred equity. We and other companies in the real estate industry have experienced limited
availability of financing from time to time. Debt or equity financing may not be available in
sufficient amounts, or on favorable terms or at all. If we issue additional equity securities to
finance developments and acquisitions instead of incurring debt, the interests of our existing
stockholders could be diluted.
Financing Could be Impacted by Negative Capital Market Conditions. Recently, domestic
financial markets have experienced unusual volatility and uncertainty. While this condition has
occurred most visibly within the subprime mortgage lending sector of the credit market, liquidity
has tightened in overall domestic financial markets, including the investment grade debt and equity
capital markets. Consequently, there is greater risk that the financial institutions UDR does
business with could experience disruptions that would negatively affect our current financing
program.
47
Development and Construction Risks Could Impact Our Profitability. We intend to continue to
develop and construct apartment communities. Development activities may be conducted through wholly
owned
affiliated companies or through joint ventures with unaffiliated parties. Our development and
construction activities may be exposed to the following risks:
|
|
|
we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use,
building, occupancy and other required governmental permits and authorizations, which could
result in increased development costs and could require us to abandon our activities
entirely with respect to a project for which we are unable to obtain permits or
authorizations, |
|
|
|
|
if we are unable to find joint venture partners to help fund the development of a
community or otherwise obtain acceptable financing for the developments, our development
capacity may be limited, |
|
|
|
|
we may abandon development opportunities that we have already begun to explore, and we
may fail to recover expenses already incurred in connection with exploring such
opportunities, |
|
|
|
|
we may be unable to complete construction and lease-up of a community on schedule, or
incur development or construction costs that exceed our original estimates, and we may be
unable to charge rents that would compensate for any increase in such costs, |
|
|
|
|
occupancy rates and rents at a newly developed community may fluctuate depending on a
number of factors, including market and economic conditions, preventing us from meeting our
profitability goals for that community, and |
|
|
|
|
when we sell to third parties homes or properties that we developed or renovated, we may
be subject to warranty or construction defect claims that are uninsured or exceed the limits
of our insurance. |
Construction costs have been increasing in our existing markets, and the costs of upgrading
acquired communities have, in some cases, exceeded our original estimates. We may experience
similar cost increases in the future. Our inability to charge rents that will be sufficient to
offset the effects of any increases in these costs may impair our profitability.
Some Potential Losses Are Not Covered by Insurance. We have a comprehensive insurance program
covering our property and operating activities. We believe the policy specifications and insured
limits of these policies are adequate and appropriate. There are, however, certain types of
extraordinary losses for which we self-insure or for which we may not have insurance. Accordingly,
we may sustain uninsured losses due to insurance deductibles, self-insured retention, uninsured
claims or casualties, or losses in excess of applicable coverage.
We may not be able to renew insurance coverage in an adequate amount or at reasonable prices.
In addition, insurance companies may no longer offer coverage against certain types of losses, such
as losses due to terrorist acts and mold, or, if offered, these types of insurance may be
prohibitively expensive. If an uninsured loss or a loss in excess of insured limits occur, we could
lose all or a portion of the capital we have invested in a property, as well as the anticipated
future revenue from the property. In such an event, we might nevertheless remain obligated for any
mortgage debt or other financial obligations related to the property. Material losses in excess of
insurance proceeds may occur in the future. If one or more of our significant properties were to
experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result
in large expenses to repair or rebuild the property. Such events could adversely affect our cash
flow and ability to make distributions to stockholders.
Failure to Succeed in New Markets May Limit Our Growth. We may from time to time make
acquisitions outside of our existing market areas if appropriate opportunities arise. We may be
exposed to a variety of risks if we choose to enter new markets, and we may not be able to operate
successfully in new markets. These risks include, among others:
|
|
|
inability to accurately evaluate local apartment market conditions and local economies, |
|
|
|
|
inability to obtain land for development or to identify appropriate acquisition
opportunities, |
|
|
|
|
inability to hire and retain key personnel, and |
|
|
|
|
lack of familiarity with local governmental and permitting procedures. |
48
Changing Interest Rates Could Increase Interest Costs and Adversely Affect Our Cash Flow and
the Market Price of Our Securities. We currently have, and expect to incur in the future,
interest-bearing debt at rates that vary with market interest rates. As of June 30, 2008, we had
approximately $307.4 million of variable rate indebtedness outstanding, which constitutes
approximately 9.5% of our total outstanding indebtedness as of such date. An increase in interest
rates would increase our interest expenses and increase the costs of refinancing existing
indebtedness and of issuing new debt. Accordingly, higher interest rates could adversely affect
cash flow and our ability to service our debt and to make distributions to security holders. In
addition, an increase in market interest rates may lead our security holders to demand a higher
annual yield, which could adversely affect the market price of our common and preferred stock and
debt securities.
Risk of Inflation/Deflation. Substantial inflationary or deflationary pressures could have a
negative effect on rental rates and property operating expenses.
Limited Investment Opportunities Could Adversely Affect Our Growth. We expect that other real
estate investors will compete with us to acquire existing properties and to develop new properties.
These competitors include insurance companies, pension and investment funds, developer
partnerships, investment companies and other apartment REITs. This competition could increase
prices for properties of the type that we would likely pursue, and our competitors may have greater
resources than we do. As a result, we may not be able to make attractive investments on favorable
terms, which could adversely affect our growth.
Failure to Integrate Acquired Communities and New Personnel Could Create Inefficiencies. To
grow successfully, we must be able to apply our experience in managing our existing portfolio of
apartment communities to a larger number of properties. In addition, we must be able to integrate
new management and operations personnel as our organization grows in size and complexity. Failures
in either area will result in inefficiencies that could adversely affect our expected return on our
investments and our overall profitability.
We depend on our senior management. Our success depends upon the retention of our senior
management. There are no assurances that we would be able to find qualified replacements for the
individuals who make up our senior management if their services were no longer available. The loss
of services of one or more members of our senior management team could have a material adverse
effect on our business, financial condition and results of operations.
Interest Rate Hedging Contracts May Be Ineffective and May Result in Material Charges. From
time to time when we anticipate issuing debt securities, we may seek to limit our exposure to
fluctuations in interest rates during the period prior to the pricing of the securities by entering
into interest rate hedging contracts. We may do this to increase the predictability of our
financing costs. Also, from time to time we may rely on interest rate hedging contracts to limit
our exposure under variable rate debt to unfavorable changes in market interest rates. If the terms
of new debt securities are not within the parameters of, or market interest rates fall below that
which we incur under a particular interest rate hedging contract, the contract is ineffective.
Furthermore, the settlement of interest rate hedging contracts has involved and may in the future
involve material charges.
49
Potential Liability for Environmental Contamination Could Result in Substantial Costs. Under
various federal, state and local environmental laws, as a current or former owner or operator of
real estate, we could be required to investigate and remediate the effects of contamination of
currently or formerly owned real estate by hazardous or toxic substances, often regardless of our
knowledge of or responsibility for the
contamination and solely by virtue of our current or former ownership or operation of the real
estate. In addition, we could be held liable to a governmental authority or to third parties for
property damage and for investigation and clean-up costs incurred in connection with the
contamination. These costs could be substantial, and in many cases environmental laws create liens
in favor of governmental authorities to secure their payment. The presence of such substances or a
failure to properly remediate any resulting contamination could materially and adversely affect our
ability to borrow against, sell or rent an affected property.
We Would Incur Adverse Tax Consequences if We Fail to Qualify as a REIT. We have elected to
be taxed as a REIT under the Internal Revenue Code. Our qualification as a REIT requires us to
satisfy numerous requirements, some on an annual and quarterly basis, established under highly
technical and complex Internal Revenue Code provisions for which there are only limited judicial or
administrative interpretations, and involves the determination of various factual matters and
circumstances not entirely within our control. We intend that our current organization and method
of operation enable us to continue to qualify as a REIT, but we may not so qualify or we may not be
able to remain so qualified in the future. In addition, U.S. federal income tax laws governing
REITs and other corporations and the administrative interpretations of those laws may be amended at
any time, potentially with retroactive effect. Future legislation, new regulations, administrative
interpretations or court decisions could adversely affect our ability to qualify as a REIT or
adversely affect our stockholders.
If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at regular corporate
rates, and would not be allowed to deduct dividends paid to our stockholders in computing our
taxable income. Also, unless the Internal Revenue Service granted us relief under certain statutory
provisions, we would be disqualified from treatment as a REIT for the four taxable years following
the year in which we first failed to qualify. The additional tax liability from the failure to
qualify as a REIT would reduce or eliminate the amount of cash available for investment or
distribution to our stockholders. This would likely have a significant adverse effect on the value
of our securities and our ability to raise additional capital. In addition, we would no longer be
required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we
will continue to be subject to certain federal, state and local taxes on our income and property.
We May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which are Subject
to Certain Tax Risks. We have established several taxable REIT subsidiaries. Despite our
qualification as a REIT, our taxable REIT subsidiaries must pay income tax on their taxable income.
In addition, we must comply with various tests to continue to qualify as a REIT for federal income
tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not
constitute permissible income and investments for these tests. While we will attempt to ensure that
our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification,
we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be
subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real
property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our
dealings with our taxable REIT subsidiaries are not deemed to be arms length in nature or are
otherwise not respected.
REIT distribution requirements limit our available cash. As a REIT, we are subject to annual
distribution requirements, which limit the amount of cash we retain for other business purposes,
including amounts to fund our growth. We generally must distribute annually at least 90% of our
net REIT taxable income, excluding any net capital gain, in order for our distributed earnings not
to be subject to corporate income tax. We intend to make distributions to our stockholders to
comply with the requirements of the Code. However, differences in timing between the recognition
of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on
a short-term or long-term basis to meet the 90% distribution requirement of the Code.
50
Certain Property Transfers May Generate Prohibited Transaction Income, Resulting in a Penalty
Tax on Gain Attributable to the Transaction. From time to time, we may transfer or otherwise
dispose of some of our properties. Under the Internal Revenue Code, any gain resulting from
transfers of properties that we hold as inventory or primarily for sale to customers in the
ordinary course of business would be treated as income from a
prohibited transaction and subject to a
100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our
occasional transfers or disposals of property are prohibited
transactions. However, whether property is held for investment purposes is a question of fact
that depends on all the facts and circumstances surrounding the particular transaction. The
Internal Revenue Service may contend that certain transfers or disposals of properties by us are
prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer
or disposition of property constituted a prohibited transaction, then we would be required to pay a
100% penalty tax on any gain allocable to us from the prohibited transaction and we may jeopardize
our ability to retain future gains on real property sales. In addition, income from a prohibited
transaction might adversely affect our ability to satisfy the income tests for qualification as a
REIT for federal income tax purposes.
Changes in Market Conditions and Volatility of Stock Prices Could Adversely Affect the Market
Price of Our Common Stock. The stock markets, including the New York Stock Exchange, on which we
list our common shares, have experienced significant price and volume fluctuations. As a result,
the market price of our common stock could be similarly volatile, and investors in our common stock
may experience a decrease in the value of their shares, including decreases unrelated to our
operating performance or prospects.
Property Ownership Through Joint Ventures May Limit Our Ability to Act Exclusively in Our
Interest. We have in the past and may in the future develop and acquire properties in joint
ventures with other persons or entities when we believe circumstances warrant the use of such
structures. If we use such a structure, we could become engaged in a dispute with one or more of
our joint venture partners that might affect our ability to operate a jointly-owned property.
Moreover, joint venture partners may have business, economic or other objectives that are
inconsistent with our objectives, including objectives that relate to the appropriate timing and
terms of any sale or refinancing of a property. In some instances, joint venture partners may have
competing interests in our markets that could create conflicts of interest.
Compliance or Failure to Comply with the Americans with Disabilities Act of 1990 or Other
Safety Regulations and Requirements Could Result in Substantial Costs. The Americans with
Disabilities Act generally requires that public buildings, including our properties, be made
accessible to disabled persons. Noncompliance could result in the imposition of fines by the
federal government or the award of damages to private litigants. From time to time claims may be
asserted against us with respect to some of our properties under this Act. If, under the Americans
with Disabilities Act, we are required to make substantial alterations and capital expenditures in
one or more of our properties, including the removal of access barriers, it could adversely affect
our financial condition and results of operations.
Our properties are subject to various federal, state and local regulatory requirements, such
as state and local fire and life safety requirements. If we fail to comply with these requirements,
we could incur fines or private damage awards. We do not know whether existing requirements will
change or whether compliance with future requirements will require significant unanticipated
expenditures that will affect our cash flow and results of operations.
Real Estate Tax and Other Laws. Generally we do not directly pass through costs resulting
from compliance with or changes in real estate tax laws to residential property tenants. We also do
not generally pass through increases in income, service or other taxes, to tenants under leases.
These costs may adversely affect funds from operations and the ability to make distributions to
stockholders. Similarly, compliance with or changes in (i) laws increasing the potential liability
for environmental conditions existing on properties or the restrictions on discharges or other
conditions or (ii) rent control or rent stabilization laws or other laws regulating housing, such
as the Americans with Disabilities Act and the Fair Housing Amendments Act of 1988, may result in
significant unanticipated expenditures, which would adversely affect funds from operations and the
ability to make distributions to stockholders.
Risk of Damage from Catastrophic Weather Events. Certain of our communities are located in
the general vicinity of active earthquake faults, mudslides and fires, and others where there are
hurricanes, tornadoes or risks of other inclement weather. The adverse weather events could cause
damage or losses greater than insured levels. In the event of a loss in excess of insured limits,
we could lose our capital invested in the affected community, as well as anticipated future revenue
from that community. We would also continue to be obligated to repay any mortgage indebtedness or
other obligations related to the community. Any such loss could materially and adversely affect our
business and our financial condition and results of operations.
51
Insurance coverage for such catastrophic events may become expensive due to limited industry
capacity. As a result, we may experience shortages in desired coverage levels if market conditions
are such that insurance is not available.
Terrorist Attacks May Have an Adverse Effect on Our Business and Operating Results and Could
Decrease the Value of Our Assets. Terrorist attacks and other acts of violence or war could have a
material adverse effect on our business and operating results. Attacks that directly impact one or
more of our apartment communities could significantly affect our ability to operate those
communities and thereby impair our ability to achieve our expected results. Further, our insurance
coverage may not cover all losses caused by a terrorist attack. In addition, the adverse effects
that such violent acts and threats of future attacks could have on the U.S. economy could similarly
have a material adverse effect on our business and results of operations.
Any Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an
Adverse Effect on Our Stock Price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to
evaluate and report on our internal control over financial reporting. If we identify one or more
material weaknesses in our internal control over financial reporting, we could lose investor
confidence in the accuracy and completeness of our financial reports, which in turn could have an
adverse effect on our stock price.
Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be
in Our Stockholders Best Interests. Maryland business statutes may limit the ability of a third
party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws
which may have the effect of discouraging offers to acquire our company and of increasing the
difficulty of consummating any such offers, even if our acquisition would be in our stockholders
best interests. The Maryland General Corporation Law restricts mergers and other business
combination transactions between us and any person who acquires beneficial ownership of shares of
our stock representing 10% or more of the voting power without our board of directors prior
approval. Any such business combination transaction could not be completed until five years after
the person acquired such voting power, and generally only with the approval of stockholders
representing 80% of all votes entitled to be cast and 66 2/3% of the votes entitled to be cast,
excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides
generally that a person who acquires shares of our equity stock that represents 10% (and certain
higher levels) of the voting power in electing directors will have no voting rights unless approved
by a vote of two-thirds of the shares eligible to vote.
Limitations on Share Ownership and Limitations on the Ability of Our Stockholders to Effect a
Change in Control of Our Company May Prevent Takeovers That are Beneficial to Our Stockholders. One
of the requirements for maintenance of our qualification as a REIT for U.S. federal income tax
purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or
fewer individuals, including entities specified in the Internal Revenue Code, during the last half
of any taxable year. Our charter contains ownership and transfer restrictions relating to our stock
primarily to assist us in complying with this and other REIT ownership requirements; however, the
restrictions may have the effect of preventing a change of control, which does not threaten REIT
status. These restrictions include a provision that generally limits ownership by any person of
more than 9.9% of the value of our outstanding equity stock, unless our board of directors exempts
the person from such ownership limitation, provided that any such exemption shall not allow the
person to exceed 13% of the value of our outstanding equity stock. These provisions may have the
effect of delaying, deferring or preventing someone from taking control of us, even though a change
of control might involve a premium price for our stockholders or might otherwise be in our
stockholders best interests.
52
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchase of Equity Securities
In February 2006, our Board of Directors authorized a 10 million share repurchase program. In
January 2008, our Board of Directors authorized a new 15 million share repurchase program. Under
the two share repurchase programs, UDR may repurchase shares of our common stock in open market
purchases, block purchases, privately negotiated transactions or otherwise. As reflected in the
table below, 1,213,200 shares of common stock were repurchased under these programs during the
quarter ended June 30, 2008.
|
|
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|
|
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|
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|
|
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|
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|
|
|
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|
|
Total Number |
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|
Maximum Number |
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|
|
|
|
|
|
|
|
|
|
of Shares |
|
|
of Shares |
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|
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|
|
|
|
|
|
|
|
Purchased as |
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that May Yet |
|
|
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Total Number |
|
|
Average |
|
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Part of Publicly |
|
|
Be Purchased |
|
|
|
of Shares |
|
|
Price |
|
|
Announced Plans |
|
|
Under the Plans |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
or Programs |
|
|
or Programs (1) (2) |
|
Beginning Balance |
|
|
7,501,000 |
|
|
$ |
24.03 |
|
|
|
7,501,000 |
|
|
|
17,499,000 |
|
April 1, 2008 through April 30, 2008 |
|
|
955,800 |
|
|
|
24.32 |
|
|
|
955,800 |
|
|
|
16,543,200 |
|
May 1, 2008 through May 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,543,200 |
|
June 1, 2008 through June 30, 2008 |
|
|
257,400 |
|
|
|
23.10 |
|
|
|
257,400 |
|
|
|
16,285,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2008 |
|
|
8,714,200 |
|
|
$ |
24.03 |
|
|
|
8,714,200 |
|
|
|
16,285,800 |
|
|
|
|
|
|
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(1) |
|
This number reflects the number of shares that were available for
purchase under our 10 million share repurchase program on December 31,
2007. |
|
(2) |
|
This number reflects the number of shares that were available for
purchase under our 10 million and 15 million share repurchase programs
on January 31, 2008. |
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 2008, UDR held its Annual Meeting of Stockholders. At the meeting, our
stockholders voted on the election of directors and a proposal to ratify the appointment of Ernst &
Young LLP to serve as our independent auditors for the year ending December 31, 2008.
53
The following persons were elected directors of UDR, to serve as such for the term indicated
and until the respective successors are duly elected and qualified or until their resignation or
removal, by the indicated vote.
|
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|
|
|
|
|
|
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Name |
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Votes For |
|
|
Votes Withheld |
|
|
Katherine A. Cattanach |
|
|
114,809,264 |
|
|
|
604,813 |
|
Eric J. Foss |
|
|
114,828,037 |
|
|
|
586,040 |
|
Robert P. Freeman |
|
|
114,823,432 |
|
|
|
590,645 |
|
Jon A. Grove |
|
|
114,812,801 |
|
|
|
601,276 |
|
James D. Klingbeil |
|
|
114,447,394 |
|
|
|
966,683 |
|
Robert C. Larson |
|
|
114,235,018 |
|
|
|
1,179,059 |
|
Thomas R. Oliver |
|
|
114,805,960 |
|
|
|
608,117 |
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Lynne B. Sagalyn |
|
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112,572,301 |
|
|
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2,841,776 |
|
Mark J. Sandler |
|
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113,377,108 |
|
|
|
2,036,969 |
|
Thomas W. Toomey |
|
|
114,786,849 |
|
|
|
627,228 |
|
Thomas C. Wajnert |
|
|
114,763,278 |
|
|
|
650,799 |
|
The stockholders approved the proposal to ratify the appointment of Ernst & Young LLP to serve
as independent auditors for the year ending December 31, 2008, by the indicated vote:
|
|
|
|
|
|
|
Votes For |
|
Votes Withheld |
|
Votes Abstained |
|
Broker Non-Votes |
|
|
|
|
|
|
|
114,771,436
|
|
514,812
|
|
127,829 |
|
|
Item 5. OTHER INFORMATION
No other information is required to be disclosed for the period ended June 30, 2008 that has
not been disclosed in a report on Form 8-K.
Item 6. EXHIBITS
The
exhibits filed or furnished with this report are set forth in the Exhibit Index.
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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UDR, Inc.
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(registrant) |
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Date: August 11, 2008
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/s/ David L. Messenger |
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David L. Messenger |
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Senior Vice President and Chief Financial Officer |
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55
EXHIBIT INDEX
|
|
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|
|
Exhibit No. |
|
Description |
|
|
|
|
|
|
2.1 |
|
|
Agreement of Purchase and Sale dated January 23, 2008, by and between
the Company, DRA Fund VI LLC and the other signatories thereto
(incorporated by reference to Exhibit 2.1 to the Companys Current Report
on Form 8-K dated January 23, 2008 and filed with the SEC on January 29, 2008
(Commission File No. 001-10524)). |
|
|
|
|
|
|
2.2 |
|
|
First Amendment to Agreement of Purchase and Sale by and between the
Company, DRA Fund VI LLC and the other signatories thereto
(incorporated by reference to Exhibit 2.2 to the Companys Current Report
on Form 8-K/A dated March 3, 2008 and filed with the SEC on May 2,
2008 (Commission File No. 001-10524)). |
|
|
|
|
|
|
10.1* |
|
|
Letter Agreement between the Company and Warren L. Troupe
(incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K dated February 22, 2008 and filed with the SEC on
February 27, 2008 (Commission File No. 001-10524)). |
|
|
|
|
|
|
10.2* |
|
|
Indemnification Agreement between the Company and Warren L. Troupe
(incorporated by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K dated February 22, 2008 and filed with the SEC on
February 27, 2008 (Commission File No. 001-10524)). |
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|
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|
|
|
12 |
|
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Computation of Ratio of Earnings to Fixed Charges. |
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|
|
|
|
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31.1 |
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Rule 13a-14(a) Certification of the Chief Executive Officer. |
|
|
|
|
|
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31.2 |
|
|
Rule 13a-14(a) Certification of the Chief Financial Officer. |
|
|
|
|
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|
32.1 |
|
|
Section 1350 Certification of the Chief Executive Officer. |
|
|
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32.2 |
|
|
Section 1350 Certification of the Chief Financial Officer. |
|
|
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* |
|
Management contracts and compensatory plans or arrangements. |