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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Or
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
     
    For the transition period from                      to                     
Commission file number 1-10524 (UDR, Inc.)
Commission file number 333-156002-01 (United Dominion Realty, L.P.)
UDR, INC.
United Dominion Realty, L.P.
(Exact name of registrant as specified in its charter)
     
Maryland (UDR, Inc.)   54-0857512
Delaware (United Dominion Realty, L.P.)   54-1776887
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (720) 283-6120
Securities registered pursuant to Section 12(b) of the Act:
     
Title of Each Class   Name of Each Exchange on Which Registered
     
Common Stock, $0.01 par value (UDR, Inc.)   New York Stock Exchange
6.75% Series G Cumulative Redeemable Preferred Stock (UDR, Inc.)   New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
             
UDR, Inc.
  Yes þ   No o    
United Dominion Realty, L.P.
  Yes o   No þ    
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
             
UDR, Inc.
  Yes o   No þ    
United Dominion Realty, L.P.
  Yes o   No þ    
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.
             
UDR, Inc.
  Yes þ   No o    
United Dominion Realty, L.P.
  Yes þ   No o    
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
             
UDR, Inc.
  Yes þ   No o    
United Dominion Realty, L.P.
  Yes þ   No o    
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
UDR, Inc.:            
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
             
United Dominion Realty, L.P.:            
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
             
UDR, Inc.
  Yes o   No þ    
United Dominion Realty, L.P.
  Yes o   No þ    
The aggregate market value of the shares of common stock of UDR, Inc. held by non-affiliates on June 30, 2011 was approximately $2.6 billion. This calculation excludes shares of common stock held by the registrant’s officers and directors and each person known by the registrant to beneficially own more than 5% of the registrant’s outstanding shares, as such persons may be deemed to be affiliates. This determination of affiliate status should not be deemed conclusive for any other purpose. As of February 17, 2012 there were 223,340,334 shares of UDR, Inc’s common stock outstanding.
There is no public trading market for the partnership units of United Dominion Realty, L.P. As a result, an aggregate market value of the partnership units of United Dominion Realty, L.P. cannot be determined.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from UDR, Inc.’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 15, 2012.
 
 

 

 


 

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EXPLANATORY NOTE
This report combines the annual reports on Form 10-K for the fiscal year ended December 31, 2011 of UDR, Inc. a Maryland corporation, and United Dominion Realty, L.P., a Delaware limited partnership, of which UDR is the parent company and sole general partner. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” the “Company,” “UDR,” or UDR, Inc. refer collectively to UDR, Inc., together with its consolidated subsidiaries and joint ventures, including the Operating Partnership. Unless the context otherwise requires, the references in this Report to the “Operating Partnership” refer to United Dominion Realty, L.P. together with its consolidated subsidiaries. “Common stock” refers to the common stock of UDR and “stockholders” means the holders of shares of UDR’s common stock and preferred stock. The limited partnership interests of the Operating Partnership are referred to as “OP Units” and the holders of the OP Units are referred to as “unitholders”. This combined Form 10-K is being filed separately by UDR and the Operating Partnership.
There are a number of differences between our company and our operating partnership, which are reflected in our disclosure in this report. UDR is a real estate investment trust (a “REIT”), whose most significant asset is its ownership interest in the Operating Partnership. UDR also conducts business through other subsidiaries and operating partnerships, including its subsidiary RE3, whose activities include development of land. UDR acts as the sole general partner of the Operating Partnership, holds interests in other operating partnerships, subsidiaries and joint ventures, owns and operates properties, issues securities from time to time and guarantees debt of certain of our subsidiaries. The Operating Partnership conducts the operations of a substantial portion of the business and is structured as a partnership with no publicly traded equity securities. The Operating Partnership has guaranteed certain outstanding securities of UDR.
As of December 31, 2011, UDR owned 110,883 units of the general partnership interests of the Operating Partnership and 174,749,068 units (or approximately 94.9%) of the limited partnership interests of the Operating Partnership (the “OP Units”). UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and being the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasers of Equity Securities” and “Controls and Procedures” are provided for each of UDR and the Operating Partnership. In addition, certain disclosures in “Business” are separated by entity to the extent that the discussion relates to UDR’s business outside of the Operating Partnership.

 

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PART I
Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unfavorable changes in the apartment market, changing economic conditions, the impact of inflation/deflation on rental rates and property operating expenses, expectations concerning availability of capital and the stabilization of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments, redevelopments and lease-ups on schedule, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, and expectations on occupancy levels. 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 Annual 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. For a further discussion of these and other factors that could impact future results, performance or transactions, see “Item 1A. Risk Factors” elsewhere in this Annual Report.
Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
Item 1. BUSINESS
General
UDR is a self administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, and manages multifamily apartment communities generally located in high barrier-to-entry markets located throughout the United States. The high barrier-to-entry markets are characterized by limited land for new construction, difficult and lengthy entitlement process, expensive single-family home prices and significant employment growth potential. At December 31, 2011, our consolidated apartment portfolio included 163 communities located in 22 markets, with a total of 47,343 completed apartment homes, which are held through our operating partnerships, including the Operating Partnership, our subsidiaries and consolidated joint ventures. In addition, we have an ownership interest in 39 communities containing 10,496 completed apartment homes through unconsolidated joint ventures. At December 31, 2011, the Company is developing seven wholly-owned communities with 2,108 apartment homes, 145 of which have been completed.
At December 31, 2011, the Operating Partnership’s consolidated apartment portfolio included 77 communities located in 17 markets, with a total of 23,160 completed apartment homes. The Operating Partnership owns, operates, acquires, renovates, develops, redevelops, and manages multifamily apartment communities generally located in high barrier-to-entry markets located throughout the United States. During the fiscal year ended December 31, 2011, revenues of the Operating Partnership represented approximately 53% of our total rental revenues.

 

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UDR elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, which we refer to in this Report as the “Code”. To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than our net capital gains) to our stockholders annually. As a qualified REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent we distribute such net income to our stockholders annually. In 2011, we declared total distributions of $0.80 per common share and paid dividends of $0.77 per common share.
                 
    Dividends        
    Declared in     Dividends Paid  
    2011     in 2011  
First Quarter
  $ 0.185     $ 0.185  
Second Quarter
    0.200       0.185  
Third Quarter
    0.200       0.200  
Fourth Quarter
    0.215       0.200  
 
           
Total
  $ 0.800     $ 0.770  
 
           
UDR was formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. The Operating Partnership was formed in 2004 as Delaware limited partnership. The Operating Partnership is the successor-in-interest to United Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations in 1995. Our corporate offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado and our telephone number is (720) 283-6120. Our website is located at www.udr.com.
As of February 17, 2012, we had 1,652 full-time associates and 98 part-time associates, all of whom were employed by UDR.
Reporting Segments
We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same Communities segment includes those communities acquired, developed, and stabilized prior to January 1, 2010, and held as of December 31, 2011. 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 classified as held for sale at year end. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. Our Non-Mature/Other Communities segment includes those communities that were acquired or developed in 2009, 2010 or 2011, sold properties, redevelopment properties, properties classified as real estate held for sale, condominium conversion properties, joint venture properties, properties managed by third parties, and the non-apartment components of mixed use properties. For additional information regarding our operating segments, see Note 15 to UDR’s consolidated financial statements and Note 11 to the Operating Partnership’s consolidated financial statements.
Business Objectives
Our principal business objective is to maximize the economic returns of our apartment communities to provide our stockholders with the greatest possible total return and value. To achieve this objective, we intend to continue to pursue the following goals and strategies:
    own and operate apartments in markets that have the best growth prospects based on favorable job formation and low home affordability, thus enhancing stability and predictability of returns to our stockholders;
    manage real estate cycles by taking an opportunistic approach to buying, selling, renovating, and developing apartment communities;
    empower site associates to manage our communities efficiently and effectively;
    measure and reward associates based on specific performance targets; and
    manage our capital structure to help enhance predictability of earnings and dividends.

 

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2011 Highlights
    We acquired eight operating communities with 3,161 homes located in New York, New York; San Francisco, California; Boston, Massachusetts; and Metropolitan D.C. markets for $1.5 billion. We also acquired three parcels of land for $34.3 million.
    We entered into a consolidated joint venture to acquire and redevelop a commercial property into a 173- apartment home community in Orange County, California. We also entered into two unconsolidated joint ventures to develop a 263- apartment home community in San Diego, California and a 256- apartment home community in College Park, Maryland.
    One of our unconsolidated joint ventures acquired two operating communities with 509 homes in the Washington, D.C. market for $237.8 million.
    We repaid $336.0 million of secured debt. The $336.0 million of secured debt includes $197.5 million of construction loans, repayment of $102.8 million of credit facilities, $22.4 million of mortgage payments, and repayment of $13.3 million in tax exempt bonds.
    Certain holders submitted their outstanding 4.00% Convertible Senior Notes due 2035 to the Company for repurchase. As a result, we repurchased notes with a notional value of $10.8 million, representing approximately 6.44% of the $167.8 million in aggregate principal amount outstanding, and expensed $207,000 of unamortized financing costs during the three months ended March 31, 2011. On March 2, 2011 the Company called the remaining outstanding notes with a notional value of $156.9 million. The notes were redeemed on April 4, 2011 and unamortized financing costs of $3.0 million were written off.
    We issued $300 million aggregate principal amount of 4.250% senior unsecured notes due June 2018 under our existing shelf registration statement. Interest is payable semiannually beginning in December 2011. The notes were priced at 98.988% of the principal amount plus accrued interest from May 23, 2011 to yield 4.419% to maturity. The notes are fully and unconditionally guaranteed by the Operating Partnership.
    We repaid $97.1 million on the maturity of our 3.625% Convertible Senior Notes due September 2011.
    We entered into a new $900 million unsecured revolving credit facility, replacing the Company’s $600 million credit facility. The Operating Partnership issued a guarantee in connection with the new facility, similar to the guarantee it issued under the prior facility. The new credit facility has an initial term of four years and includes a one-year extension option, and contains an accordion feature that allows the Company to increase the facility to $1.35 billion. Based on the Company’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points. In 2011, the Company had net borrowings of $389.3 million on its unsecured revolving credit facilities.
    In September 2009, the Company entered into an equity distribution agreement under which the Company may offer and sell up to 15.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 4,395,601 shares of common stock through an equity distribution agreement for aggregate gross proceeds of approximately $104.5 million at a weighted average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $2.1 million, were approximately $102.4 million, and such proceeds were used for general corporate purposes.
    We entered into a new equity distribution agreement under which the Company may offer and sell up to 20.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 11,849,079 shares of common stock through this program (of which 419,048 shares were settled subsequent to December 31, 2011) for aggregate gross proceeds of approximately $297.7 million at a weighted average price per share of $25.12. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $6.0 million, were approximately $291.7 million, and such proceeds were used for general corporate purposes. In September 2011, the Company entered into a new equity distribution agreement in connection with filing a new registration statement on Form S-3. The new equity distribution agreement replaced the March 2011 agreement, and no material changes were made to the equity distribution agreement. As of December 31, 2011 8,150,921 shares of common stock may be sold under our equity distribution agreement.

 

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    We closed on a public offering of 20,700,000 shares of our common stock, including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately $496.3 million after underwriting discounts and commissions and estimated offering expenses.
    We repurchased 141,200 shares of our 6.75% Series G Cumulative Redeemable Preferred Stock for $3.6 million, which is $100,000 more than their liquidation value of $3.5 million.
Other than the following, there were no significant changes to the Operating Partnership’s business during 2011 (the above 2011 highlights relate to UDR or other subsidiaries of UDR):
    The Operating Partnership acquired four operating communities with 1,833 homes located in the New York, New York and Boston, Massachusetts markets for $761.2 million. In partial consideration for the acquisition of two of these communities, 4,371,845 OP Units were issued.
    The Operating Partnership issued a guarantee on $300 million of medium-term notes due June 2018 issued by UDR.
    The Operating Partnership issued a guarantee in conjunction with a $900 million unsecured revolving credit facility entered into by UDR. The facility replaced the General Partner’s $600 million credit facility, which the Operating Partnership had previously guaranteed.
Our Strategies and Vision
We previously announced our vision to be the innovative multifamily public real estate investment trust of choice. We identified the following strategies to guide decision-making and growth:
  1.   Strengthen quality of our portfolio
 
  2.   Grow our cash flow to support dividend growth
 
  3.   Increase our balance sheet strength and flexibility
 
  4.   Great place to work and live
Strengthen quality of our Portfolio
We are focused on increasing our presence in markets with favorable job formation, low single-family home affordability, and a favorable demand/supply ratio for multifamily housing. Portfolio decisions consider internal analyses and third-party research, taking into account job growth, multifamily permitting and housing affordability.
For the year ended December 31, 2011, approximately 50.9% of our same store net operating income (“NOI”) was provided by our communities located in California, Metropolitan Washington, D.C., Oregon and Washington state.

 

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Grow our cash flow to support dividend growth
Acquisitions and Dispositions
During 2011, in conjunction with our strategy to strengthen our portfolio, we acquired eight operating communities with 3,161 apartment homes for approximately $1.5 billion. Four of these operating communities, representing 1,833 homes, were acquired by the Operating Partnership for approximately $761.2 million.
When evaluating potential acquisitions, we consider:
    population growth, cost of alternative housing, overall potential for economic growth and the tax and regulatory environment of the community in which the property is located;
    geographic location, including proximity to jobs, entertainment, transportation, and our existing communities which can deliver significant economies of scale;
    construction quality, condition and design of the community;
    current and projected cash flow of the property and the ability to increase cash flow;
    potential for capital appreciation of the property;
    ability to increase the value and profitability of the property through operations and redevelopment;
    terms of resident leases, including the potential for rent increases;
    occupancy and demand by residents for properties of a similar type in the vicinity;
    prospects for liquidity through sale, financing, or refinancing of the property; and
    competition from existing multifamily communities and the potential for the construction of new multifamily properties in the area.
We regularly monitor our assets to increase the quality and performance of our portfolio. Factors we consider in deciding whether to dispose of a property include:
    current market price for an asset compared to projected economics for that asset;
    potential increases in new construction in the market area;
    areas where the economy is not expected to grow substantially;
    markets where we do not intend to establish a long-term concentration; and
    operating efficiencies.
During 2011, we sold eighteen apartment home communities, of which eight communities were owned by the Operating Partnership.
The following table summarizes our apartment community acquisitions, apartment community dispositions and our consolidated year-end ownership position for the past five years (dollars in thousands):
                                         
    2011     2010     2009     2008     2007  
 
                                       
Homes acquired
    3,161       1,374       289       4,558       2,671  
Homes disposed
    4,488       149             25,684       7,125  
Homes owned at December 31
    47,343       48,553       45,913       44,388       65,867  
Total real estate owned, at cost
  $ 8,074,471     $ 6,881,347     $ 6,315,047     $ 5,831,753     $ 5,956,481  

 

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The following table summarizes our apartment community acquisitions, apartment community dispositions and our year-end ownership position of the Operating Partnership for the past five years (dollars in thousands):
                                         
    2011     2010     2009     2008     2007  
 
                                       
Homes acquired
    1,833                   3,346       943  
Homes disposed
    2,024                   16,960       4,631  
Homes owned at December 31
    23,160       23,351       23,351       23,351       36,965  
Total real estate owned, at cost
  $ 4,205,298     $ 3,706,184     $ 3,640,888     $ 3,569,239     $ 2,685,249  
Development Activities
The following wholly owned projects were under development as of December 31, 2011:
                                                 
    Number of     Completed     Cost to     Budgeted     Estimated     Expected  
    Apartment     Apartment     Date     Cost     Cost     Completion  
    Homes     Homes     (in thousands)     (in thousands)     Per Home     Date  
 
                                               
Savoye2 (Phase II of Vitruvian Park) Addison, TX
    347       145     $ 66,707     $ 69,000     $ 198,847        1Q12  
 
                                               
Belmont Townhomes Dallas, TX
    13             1,947       4,175       321,154        2Q12  
 
                                               
2400 14th Street Washington, DC
    255             64,899       126,100       494,510        4Q12  
 
                                               
Village at Bella Terra Huntington Beach, CA
    467             32,202       150,000       300,000        2Q13  
 
                                               
Mission Bay San Francisco, CA
    315             37,679       139,600       443,175        3Q13  
 
                                               
Phase III of Vitruvian Park Addison, TX
    391             18,518       98,350       251,535        3Q13  
 
                                               
Los Alisos (formerly Mission Viejo) Mission Viejo, CA
    320             26,794       87,050       272,031        4Q13  
 
                                     
 
                                               
 
    2,108       145     $ 248,746     $ 674,275     $ 315,168          
 
                                     
None of these projects are held by the Operating Partnership.
Redevelopment Activities
During 2011, we continued to redevelop properties in targeted markets where we concluded there was an opportunity to add value. During the year ended December 31, 2011, we incurred $30.0 million in major renovations, which include major structural changes and/or architectural revisions to existing buildings.

 

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Joint Venture Activities
Consolidated joint venture
In August 2011, the Company invested in a consolidated joint venture with an unaffiliated third party to acquire and redevelop an existing commercial property into a 173-apartment home community in Orange County, California. At closing the Company contributed $9.0 million and at December 31, 2011, UDR owned a 90% controlling interest in the investment. Under the terms of the operating agreement, our partner is required to achieve certain criteria as it relates to the entitlement process. If the criteria are met on or before 730 days after the site plan application is deemed complete by the city, the Company is obligated to contribute an additional $3.0 million to the joint venture for distribution to our partner. At the acquisition date, the Company accrued and capitalized $3.0 million related to the contingent consideration, which represents the difference between fair value of the property of $9.8 million on the formation date and the estimated fair value of the underlying property upon completion of the entitlement process of $12.8 million.
Unconsolidated joint ventures
In May 2011, the Company entered into a joint venture to develop a 263-home community in San Diego, California. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $9.9 million and our investment at December 31, 2011 was $12.1 million.
In June 2011, one of our existing joint ventures (UDR/MetLife I) sold a parcel of land to a joint venture, in which the Company is a partner, to develop a 256-home community in College Park, Maryland. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $7.1 million and our investment at December 31, 2011 was $8.6 million.
UDR is a partner with an unaffiliated third party, which formed a joint venture for the investment of up to $450.0 million in multifamily properties located in key, high barrier to entry markets such as Metropolitan Washington D.C. The partners will contribute equity of $180.0 million of which the Company’s maximum equity will be 30% or $54.0 million when fully invested. In 2011, the joint venture acquired two properties (509 homes). At December 31, 2011, the Company owned a 30% interest in the joint venture. Our investment at December 31, 2011 was $34.1 million.
For additional information regarding these and our other joint ventures, see Note 5, Joint Ventures to the Consolidated Financial Statements of UDR, Inc. in this Report.
The Operating Partnership is not a party to any of the joint venture activities described above.

 

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Increase our balance sheet strength and flexibility
We maintain a capital structure that allows us to seek, and not just react to, opportunities available in the marketplace. We have structured our borrowings to stagger our debt maturities and to be able to opportunistically access both secured and unsecured debt.
Financing Activities
As part of our plan to strengthen our capital structure, we utilized proceeds from debt and equity offerings and refinancings to extend maturities, pay down existing debt and acquire apartment communities. The following is a summary of our major financing activities in 2011.
    We received proceeds of $30.7 million from secured debt financings. The $30.7 million includes $25.7 million in variable rate mortgages and $5.0 million in fixed rate mortgages.
    We repaid $336.0 million of secured debt, which includes $197.5 million of construction loans, repayment of $102.8 million of credit facilities, $22.4 million of mortgage payments, and repayment of $13.3 million in tax exempt bonds.
    Certain holders submitted their outstanding 4.00% Convertible Senior Notes due 2035 to us for repurchase. As a result, we repurchased notes with a notional value of $10.8 million, representing approximately 6.44% of the $167.8 million in aggregate principal amount outstanding, and expensed $207,000 of unamortized financing costs during the three months ended March 31, 2011. On March 2, 2011, the Company called the remaining outstanding notes with a notional value of $156.9 million. The notes were redeemed on April 4, 2011 and unamortized financing costs of $3.0 million were written off.
    In May 2011, we issued $300 million aggregate principal amount of 4.250% senior unsecured notes due June 2018 under its existing shelf registration statement. Interest is payable semiannually beginning in December 2011. The notes were priced at 98.988 % of the principal amount plus accrued interest from May 23, 2011 to yield 4.419% to maturity. The notes are fully and unconditionally guaranteed by the Operating Partnership.
    We repaid $97.1 million on our 3.625% Convertible Senior Notes due September 2011.
    In October 2011, we entered into a $900 million unsecured revolving credit facility, replacing the Company’s $600 million credit facility. The Operating Partnership issued a guarantee in connection with the new credit facility, similar to the guarantee it issued under the prior facility. The new facility has an initial term of four years and includes a one-year extension option, and contains an accordion feature that allows the Company to increase the facility to $1.35 billion. Based on the Company’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points. In 2011, the Company had net borrowings of $389.3 million on its unsecured revolving credit facilities.
    In September 2009, we entered into an equity distribution agreement under which we may offer and sell up to 15.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 4,395,601 shares of common stock through an equity distribution agreement for aggregate gross proceeds of approximately $104.5 million at a weighted average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $2.1 million, were approximately $102.4 million.
    In March 2011, we entered into a new equity distribution agreement under which we may offer and sell up to 20.0 million shares of our common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 11,849,079 shares of common stock through this program (of which 419,048 shares were settled subsequent to December 31, 2011) for aggregate gross proceeds of approximately $297.7 million at a weighted average price per share of $25.12. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $6.0 million, were approximately $291.7 million. In September 2011, we entered into a new equity distribution agreement in connection with filing a new registration statement on Form S-3. The new equity distribution agreement replaced the March 2011 agreement, and no material changes were made to the equity distribution agreement.
    In July 2011, we closed a public offering of 20,700,000 shares of its common stock, including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately $496.3 million after underwriting discounts and commissions and estimated offering expenses.
    We repurchased 141,200 shares of our 6.75% Series G Cumulative Redeemable Preferred Stock for $3.6 million, which was $100,000 more than their liquidation value of $3.5 million.
Great place to work and live
We continue to make progress on automating our business as a way to drive operating efficiencies and to better meet the changing needs of our residents. Since its launch in January 2009, our residents have been utilizing the resident internet portal on our website. Our residents have access to conduct business with us 24 hours a day, 7 days a week, to pay rent on line and to submit service requests. In July 2010, we completed the roll out of online renewals throughout our entire portfolio. As a result of transforming operations through technology, our residents get the convenience they want, and our operating teams have become more efficient. These improvements in adopting the web as a way to conduct business with us have also resulted in a decline in marketing and advertising costs, improved cash management, and improved capabilities to better manage pricing of our available apartment homes.
In 2011, UDR.com features and functionality were enhanced to increase user engagement and increase lead volume year-over-year, such as, improved photography, enhancements to the online web forms and improved layout of the individual UDR community homepages. In addition to improvements to www.udr.com, we also improved our suite of mobile and tablet devices on the iPhone, iPad and Android platforms. These overall enhancements have contributed to increasing our web visitor traffic to almost 3.1 million visitors (up 31%), almost 2.1 million organic search engine visitors (up 38%), mobile traffic increased 112%, mobile leads generated increased 115% and mobile as a percent of total web traffic was at 22% in Q4 2011. Overall, the UDR.com and mobile initiatives contributed to a 17% year-over-year lead stream increase.

 

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Operating Partnership Strategies and Vision
The Operating Partnership’s long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets and enhance resident and associate service through technology. As a result, the Operating Partnership has sought to expand its interests in communities located in New York, New York; San Francisco, California; Boston, Massachusetts; and Metropolitan D.C. markets over the past years. Prospectively, we plan to continue to channel new investments into those markets we believe will continue to provide the best investment returns. Markets will be targeted based upon defined criteria including above average job growth, low single-family home affordability and limited new supply for multifamily housing- three key drivers to strong rental growth.
Markets and Competitive Conditions
At December 31, 2011, 50.9% of our consolidated same store net operating income and 72.4% of the Operating Partnership’s same store net operating income was generated from apartment homes located in California, Metropolitan Washington D.C., Oregon, and Washington state. We believe that this diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of our earnings.
Competition for new residents is generally intense across all of our markets. Some competing communities offer features that our communities do not have. Competing communities can use concessions or lower rents to obtain temporary competitive advantages. Also, some competing communities are larger or newer than our communities. The competitive position of each community is different depending upon many factors including sub-market supply and demand. In addition, other real estate investors compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, public and private real estate companies, investment companies and other public and private apartment REITs, some of which may have greater resources, or lower capital costs, than we do.
We believe that, in general, we are well-positioned to compete effectively for residents and investments. We believe our competitive advantages include:
    a fully integrated organization with property management, development, redevelopment, acquisition, marketing, sales and financing expertise;
    scalable operating and support systems, which include automated systems to meet the changing electronic needs of our residents and to effectively focus on our Internet marketing efforts;
    purchasing power;
    geographic diversification with a presence in 22 markets across the country; and
    significant presence in many of our major markets that allows us to be a local operating expert.
Moving forward, we will continue to emphasize aggressive lease management, improved expense control, increased resident retention efforts and the alignment of employee incentive plans tied to our bottom line performance. We believe this plan of operation, coupled with the portfolio’s strengths in targeting renters across a geographically diverse platform, should position us for continued operational improvement in spite of the difficult economic environment.
Communities
At December 31, 2011, our apartment portfolio included 163 consolidated communities having a total of 47,343 completed apartment homes and an additional 1,963 apartment homes under development, which included the Operating Partnership’s apartment portfolio of 77 consolidated communities having a total of 23,160 completed apartment homes. The overall quality of our portfolio enables us to raise rents and to attract residents with higher levels of disposable income who are more likely to absorb expenses, such as water and sewer costs, from the landlord to the resident. In addition, it potentially reduces recurring capital expenditures per apartment home, and therefore should result in increased cash flow in the future.
At December 31, 2011, the Company is developing seven wholly-owned communities with 2,108 apartment homes, 145 of which have been completed.
At December 31, 2011, the Company is redeveloping seven wholly-owned communities with 3,123 apartment homes, 467 of which have been completed.
Same Store Community Comparison
We believe that one pertinent quantitative measurement of the performance of our portfolio is tracking the results of our same store community’s net operating income, which is total rental revenue, less rental expenses excluding property management and other operating expenses. Our same store community population are operating communities which we own and have stabilized occupancy, revenues and expenses as of the beginning of the prior year.

 

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For the year ended December 31, 2011, our same store NOI increased by $18.1 million or 5.6% compared to the prior year. The increase in NOI for the 37,869 apartment homes which make up the same store population was driven by an increase in rental rates and fee and reimbursement income, partially offset by an increase in operating expenses and decreased occupancy.
For the year ended December 31, 2011, the Operating Partnership’s same store NOI increased by $11.5 million or 6.2% compared to the prior year. The increase in NOI for the 19,194 apartment homes which make up the same store population was driven by an increase in revenue rental rates, partially offset by an increase in operating expenses and decreased occupancy.
Revenue growth in 2012 may be impacted by general adverse conditions affecting the economy, reduced occupancy rates, increased rental concessions, increased bad debt and other factors which may adversely impact our ability to increase rents.
Tax Matters
UDR has elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, UDR must continue to meet certain tests that, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than net capital gains) to our stockholders annually. Provided we maintain our qualification as a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent such net income is distributed to our stockholders annually. 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 utilize taxable REIT subsidiaries to engage in activities that REITs may be prohibited from performing, including the provision of management and other services to third parties and the conduct of certain nonqualifying real estate transactions. Taxable REIT subsidiaries generally are taxable as regular corporations and therefore are subject to federal, state and local income taxes.
The Operating Partnership intends to qualify as a partnership for federal income tax purposes. As a partnership, the Operating Partnership generally is not a taxable entity and does not incur federal income tax liability. However, any state or local revenue, excise or franchise taxes that result from the operating activities of the Operating Partnership are incurred at the entity level.
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 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 year ended December 31, 2011.
Environmental Matters
Various environmental laws govern certain aspects of the ongoing operation of our communities. Such environmental laws include those regulating the existence of asbestos-containing materials in buildings, management of surfaces with lead-based paint (and notices to residents about the lead-based paint), use of active underground petroleum storage tanks, and waste-management activities. The failure to comply with such requirements could subject us to a government enforcement action and/or claims for damages by a private party.
To date, compliance with federal, state and local environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position. We have a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigations and reports have been completed for each property we acquire. In addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase or development of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we have abandoned otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. We believe that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a relatively conservative posture toward accepting known environmental risk, we can minimize our exposure to potential liability associated with environmental hazards.

 

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Federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and imposes treble damages for failure to provide such notification. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.
We are unaware of any environmental hazards at any of our properties that individually or in the aggregate may have a material adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise aware, of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties. We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on us or our financial condition or results of operations. Future environmental laws, regulations, or ordinances, however, may require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on us in the future, the costs of compliance could have a material adverse effect on us and our financial condition.
Insurance
We carry comprehensive general liability coverage on our communities, with limits of liability customary within the industry to insure against liability claims and related defense costs. We are also insured, with limits of liability customary within the industry, against the risk of direct physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.
Executive Officers of the Company
UDR is the sole general partner of the Operating Partnership. The following table sets forth information about our executive officers as of February 17, 2012. The executive officers listed below serve in their respective capacities at the discretion of our Board of Directors.
                     
Name   Age   Office   Since
 
                   
Thomas W. Toomey
    51     Chief Executive Officer, President and Director     2001  
Warren L. Troupe
    58     Senior Executive Vice President     2008  
Harry G. Alcock
    49     Senior Vice President — Asset Management     2010  
Jerry A. Davis
    49     Senior Vice President — Property Operations     2008  
David L. Messenger
    41     Senior Vice President — Chief Financial Officer     2008  
R. Scott Wesson
    49     Senior Vice President — Chief Information Officer     2011  
Set forth below is certain biographical information about our executive officers.
Mr. Toomey spearheads the vision and strategic direction of the Company and oversees its executive officers. He joined us in February 2001 as President, Chief Executive Officer and Director. Prior to joining us, Mr. Toomey was with Apartment Investment and Management Company (AIMCO), where he served as Chief Operating Officer for two years and Chief Financial Officer for four years. During his tenure at AIMCO, Mr. Toomey was instrumental in the growth of AIMCO from 34,000 apartment homes to 360,000 apartment homes. He has also served as a Senior Vice President at Lincoln Property Company, a national real estate development, property management and real estate consulting company, from 1990 to 1995. He currently serves on the Executive Board of the National Association of Real Estate Investment Trusts (NAREIT), as a member of the Real Estate Roundtable, as a trustee with the Urban Land Institute and as a trustee of the Oregon State University Foundation.

 

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Mr. Troupe oversees all financial, treasury, tax and legal functions of the Company. He joined us in March 2008 as Senior Executive Vice President. In May 2008, he was appointed the Company’s Corporate Compliance Officer and in October 2008 he was named the Company’s Corporate Secretary. Prior to joining us, Mr. Troupe was a partner with Morrison & Forester LLP from 1997 to 2008, where his practice focused on all aspects of corporate finance including, but not limited to, public and private equity offerings, traditional loan structures, debt placements to subordinated debt financings, workouts and recapitalizations. While at Morrison & Forester LLP he represented both public and private entities in connection with merger and acquisition transactions, including tender offers, hostile proxy contests and negotiated acquisitions. He currently is a member of the National Multi Housing Council (NMHC), the Pension Real Estate Association (PREA) and the Urban Land Institute.
Mr. Alcock oversees the Company’s acquisitions, dispositions, redevelopment and asset management. He joined us in December 2010 as Senior Vice President — Asset Management. Prior to joining the company, Mr. Alcock was with AIMCO for over 16 years, serving most recently as Executive Vice President, co-Head of Transactions and Asset Management. He was appointed Executive Vice President and Chief Investment officer in 1999, a position he held through 2007. Mr. Alcock established and chaired the company’s Investment Committee, established the portfolio management function and at various times ran the property debt and redevelopment departments. Prior to the formation of AIMCO, from 1992 to 1994, Mr. Alcock was with Heron Financial and PDI, predecessor companies to AIMCO. From 1988 to 1992 he worked for Larwin Company, a national homebuilder.
Mr. Davis oversees property operations, human resources and technology. He originally joined us in March 1989 as Controller and subsequently moved into Operations as an Area Director and in 2001, he accepted the position of Chief Operating Officer of JH Management Co., a California-based apartment company. He returned to the Company in March 2002 and in 2008, Mr. Davis was promoted to Senior Vice President — Property Operations. He began his career in 1984 as a Staff Accountant for Arthur Young & Co.
Mr. Messenger oversees the areas of accounting, risk management, financial planning and analysis, property tax administration and SEC reporting. He joined us in August 2002 as Vice President and Controller. In March 2006, Mr. Messenger was appointed Vice President and Chief Accounting Officer and in January 2007, while retaining the Chief Accounting Officer title, he was promoted to Senior Vice President. Prior to joining the company in 2002, Mr. Messenger was owner and President of TRC Management Company, a restaurant management company, in Chicago. Mr. Messenger began his career in real estate and financial services with Ernst & Young LLP, as a manager in their Chicago real estate division.
Mr. Wesson oversees all aspects of the company’s information technology infrastructure and strategy. He joined us in May 2011 as Senior Vice President — Chief Information Officer. Prior to joining the Company, Mr. Wesson was with RealFoundations, a global real estate management consultancy, where he served as Managing Director from 2008 to 2011. From 1997 to 2008 he was with Apartment Investment and Management Company (AIMCO) where he served as Senior Vice President, Chief Investment Officer. He took on the additional role of Chief Strategy Officer for AIMCO in 2006. From 1991 to 1997 Mr. Wesson was with Lincoln Property Company in the role of Vice President of Information Systems. Prior to that time he worked for five years as a District Manager for ADP. Mr. Wesson began his career in Dallas, Texas working as an Analyst for Federated Department Stores.
Available Information
Both UDR and the Operating Partnership file electronically with the Securities and Exchange Commission their respective annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports on the day of filing with the SEC on our website at www.udr.com, or by sending an e-mail message to ir@udr.com.

 

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Item 1A. RISK FACTORS
There are many factors that affect the business and the results of operations of the Company and the Operating Partnership, some of which are beyond the control of the Company and the Operating Partnership. The following is a description of important factors that may cause the actual results of operations of the Company and the Operating Partnership 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. Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
Risks Related to Our Real Estate Investments and Our Operations
Unfavorable Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels, Rental Revenues and the Value of Our Real Estate Assets. Unfavorable market conditions in the areas in which we operate and unfavorable economic conditions generally may significantly affect our occupancy levels, our rental rates and collections, the value of the properties and our ability to strategically acquire or dispose of apartment communities on economically favorable terms. Our ability to lease our properties at favorable rates is adversely affected by the increase in supply in the multifamily market and is dependent upon the overall level in the economy, which is adversely affected by, among other things, job losses and unemployment levels, recession, personal debt levels, the downturn in the housing market, stock market volatility and uncertainty about the future. Some of our major expenses, including mortgage payments and real estate taxes, generally do not decline when related rents decline. We would expect that declines in our occupancy levels, rental revenues and/or the values of our apartment communities would cause us to have less cash available to pay our indebtedness and to distribute to UDR’s stockholders, which could adversely affect our financial condition and the market value of our securities. Factors that may affect our occupancy levels, our rental revenues, and/or the value of our properties include the following, among others:
    downturns in the national, regional and local economic conditions, particularly increases in unemployment;
 
    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 options more attractive;
 
    local real estate market conditions, including oversupply of, or reduced demand for, apartment homes;
 
    declines in the financial condition of our tenants, which may make it more difficult for us to collect rents from some tenants;
 
    changes in market rental rates;
 
    our ability to renew leases or re-lease space on favorable terms;
 
    the timing and costs associated with property improvements, repairs or renovations;
 
    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.
Continued Economic Weakness Following the Economic Recession that the U.S. Economy Recently Experienced May Materially and Adversely Affect our Financial Condition and Results of Operations. The U.S. economy continues to experience weakness following a severe recession, which has resulted in increased unemployment, decreased consumer spending and a decline in residential and commercial property values. Although it is not clear whether the U.S. economy has fully emerged from the recession, high levels of unemployment have continued to persist. If the economic recovery slows or stalls, we may experience adverse effects on our occupancy levels, our rental revenues and the value of our properties, any of which could adversely affect our cash flow, financial condition and results of operations.
Substantial International, National and Local Government Spending and Increasing Deficits May Adversely Impact Our Business, Financial Condition and Results of Operations. The values of, and the cash flows from, the properties we own are affected by developments in global, national and local economies. As a result of the recent recession and the significant government interventions, federal, state and local governments have incurred record deficits and assumed or guaranteed liabilities of private financial institutions or other private entities. These increased budget deficits and the weakened financial condition of federal, state and local governments may lead to reduced governmental spending, tax increases, public sector job losses, increased interest rates, currency devaluations or other adverse economic events, which may directly or indirectly adversely affect our business, financial condition and results of operations.

 

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Risk of Inflation/Deflation. Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses. Neither inflation nor deflation has materially impacted our operations in the recent past. The general risk of inflation is that our debt interest and general and administrative expenses increase at a rate higher than our rental rates. The predominant effects of deflation include high unemployment and credit contraction. Restricted lending practices could impact our ability to obtain financing or refinancing for our properties. High unemployment may have a negative effect on our occupancy levels and our rental revenues.
We Are Subject to Certain Risks Associated with Selling Apartment Communities, Which Could Limit Our Operational and Financial Flexibility. We periodically dispose of apartment communities that no longer meet our strategic objectives, but adverse market conditions may make it difficult to sell apartment communities like the ones we own. We cannot predict whether we will be able to sell any property for the price or on the terms we set, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Furthermore, we may be required to expend funds to correct defects or to make improvements before a property can be sold. These conditions may limit our ability to dispose of properties and to change our portfolio promptly in order to meet our strategic objectives, which may in turn have a material adverse effect on our financial condition and the market value of our securities. We are also subject to the following risks in connection with sales of our apartment communities:
    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 of 1986, as amended, or the “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 proceeds generated from our property sales; and
 
    federal tax laws limit our ability to profit on the sale of communities that we have owned for less than two years, and this limitation may prevent us from selling communities when market conditions are favorable.
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, condominiums 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.
We May Not Realize the Anticipated Benefits of Past or Future Acquisitions, and the Failure to Integrate Acquired Communities and New Personnel Successfully Could Create Inefficiencies. We have selectively acquired in the past, and if presented with attractive opportunities we intend to selectively acquire in the future, apartment communities that meet our investment criteria. Our acquisition activities and their success are subject to the following risks:
    we may be unable to obtain financing for acquisitions on favorable terms or at all;
 
    even if we are able to finance the acquisition, cash flow from the acquisition may be insufficient to meet our required principal and interest payments on the acquisition;
 
    even if we enter into an acquisition agreement for an apartment community, we may be unable to complete the acquisition after incurring certain acquisition-related costs;
 
    we may incur significant costs and divert management attention in connection with the evaluation and negotiation of potential acquisitions, including potential acquisitions that we are subsequently unable to complete;

 

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    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 may invest additional amounts in it with the intention of increasing profitability, and these additional investments may not produce the anticipated improvements in profitability; and
 
    we may be unable to quickly and efficiently integrate acquired apartment communities and new personnel into our existing operations, and the failure to successfully integrate such apartment communities or personnel will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.
In the past, other real estate investors, including insurance companies, pension and investment funds, developer partnerships, investment companies and other public and private apartment REITs, have competed with us to acquire existing properties and to develop new properties, and such competition in the future may make it more difficult for us to pursue attractive investment opportunities on favorable terms, which could adversely affect growth.
Development and Construction Risks Could Impact Our Profitability. In the past we have selectively pursued the development and construction of apartment communities, and we intend to do so in the future as appropriate opportunities arise. Development activities have been, and in the future may be, conducted through wholly owned affiliated companies or through joint ventures with unaffiliated parties. Our development and construction activities are subject to the following risks:
    we may be unable to obtain construction financing for development activities under favorable terms, including but not limited to interest rates, maturity dates and/or loan to value ratios, or at all which could cause us to delay or even abandon potential developments;
 
    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, could delay initial occupancy dates for all or a portion of a development community, and could require us to abandon our activities entirely with respect to a project for which we are unable to obtain permits or authorizations;
 
    yields may be less than anticipated as a result of delays in completing projects, costs that exceed budget and/or higher than expected concessions for lease up and lower rents than pro forma;
 
    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 communities 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.

 

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In some cases in the past, the costs of upgrading acquired communities 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.
Bankruptcy of Developers in Our Development Joint Ventures Could Impose Delays and Costs on Us With Respect to the Development of Our Communities and May Adversely Affect Our Financial Condition and Results of Operations. The bankruptcy of one of the developers in any of our development joint ventures could materially and adversely affect the relevant property or properties. If the relevant joint venture through which we have invested in a property has incurred recourse obligations, the discharge in bankruptcy of the developer may require us to honor a completion guarantee and therefore might result in our ultimate liability for a greater portion of those obligations than we would otherwise bear.
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.
We Could Incur Significant Insurance Costs and Some Potential Losses May Not Be Adequately 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 which may not be adequately covered under our insurance program. In addition, we will sustain losses due to insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess of applicable coverage.
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 UDR’s stockholders.
As a result of our substantial real estate holdings, the cost of insuring our apartment communities is a significant component of expense. Insurance premiums are subject to significant increases and fluctuations, which can be widely outside of our control. We insure our properties with insurance companies that we believe have a good rating at the time our policies are put into effect. The financial condition of one or more of our insurance companies that we hold policies with may be negatively impacted resulting in their inability to pay on future insurance claims. Their inability to pay future claims may have a negative impact on our financial results. In addition, the failure of one or more insurance companies may increase the costs to renew our insurance policies or increase the cost of insuring additional properties and recently developed or redeveloped properties.
Failure to Succeed in New Markets May Limit Our Growth. We have acquired in the past, and we may acquire in the future if appropriate opportunities arise, apartment communities that are outside of our existing markets. Entering into new markets may expose us to a variety of risks, 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 hire and retain key personnel;
 
    lack of familiarity with local governmental and permitting procedures; and
 
    inability to achieve budgeted financial results.

 

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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.
In addition, our properties are subject to various federal, state and local environmental, health and safety laws, including laws governing the management of wastes and underground and aboveground storage tanks. Noncompliance with these environmental, health and safety laws could subject us to liability. Changes in laws could increase the potential costs of compliance with environmental laws, health and safety laws or increase liability for noncompliance. This may result in significant unanticipated expenditures or may otherwise materially and adversely affect our operations.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain, or may have contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that ACM be properly managed and maintained and may impose fines or penalties on owners, operators or employers for non-compliance with those requirements.
These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM into the environment.
We cannot assure you that costs or liabilities incurred as a result of environmental issues will not affect our ability to make distributions to our shareholders, or that such costs or liabilities will not have a material adverse effect on our financial condition and results of operations.
Our Properties May Contain or Develop Harmful Mold or Suffer from Other Indoor Air Quality Issues, Which Could Lead to Liability for Adverse Health Effects or Property Damage or Cost for Remediation. When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and bacteria. Indoor exposure to airborne toxins or irritants can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our tenants or others if property damage or personal injury occurs.
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.

 

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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 net operating income 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 that may be 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.
Actual or Threatened Terrorist Attacks May Have an Adverse Effect on Our Business and Operating Results and Could Decrease the Value of Our Assets. Actual or threatened 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.
We May Experience a Decline in the Fair Value of Our Assets and Be Forced to Recognize Impairment Charges, Which Could Materially and Adversely Impact Our Financial Condition, Liquidity and Results of Operations and the Market Price of UDR’s Common Stock. A decline in the fair value of our assets may require us to recognize an impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we are required to recognize asset impairment charges in the future, these charges could materially and adversely affect our financial condition, liquidity, results of operations and the per share trading price of UDR’s common stock.
Any Material Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an Adverse Effect on UDR’s 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 UDR’s stock price.
Our Business and Operations Would Suffer in the Event of System Failures. Despite system redundancy, the implementation of security measures and the existence of a disaster recovery plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war, and telecommunication failures. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information and to manage or support a variety of our business processes, including financial transactions and keeping of records, which may include personal identifying information of tenants and lease data. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential tenant information, such as individually identifiable information relating to financial accounts. Although we take steps to protect the security of the data maintained in our information systems, it is possible that our security measures will not be able to prevent the systems’ improper functioning, or the improper disclosure of personally identifiable information, such as in the event of cyber attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could materially and adversely affect us.
Our Success Depends on Our Senior Management. Our success depends upon the retention of our senior management, whose continued service is not guaranteed. We may not be able to find qualified replacements for the individuals who make up our senior management if their services should no longer be available to us. 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.

 

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We May be Adversely Affected by New Laws and Regulations. The United States Administration and Congress have enacted, or called for consideration of, proposals relating to a variety of issues, including with respect to health care, financial regulation reform, climate control, executive compensation and others. We believe that these and other potential proposals could have varying degrees of impact on us ranging from minimal to material. At this time, we are unable to predict with certainty what level of impact specific proposals could have on us.
Certain rulemaking and administrative efforts that may have an impact on us focus principally on the areas perceived as contributing to the global financial crisis and the recent economic downturn. These initiatives have created a degree of uncertainty regarding the basic rules governing the real estate industry and many other businesses that is unprecedented in the United States at least since the wave of lawmaking and regulatory reform that followed in the wake of the Great Depression. The federal legislative response in this area culminated in the enactment on July 21, 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking by regulatory authorities; thus, the impact on us may not be known for an extended period of time. The Dodd-Frank Act, including future rules implementing its provisions and the interpretation of those rules, along with other legislative and regulatory proposals that are proposed or pending in the United States Congress, may limit our revenues, impose fees or taxes on us, and/or intensify the regulatory framework in which we operate in ways that are not currently identifiable.
Changing laws, regulations and standards relating to corporate governance and public disclosure in particular, including certain provisions of the Dodd-Frank Act and the rules and regulations promulgated thereunder, have created uncertainty for public companies like ours and could significantly increase the costs and risks associated with accessing the U.S. public markets. Because we are committed to maintaining high standards of internal control over financial reporting, corporate governance and public disclosure, our management team will need to devote significant time and financial resources to comply with these evolving standards for public companies. We intend to continue to invest appropriate resources to comply with both existing and evolving standards, and this investment has resulted and will likely continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
The Adoption of Derivatives Legislation by Congress Could Have an Adverse Impact on our Ability to Hedge Risks Associated with our Business. The Dodd-Frank Act regulates derivative transactions, which include certain instruments used in our risk management activities. The Dodd-Frank Act contemplates that most swaps will be required to be cleared through a registered clearing facility and traded on a designated exchange or swap execution facility. There are some exceptions to these requirements for entities that use swaps to hedge or mitigate commercial risk. While we may ultimately be eligible for such exceptions, the scope of these exceptions is currently uncertain, pending further definition through rulemaking proceedings. Although the Dodd-Frank Act includes significant new provisions regarding the regulation of derivatives, the impact of those requirements will not be known definitively until regulations have been adopted by the SEC and the Commodities Futures Trading Commission. The new legislation and any new regulations could increase the operational and transactional cost of derivatives contracts and affect the number and/or creditworthiness of available hedge counterparties to us.
Changes in the System for Establishing U.S. Accounting Standards May Materially and Adversely Affect Our Reported Results of Operations. Accounting for public companies in the United States has historically been conducted in accordance with generally accepted accounting principles as in effect in the United States (“GAAP”). GAAP is established by the Financial Accounting Standards Board (the “FASB”), an independent body whose standards are recognized by the SEC as authoritative for publicly held companies. The International Accounting Standards Board (the “IASB”) is a London-based independent board established in 2001 and charged with the development of International Financial Reporting Standards (“IFRS”). IFRS generally reflects accounting practices that prevail in Europe and in developed nations around the world.
IFRS differs in material respects from GAAP. Among other things, IFRS has historically relied more on “fair value” models of accounting for assets and liabilities than GAAP. “Fair value” models are based on periodic revaluation of assets and liabilities, often resulting in fluctuations in such values as compared to GAAP, which relies more frequently on historical cost as the basis for asset and liability valuation.

 

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We are monitoring the SEC’s activity with respect to the proposed adoption of IFRS by United States public companies. It is unclear at this time how the SEC will propose that GAAP and IFRS be harmonized if the proposed change is adopted. In addition, switching to a new method of accounting and adopting IFRS will be a complex undertaking. We may need to develop new systems and controls based on the principles of IFRS. Since these are new endeavors, and the precise requirements of the pronouncements ultimately to be adopted are not now known, the magnitude of costs associated with this conversion are uncertain.
We are currently evaluating the impact of the adoption of IFRS on our financial position and results of operations. Such evaluation cannot be completed, however, without more clarity regarding the specific IFRS standards that will be adopted. Until there is more certainty with respect to the IFRS standards to be adopted, prospective investors should consider that our conversion to IFRS could have a material adverse impact on our reported results of operations.
Risks Related to Our Indebtedness and Financings
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 UDR’s distribution requirements to maintain its status as a REIT for federal income tax purposes. In addition, 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. We are also 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, increase our financing costs and impact our ability to make distributions to UDR’s stockholders.
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 UDR’s 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;
 
    competition from other apartment communities;
 
    changes in interest rates and the availability of financing;
 
    changes in governmental regulations and the related costs of compliance; 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 an apartment 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.
Our 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.

 

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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. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted.
Failure To Maintain Our Current Credit Ratings Could Adversely Affect Our Cost of Funds, Related Margins, Liquidity, and Access to Capital Markets. Moody’s and Standard & Poor’s, the major debt rating agencies, routinely evaluate our debt and have given us ratings on our senior unsecured debt. These ratings are based on a number of factors, which included their assessment of our financial strength, liquidity, capital structure, asset quality, and sustainability of cash flow and earnings. Due to changes in market conditions, we may not be able to maintain our current credit ratings, which could adversely affect our cost of funds and related margins, liquidity, and access to capital markets.
Disruptions in Financial Markets May Adversely Impact Availability and Cost of Credit and Have Other Adverse Effects on Us and the Market Price of UDR’s Stock. Our ability to make scheduled payments or to refinance debt obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond our control. During the past few years, the United States stock and credit markets have experienced significant price volatility, dislocations and liquidity disruptions, which have caused market prices of many stocks to fluctuate substantially and the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in some cases have resulted in the unavailability of financing. The recent downgrade of the U.S. credit rating by Standard & Poor’s and the ongoing European debt crisis have contributed to the instability in global credit markets. Continued uncertainty in the stock and credit markets may negatively impact our ability to access additional financing for acquisitions, development of our properties and other purposes at reasonable terms, which may negatively affect our business. Additionally, due to this uncertainty, we may be unable to refinance our existing indebtedness or the terms of any refinancing may not be as favorable as the terms of our existing indebtedness. If we are not successful in refinancing this debt when it becomes due, we may be forced to dispose of properties on disadvantageous terms, which might adversely affect our ability to service other debt and to meet our other obligations. A prolonged downturn in the financial markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. These events also may make it more difficult or costly for us to raise capital through the issuance of UDR’s common or preferred stock. The disruptions in the financial markets have had and may continue to have a material adverse effect on the market value of UDR’s common shares and other adverse effects on us and our business.
Prospective buyers of our properties may also experience difficulty in obtaining debt financing which might make it more difficult for us to sell properties at acceptable pricing levels. Tightening of credit in financial markets and high unemployment rates may also adversely affect the ability of tenants to meet their lease obligations and for us to continue increasing rents on a prospective basis. Disruptions in the credit and financial markets may also have other adverse effects on us and the overall economy.
A Change in U.S. Government Policy Regarding Fannie Mae or Freddie Mac Could Have a Material Adverse Impact on Our Business. Fannie Mae and Freddie Mac are a major source of financing for secured multifamily rental real estate. We and other multifamily companies depend heavily on Fannie Mae and Freddie Mac to finance growth by purchasing or guaranteeing apartment loans. In September 2008, the U.S. government assumed control of Fannie Mae and Freddie Mac and placed both companies into a government conservatorship under the Federal Housing Finance Agency. The Administration has proposed potential options for the future of mortgage finance in the U.S. that could involve the phase out of Fannie Mae and Freddie Mac. While we believe Fannie Mae and Freddie Mac will continue to provide liquidity to our sector, should they discontinue doing so, have their mandates changed or reduced or be disbanded or reorganized by the government, it would significantly reduce our access to debt capital and adversely affect our ability to finance or refinance existing indebtedness at competitive rates and it may adversely affect our ability to sell assets. Uncertainty in the future activity and involvement of Fannie Mae and Freddie Mac as a source of financing could negatively impact our ability to make acquisitions and make it more difficult or not possible for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing.
The Soundness of Financial Institutions Could Adversely Affect Us. We have relationships with many financial institutions, including lenders under our credit facilities, and, from time to time, we execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, financial institutions or the financial services industry generally, could result in losses or defaults by these institutions. In the event that the volatility of the financial markets adversely affects these financial institutions or counterparties, we or other parties to the transactions with us may be unable to complete transactions as intended, which could adversely affect our business and results of operations.

 

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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 December 31, 2011, UDR had approximately $1.1 billion of variable rate indebtedness outstanding, which constitutes approximately 28% of total outstanding indebtedness as of such date. As of December 31, 2011, the Operating Partnership had approximately $287.0 million of variable rate indebtedness outstanding, which constitutes approximately 24% of total outstanding indebtedness to third parties 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. The effect of prolonged interest rate increases could negatively impact our ability to make acquisitions and develop properties. 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 UDR’s common and preferred stock and debt securities.
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. In addition, our use of interest rate hedging arrangements may expose us to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor its obligations. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have desired beneficial impact on our results of operations or financial condition. Termination of these hedging agreements typically involves costs, such as transaction fees or breakage costs.
Risks Related to Tax Laws
We Would Incur Adverse Tax Consequences if UDR Failed to Qualify as a REIT. UDR has elected to be taxed as a REIT under the 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 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 UDR’s 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 UDR’s stockholders in computing our taxable income. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, we could not re-elect REIT status until the fifth calendar year after the year in which we first failed to qualify as a REIT. 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 UDR’s 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 UDR’s 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.
REITs May Pay a Portion of Dividends in Common Stock. In December 2009, the Internal Revenue Service issued Revenue Procedure 2010-12, which expanded previously issued temporary guidance relating to certain stock distributions made by publicly traded REITs to satisfy their tax-related distribution requirements. This expanded temporary guidance is intended to permit REITs to limit cash distributions in order to maintain liquidity during the current downturn in economic conditions. Under this expanded guidance, for stock dividends declared on or after January 1, 2008 and before December 31, 2012, with respect to a taxable year ending on or before December 31, 2011, the Internal Revenue Service will treat a distribution of stock by a publicly traded REIT, pursuant to certain stockholder elections to receive either stock or cash, as a taxable distribution of property, provided that, among other conditions, (i) the total amount of cash available for distribution is not less than 10% of the aggregate declared distribution, and (ii) if too many stockholders elect to receive cash, each stockholder electing to receive cash will receive a pro rata amount of cash corresponding to its respective entitlement under the declaration, but in no event will any such electing stockholder receive less than 10% of the stockholder’s entire entitlement in money. The amount of such stock distribution will generally be treated as equal to the amount of cash that could have been received instead. If we pay a portion of our dividends in shares of UDR’s common stock pursuant to this temporary guidance, UDR’s stockholders may receive less cash than they received in distributions in prior years and the market value of our securities may decline.

 

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Dividends Paid By REITs Generally Do Not Qualify for Reduced Tax Rates. In general, the maximum U.S. federal income tax rate for dividends paid to individual U.S. shareholders is 15% (through 2012). Unlike dividends received from a corporation that is not a REIT, our distributions to individual shareholders generally are not eligible for the reduced rates.
UDR 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 UDR’s qualification as a REIT, its 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 arm’s length in nature or are otherwise not respected.
REIT Distribution Requirements Limit Our Available Cash. As a REIT, UDR is 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 UDR’s 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.
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 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 UDR’s ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
We Could Face Possible State and Local Tax Audits and Adverse Changes in State and Local Tax Laws. As discussed in the risk factors above, because UDR is organized and qualifies as a REIT it is generally not subject to federal income taxes, but it is subject to certain state and local taxes. From time to time, changes in state and local tax laws or regulations are enacted, which may result in an increase in our tax liability. A shortfall in tax revenues for states and municipalities in which we own apartment communities may lead to an increase in the frequency and size of such changes. If such changes occur, we may be required to pay additional state and local taxes. These increased tax costs could adversely affect our financial condition and the amount of cash available for the payment of distributions to UDR’s stockholders. In the normal course of business, entities through which we own real estate may also become subject to tax audits. If such entities become subject to state or local tax audits, the ultimate result of such audits could have an adverse effect on our financial condition.

 

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The Operating Partnership Intends to Qualify as a Partnership, But Cannot Guarantee That It Will Qualify. The Operating Partnership intends to qualify as a partnership for federal income tax purposes at any such time that the Operating Partnership admits additional limited partners other than UDR. If classified as a partnership, the Operating Partnership generally will not be a taxable entity and will not incur federal income tax liability. However, the Operating Partnership would be treated as a corporation for federal income tax purposes if it were a “publicly traded partnership,” unless at least 90% of the Operating Partnership’s income was qualifying income as defined in the Code. A “publicly traded partnership” is a partnership whose partnership interests are traded on an established securities market or are readily tradable on a secondary market (or the substantial equivalent thereof). Although the Operating Partnership’s partnership units are not traded on an established securities market, because of the redemption right, the Operating Partnership’s units held by limited partners could be viewed as readily tradable on a secondary market (or the substantial equivalent thereof), and the Operating Partnership may not qualify for one of the “safe harbors” under the applicable tax regulations. Qualifying income for the 90% test generally includes passive income, such as real property rents, dividends and interest. The income requirements applicable to REITs and the definition of qualifying income for purposes of this 90% test are similar in most respects. The Operating Partnership may not meet this qualifying income test. If the Operating Partnership were to be taxed as a corporation, it would incur substantial tax liabilities, and UDR would then fail to qualify as a REIT for tax purposes, unless it qualified for relief under certain statutory savings provisions, and our ability to raise additional capital would be impaired.
Qualifying as a REIT Involves Highly Technical and Complex Provisions of the Code. Our qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, shareholder ownership and other requirements on a continuing basis. Our ability to satisfy the REIT income and asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination and for which we will not obtain independent appraisals, and upon our ability to successfully manage the composition of our income and assets on an ongoing basis. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
Risks Related to Our Organization and Ownership of UDR’s Stock
Changes in Market Conditions and Volatility of Stock Prices Could Adversely Affect the Market Price of UDR’s Common Stock. The stock markets, including the New York Stock Exchange (“NYSE”), on which we list UDR’s common stock, have experienced significant price and volume fluctuations. As a result, the market price of UDR’s common stock could be similarly volatile, and investors in UDR’s common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. In addition to the risks listed in this “Risk Factors” section, a number of factors could negatively affect the price per share of UDR’s common stock, including:
    general market and economic conditions;
 
    actual or anticipated variations in UDR’s quarterly operating results or dividends or UDR’s payment of dividends in shares of UDR’s stock;
 
    changes in our funds from operations or earnings estimates;
 
    difficulties or inability to access capital or extend or refinance existing debt;
 
    decreasing (or uncertainty in) real estate valuations;
 
    changes in market valuations of similar companies;
 
    publication of research reports about us or the real estate industry;
 
    the general reputation of real estate investment trusts and the attractiveness of their equity securities in comparison to other equity securities (including securities issued by other real estate companies);
 
    general stock and bond market conditions, including changes in interest rates on fixed income securities, that may lead prospective purchasers of UDR’s stock to demand a higher annual yield from future dividends;
 
    a change in analyst ratings;

 

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    additions or departures of key management personnel;
 
    adverse market reaction to any additional debt we incur in the future;
 
    speculation in the press or investment community;
 
    terrorist activity which may adversely affect the markets in which UDR’s securities trade, possibly increasing market volatility and causing the further erosion of business and consumer confidence and spending;
 
    failure to qualify as a REIT;
 
    strategic decisions by us or by our competitors, such as acquisitions, divestments, spin-offs, joint ventures, strategic investments or changes in business strategy;
 
    failure to satisfy listing requirements of the NYSE;
 
    governmental regulatory action and changes in tax laws; and
 
    the issuance of additional shares of UDR’s common stock, or the perception that such sales might occur, including under UDR’s at-the-market equity distribution program.
Many of the factors listed above are beyond our control. These factors may cause the market price of shares of UDR’s common stock to decline, regardless of our financial condition, results of operations, business or our prospects.
We May Change the Dividend Policy for UDR’s Common Stock in the Future. The decision to declare and pay dividends on UDR’s common stock, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of our board of directors and will depend on our earnings, funds from operations, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the annual distribution requirements under the REIT provisions of the Code, state law and such other factors as our board of directors considers relevant. Any change in our dividend policy could have a material adverse effect on the market price of UDR’s common stock.
Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in UDR’s 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 UDR’s 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 UDR’s 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.

 

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Limitations on Share Ownership and Limitations on the Ability of UDR’s Stockholders to Effect a Change in Control of Our Company Restricts the Transferability of UDR’s Stock and May Prevent Takeovers That are Beneficial to UDR’s 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 Code, during the last half of any taxable year. Our charter contains ownership and transfer restrictions relating to UDR’s 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. Absent such an exemption from our board of directors, the transfer of UDR’s stock to any person in excess of the applicable ownership limit, or any transfer of shares of such stock in violation of the ownership requirements of the Code for REITs, will be considered null and void, and the intended transferee of such stock will acquire no rights in such shares. These provisions of our charter 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 UDR’s stockholders or might otherwise be in UDR’s stockholders’ best interests.
Item 1B. UNRESOLVED STAFF COMMENTS
None.

 

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Item 2. PROPERTIES
At December 31, 2011, our consolidated apartment portfolio included 163 communities located in 24 markets, with a total of 47,343 completed apartment homes.
We lease approximately 38,000 square feet of office space in Highlands Ranch, Colorado for our corporate headquarters. We also lease an additional 3,000 square feet for a regional office in Richmond, Virginia.
The tables below set forth a summary of real estate portfolio by geographic market of the Company and of the Operating Partnership at December 31, 2011.
SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2011
UDR, INC.
                                                                 
                                                            Average  
    Number of     Number of     Percentage of     Carrying                     Average     Home Size  
    Apartment     Apartment     Carrying     Value     Encumbrances     Cost per     Physical     Square  
    Communities     Homes     Value     (in thousands)     (in thousands)     Home     Occupancy     Feet  
WESTERN REGION
                                                               
Orange County, CA
    13       4,254       10.1 %   $ 814,951     $ 336,153     $ 191,573       94.9 %     835  
San Francisco, CA
    11       2,436       8.0 %     645,240       105,236       264,877       94.3 %     833  
Los Angeles, CA
    6       1,502       5.5 %     445,931       166,213       296,891       95.4 %     939  
Seattle, WA
    11       2,165       5.8 %     471,410       68,342       217,741       95.8 %     882  
San Diego, CA
    2       366       0.7 %     55,679             152,131       94.8 %     865  
Monterey Peninsula, CA
    7       1,565       1.9 %     154,030             98,422       93.8 %     724  
Inland Empire, CA
    2       654       1.3 %     100,946       78,325       154,353       94.9 %     955  
Sacramento, CA
    2       914       0.9 %     69,058             75,556       93.1 %     820  
Portland, OR
    3       716       0.9 %     70,383       41,934       98,300       95.5 %     918  
MID-ATLANTIC REGION
                                                               
Metropolitan DC
    14       4,500       11.2 %     907,496       196,232       201,666       96.2 %     963  
Baltimore, MD
    11       2,301       3.7 %     300,389       131,794       130,547       96.5 %     1,001  
Richmond, VA
    6       2,211       2.3 %     189,470       67,089       85,694       95.9 %     966  
Norfolk, VA
    6       1,438       1.1 %     86,194             59,940       94.7 %     1,016  
Boston, MA
    4       1,179       3.9 %     313,565       85,463       265,958       96.3 %     1,097  
New York, NY
    4       1,916       14.5 %     1,171,983       241,094       611,682       96.4 %     761  
Other Mid-Atlantic
    3       844       0.8 %     61,393             72,741       95.9 %     963  
SOUTHEASTERN REGION
                                                               
Tampa, FL
    11       3,804       4.2 %     336,859       20,561       88,554       95.5 %     963  
Orlando, FL
    11       3,167       3.4 %     274,931       85,999       86,811       95.0 %     978  
Nashville, TN
    8       2,260       2.3 %     182,764       24,591       80,869       96.3 %     933  
Jacksonville, FL
    5       1,857       2.0 %     159,213             85,737       94.5 %     913  
Other Florida
    4       1,184       1.4 %     113,640       40,133       95,980       93.7 %     1,035  
SOUTHWESTERN REGION
                                                               
Dallas, TX
    10       3,581       5.1 %     415,779       98,273       116,107       95.5 %     889  
Phoenix, AZ
    6       1,744       2.1 %     171,782       31,695       98,499       94.6 %     970  
Austin, TX
    2       640       1.2 %     98,146       25,079       153,350       91.8 %     888  
 
                                               
Total Operating Communities
    162       47,198       94.3 %     7,611,232       1,844,206     $ 161,262       95.3 %     920  
 
                                               
Real Estate Under Development (a)
    1       145       3.1 %     248,746       25,076                          
Land
                1.6 %     125,824                                
Other
                1.0 %     88,669       22,271                          
 
                                                     
Total Real Estate Owned
    163       47,343       100.0 %   $ 8,074,471     $ 1,891,553                          
 
                                                     
     
(a)   The Company is currently developing seven wholly-owned communities with 2,108 apartment homes, 145 of which have been completed.

 

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SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2011
UNITED DOMINION REALTY, L.P.
                                                                 
                                                            Average  
    Number of     Number of     Percentage of     Carrying                     Average     Home Size  
    Apartment     Apartment     Carrying     Value     Encumbrances     Cost per     Physical     (In Square  
    Communities     Homes     Value     (In thousands)     (In thousands)     Home     Occupancy     Feet)  
WESTERN REGION
                                                               
Orange County, CA
    11       3,899       17.3 %   $ 725,615     $ 336,153     $ 186,103       94.9 %     812  
San Francisco, CA
    9       2,185       12.9 %     543,953       105,236       248,949       94.0 %     809  
Los Angeles, CA
    3       463       3.0 %     125,104       8,663       270,201       95.4 %     960  
Seattle, WA
    5       932       4.9 %     208,097       32,044       223,280       96.1 %     865  
San Diego, CA
    2       366       1.3 %     55,679             152,131       94.8 %     865  
Monterey Peninsula, CA
    7       1,565       3.7 %     154,030             98,422       93.8 %     724  
Inland Empire, CA
    1       414       1.7 %     69,584       54,308       168,077       94.8 %     989  
Sacramento, CA
    2       914       1.6 %     69,058             75,556       93.1 %     820  
Portland, OR
    3       716       1.7 %     70,383       41,934       98,300       95.5 %     918  
MID-ATLANTIC REGION
                                                               
Metropolitan DC
    8       2,565       13.8 %     582,283       98,452       227,011       95.6 %     948  
Baltimore, MD
    5       994       3.5 %     147,209       83,682       148,098       95.6 %     971  
Boston, MA
    2       833       4.1 %     172,991       60,702       207,672       96.1 %     1,120  
New York, NY
    2       1,000       13.9 %     586,529       205,526       586,529       95.6 %     687  
SOUTHEASTERN REGION
                                                               
Tampa, FL
    3       1,154       2.6 %     111,019             96,203       96.0 %     1,029  
Nashville, TN
    6       1,612       3.1 %     128,836             79,923       96.3 %     925  
Jacksonville, FL
    1       400       1.0 %     42,692             106,730       94.3 %     964  
Other Florida
    1       636       1.8 %     77,499       40,133       121,854       93.2 %     1,130  
SOUTHWESTERN REGION
                                                               
Dallas, TX
    2       1,348       4.4 %     184,158       91,117       136,616       95.8 %     909  
Phoenix, AZ
    3       914       1.7 %     72,919       31,695       79,781       95.0 %     1,000  
Austin, TX
    1       250       0.9 %     37,631             150,512       85.5 %     883  
 
                                               
Total Operating Communities
    77       23,160       98.9 %     4,165,269       1,189,645       179,848       95.0 %     890  
Land and other
                1.1 %     40,029                                
 
                                                     
Total Real Estate Owned
    77       23,160       100.0 %   $ 4,205,298     $ 1,189,645                          
 
                                                     

 

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Item 3. LEGAL PROCEEDINGS
We are subject to various legal proceedings and claims arising in the ordinary course of business. We cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. We believe 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.
Item 4. MINE SAFETY DISCLOSURES
Not Applicable.

 

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PART II
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
UDR, Inc.:
Common Stock
UDR, Inc.’s common stock has been listed on the New York Stock Exchange, or “NYSE”, under the symbol “UDR” since May 7, 1990. The following tables set forth the quarterly high and low sale prices per common share reported on the NYSE for each quarter of the last two fiscal years. Distribution information for common stock reflects distributions declared per share for each calendar quarter and paid at the end of the following month.
                                                 
    2011     2010  
                    Distributions                     Distributions  
    High     Low     Declared     High     Low     Declared  
 
                                               
Quarter ended March 31,
  $ 24.42     $ 22.19     $ 0.185     $ 18.26     $ 14.47     $ 0.180  
 
                                               
Quarter ended June 30,
  $ 26.46     $ 23.42     $ 0.200     $ 21.82     $ 17.57     $ 0.180  
 
                                               
Quarter ended September 30,
  $ 27.26     $ 21.18     $ 0.200     $ 22.26     $ 17.93     $ 0.185  
 
                                               
Quarter ended December 31,
  $ 25.67     $ 20.04     $ 0.215     $ 24.10     $ 20.99     $ 0.185  
On February 17, 2012, the closing sale price of our common stock was $25.73 per share on the NYSE and there were  5,563  holders of record of the 223,340,334 outstanding shares of our common stock.
We have determined that, for federal income tax purposes, approximately 64% of the distributions for 2011 represented ordinary income, 10% represented long-term capital gain, and 26% represented unrecaptured section 1250 gain.
UDR pays regular quarterly distributions to holders of its common stock. Future distributions will be at the discretion of our Board of Directors and will depend on our actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Code, and other factors.
Series E Preferred Stock
The Series E Cumulative Convertible Preferred Stock (“Series E”) has no stated par value and a liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each share of the Series E is convertible at any time and from time to time at the holder’s option into 1.083 shares of our common stock. The holders of the Series E are entitled to vote on an as-converted basis as a single class in combination with the holders of common stock at any meeting of our stockholders for the election of directors or for any other purpose on which the holders of common stock are entitled to vote. The Series E has no stated maturity and is not subject to any sinking fund or any mandatory redemption. In connection with a special dividend (declared on November 5, 2008), the Company reserved for issuance upon conversion of the Series E additional shares of common stock to which a holder of the Series E would have received if the holder had converted the Series E immediately prior to the record date for this special dividend.
Distributions declared on the Series E for the year ended December 31, 2011 were $1.33 per share or $0.3322 per quarter. The Series E is not listed on any exchange. At December 31, 2011, a total of 2,803,812 shares of the Series E were outstanding.

 

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Series F Preferred Stock
We are authorized to issue up to 20,000,000 shares of our Series F (“Series F”) Preferred Stock. The Series F Preferred Stock may be purchased by holders of our Operating Partnership Units, or OP Units, described below under “Operating Partnership Units,” at a purchase price of $0.0001 per share. OP Unitholders are entitled to subscribe for and purchase one share of the Series F for each OP Unit held. At December 31, 2011, a total of 2,534,846 shares of the Series F were outstanding at a value of $253. Holders of the Series F are entitled to one vote for each share of the Series F they hold, voting together with the holders of our common stock, on each matter submitted to a vote of security holders at a meeting of our stockholders. The Series F does not entitle its holders to any other rights, privileges or preferences.
Series G Preferred Stock
In May 2007, UDR issued 5,400,000 shares of our 6.75% Series G Cumulative Redeemable Preferred Stock (“Series G”). The Series G has no stated par value and a liquidation preference of $25 per share. The Series G generally has no voting rights except under certain limited circumstances and as required by law. The Series G has no stated maturity and is not subject to any sinking fund or mandatory redemption and is not convertible into any of our other securities. The Series G is not redeemable prior to May 31, 2012. On or after this date, the Series G may be redeemed for cash at our option, in whole or in part, at a redemption price of $25 per share plus accrued and unpaid dividends. During the year ended December 31, 2011, the Company repurchased 141,200 shares of Series G, for less than the liquidation preference of $25 per share resulting in a loss of $175,000 to our net income attributable to common stockholders. Distributions declared on the Series G for the year ended December 31, 2011 was $1.69 per share. The Series G is listed on the NYSE under the symbol “UDRPrG”. At December 31, 2011, a total of 3,264,362 shares of the Series G were outstanding.
Distribution Reinvestment and Stock Purchase Plan
We have a Distribution Reinvestment and Stock Purchase Plan under which holders of our common stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of our common stock. Stockholders who do not participate in the plan continue to receive distributions as and when declared. As of February 17, 2012, there were approximately  2,607  participants in the plan.
United Dominion Realty, L.P.:
Operating Partnership Units
There is no established public trading market for United Dominion Realty, L.P.’s Operating Partnership Units. From time to time we issue shares of our common stock in exchange for OP Units tendered to the Operating Partnership, for redemption in accordance with the provisions of the Operating Partnership’s limited partnership agreement. At December 31, 2011, there were 184,281,253 OP Units outstanding in the Operating Partnership, of which 174,859,951 OP Units or 94.9% were owned by UDR and 9,421,302 OP Units or 5.1% were owned by limited partners. Under the terms of the Operating Partnership’s limited partnership agreement, the holders of OP Units have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the holder in exchange for a cash payment based on the market value of our common stock at the time of redemption. However, the Operating Partnership’s obligation to pay the cash amount is subject to the prior right of the Company to acquire such OP Units in exchange for either the cash amount or the number of shares of our common stock equal to the number of OP Units being redeemed. During 2011, we issued a total of 12,511 shares of common stock upon redemption of OP Units.
Purchases of Equity Securities
In February 2006, UDR’s Board of Directors authorized a 10,000,000 share repurchase program. In January 2008, UDR’s Board of Directors authorized a new 15,000,000 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, no shares of common stock were repurchased under these programs during the quarter ended December 31, 2011.

 

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The following table set forth certain information regarding our common stock repurchases during the quarter ended December 31, 2011.
                                 
                    Total Number of Shares     Maximum Number of  
    Total Number     Average     Purchased as Part     Shares that May Yet Be  
    of Shares     Price per     of Publicly Announced     Purchased Under the  
Period   Purchased     Share     Plans or Programs     Plans or Programs (1)  
 
                               
Beginning Balance
    9,967,490     $ 22.00       9,967,490       15,032,510  
 
                               
October 1, 2011 through October 31, 2011
                      15,032,510  
November 1, 2011 through November 30, 2011
                      15,032,510  
December 1, 2011 through December 31, 2011
                      15,032,510  
 
                       
Balance as of December 31, 2011
    9,967,490     $ 22.00       9,967,490       15,032,510  
 
                       
     
(1)   This number reflects the amount of shares that were available for purchase under our 10,000,000 share repurchase program authorized in February 2006 and our 15,000,000 share repurchase program authorized in January 2008.
Comparison of Five- year Cumulative Total Returns
The following graph compares the five-year cumulative total returns for UDR common stock with the comparable cumulative return of the NAREIT Equity REIT Index, Standard & Poor’s 500 Stock Index, the NAREIT Equity Apartment Index and the MSCI US REIT Index. Each graph assumes that $100 was invested on December 31 (of the initial year shown in the graph), in each of our common stock and the indices presented. Historical stock price performance is not necessarily indicative of future stock price performance. The comparison assumes that all dividends are reinvested.
()
                                                 
    Period Ending  
Index   12/31/06     12/31/07     12/31/08     12/31/09     12/31/10     12/31/11  
UDR, Inc.
    100.00       65.38       53.19       67.84       100.87       111.19  
NAREIT Equity Appartment Index
    100.00       74.57       55.83       72.81       107.05       123.22  
US MSCI REITS
    100.00       83.18       51.60       66.36       85.26       92.67  
S&P 500
    100.00       105.49       66.46       84.05       96.71       98.76  
NAREIT Equity REIT Index
    100.00       84.31       52.50       67.20       85.98       93.11  
The performance graph and the related chart and text, are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of ours, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

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Item 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and other information of UDR, Inc. and of the Operating Partnership as of and for each of the years in the five-year period ended December 31, 2011. The table should be read in conjunction with each of UDR, Inc.’s and the Operating Partnership’s respective consolidated financial statements and the notes thereto, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Report.
                                         
    UDR, Inc.  
    Years Ended December 31,  
    (In thousands, except per share data  
    and apartment homes owned)  
    2011     2010     2009     2008     2007  
OPERATING DATA:
                                       
 
                                       
Rental income (a)
  $ 691,263     $ 574,084     $ 547,820     $ 512,683     $ 458,159  
(Loss)/income from continuing operations (a)
    (111,636 )     (115,804 )     (97,480 )     (66,536 )     40,008  
Income from discontinued operations (a)
    132,221       9,216       5,857       810,403       186,722  
Consolidated net income/(loss)
    20,585       (106,588 )     (91,623 )     743,867       226,730  
Distributions to preferred stockholders
    9,311       9,488       10,912       12,138       13,910  
Net income/(loss) attributable to common stockholders
    10,537       (112,362 )     (95,858 )     688,708       198,958  
Common distributions declared
    165,590       126,086       127,066       308,313       177,540  
Special Dividend declared
                      177,074        
 
 
Earnings per share — basic and diluted:
                                       
(Loss)/income from continuing operations attributable to common stockholders
  $ (0.60 )   $ (0.73 )   $ (0.68 )   $ (0.93 )   $ 0.09  
Income from discontinued operations (a)
    0.66       0.06       0.04       6.22       1.39  
Net income/(loss) attributable to common stockholders
    0.05       (0.68 )     (0.64 )     5.29       1.48  
Weighted average number of Common Shares outstanding — basic and diluted
    201,294       165,857       149,090       130,219       134,016  
Weighted average number of Common Shares outstanding, OP Units and Common Stock equivalents outstanding — diluted (b)
    214,086       176,900       159,561       142,904       147,199  
 
                                       
Common distributions declared
  $ 0.80     $ 0.73     $ 0.85     $ 2.29     $ 1.22  
 
                                       
Balance Sheet Data:
                                       
Real estate owned, at cost (c)
  $ 8,074,471     $ 6,881,347     $ 6,315,047     $ 5,831,753     $ 5,956,481  
Accumulated depreciation (c)
    1,831,727       1,638,326       1,351,293       1,078,689       1,371,759  
Total real estate owned, net of accumulated depreciation (c)
    6,242,744       5,243,021       4,963,754       4,753,064       4,584,722  
Total assets
    6,721,354       5,529,540       5,132,617       5,143,805       4,800,454  
Secured debt (c)
    1,891,553       1,963,670       1,989,434       1,462,471       1,137,936  
Unsecured debt
    2,026,817       1,603,834       1,437,155       1,798,662       2,341,895  
Total debt
    3,918,370       3,567,504       3,426,589       3,261,133       3,479,831  
Stockholders’ equity
    2,314,050       1,606,343       1,395,441       1,415,989       941,205  
Number of Common Shares outstanding
    219,650       182,496       155,465       137,423       133,318  

 

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    UDR, Inc.  
    Years Ended December 31,  
    (In thousands, except per share data  
    and apartment homes owned)  
    2011     2010     2009     2008     2007  
 
                                       
OPERATING DATA (continued):
                                       
Other Data (c)
                                       
Total apartments owned (at end of year)
    47,343       48,553       45,913       44,388       65,867  
Weighted average number of apartment homes owned during the year
    48,531       48,531       45,113       46,149       69,662  
 
                                       
Cash Flow Data:
                                       
Cash provided by operating activities
  $ 244,236     $ 214,180     $ 229,383     $ 179,754     $ 269,281  
Cash (used in)/provided by investing activities
    (1,053,182 )     (583,754 )     (158,045 )     302,304       (90,100 )
Cash provided by/(used in) financing activities
    811,963       373,075       (78,093 )     (472,537 )     (178,105 )
 
                                       
Funds from Operations (b):
                                       
Funds from operations — basic
  $ 269,856     $ 189,045     $ 180,858     $ 204,213     $ 238,722  
Funds from operations — diluted
    273,580       192,771       184,582       207,937       242,446  
     
(a)   Reclassified to conform to current year presentation in accordance with ACS Topic 205-20, Presentation of Financial Statements — Discontinued Operations, as described in Note 4 to the Consolidated Financial Statements included in this Report.
 
(b)   Funds from operations, or FFO, is defined as net income (computed in accordance with generally accepted accounting principles), excluding impairment write-downs of depreciable real estate or of investments in non-consolidated investees that are driven by measurable decreases in the fair value of depreciable real estate held by the investee, gains (or losses) from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s definition issued in April 2002. 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 flows 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.
 
    RE3 is our subsidiary that focuses on development, and land entitlement. 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. To determine whether gains from RE3 will be included in FFO, the Company considers whether the operating asset has been a short term investment. 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 produces a profit that differs from the traditional long-term investment in real estate for REITs.
 
    See “Funds from Operations” below for a reconciliation of FFO and Net income/(loss) attributable to UDR, Inc.
 
(c)   Includes amounts classified as Held for Sale, where applicable.

 

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United Dominion Realty, L.P.
Years Ended December 31,
(In thousands, except per OP unit data
and apartment homes owned)
                                         
    2011     2010     2009     2008     2007  
OPERATING DATA:
                                       
 
                                       
Rental income (a)
  $ 367,245     $ 319,089     $ 322,456     $ 305,016     $ 266,387  
(Loss)/income from continuing operations (a)
    (34,038 )     (25,658 )     (7,160 )     8,045       114,467  
Income from discontinued operations
    64,267       4,964       3,115       490,863       79,963  
Consolidated net income/(loss)
    30,229       (20,694 )     (4,045 )     498,908       194,430  
Net income/(loss) attributable to OP unitholders
    30,159       (20,735 )     (4,176 )     497,720       193,688  
 
                                       
Earnings per OP unit- basic and diluted:
                                       
(Loss)/income from continuing operations (a)
  $ (0.19 )   $ (0.14 )   $ (0.04 )   $ 0.05     $ 0.69  
Income from discontinued operations
    0.35       0.03       0.02       2.95       0.48  
Net income/(loss) attributable to OP unitholders
    0.17       (0.12 )     (0.02 )     3.00       1.17  
 
 
Weighted average number of OP units outstanding — basic and diluted
    182,448       179,909       178,817       166,163       166,174  
 
                                       
Balance Sheet Data:
                                       
Real estate owned, at cost (b)
  $ 4,205,298     $ 3,706,184     $ 3,640,888     $ 3,569,239       2,685,249  
Accumulated depreciation (b)
    976,358       884,083       717,892       552,369       403,092  
Total real estate owned, net of accumulated depreciation (b)
    3,228,940       2,822,101       2,922,996       3,016,870       2,282,157  
Total assets
    3,292,167       2,861,395       2,961,067       3,254,851       2,909,707  
Secured debt (b)
    1,189,645       1,070,061       1,122,198       851,901       594,845  
Total liabilities
    1,437,665       1,299,772       1,339,319       1,272,101       920,698  
Total partners’ capital
    2,034,792       2,042,241       2,197,753       2,345,825       2,232,404  
Receivable due from General Partner
    192,451       492,709       588,185       375,124       254,256  
Number of OP units outstanding
    184,281       179,909       179,909       166,163       166,163  
 
                                       
Other Data:
                                       
Total apartments owned (at end of year) (b)
    23,160       23,351       23,351       23,351       36,965  
 
                                       
Cash Flow Data:
                                       
Cash provided by operating activities
  $ 156,071     $ 146,604     $ 157,333     $ 168,660     $ 212,727  
Cash (used in)/provided by investing activities
    (226,980 )     (59,458 )     129,628       81,993       75,069  
Cash provided by/(used in) financing activities
    70,693       (86,668 )     (290,109 )     (247,150 )     (287,847 )
     
(a)   Reclassified to conform to current year presentation in accordance with ASC Topic 205-20, Presentation of Financial Statements — Discontinued Operations, as described in Note 4 to the Consolidated Financial Statements included in this Report.
 
(b)   Includes amounts classified as Held for Sale, where applicable.

 

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “likely,” “will,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unfavorable changes in the apartment market, changing economic conditions, the impact of inflation/deflation on rental rates and property operating expenses, expectations concerning availability of capital and the stabilization of the capital markets, the impact of competition and competitive pricing, acquisitions, developments and redevelopments not achieving anticipated results, delays in completing developments, redevelopments and lease-ups on schedule, expectations on job growth, home affordability and demand/supply ratio for multifamily housing, expectations concerning development and redevelopment activities, and expectations on occupancy levels.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
    general economic conditions;
    unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates;
    the failure of acquisitions to achieve anticipated results;
    possible difficulty in selling apartment communities;
    competitive factors that may limit our ability to lease apartment homes or increase or maintain rents;
    insufficient cash flow that could affect our debt financing and create refinancing risk;
    failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders;
    development and construction risks that may impact our profitability;
    potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs to us;
    risks from extraordinary losses for which we may not have insurance or adequate reserves;
    uninsured losses due to insurance deductibles, self-insurance retention, uninsured claims or casualties, or losses in excess of applicable coverage;
    delays in completing developments and lease-ups on schedule;
    our failure to succeed in new markets;
    changing interest rates, which could increase interest costs and affect the market price of our securities;
    potential liability for environmental contamination, which could result in substantial costs to us;
    the imposition of federal taxes if we fail to qualify as a REIT under the Code in any taxable year;
    our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price; and
    changes in real estate laws, tax laws and other laws affecting our business.

 

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A discussion of these and other factors affecting our business and prospects is set forth in Part I, Item 1A. Risk Factors. We encourage investors to review these risk factors.
Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.
The following discussion should be read in conjunction with the consolidated financial statements appearing elsewhere herein and is based primarily on the consolidated financial statements and the accompanying notes for the years ended December 31, 2011, 2010 and 2009 of each of UDR, Inc. and United Domination Realty, L.P.
UDR, Inc.:
Business Overview
We are a self administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, redevelops, and manages apartment communities in select markets throughout the United States. 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 an operating partnership United Dominion Realty, L.P., a Delaware limited partnership.
At December 31, 2011, our consolidated real estate portfolio included 163 communities located in 22 markets with a total of 47,343 completed apartment homes and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 39 communities with 10,400 completed apartment homes.
At December 31, 2011, the Company is developing seven wholly-owned communities with 2,108 apartment homes, 145 of which have been completed.
At December 31, 2011, the Company is redeveloping seven wholly-owned communities with 3,123 apartment homes, 467 of which have been completed.

 

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The following table summarizes our market information by major geographic markets as of December 31, 2011.
                                                         
          Twelve Months Ended  
    As of December 31, 2011     December 31, 2011  
                    Percentage     Total        
    Number of     Number of     of Total     Carrying     Average     Total Income     Net Operating  
    Apartment     Apartment     Carrying     Value     Physical     per Occupied     Income  
SAME COMMUNITIES   Communities     Homes     Value     (in thousands)     Occupancy     Home (a)     (in thousands)  
WESTERN REGION
                                                       
Orange County, CA
    9       3,025       6.5 %   $ 524,771       94.8 %   $ 1,499     $ 36,546  
Seattle, WA
    9       1,725       3.8 %     306,295       95.5 %     1,241       16,746  
Monterey Peninsula, CA
    7       1,565       1.9 %     154,030       93.8 %     1,110       13,305  
San Francisco, CA
    7       1,477       4.5 %     364,336       96.7 %     2,133       26,940  
Los Angeles, CA
    5       919       3.6 %     293,198       95.6 %     1,932       13,376  
Sacramento, CA
    2       914       0.9 %     69,058       93.1 %     882       5,973  
Portland, OR
    3       716       0.9 %     70,383       95.5 %     998       5,570  
Inland Empire, CA
    2       654       1.3 %     100,946       94.9 %     1,379       7,061  
San Diego, CA
    2       366       0.7 %     55,679       94.8 %     1,365       3,775  
 
                                                       
MID-ATLANTIC REGION
                                                       
Metropolitan DC
    10       3,516       8.2 %     665,877       96.9 %     1,669       46,108  
Richmond, VA
    6       2,211       2.3 %     189,470       95.9 %     1,055       19,251  
Baltimore, MD
    10       2,121       3.2 %     254,844       96.5 %     1,316       22,759  
Norfolk VA
    6       1,438       1.1 %     86,194       94.7 %     980       10,865  
Other Mid-Atlantic
    3       844       0.8 %     61,393       95.9 %     1,079       7,410  
 
                                                       
SOUTHEASTERN REGION
                                                       
Tampa, FL
    11       3,804       4.2 %     336,859       95.5 %     980       26,309  
Orlando, FL
    10       2,796       2.8 %     224,069       94.9 %     916       18,884  
Nashville, TN
    8       2,260       2.3 %     182,764       96.3 %     894       14,878  
Jacksonville, FL
    5       1,857       2.0 %     159,213       94.5 %     846       11,083  
Other Florida
    4       1,184       1.4 %     113,640       93.7 %     1,016       8,215  
 
                                                       
SOUTHWESTERN REGION
                                                       
Dallas, TX
    8       2,725       3.5 %     282,940       96.1 %     952       17,341  
Phoenix, AZ
    5       1,362       1.5 %     122,434       94.9 %     900       9,076  
Austin, TX
    1       390       0.7 %     60,517       95.8 %     1,195       2,978  
 
                                         
 
                                                       
Total/Average Same Communities
    133       37,869       58.1 %     4,678,910       95.5 %   $ 1,188     $ 344,449  
 
                                         
Non Matures, Commercial Properties & Other
    29       9,329       39.3 %     3,146,815                          
Total Real Estate Held for Invertment
    162       47,198       97.4 %     7,825,725                          
 
                                               
Real Estate Under Development (b)
    1       145       2.6 %     248,746                          
 
                                               
Total Real Estate Owned
    163       47,343       100.0 %     8,074,471                          
 
                                               
 
                                                       
Total Accumulated Depreciation
                            (1,831,727 )                        
 
                                                     
 
                                                       
Total Real Estate Owned, Net of Accumulated Depreciation
                          $ 6,242,744                          
 
                                                     
     
(a)   Total Income per Occupied Home represents total revenues divided by the product of occupancy and the number of mature apartment homes.
 
(b)   The Company is currently developing seven wholly-owned communities with 2,108 apartment homes, 145 of which have been completed.
We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same Communities segment includes those communities acquired, developed, and stabilized prior to January 1, 2010, and held as of December 31, 2011. 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 sale within the current quarter. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. Our Non-Mature/Other Communities segment includes those communities that were acquired or developed in 2009, 2010, and 2011, sold properties, redevelopment properties, properties classified as real estate held for sale, condominium conversion properties, joint venture properties, properties managed by third parties, and the non-apartment components of mixed use properties.

 

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Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt and equity. 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 and borrowings under credit agreements. We routinely use our unsecured credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we repositioned our portfolio.
We expect to meet our short-term liquidity requirements generally through cash flow provided by operations and borrowings under credit agreements. 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 secured and unsecured borrowings, the issuance of debt or equity securities, and the disposition of properties. We believe that our net cash provided by operations and borrowings under credit agreements will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings under credit agreements, and the issuance of debt or equity securities.
We have a shelf registration statement filed with the Securities and Exchange Commission, or “SEC” which provides for the issuance of an indeterminate amount of Common Stock, Preferred Stock, guarantees of debt securities, warrants, subscription rights, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of issuance.
In September 2009, the Company entered into an equity distribution agreement under which the Company may offer and sell up to 15.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 4,395,601 shares of common stock through this program for aggregate gross proceeds of approximately $104.5 million at a weighted average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $2.1 million, were approximately $102.4 million.
In March 2011, the Company entered into a new equity distribution agreement under which the Company may offer and sell up to 20.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 11,849,079 shares of common stock through this program (of which 419,048 shares were settled subsequent to December 31, 2011) for aggregate gross proceeds of approximately $297.7 million at a weighted average price per share of $25.12. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $6.0 million, were approximately $291.7 million. In September 2011, the Company entered into a new equity distribution agreement in connection with filing a new registration statement on Form S-3. The new equity distribution agreement replaced the March 2011 agreement, and no material changes were made to the equity distribution agreement.
In May 2011, the Company issued $300 million aggregate principal amount of 4.250% senior unsecured notes due June 2018 under its existing shelf registration statement. Interest is payable semiannually beginning in December 2011. The notes were priced at 98.988 % of the principal amount plus accrued interest from May 23, 2011 to yield 4.419% to maturity. The notes are fully and unconditionally guaranteed by the Operating Partnership.
In July 2011, the Company closed a public offering of 20,700,000 shares of its common stock, including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately $496.3 million after underwriting discounts and commissions and estimated offering expenses.
In October 2011, the Company entered into a $900 million unsecured revolving credit facility, replacing the Company’s $600 million credit facility. The Operating Partnership issued a guarantee in connection with the new credit facility, similar to the guarantee it issued under the prior facility. The new facility has an initial term of four years and includes a one-year extension option, and contains an accordion feature that allows the Company to increase the facility to $1.35 billion. Based on the Company’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points. As of December 31, 2011, we had $421.0 million of borrowings outstanding under the credit facility leaving $479.0 million of unused capacity (excluding $3.6 million of letters of credit at December 31, 2011).

 

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In January 2012, the Company issued $400 million aggregate principal amount of 4.625% Medium Term Notes due January 2022. Interest is payable semiannually beginning in July 2012. The notes were priced at 99.100% of the principal amount plus accrued interest from January 10, 2012 to yield 4.739% to maturity. The notes are fully and unconditionally guaranteed by the Operating Partnership.
Future Capital Needs
Future development expenditures are expected to be funded through unsecured or secured credit facilities, proceeds from the issuance of equity or debt securities, the sale of properties and to a lesser extent, with cash flows provided by operating activities. Acquisition activity in strategic markets may be funded through joint ventures, by the reinvestment of proceeds from the sale of properties, through the issuance of equity or debt securities, the issuance of operating partnership units, and the assumption or placement of secured and/or unsecured debt.
During 2012, we have approximately $207.8 million of secured debt maturing, inclusive of principal amortization and net of extension rights of $99.0 million, and $99.4 million of unsecured debt maturing. We anticipate repaying that debt with proceeds from our operations, debt and equity offerings, proceeds from the sales of properties, and by exercising extension rights with respect to the secured debt.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations as well as involves some degree of uncertainty. Estimates are prepared based on management’s assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required.
Capital Expenditures
In conformity with GAAP, we capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
During 2011, $51.9 million or $1,081 per apartment home was spent on recurring capital expenditures. These include revenue enhancing capital expenditures, exterior/interior upgrades, turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as exterior paint, roofs, siding, parking lots, and asset preservation capital expenditures. In addition, major renovations totaled $30.0 million for the year ended December 31, 2011. Total capital expenditures, which in aggregate include recurring capital expenditures and major renovations, of $81.9 million or $1,706 per home was spent on all of our communities, excluding development and commercial properties, for the year ended December 31, 2011.

 

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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:
                                                 
    Year ended December 31,  
    (dollars in thousands, except for per apartment homes)  
                            Per Apartment Home  
    2011     2010     % Change     2011     2010     % Change  
 
                                               
Revenue enhancing improvements
  $ 7,330     $ 15,043       -51.3 %   $ 153     $ 334       -54.2 %
Turnover capital expenditures
    12,905       9,528       35.4 %     269       212       26.9 %
Asset preservation expenditures
    31,658       22,538       40.5 %     659       501       31.6 %
 
                                   
Total recurring capital expenditures
    51,893       47,109       10.2 %     1,081       1,047       3.2 %
 
                                               
Major renovations
    29,992       30,816       -2.7 %     625       685       -8.8 %
 
                                   
Total capital expenditures
  $ 81,885     $ 77,925       5.1 %   $ 1,706     $ 1,732       -1.5 %
 
                                   
 
                                               
Repair and maintenance expense
  $ 37,855     $ 33,224       13.9 %   $ 789     $ 738       6.9 %
 
                                   
 
                                               
Average stabilized home count
    48,005       44,999                                  
We will continue 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 2012 are currently expected to be approximately $1,150 per apartment home.
Investment in Unconsolidated Joint Ventures
We continually evaluate our investments in unconsolidated joint ventures when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. The amount of loss recognized is the excess of the investment’s carrying amount over its estimated fair value. If we believe that the decline in fair value is temporary, no impairment is recorded. The aforementioned factors are taken as a whole by management in determining the valuation of our investment property. Should the actual results differ from management’s judgment, the valuation could be negatively affected and may result in a negative impact to our Consolidated Financial Statements.
Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.
Real Estate Investment Properties
We purchase real estate investment properties from time to time and record the fair value to various components, such as land, buildings, and intangibles related to in-place leases, based on the fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining average contractual lease period.

 

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REIT Status
We are a Maryland corporation that has elected to be treated for federal income tax purposes as a REIT. A REIT is a legal entity that holds interests in real estate and is required by the Code to meet a number of organizational and operational requirements, including a requirement that a REIT must distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. If we were to fail to qualify as a REIT in any taxable year, we will be subject to federal and state income taxes at the regular corporate rates and may not be able to qualify as a REIT for four years. Based on the net earnings reported for the year ended December 31, 2011 in our Consolidated Statements of Operations we would have incurred immaterial federal and state GAAP income taxes if we had failed to qualify as a REIT.
Statements of Cash Flow
The following discussion explains the changes in net cash provided by operating activities, net cash used in investing, and net cash provided by/(used in) financing activities that are presented in our Consolidated Statements of Cash Flows.
Operating Activities
For the year ended December 31, 2011, our net cash flow provided by operating activities was $244.2 million compared to $214.2 million for 2010. The increase in cash flow from operating activities is primarily due to an increase in property net operating income from our apartment community portfolio, which was partially offset by the increase in operating assets and a decrease in operating liabilities.
For the year ended December 31, 2010, our net cash flow provided by operating activities was $214.2 million compared to $229.4 million for 2009. The decrease in cash flow from operating activities is primarily due to changes in operating assets and operating liabilities, which include accrued restructuring and severance charges. This decrease is partially offset by an increase in property net operating income.
Investing Activities
For the year ended December 31, 2011, net cash used in investing activities was $1.1 billion compared to net cash used in investing activities of $583.8 million for 2010. The change relates to acquisitions of real estate assets and investments in unconsolidated joint ventures, which are discussed in further detail throughout this Report.
For the year ended December 31, 2010, net cash used in investing activities was $583.8 million compared to net cash used in investing activities of $158.0 million for 2009. The change relates to acquisitions of real estate assets and investments in unconsolidated joint ventures, which are discussed in further detail throughout this Report.

 

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Acquisitions
The following table summarizes UDR’s real estate community acquisitions for the year ended December 31, 2011 (dollar amounts in thousands):
                         
                    Purchase  
Property Name   Market   Acquisition Date   Units     Price (a)  
 
                       
10 Hanover Square
  New York, NY   April 2011     493     $ 259,750  
388 Beale
  San Francisco, CA   April 2011     227       90,500  
14 North
  Boston, MA   April 2011     387       64,500  
Inwood West
  Boston, MA   April 2011     446       108,000  
View 14
  Metropolitan D.C.   June 2011     185       105,538  
Rivergate
  New York, NY   July 2011     706       443,403  
21 Chelsea
  New York, NY   August 2011     210       138,930  
95 Wall
  New York, NY   August 2011     507       328,914  
 
                   
 
            3,161     $ 1,539,535  
 
                   
During the year ended December 31, 2011, the Company also acquired three parcels of land located in Huntington Beach, California; Addison, Texas; and Boston, Massachusetts for a gross purchase price of $34.3 million.
Our long-term strategic plan is to continue achieving greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been seeking to expand our interests in communities located in the New York, New York; San Francisco, California; Boston, Massachusetts; and Metropolitan D.C. markets over the past years. Prospectively, we plan to channel new investments into those markets we believe will provide the best investment returns. Markets will be targeted based upon defined criteria including above average job growth, low single-family home affordability and limited new supply for multifamily housing-three key drivers to strong rental growth.
For the year ended December 31, 2010, the Company acquired five apartment communities located in Orange County, California; Baltimore, Maryland; Los Angeles, California; and Boston, Massachusetts for a total gross purchase price of $412.0 million. During the same period, the Company also acquired land located in San Francisco, California for a gross purchase price of $23.6 million.
Real Estate Under Development and Redevelopment
At December 31, 2011, our development pipeline for wholly-owned communities totaled 2,108 apartment homes with a budget of $674.3 million in which we have a carrying value of $248.7 million. We anticipate the completion of these communities from the first quarter of 2012 through the fourth quarter of 2013.
At December 31, 2011, the Company is redeveloping seven wholly-owned communities with 3,123 apartment homes, 467 of which have been completed.
For the year ended December 31, 2011, we invested approximately $98.7 million in development and redevelopment projects, an increase of $6.6 million from our 2010 level of $92.1 million.
Consolidated Joint Ventures
In August 2011, the Company invested in a joint venture with an unaffiliated third party to acquire and redevelop an existing commercial property into a 173 apartment home community in Orange County, California. At closing the Company contributed $9.0 million and at December 31, 2011, UDR owned a 90% controlling interest in the investment. Under the terms of the operating agreement, our partner is required to achieve certain criteria as it relates to the entitlement process. If the criteria are met on or before 730 days after the site plan application is deemed complete by the city, the Company is obligated to contribute an additional $3.0 million to the joint venture for distribution to our partner. At the acquisition date, the Company accrued and capitalized $3.0 million related to the contingent consideration, which represents the difference between fair value of the property of $9.8 million on the formation date and the estimated fair value of the underlying property upon completion of the entitlement process of $12.8 million. The Company estimated the fair value based in part on a third party valuation that utilized Level 3 inputs.

 

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During the year ended December 31, 2011, the Company paid $450,000 to acquire from our partner its remaining 2% noncontrolling interests in the 989 Elements, Elements Too, and Bellevue joint ventures. The consideration paid was in excess of the book value of the noncontrolling interest, and is reflected as a reduction of the Company’s equity.
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 ventures. In addition, we may earn fees for providing management services to the unconsolidated joint ventures. As of December 31, 2011, UDR had investments in the following unconsolidated joint ventures which are accounted for under the equity method of accounting.
In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests in the Hanover/MetLife Master Limited Partnership (“UDR/MetLife I”) at a cost of $100.8 million. UDR/MetLife I owns a portfolio of 26 operating communities containing 5,748 apartment homes and 10 land parcels with the potential to develop approximately 2,000 additional apartment homes. Under the terms of UDR/MetLife I, UDR acts as the general partner and earns fees for property and asset management and financing transactions.
UDR has a weighted average ownership interest of 12.27% in the operating communities and 4.11% in the land parcels. The initial investment of $100.8 million consisted of $71.8 million in cash, which included associated transaction costs, and a $30 million payable (includes present value discount of $1.0 million) to Hanover. UDR agreed to pay the $30.0 million balance to Hanover in two interest free installments in the amounts of $20.0 million (paid in November 2011) and $10.0 million on the second anniversary of the closing. The $30.0 million payable was recorded at its present value of $29.0 million using an effective interest rate of 2.67%. At December 31, 2011 and 2010, the net carrying value of the payable was $9.8 million and $29.1 million, respectively. Interest expense of $697,000 and $129,000 was recorded during the years ended December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, the Company’s investment was $133.8 million and $122.2 million, respectively.
UDR’s total cost of its equity investment of $100.8 million differed from the proportionate share in the underlying net assets of UDR/MetLife I of $111.4 million. The difference of $10.6 million was attributable to certain assets and adjustments that were allocated to UDR’s proportionate share in UDR/MetLife I’s buildings of $8.4 million, land of $3.9 million, and ($1.6 million) of lease intangible assets. With the exception of land, the difference related to buildings is amortized and recorded as a component of loss from unconsolidated entities over 45 years and the difference related to lease intangible assets was amortized and recorded as a component of loss from unconsolidated entities over 11 months with the offset to the Company’s carrying value of its equity investment. During the years ended December 31, 2011 and 2010, the Company recorded $1.1 million and $264,000 of amortization, respectively.
On January 12, 2012, the Company formed a new real estate joint venture, UDR/MetLife II, with MetLife wherein each party owns a 50% interest in a $1.3 billion portfolio of 12 operating communities containing 2,528 apartment homes. The 12 communities in the joint venture include seven from UDR/MetLife I, while the remaining five operating communities have been newly acquired by UDR/MetLife II. The newly acquired communities, collectively known as Columbus Square, are recently developed, high-rise apartment buildings located on the Upper West Side of Manhattan and were purchased for $630 million.
The Company serves as the general partner for UDR/MetLife II and earns property management, asset management and financing fees.
With the closing of UDR/MetLife II, the original joint venture between the parties, UDR/MetLife I, now comprises 19 operating properties containing 3,930 homes as well as 10 vacant land parcels. Historical cost of the venture now stands at $1.8 billion and the Company’s weighted average ownership interest in the UDR/MetLife I operating assets is now 12.6 % and 4.0 % for the land parcels in the venture.
In connection with the purchase of Hanover’s interests in UDR/MetLife I, UDR agreed to indemnify Hanover from liabilities arising from Hanover’s guaranty of $506.0 million in loans ($51.0 million outstanding at December 31, 2011) which are secured by a security interest in the operating communities subject to the respective loans. The loans were to the sub-tier partnerships which own the 26 operating communities. The Company anticipates that the $51.0 million outstanding at December 31, 2011 will be refinanced by UDR/MetLife I over the next twelve months.

 

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In October 2010, the Company entered into a joint venture to develop a 240-home community in Stoughton, Massachusetts. At December 31, 2011 and 2010, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $10.0 million. Our investment at December 31, 2011 and 2010 was $17.2 million and $10.3 million, respectively.
In May 2011, the Company entered into a joint venture with to develop a 263-home community in San Diego, California. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $9.9 million and our investment at December 31, 2011 was $12.1 million.
In June 2011, UDR/MetLife I sold a parcel of land to a joint venture, in which the Company is a partner, to develop a 256-home community in College Park, Maryland. At December 31, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $7.1 million and our investment at December 31, 2011 was $8.6 million.
UDR is a partner with an unaffiliated third party, which formed a joint venture for the investment of up to $450.0 million in multifamily properties located in key, high barrier to entry markets such as Metropolitan Washington D.C. The partners will contribute equity of $180.0 million of which the Company’s maximum equity will be 30% or $54.0 million when fully invested. In 2010, the joint venture acquired its first property (151 homes). During the year ended December 31, 2011, the joint venture acquired two additional properties (509 homes). At December 31, 2011 and 2010, the Company owned a 30% interest in the joint venture. Our investment at December 31, 2011 and 2010 was $34.1 million and $5.2 million, respectively.
UDR is a partner with an unaffiliated third party, which owns and operates 10 operating properties located in Texas (3,992 homes). UDR contributed cash and a property equal to 20% of the fair value of the properties. The unaffiliated member contributed cash equal to 80% of the fair value of the properties comprising the joint venture, which was then used to purchase the nine operating properties from UDR. Our initial investment was $20.4 million. Our investment at December 31, 2011 and 2010 was $7.1 million and $10.3 million, respectively.
Disposition of Investments
In 2011, we sold 18 apartment home communities (4,488 homes), which included six apartment home communities (1,418 homes) sold in conjunction with an asset exchange in April 2011, for a total sales price of $593.4 million. UDR recognized gains for financial reporting purposes of $138.5 million, which is included in discontinued operations. Proceeds from the sale were used primarily to acquire apartment home communities and reduce debt.
In 2010, UDR sold one 149 apartment home community for a total sales price of $21.2 million. In 2009, we did not dispose of any apartment home communities.
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
For the year ended December 31, 2011, our net cash provided by financing activities was $812.0 million compared to $373.1 million for the comparable period of 2010.
The following significant financing activity occurred during the year ended December 31, 2011.
    We received proceeds of $30.7 million from secured debt financings. The $30.7 million includes $25.7 million in variable rate mortgages and $5.0 million in fixed rate mortgages.
    We repaid $336.0 million of secured debt, which includes $197.5 million of construction loans, repayment of $102.8 million of credit facilities, $22.4 million of mortgage payments, and repayment of $13.3 million in tax exempt bonds.

 

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    Certain holders submitted their outstanding 4.00% Convertible Senior Notes due 2035 to the Company for repurchase. As a result, we repurchased notes with a notional value of $10.8 million, representing approximately 6.44% of the $167.8 million in aggregate principal amount outstanding, and expensed $207,000 of unamortized financing costs during the three months ended March 31, 2011. On March 2, 2011 the Company called the remaining outstanding notes with a notional value of $156.9 million. The notes were redeemed on April 4, 2011 and unamortized financing costs of $3.0 million were written off.
    In May 2011, the Company issued $300 million aggregate principal amount of 4.250% senior unsecured notes due June 2018 under its existing shelf registration statement. Interest is payable semiannually beginning in December 2011. The notes were priced at 98.988% of the principal amount plus accrued interest from May 23, 2011 to yield 4.419% to maturity. The notes are fully and unconditionally guaranteed by the Operating Partnership.
    We repaid $97.1 million on our 3.625% Convertible Senior Notes due September 2011.
    In October 2011, the Company entered into a new $900 million unsecured revolving credit facility, replacing the Company’s $600 million credit facility. The Operating Partnership issued a guarantee in connection with the new credit facility, similar to the guarantee it issued under the prior facility. The new facility has an initial term of four years and includes a one-year extension option, and contains an accordion feature that allows the Company to increase the facility to $1.35 billion. Based on the Company’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points. In 2011, the Company had net borrowings of $389.3 million on its unsecured revolving credit facilities.
    In September 2009, the Company entered into an equity distribution agreement under which the Company may offer and sell up to 15.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 4,395,601 shares of common stock through an equity distribution agreement for aggregate gross proceeds of approximately $104.5 million at a weighted average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $2.1 million, were approximately $102.4 million, and such proceeds were used for general corporate purposes.
    In March 2011, the Company entered into a new equity distribution agreement under which the Company may offer and sell up to 20.0 million shares of its common stock over time to or through its sales agents. During the year ended December 31, 2011, we sold 11,849,079 shares of common stock through this program (of which 419,048 shares were settled subsequent to December 31, 2011) for aggregate gross proceeds of approximately $297.7 million at a weighted average price per share of $25.12. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $6.0 million, were approximately $291.7 million, and such proceeds were used for general corporate purposes. In September 2011, the Company entered into a new equity distribution agreement in connection with filing a new registration statement on Form S-3. The new equity distribution agreement replaced the March 2011 agreement, and no material changes were made to the equity distribution agreement. As of December 31, 2011 8,150,921 shares of common stock may be sold under our equity distribution agreement.
    In July 2011, the Company closed a public offering of 20,700,000 shares of its common stock, including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately $496.3 million after underwriting discounts and commissions and estimated offering expenses.
    We repurchased 141,200 shares of our 6.75% Series G Cumulative Redeemable Preferred Stock for $3.6 million, which was $100,000 more than their liquidation value of $3.5 million.
For the year ended December 31, 2010, our net cash provided by/(used in) financing activities was $373.1 million compared to ($78.1 million) for the comparable period of 2009. The increase in cash provided by financing activities was primarily due to an increase in net proceeds from issuance of our Common Stock through a public offering in 2010.

 

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Credit Facilities
As of December 31, 2011 and 2010, we have secured revolving credit facilities with Fannie Mae with an aggregate commitment of $1.3 billion with $1.1 billion outstanding. The Fannie Mae credit facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and certain variable rate facilities can be extended for an additional five years at our option. We have $744.5 million of the funded balance fixed at a weighted average interest rate of 5.14% and the remaining balance on these facilities is currently at a weighted average variable rate of 1.63% as of December 31, 2011. We had $897.3 million of the funded balance fixed at a weighted average interest rate of 5.32% and $260.5 million was at a weighted average variable rate of 1.68% as of December 31, 2010.
In October 2011, the Company entered into a $900 million unsecured revolving credit facility, replacing the Company’s $600 million credit facility noted below. The Operating Partnership issued a guarantee in connection with the new facility, similar to the guarantee it issued under the prior facility. The unsecured credit facility has an initial term of four years and includes a one-year extension option, and contains an accordion feature that allows the Company to increase the facility to $1.35 billion. Based on the Company’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 122.5 basis points and a facility fee of 22.5 basis points (1.53% at December 31, 2011). As of December 31, 2011, we had $421.0 million of borrowings outstanding under the credit facility leaving $479.0 million of unused capacity (excluding $3.6 million of letters of credit at December 31, 2011).
We had an unsecured revolving credit facility with an aggregate borrowing capacity of $600 million, which we could have increased to $750 million at our election under certain circumstances. This credit facility carried an interest rate equal to LIBOR plus 47.5 basis points (0.89% interest at December 30, 2010), and had a maturity of July 2012. As of December 31, 2010, we had $31.8 million of borrowings outstanding under the credit facility leaving $568.2 million of unused capacity (excluding $4.8 million of letters of credit at December 31, 2010).
The Fannie Mae credit facilities and the bank revolving credit facility are subject to customary financial covenants and limitations. As of December 31, 2011, we were in compliance with all financial covenants under these credit facilities.
Interest Rate Risk
We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had $1.1 billion in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2011. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $9.2 million based on the average balance outstanding during the year.
These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.

 

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Funds from Operations
Funds from operations, or FFO, is defined as net income (computed in accordance with GAAP), excluding impairment write-downs of depreciable real estate or of investments in non-consolidated investees that are driven by measurable decreases in the fair value of depreciable real estate held by the investee, gains (or losses) from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for 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 Trust’s (“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 GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Thus, NAREIT created FFO as a supplemental measure of 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 Company’s 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.

 

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The following table outlines our FFO calculation and reconciliation to GAAP for the three years ended December 31, 2011 (dollars in thousands):
                         
    For the year ended December 31,  
    2011     2010     2009  
 
 
Net income/(loss) attributable to UDR, Inc.
  $ 20,023     $ (102,899 )   $ (87,532 )
Adjustments:
                       
Distributions to preferred stockholders
    (9,311 )     (9,488 )     (10,912 )
Real estate depreciation and amortization, including discontinued operations
    370,343       303,446       278,391  
Net income/(loss) attributable to redeemable non-controlling interests in OP
    395       (3,835 )     (4,282 )
Net income attributable to non-controlling interests
    167       146       191  
Real estate depreciation and amortization on unconsolidated joint ventures
    11,631       5,698       4,759  
Net gains on the sale of depreciable property in discontinued operations, excluding RE3
    (123,217 )     (4,048 )     (2,343 )
(Premium)/discount on preferred stock repurchases, net
    (175 )     25       2,586  
 
                 
Funds from operations — basic
  $ 269,856     $ 189,045     $ 180,858  
 
                 
Distributions to preferred stockholders — Series E (Convertible)
    3,724       3,726       3,724  
 
                 
Funds from operations — diluted
  $ 273,580     $ 192,771     $ 184,582  
 
                 
 
                       
Weighted average number of common shares and OP Units outstanding — basic
    208,896       171,569       155,796  
 
                       
Weighted average number of common shares and OP Units outstanding — diluted
    214,086       176,900       159,561  
In the computation of diluted FFO, OP Units, unvested restricted stock, stock options, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count. The effect of the conversion of the Series E Out-Performance Partnership Shares (the Series E Out-Performance Program terminated on December 31, 2009) are anti-dilutive for the year ended December 31, 2009 and are excluded from the diluted share count.
RE3 is our subsidiary whose activities include development and land entitlement. 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. To determine whether gains from RE3 will be included in FFO, the Company considers whether the operating asset has been a short term investment. 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.
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 years ended December 31, 2011 (shares in thousands):
                         
    For the year ended December 31,  
    2011     2010     2009  
 
                       
Weighted average number of Common Shares and OP Units outstanding basic
    208,896       171,569       155,796  
Weighted average number of OP Units outstanding
    (7,602 )     (5,712 )     (6,706 )
 
                 
Weighted average number of Common Shares outstanding - basic per the Consolidated Statement of Operations
    201,294       165,857       149,090  
 
                 
Weighted average number of Common Shares, OP Units, and common stock equivalents outstanding — diluted
    214,086       176,900       159,561  
Weighted average number of OP Units outstanding
    (7,602 )     (5,712 )     (6,706 )
Weighted average incremental shares from assumed conversion of stock options
    (1,297 )     (1,637 )     (567 )
Weighted average incremental shares from unvested restricted stock
    (857 )     (658 )     (162 )
Weighted average number of Series E preferred shares outstanding
    (3,036 )     (3,036 )     (3,036 )
 
                 
Weighted average number of Common Shares outstanding — diluted per the Consolidated Statements of Operations
    201,294       165,857       149,090  
 
                 

 

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FFO also does not represent cash generated from operating activities in accordance with GAAP, 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 GAAP is as follows (dollars in thousands):
                         
    For the year ended December 31,  
    2011     2010     2009  
 
                       
Net cash provided by operating activities
  $ 244,236     $ 214,180     $ 229,383  
Net cash used in investing activities
    (1,053,182 )     (583,754 )     (158,045 )
Net cash used provided by/(used in) financing activities
    811,963       373,075       (78,093 )
Results of Operations
The following discussion includes the results of both continuing and discontinued operations for the periods presented.
Net Income/(Loss) Attributable to Common Stockholders
2011-vs-2010
Net income attributable to common stockholders was $10.5 million ($0.05 per diluted share) for the year ended December 31, 2011 as compared to net loss attributable to common stockholders of $112.4 million ($0.68 per diluted share) for the comparable period in the prior year. The increase in net income attributable to common stockholders for the year ended December 31, 2011 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
    an increase in disposition gains in 2011 as compared to 2010. The Company recognized gains of $138.5 million and $4.1 million during the years ended December 31, 2011 and 2010, respectively, on the sale of eighteen apartment home communities and one community, respectively; and
    an increase in our net operating income.
The increase to our net income attributable to common stockholders was partially offset by:
    an increase in depreciation expense primarily due to the Company’s acquisition of eight apartment communities during the year ending December 31, 2011, and the completion of redevelopment and development communities in 2010 and 2011.
2010-vs-2009
Net loss attributable to common stockholders was $112.4 million ($0.68 per diluted share) for the year ended December 31, 2010 as compared to net loss attributable to common stockholders of $95.9 million ($0.64 per diluted share) for the comparable period in the prior year. The increase in net loss attributable to common stockholders for the year ended December 31, 2010 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
    an increase in depreciation expense primarily due to the Company’s acquisition of five apartment communities in the third quarter of 2010, consolidation of certain joint venture assets in the fourth quarter of 2009, and the completion of redevelopment and development communities in 2009 and 2010;
    an increase in interest expense primarily due to debt extinguishment gain from the repurchase of unsecured debt securities in 2009; and
    an increase in severance costs and restructuring charges in the fourth quarter of 2010 due to the consolidation of corporate operations and the centralization of job functions from its Richmond, Virginia office to its Highlands Ranch, Colorado headquarters, in addition to severance costs related to the retirement of an executive officer of the Company.

 

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The increase to our net loss attributable to common stockholders was partially offset by:
    an increase in our net operating income; and
    a decrease in our loss from unconsolidated entities primarily due to the recognition of a $16.0 million non-cash charge representing an other-than-temporary decline in the fair value of equity investments in two of our unconsolidated joint ventures during the year ended December 31, 2009.
Apartment Community Operations
Our net income is primarily generated from the operation of our apartment communities. The following table summarizes the operating performance of our total apartment portfolio which excludes commercial operating income and expense for each of the periods presented (dollars in thousands):
                                                 
    Year Ended December 31,             Year Ended December 31,        
    2011     2010     % Change     2010     2009     % Change  
 
                                               
Property rental income
  $ 718,800     $ 624,981       15.0 %   $ 624,981     $ 594,359       5.2 %
Property operating expense (a)
    (243,616 )     (220,279 )     10.6 %     (220,279 )     (202,773 )     8.6 %
 
                                   
Property net operating income
  $ 475,184     $ 404,702       17.4 %   $ 404,702     $ 391,586       3.3 %
 
                                   
(a) Excludes depreciation, amortization, and property management expenses.
The following table is our reconciliation of property NOI to net income/(loss) attributable to UDR, Inc. as reflected, for both continuing and discontinued operations, for the periods presented (dollars in thousands):
                         
    Year Ended December 31,  
    2011     2010     2009  
 
                       
Property net operating income
  $ 475,184     $ 404,702     $ 391,586  
Other net operating income
    9,576       6,362       6,874  
Non-property income
    17,422       14,347       14,274  
Real estate depreciation and amortization
    (370,343 )     (303,446 )     (278,391 )
Interest expense
    (158,333 )     (150,796 )     (142,152 )
General and administrative and property management
    (66,016 )     (62,675 )     (55,616 )
Other depreciation and amortization
    (3,931 )     (4,843 )     (5,161 )
Other operating expenses
    (6,217 )     (5,848 )     (6,485 )
Severance costs and other restructuring charges
    (1,342 )     (6,803 )      
Loss from unconsolidated entities
    (6,352 )     (4,204 )     (18,665 )
Redeemable non-controlling interests in OP
    (395 )     3,835       4,282  
Non-controlling interests
    (167 )     (146 )     (191 )
Tax (expense)/benefit
    (7,571 )     2,533       (311 )
Gain on sale of properties
    138,508       4,083       2,424  
 
                 
Net income/(loss) attributable to UDR, Inc.
  $ 20,023     $ (102,899 )   $ (87,532 )
 
                 

 

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Same Communities
2011-vs.-2010
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2010 and held on December 31, 2011) consisted of 37,869 apartment homes and provided $344.4 million or 72% of our total property NOI for the year ended December 31, 2011.
NOI for our same community properties increased 5.6% or $18.1 million for the year ended December 31, 2011 compared to the same period in 2010. The increase in property NOI was primarily attributable to a 4.1% or $20.5 million increase in property rental income which was offset by a 1.4% or $2.3 million increase in operating expenses. The increase in revenues was primarily driven by a 4.0% or $19.1 million increase in rental rates and a 12.1% or $4.4 million increase in fee and reimbursement income which was offset by a 12.2% or $2.2 million increase in vacancy loss. Physical occupancy decreased 0.2% to 95.5% and total income per occupied home increased $50 to $1,188.
The increase in property operating expenses was primarily driven by a 6.5% or $1.8 million increase in utilities expense, a 1.5% or $781,000 increase in taxes, and a 4.1% or $369,000 increase in insurance costs, which was partially offset by a 1.5% or $647,000 decrease in personnel cost.
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 66.8% as compared to 65.9% in the comparable period in the prior year.
2010-vs.-2009
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2009 and held on December 31, 2010) consisted of 39,281 apartment homes and provided $341.3 million or 84% of our total property NOI for the year ended December 31, 2010.
NOI for our same community properties decreased 1.8% or $6.2 million for the year ended December 31, 2010 compared to the same period in 2009. The decrease in property NOI was primarily attributable to a 0.9% or $4.6 million decrease in property rental income and a 0.9% or $1.5 million increase in operating expenses. The decrease in revenues was primarily driven by a 2.4% or $12.1 million decrease in rental rates which was offset by a 57.8% or $2.7 million decrease in concessions, a 7.9% or $1.7 million decrease in vacancy loss and a 12.4% or $2.7 million increase in reimbursement income. Physical occupancy increased 0.4% to 95.7% and total income per occupied home decreased $15 to $1,144.
The increase in property operating expenses was primarily driven by a 3.2% or $874,000 increase in utilities expense, a 3.9% or $1.1 million increase in repairs and maintenance, and a 2.6% or $1.1 million increase in personnel costs, which was partially offset by a 2.5% or $1.3 million decrease in real estate taxes.
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) decreased to 66.1% as compared to 66.7% in the comparable period in the prior year.
Non-Mature Communities
2011-vs.-2010
The remaining $130.8 million and $78.4 million of our NOI during the year ended December 31, 2011 and 2010, respectively, was generated from communities that we classify as “non-mature communities”. UDR’s non-mature communities consist of communities that do not meet the criteria to be included in same communities, which include communities developed or acquired, redevelopment properties, sold properties, and properties classified as real estate held for disposition. For the year ended December 31, 2011, we recognized NOI for our developments of $14.5 million, acquired communities of $49.7 million, redeveloped properties of $37.8 million, and sold properties of $23.9 million. For the year ended December 31, 2010, we recognized NOI for our developments of $3.6 million, acquired communities of $8.3 million, redeveloped properties of $23.7 million, and sold properties of $37.9 million.
2010-vs.-2009
The remaining $63.4 million and $44.1 million of our NOI during the year ended December 31, 2010 and 2009, respectively, was generated from communities that we classify as “non-mature communities.” UDR’s non-mature communities consist of communities that do not meet the criteria to be included in same communities, which include communities developed or acquired, redevelopment properties, sold properties, properties classified as real estate held for sale, joint venture properties, properties managed by third-parties, and the non-apartment components of mixed use properties, and condominium properties. For the year ended December 31, 2010, we recognized NOI for our properties held for sale of $18.6 million, developments of $15.6 million, acquired communities of $10.8 million, redeveloped properties of $12.3 million, and sold properties of $980,000. For the year ended December 31, 2009, we recognized NOI for our properties held for sale of $17.3 million, developments of $7.0 million, acquired communities of $2.1 million, redeveloped properties of $11.5 million, and sold properties of $1.4 million.

 

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Other Income
For the year ended December 31, 2011, significant amounts reflected in other income include: fees earned from the Company’s joint ventures of $9.6 million, a gain of $3.1 million from the sale of marketable securities, and a gain of $3.9 million from the sale of our cost investment in a privately held company. For the year ended December 31, 2010, significant amounts reflected in other income include: a gain of $4.7 million from the sale of marketable securities, a reversal of certain tax accruals of $2.1 million, and $3.2 million of fees earned for both recurring and non-recurring items related to the Company’s joint ventures. For the years ended December 31, 2010 and 2009, other income also included interest income and discount amortization from an interest in a convertible debt security of $2.9 million and $3.6 million, respectively. For the year ended December 31, 2009, other income also included $5.1 million of interest income from a note for $200 million that the Company received related to the disposition of 86 properties during 2008. In May 2009, the $200 million note was paid in full.
Tax Benefit/Expense of Taxable REIT Subsidiaries
UDR elected for certain consolidated subsidiaries to be treated as Taxable REIT Subsidiaries (“TRS”). 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. For the year ended December 31, 2011, we recognized a benefit of $5.7 million in continuing operations due to the results of operations and temporary differences associated with the TRS, and an expense of $13.2 million in discontinued operations due to assets disposed of at a gain. For the year ended December 31, 2010, we recognized a net benefit of $2.5 million from the write-off of income taxes payable (net of income taxes paid). For the year ended December 31, 2009, we recognized tax expense of $311,000 to the extent of cash taxes paid.
Real Estate Depreciation and Amortization
For the year ended December 31, 2011, real estate depreciation and amortization on both continuing and discontinued operations increased 22.0% or $66.9 million as compared to the comparable period in 2010. The increase in depreciation and amortization for the year ended December 31, 2011 is primarily the result of the Company’s acquisition of eight communities with 3,161 apartment homes during 2011, development and redevelopment activity during 2011 and 2010, and additional capital expenditures.
For the year ended December 31, 2010, real estate depreciation and amortization on both continuing and discontinued operations increased 9.0% or $25.1 million as compared to the comparable period in 2009. The increase in depreciation and amortization for the year ended December 31, 2010 is primarily the result of the Company’s acquisition of five communities with 1,374 apartment homes during 2010, development completions during 2010 and 2009, and additional capital expenditures.
As part of the Company’s acquisition activity a portion of the purchase price is attributable to the fair value of intangible assets which are typically amortized over a period of less than one year.
Interest Expense
For the year ended December 31, 2011, interest expense on both continuing and discontinued operations increased 5.0% or $7.5 million as compared to 2010. This increase in interest expense was primarily due to slightly higher debt balances. The increase was also attributable to the write off of $4.6 million of deferred financing costs related to the prepayment of debt.

 

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For the year ended December 31, 2010, interest expense on both continuing and discontinued operations increased 6.1% or $8.6 million as compared to 2009. This increase is primarily due to the Company’s debt repurchase activity during 2010 and 2009. During the year ended December 31, 2010, we recognized a loss of $1.0 million as a result of repurchasing some of our 3.625% convertible Senior Notes in the open market as compared to our recognition of $9.8 million in gains resulting from the repurchase of unsecured debt securities with a notional amount of $238.9 million in the open market in 2009. The decrease in our gain from debt repurchase activity was partially offset by a decrease of $3.8 million of expenses related to the tender of $37.5 million of unsecured debt in 2009.
Severance Costs and Other Restructuring Charges
For the year ended December 31, 2010, the Company recognized $6.8 million of severance and restructuring charges as the Company consolidated its corporate operations and centralized job functions to its Highlands Ranch, Colorado headquarters from its Richmond, Virginia office. Also included in these charges were severance costs related to the retirement of an executive officer.
Gains on the Sale of Depreciable Property
For the years ended December 31, 2011, 2010 and 2009, we recognized gains for financial reporting purposes of $138.5 million, $4.1 million, and $2.4 million, respectively. 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.
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 year ended December 31, 2011.
Off-Balance Sheet Arrangements
In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests in the Hanover/MetLife Master Limited Partnership (“UDR/MetLife I”).
In connection with the purchase of Hanover’s interests in the UDR/MetLife Partnership, UDR agreed to indemnify Hanover from liabilities from Hanover’s guaranty of $506.0 million in loans ($51.0 million outstanding at December 31, 2011) which are secured by a security interest in the operating communities subject to the loan. The loans are to the sub-tier partnerships which own the 26 operating communities. The Company anticipates that the remaining $51.0 million will be refinanced by the UDR/MetLife Partnership over the next twelve months.
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.

 

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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2011 (dollars in thousands):
                                         
    Payments Due by Period  
Contractual Obligations   2012     2013-2014     2015-2016     Thereafter     Total  
 
                                       
Long-term debt obligations
  $ 406,197     $ 667,595     $ 1,527,679     $ 1,316,899     $ 3,918,370  
Interest on debt obligations
    150,892       254,507       158,323       137,851       701,573  
Contingent purchase consideration
    3,000                         3,000  
Letters of credit
    3,553                         3,553  
Unfunded commitments on development projects (a)
    65,722       359,807                   425,529  
Operating lease obligations:
                                       
Operating space
    458       976       539             1,973  
Ground leases (b)
    5,043       10,086       10,086       314,914       340,129  
 
                             
 
                                       
 
  $ 634,865     $ 1,292,971     $ 1,696,627     $ 1,769,664     $ 5,394,127  
 
                             
     
(a)   Any unfunded costs at December 31, 2011 are shown in the year of estimated completion. The Company has project debt on many of our development projects.
 
(b)   For purposes of our ground lease contracts, the Company uses the minimum lease payment, if stated in the agreement. For ground lease agreements where there is a reset provision based on the communities appraised value or consumer price index but does not included a specified minimum lease payment, the Company uses the current rent over the remainder of the lease term.
During 2011, we incurred gross interest costs of $171.3 million, of which $13.0 million was capitalized.
UNITED DOMINION REALTY, L.P.:
Business Overview
United Dominion Realty, L.P. (the “Operating Partnership” or “UDR, L.P”.), is a Delaware limited partnership formed in February 2004 and organized pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act (as amended from time to time, or any successor to such statute, the “Act”). The Operating Partnership is the successor-in-interest to United Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations on November 4, 1995. Our sole general partner is UDR, Inc., a Maryland corporation (“UDR” or the “General Partner”), which conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership. At December 31, 2011, the Operating Partnership’s real estate portfolio included 77 communities located in 9 states plus the District of Columbia, with a total of 23,160 apartment homes.
As of December 31, 2011, UDR owned 110,883 units of our general limited partnership interests and 174,749,068 units of our limited partnership interests (the “OP Units”), or approximately 94.9% of our outstanding OP Units. By virtue of its ownership of our OP Units and being our sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the Operating Partnership refer to the Operating Partnership together with its consolidated subsidiaries, and all references in this “Item 7. Management’s Discussion and Analysis—United Dominion Realty, L.P”. to “we,” “us” or “our” refer to the Operating Partnership together with its consolidated subsidiaries. We refer to our General Partner together with its consolidated subsidiaries (including us) and the General Partner’s consolidated joint ventures as “UDR” or the “General Partner”.
UDR operates as a self administered real estate investment trust, or REIT, for federal income tax purposes. UDR focuses on owning, acquiring, renovating, developing, redeveloping, and managing apartment communities in select markets throughout the United States. The General Partner was formed in 1972 as a Virginia corporation and changed its state of incorporation from Virginia to Maryland in September 2003. At December 31, 2011, UDR’s consolidated real estate portfolio included 163 communities located in 22 markets with a total of 47,343 completed apartment homes and UDR’s total real estate portfolio, inclusive of UDR’s unconsolidated communities, included an additional 39 communities with 10,400 completed apartment homes.

 

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The following table summarizes our market information by major geographic markets as of December 31, 2011.
                                                         
    As of December 31, 2011     Year Ended  
                    Percentage     Total     December 31, 2011  
    Number of     Number of     of Total     Carrying     Average     Total Income     Net Operating  
    Apartment     Apartment     Carrying     Value     Physical     per Occupied     Income  
SAME COMMUNITIES   Communities     Homes     Value     (in thousands)     Occupancy     Home (a)     (in thousands)  
 
                                                       
WESTERN REGION
                                                       
Orange County, CA
    8       2,935       12.0 %   $ 504,228       94.8 %   $ 1,492     $ 35,302  
San Francisco, CA
    6       1,453       8.4 %     351,843       96.7 %     2,130       26,496  
Monterey Peninsula, CA
    7       1,565       3.7 %     154,030       93.8 %     1,110       13,305  
Los Angeles, CA
    3       463       3.0 %     125,104       95.4 %     1,765       6,054  
San Diego, CA
    2       366       1.3 %     55,679       94.8 %     1,365       3,775  
Seattle, WA
    5       932       4.9 %     208,097       96.1 %     1,276       9,273  
Inland Empire, CA
    1       414       1.7 %     69,584       94.8 %     1,495       4,883  
Sacramento, CA
    2       914       1.6 %     69,058       93.1 %     882       5,973  
Portland, OR
    3       716       1.7 %     70,383       95.5 %     998       5,570  
 
                                                       
MID-ATLANTIC REGION
                                                       
Metropolitan DC
    7       2,378       13.1 %     550,008       96.3 %     1,770       33,452  
Baltimore, MD
    5       994       3.5 %     147,209       95.6 %     1,348       10,948  
 
                                                       
SOUTHEASTERN REGION
                                                       
Tampa, FL
    3       1,154       2.6 %     111,019       96.0 %     1,036       8,723  
Nashville, TN
    6       1,612       3.1 %     128,836       96.3 %     870       10,192  
Jacksonville, FL
    1       400       1.0 %     42,692       94.3 %     889       2,511  
Other Florida
    1       636       1.8 %     77,498       93.2 %     1,214       5,296  
 
                                                       
SOUTHWESTERN REGION
                                                       
Dallas, TX
    2       1,348       4.4 %     184,158       95.8 %     1,180       10,994  
Phoenix, AZ
    3       914       1.7 %     72,919       95.0 %     890       6,133  
 
                                         
 
                                                       
Total/Average Same Communities
    65       19,194       69.5 %     2,922,345       95.3 %   $ 1,333     $ 198,880  
 
                                         
 
                                                       
Non Matures, Commercial Properties & Other
    12       3,966       30.5 %     1,282,953                          
 
                                               
 
 
Total Real Estate Held for Investment
    77       23,160       100.0 %     4,205,298                          
 
                                               
 
 
Total Accumulated Depreciation
                            (976,358 )                        
 
                                                     
 
 
Total Real Estate Owned, Net of Accumulated Depreciation
                          $ 3,228,940                          
 
                                                     
     
(a)   Total Income per Occupied Home represents total revenues divided by the product of occupancy and the number of mature apartment homes.
We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same Communities segment includes those communities acquired, developed, and stabilized prior to January 1, 2010, and held as of December 31, 2011. 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. Our Non-Mature/Other Communities segment includes those communities that were acquired or developed in 2010 or 2011, 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.

 

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Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. The Operating Partnership’s primary source of liquidity is cash flow from operations as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes and borrowings allocated to us under the General Partner’s credit agreements. The General Partner will routinely use its unsecured credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities as we repositioned our portfolio.
We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings allocated to us under the General Partner’s credit agreements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities and potential property acquisitions through borrowings and the disposition of properties. We believe that our net cash provided by operations and borrowings will continue to be adequate to meet both operating requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations and borrowings allocated to us under the General Partner’s credit agreements the Operating Partnership is a party to.
Future Capital Needs
Future capital expenditures are expected to be funded with proceeds from the issuance of secured debt, the sale of properties, the borrowings allocated to us under our General Partner’s credit agreements, 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, the issuance of OP Units and the assumption or placement of secured debt.
During 2012, we have approximately $210.2 million of secured debt maturing and we anticipate that we will repay that debt with operating cash flows, proceeds from borrowings allocated to us under our General Partner’s credit agreements, or by exercising extension rights on such secured debt, as applicable. The repayment of debt will be recorded as an offset to the “Receivable due from General Partner”.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. A critical accounting policy is one that is both important to our financial condition and results of operations and that involves some degree of uncertainty. Estimates are prepared based on management’s assessment after considering all evidence available. Changes in estimates could affect our financial position or results of operations. Below is a discussion of the accounting policies that we consider critical to understanding our financial condition or results of operations where there is uncertainty or where significant judgment is required.
Capital Expenditures
In conformity with GAAP, we capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
During the year ended December 31, 2011, $63.2 million was spent on capital expenditures for all of our communities as compared to $59.5 million for the year ended December 31, 2010. These capital improvements included turnover-related capital expenditures, revenue enhancing capital expenditures, asset preservation expenditures, kitchen and bath upgrades, other extensive interior/exterior upgrades and major renovations.
We will continue to selectively add revenue enhancing improvements which we believe will provide a return on investment substantially in excess of our cost of capital.

 

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Impairment of Long-Lived Assets
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.
Real Estate Investment Properties
We purchase real estate investment properties from time to time and record the fair value to various components, such as land, buildings, and intangibles related to in-place leases based on the fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining average contractual lease period.
Statements of Cash Flows
The following discussion explains the changes in net cash provided by operating activities, net cash (used in)/provided by investing activities and net cash provided by/(used in) financing activities that are presented in our Consolidated Statements of Cash Flows.
Operating Activities
For the year ended December 31, 2011, net cash flow provided by operating activities was $156.1 million compared to $146.6 million for the comparable period in 2010. The increase in net cash flow from operating activities is primarily due to an increase in property net operating income from our apartment community portfolio, which was partially offset by the increase in operating assets and a decrease in operating liabilities.
For the year ended December 31, 2010, our net cash flow provided by operating activities was $146.6 million compared to $157.3 million for 2009. The decrease in net cash flow from operating activities is primarily due to an increase in consolidated net loss, primarily due to a decrease in property net operating income and increase in allocated general and administrative costs.
Investing Activities
For the year ended December 31, 2011, net cash used in investing activities was $227.0 million compared to $59.5 million for the comparable period in 2010. The increase in net cash used in investing activities was primarily due to acquisition activities partially offset by proceeds received from dispositions in 2011.
For the year ended December 31, 2010, net cash used in investing activities was $59.5 million compared to net cash provided by investing activities of $129.6 million for the comparable period in 2009. This change was primarily due to the full payment received on a $200.0 million note receivable in 2009. The activity during 2010 consisted entirely of capital expenditures.
Acquisitions and Dispositions
In April 2011, UDR and the Operating Partnership closed on an acquisition of a 493- home multifamily apartment community referred to as 10 Hanover Square, located in New York, New York. The community was acquired for $259.8 million, which included assumed debt with a fair value of $208.1 million and the issuance of 2,569,606 OP Units of the Operating Partnership. The OP Units were deemed to have a value equal to the greater of $25.00 or the volume weighted average closing price per share of the Company’s common stock for the 10 day period ended on (and including) the date one business day prior to the settlement date. For purchase price accounting purposes, the fair value of these OP units was $24.47 at the settlement date.

 

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In April 2011, the Operating Partnership and its General Partner completed a $500 million asset exchange whereby the Operating Partnership acquired two multifamily apartment communities (833 homes) and a parcel of land, and UDR acquired one multifamily apartment community (227 homes). The acquired assets are: 388 Beale in San Francisco, CA (227 homes)- acquired by UDR; 14 North in Peabody, MA (387 homes); and Inwood West in Woburn, MA (446 homes). The communities acquired were valued at $263.0 million representing their estimated fair value. The Company and the Operating Partnership paid $28.1 million of cash and assumed debt with a fair value of $61.7 million. The Operating Partnership sold four multifamily apartment communities (984 homes) and UDR sold two multifamily apartment communities (434 homes) located in California as part of the transaction. The communities are: Crest at Phillips Ranch, Villas at San Dimas, Villas at Bonita, The Arboretum, Rancho Vallecitos and Milazzo.
In August 2011, UDR and the Operating Partnership closed on the acquisition of a 507- home multifamily apartment community referred to as 95 Wall located in New York, New York. The community was acquired for $328.9 million, which included the issuance of 1,802,239 OP Units of the Operating Partnership. The OP Units were deemed to have a value equal to the greater of $25.00 or the volume weighted average closing price per share of the Company’s common stock for the 10-day period ended on (and including) the date one business day prior to the settlement date. For purchase price accounting purposes, the fair value of these OP units was $26.71 at the settlement date.
For the year ended December 31, 2010, the Operating Partnership had no property acquisitions.
The Operating Partnership’s long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been seeking to expand our interests in communities located in Boston, California, Metropolitan Washington D.C., New York, and the Washington state markets over the past years. Prospectively, we plan to continue to channel new investments into those markets we believe will continue to provide the best investment returns. Markets will be targeted based upon defined criteria including above average job growth, low single-family home affordability and limited, new supply for multifamily housing- three key drivers to strong rental growth.
In 2011, the Operating Partnership sold eight apartment home communities (2,024 homes), which included four apartment home communities (984 homes) sold in conjunction with an asset exchange in April 2011, for a total sales price of $299.6 million. Proceeds from the sales were used primarily to acquire new communities, reduce debt, and repay our General Partner. During the year ended December 31, 2010, we did not dispose of any apartment home communities.
Financing Activities
For the year ended December 31, 2011, our net cash provided by financing activities was $70.7 million compared to net cash used in financing activities of $86.7 million for 2010. The increase in cash provided by financing activities was primarily due to an increase in advances from the General Partner, partially offset by an increase in payments of secured debt.
For the year ended December 31, 2010, our net cash used in financing activities was $86.7 million compared to $290.1 million for 2009. The decrease in cash used in financing activities was primarily due to a net decrease in payments to the General Partner, partially offset by a decrease in the proceeds from secured debt.
Credit Facilities
As of December 31, 2011, the General Partner had secured credit facilities with Fannie Mae with an aggregate commitment of $1.3 billion with $1.1 billion outstanding. The Fannie Mae credit facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and certain variable rate facilities can be extended for an additional five years at the General Partner’s option. At December 31, 2011, $744.5 million of the outstanding balance was fixed at a weighted average interest rate of 5.14% and the remaining balance of $310.5 million on these facilities had a weighted average variable interest rate of 1.63%. $667.5 million of these credit facilities were allocated to the Operating Partnership at December 31, 2011 based on the ownership of the assets securing the debt.
At December 31, 2010, there was $897.3 million of the funded balance fixed at a weighted average interest rate of 5.3% and the remaining balance on these facilities was at a weighted average variable rate of 1.7%. $736.9 million of these credit facilities were allocated to the Operating Partnership at December 31, 2009 based on the ownership of the assets securing the debt.

 

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At December 31, 2010, the Operating Partnership guaranteed the General Partner’s unsecured credit facility, with an aggregate borrowing capacity of $600 million. The outstanding balance under the unsecured credit facility was $31.8 million at December 31, 2010. On October 25, 2011, the Operating Partnership issued a guarantee in conjunction with a new $900 million unsecured revolving credit facility entered into by our General Partner. The new facility replaces the General Partner’s $600 million facility. The outstanding balance under the new $900 million unsecured revolving credit facility was $421.0 million at December 31, 2011.
The Operating Partnership is also a guarantor on the General Partner’s $250 million term loan which matures January 2016, $100 million term loan which matures December 2016, $300 million of medium term notes due June 2018, and $400 million of medium term notes due January 2022 (issued in January 2012).
The credit facilities are subject to customary financial covenants and limitations.
Interest Rate Risk
We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. We had $287.0 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2011. If market interest rates for variable rate debt increased by 100 basis points, our interest expense would increase by $2.8 million based on the balance at December 31, 2011.
These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.
Results of Operations
The following discussion explains the changes in results of operations that are presented in our Consolidated Statements of Operations for each of the three years ended December 31, 2011, and includes the results of both continuing and discontinued operations for the periods presented.
Net Income/(Loss) Attributable to OP Unitholders
2011 — vs. — 2010
Net income attributable to OP unitholders was $30.2 million ($0.17 per OP unit) for the year ended December 31, 2011 as compared to a net loss of $20.7 million ($0.12 per OP unit) for the comparable period in the prior year. The increase in net income attributable to OP unit holders for the year ended December 31, 2011 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
    an increase in disposition gains in 2011 as compared to 2010. We recognized net gains of $60.1 million for the year ended December 31, 2011 on the sale of eight apartment home communities. We recognized net gains of $152,000 for the year ended December 31, 2010 on trailing activities of apartment home communities sold in years prior to 2010; and
    an increase in net operating income.
The increase to our net income attributable to OP unitholders was partially offset by:
    an increase in depreciation expense primarily due to the four acquisitions of operating properties in 2011.

 

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2010 — vs. — 2009
Net loss attributable to OP unit holders was $20.7 million ($0.12 per OP unit) for the year ended December 31, 2010 as compared to $4.2 million ($0.02 per OP unit) for the comparable period in the prior year. The increase in net loss attributable to OP unit holders for the year ended December 31, 2010 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
    a decrease in net operating income;
    an increase in general and administrative expenses allocated to us by our General Partner; and
    a decrease in other income.
Apartment Community Operations
Our net income is primarily generated from the operation of our apartment communities.
The following table summarizes the operating performance of our total portfolio for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):
                                                 
    Year Ended December 31,             Year Ended December 31,        
    2011     2010     % Change     2010     2009     % Change  
 
                                               
Property rental income
  $ 387,057     $ 350,394       10.5 %   $ 350,394     $ 353,056       -0.8 %
Property operating expense (a)
    (122,799 )     (116,278 )     5.6 %     (116,278 )     (112,488 )     3.4 %
 
                                   
Property net operating income
  $ 264,258     $ 234,116       12.9 %   $ 234,116     $ 240,568       -2.7 %
 
                                   
     
(a)   Excludes depreciation, amortization, and property management expenses.
The following table is our reconciliation of property NOI to net income attributable to OP unitholders as reflected, for both continuing and discontinued operations, for the years ended December 31, 2011, 2010 and 2009 (dollars in thousands):
                         
    Year Ended December 31,  
    2011     2010     2009  
 
                       
Property net operating income
  $ 264,258     $ 234,116     $ 240,568  
Other non-property income
          1,695       5,695  
Real estate depreciation and amortization
    (197,964 )     (166,480 )     (166,773 )
Interest expense
    (53,632 )     (52,222 )     (53,547 )
General and administrative and property management
    (37,014 )     (32,927 )     (26,595 )
Other operating expenses
    (5,484 )     (5,028 )     (4,868 )
Net gain on sale of real estate
    60,065       152       1,475  
Non-controlling interests
    (70 )     (41 )     (131 )
 
                 
Net (loss)/income attributable to OP unitholders
  $ 30,159     $ (20,735 )   $ (4,176 )
 
                 
Same Store Communities
2011 — vs. — 2010
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2010 and held on December 31, 2011) consisted of 19,194 apartment homes and provided 75.3% of our total NOI for the year ended December 31, 2011.
NOI for our same store community properties increased 6.2% or $11.5 million for the year ended December 31, 2011 compared to the same period in 2010. The increase in property NOI was primarily attributable to a 4.5% or $12.7 million increase in rental income and by a 1.3% or $1.2 million increase in operating expenses. The increase in revenues was primarily driven by a 4.4% or $11.8 million increase in rental rates. Physical occupancy decreased 0.3% to 95.3% and total income per occupied home increased $62 to $1,333 for the year ended December 31, 2011 as compared to the prior year.

 

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The increase in property operating expenses was primarily due to a 6.8% or $989,000 increase in utility 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) was 68.0% for the year ended December 31, 2011 as compared to 67.0% for the comparable period in 2010.
2010 — vs. — 2009
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2009 and held on December 31, 2010) consisted of 21,120 apartment homes and provided 88.8% of our total NOI for the year ended December 31, 2010.
NOI for our same store community properties decreased 2.8 % or $6.0 million for the year ended December 31, 2010 compared to the same period in 2009. The decrease in property NOI was primarily attributable to a 1.4% or $4.3 million decrease in property rental income and by a 1.7% or $1.7 million increase in operating expenses. The decrease in revenues was primarily driven by a 2.8% or $8.8 million decrease in rental rates which was partially offset by a 54.8% or $1.7 million decrease in concessions, a 7.3% or $926,000 decrease in vacancy loss and a 4.7% or $1.1 million increase in reimbursement income. Physical occupancy increased 0.3% to 95.6% and total income per occupied home decreased $22 to $1,279 for the year ended December 31, 2010 as compared to the prior year.
The increase in property operating expenses was primarily driven by a 3.5% or $533,000 increase in utilities, a 4.9% or $743,000 increase in repairs and maintenance, and a 3.0% or $719,000 increase in personnel costs which was partially offset by a 0.7% or $242,000 decrease in real estate taxes and a 3.7% or $241,000 decrease in administrative and marketing 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) was 67.1% for the year ended December 31, 2010 as compared to 68.1% for the comparable period in 2009.
Non-Mature/Other Communities
2011 — vs. — 2010
The remaining $65.4 million and $46.8 million of our NOI during the year ended December 31, 2011 and 2010, respectively, was generated from communities that we classify as “non-mature communities”. Our non-mature communities consist of communities that do not meet the criteria to be included in same store communities, which include communities developed or acquired, redevelopment properties, sold properties, properties managed by third-parties, and properties classified as real estate held for disposition. For the year ended December 31, 2011, we recognized NOI for acquired communities of $22.6 million, redevelopments of $23.9 million, and sold properties of $11.8 million. For the year ended December 31, 2010, we recognized NOI for redeveloped properties of $21.3 million and sold properties of $20.8 million.
2010 — vs. — 2009
The remaining $26.2 million and $26.7 million of our NOI during the year ended December 31, 2010 and 2009, respectively, was generated from communities that we classify as “non-mature communities.” Our non-mature communities consist of communities that do not meet the criteria to be included in same store communities, which includes communities developed or acquired, redevelopment properties, sold properties, properties managed by third-parties, the non-apartment components of mixed use properties, and properties classified as real estate held for sale. For the year ended December 31, 2010, we recognized NOI of $11.4 million for our properties held for sale and $10.2 million of NOI for our redevelopments. The remainder was primarily due to the non-apartment components of mixed use properties. For the year ended December 31, 2009, we recognized NOI of $11.5 million for our properties and $9.5 million of NOI for redeveloped properties. The remaining NOI was primarily due to the non-apartment components of mixed use properties.

 

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Other Income
For the year ended December 31, 2010, other income primarily includes a reversal of certain real estate tax accruals partially offset by losses due to the change in the fair value of derivatives.
For the years ended December 31, 2009, other income primarily includes interest income on a note for $200 million that a subsidiary of the Operating Partnership received related to the disposition of 55 properties during 2008. In May 2009, the $200 million note was paid in full.
Real Estate Depreciation and Amortization
For the year ended December 31, 2011, real estate depreciation and amortization from continuing and discontinued operations increased 18.9% or $31.5 million as compared to the comparable period in 2010. The increase in depreciation and amortization expense is primarily due to the acquisition of four apartment home communities in 2011. As part of the Operating Partnership’s acquisition activities a portion of the purchase price is attributable to the fair value of intangible assets which are typically amortized over a period of less than one year.
For the years ended December 31, 2010, real estate depreciation and amortization from continuing and discontinued operations did not change significantly as compared to the comparable period in 2009 as the Operating Partnership did not have any acquisitions or dispositions during this period.
Interest Expense
For the year ended December 31, 2011, interest expense increased 2.7% or $1.4 million, as compared to the same period in 2010. This increase is primarily due to a higher debt balances from mortgages assumed on certain 2011 acquisitions, issuance of a note payable due to the General Partner in 2011, and an increase in the interest rate charged on the note payable due to the General Partner. The increase is partially offset by lower average borrowings on secured credit facilities, lower weighted average interest rates and the payment of a tax exempt secured note payable in 2011.
For the year ended December 31, 2010, interest expense decreased 2.5% or $1.3 million, as compared to the same period in 2009. This decrease is primarily due a decrease in the interest rate charged on the note payable due to the General Partner partially offset by slightly higher average borrowings on secured credit facilities.
General and Administrative
The Operating Partnership is charged directly for general and administrative expenses it incurs. The Operating Partnership is also charged for other general and administrative expenses that have been allocated by UDR to each of its subsidiaries, including the Operating Partnership, based on each subsidiary’s pro-rata portion of UDR’s total apartment homes.
For the year ended December 31, 2011, general and administrative expenses increased 13.2% or $3.1 million, as compared to the comparable period in 2010. The increase was primarily due to acquisition-related costs associated directly with acquisitions of the Operating Partnership.
For the year ended December 31, 2010, general and administrative expenses increased 37.9% or $6.4 million, as compared to the comparable period in 2009. The increase was due to a number of factors including acquisition-related costs and severance and other restructuring charges recognized in 2010. The increases were consistent with the changes in UDR’s general and administrative expenses and severance and other restructuring expenses for the year ended December 31, 2010.
Income from Discontinued Operations
For the years ended December 31, 2011, 2010 and 2009, we recognized gains on property sales for financial reporting purposes of $60.1 million, $152,000, and $1.5 million, respectively. The increase in gains recognized for the year ended December 31, 2011 as compared to the comparable period in 2010 was primarily due to the sale of eight apartment home communities in 2011. Changes in the level of gains recognized in 2010 as compared to 2009 reflect the residual activities from specific properties sold.

 

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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 year ended December 31, 2011.
Off-Balance Sheet Arrangements
At December 31, 2010, the Operating Partnership was a guarantor on the General Partner’s unsecured credit facility, with an aggregate borrowing capacity of $600 million ($31.8 million outstanding at December 31, 2010). On October 25, 2011, the Operating Partnership issued a guarantee in conjunction with a $900 million unsecured revolving credit facility entered into by the General Partner. The facility replaced the General Partner’s $600 million credit facility. At December 31, 2011, the outstanding balance under the $900 million unsecured credit facility was $421.0 million.
The Operating Partnership is also a guarantor on the General Partner’s $250 million term loan which matures January 2016, a $100 million term loan which matures December 2016, $300 million of medium-term notes due June 2018, and $400 million medium-term notes due January 2022 (issued in January 2012).
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.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2011 (dollars in thousands):
                                         
    Payments Due by Period  
Contractual Obligations   2012     2013-2014     2015-2016     Thereafter     Total  
 
                                       
Long-term debt obligations
  $ 210,191     $ 92,104     $ 325,113     $ 562,237     $ 1,189,645  
Interest on debt obligations
    49,920       85,180       68,175       56,982       260,257  
Operating lease obligations — Ground leases (a)
    4,939       9,878       9,878       314,516       339,211  
 
                             
 
                                       
 
  $ 265,050     $ 187,162     $ 403,166     $ 933,735     $ 1,789,113  
 
                             
(a)   For purposes of our ground lease contracts, the Operating Partnership uses the minimum lease payment, if stated in the agreement. For ground lease agreements where there is a reset provision based on the communities appraised value or consumer price index but does not included a specified minimum lease payment, the Operating Partnership uses the current rent over the remainder of the lease term.
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in and incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report.
Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related financial information required to be filed are attached to this Report. Reference is made to page 74 of this Report for the Index to Consolidated Financial Statements and Schedule of UDR, Inc. and United Dominion Realty, L.P.

 

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Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A.   CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The disclosure controls and procedures of the Company and the Operating Partnership 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 SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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. As a result, our disclosure controls and procedures are designed to provide reasonable assurance that such disclosure controls and procedures will meet their objectives.
As of December 31, 2011, we carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the Company, which is the sole General Partner of the Operating Partnership of the effectiveness of the design and operation of the disclosure controls and procedures of the Company and the Operating Partnership. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer of the Company concluded that the disclosure controls and procedures of the Company and the Operating Partnership are effective at the reasonable assurance level described above.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act for the Company and the Operating Partnership. Under the supervision and with the participation of the management, the Chief Executive Officer and Chief Financial Officer of the Company, which is the sole General Partner of the Operating Partnership, conducted an evaluation of the effectiveness of the internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO). Based on such evaluation, management concluded that the Company’s and the Operating Partnership’s internal control over financial reporting was effective as of December 31, 2011.
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Report, has audited UDR, Inc.’s internal control over financial reporting as of December 31, 2011. The report of Ernst & Young LLP, which expresses an unqualified opinion on UDR, Inc.’s internal control over financial reporting as of December 31, 2011, is included under the heading “Report of Independent Registered Public Accounting Firm” of UDR, Inc. contained in this Report. Further, an attestation report of the registered public accounting firm of United Dominion Realty, L.P. will not be required as long as United Dominion Realty, L.P. is a non-accelerated filer.
Changes in Internal Control Over Financial Reporting
There have not been any changes in either the Company’s or the Operating Partnership’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal quarter to which this report relates that materially affected, or are reasonably likely to materially affect, the internal control over financial reporting of either the Company or the Operating Partnership.

 

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Item 9B.   OTHER INFORMATION
Other Agreements with Executive Officers. In December 2011, we entered into separate aircraft time-share agreements with Mr. Toomey and Mr. Troupe. Under each aircraft time-share agreement, we have agreed to lease an aircraft, including crew and flight services, to each of Mr. Toomey and Mr. Troupe for personal flights from time to time upon their request. Mr. Toomey and Mr. Troupe will each pay us a lease fee as may be set by the board from time to time for the flight expenses that may be charged under applicable regulations. We will invoice Mr. Toomey and Mr. Troupe on the last day of the month in which any respective flight occurs. Each aircraft time-share agreement will remain in effect until December 15, 2014, and each agreement may be terminated by either party, upon ten days’ prior written notice. Each agreement automatically terminates upon the date either Mr. Toomey or Mr. Troupe, respectively, are no longer employed by the Company.

 

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PART III
Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to the information set forth under the headings “Election of Directors,” “Corporate Governance Matters,” “Audit Committee Report,” “Corporate Governance Matters-Board Leadership Structure and Committees-Audit Committee Financial Expert,” “Corporate Governance Matters-Identification and Selection of Nominees for Directors,” “Corporate Governance Matters-Board of Directors and Committee Meetings” and “Section 16(a) Beneficial Ownership Reporting Compliance” in UDR, Inc.’s definitive proxy statement (our “definitive proxy statement”) for its Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the sole general partner of the Operating Partnership.
Information required by this item regarding our executive officers is included in Part I of this Report in the section entitled “Business-Executive Officers of the Company”.
We have a code of ethics for senior financial officers that applies to our principal executive officer, all members of our finance staff, including the principal financial officer, the principal accounting officer, the treasurer and the controller, our director of investor relations, our corporate secretary, and all other Company officers. We also have a code of business conduct and ethics that applies to all of our employees. Information regarding our codes is available on our website, www.udr.com, and is incorporated by reference to the information set forth under the heading “Corporate Governance Matters” in our definitive proxy statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of our codes by posting such amendment or waiver on our website.
Item 11.   EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management,” “Corporate Governance Matters-Board Leadership Structure and Committees-Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation of Directors” and “Compensation Committee Report” in the definitive proxy statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the sole general partner of the Operating Partnership.
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management,” “Executive Compensation” and “Equity Compensation Plan Information” in the definitive proxy statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the sole general partner of the Operating Partnership.
Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to the information set forth under the heading “Security Ownership of Certain Beneficial Owners and Management,” “Corporate Governance Matters-Corporate Governance Overview,” “Corporate Governance Matters-Director Independence,” “Corporate Governance Matters-Board Leadership Structure and Committees-Independence of Audit, Compensation and Governance Committees,” and “Executive Compensation” in the definitive proxy statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the sole general partner of the Operating Partnership.
Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the information set forth under the headings “Audit Fees” and “Pre-Approval Policies and Procedures” in the definitive proxy statement for UDR’s Annual Meeting of Stockholders to be held on May 15, 2012. UDR is the sole general partner of the Operating Partnership.

 

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PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
1. Financial Statements. See Index to Consolidated Financial Statements and Schedules of UDR, Inc. and United Dominion Realty, L.P. on page 74 of this Report.
2. Financial Statement Schedules. See Index to Consolidated Financial Statements and Schedule of UDR, Inc. and United Dominion Realty, L.P. on page 149 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
3. Exhibits. The exhibits filed with this Report are set forth in the Exhibit Index.

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
         
  UDR, INC.
 
 
Date: February 27, 2012  By:   /s/ Thomas W. Toomey    
    Thomas W. Toomey   
    Chief Executive Officer and President   
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on February 27, 2012 by the following persons on behalf of the registrant and in the capacities indicated.
         
/s/ Thomas W. Toomey
  /s/ Eric J. Foss    
 
Thomas W. Toomey
 
 
Eric J. Foss
   
Chief Executive Officer, President, and Director
  Director    
 
       
/s/ David L. Messenger
  /s/ Robert P. Freeman    
 
David L. Messenger
 
 
Robert P. Freeman
   
Senior Vice President and Chief Financial Officer
  Director    
(Principal Financial and Accounting Officer)
       
 
       
/s/ James D. Klingbeil
  /s/ Jon A. Grove    
 
James D. Klingbeil
 
 
Jon A. Grove
   
Chairman of the Board
  Director    
 
       
/s/ Lynne B. Sagalyn
  /s/ Mark J. Sandler    
 
Lynne B. Sagalyn
 
 
Mark J. Sandler
   
Vice Chair of the Board
  Director    
 
       
/s/ Katherine A. Cattanach
  /s/ Thomas C. Wajnert    
 
Katherine A. Cattanach
 
 
Thomas C. Wajnert
   
Director
  Director    

 

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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
         
  UNITED DOMINION REALTY, L.P.

By: UDR, INC., its sole general partner
 
 
Date: February 27, 2012  By:   /s/ Thomas W. Toomey    
    Thomas W. Toomey   
    Chief Executive Officer and President   
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on February 27, 2012 by the following persons on behalf of the registrant and in the capacities indicated.
         
/s/ Thomas W. Toomey
  /s/ Eric J. Foss    
 
Thomas W. Toomey
 
 
Eric J. Foss
   
Chief Executive Officer, President, and
  Director of the General Partner    
Director of the General Partner
       
 
       
/s/ David L. Messenger
  /s/ Robert P. Freeman    
 
David L. Messenger
 
 
Robert P. Freeman
   
Senior Vice President and Chief Financial
  Director of the General Partner    
Officer of the General Partner
       
(Principal Financial and Accounting Officer)
       
 
       
/s/ James D. Klingbeil
  /s/ Jon A. Grove    
 
James D. Klingbeil
 
 
Jon A. Grove
   
Chairman of the Board of the General Partner
  Director of the General Partner    
 
       
/s/ Lynne B. Sagalyn
  /s/ Mark J. Sandler    
 
Lynne B. Sagalyn
 
 
Mark J. Sandler
   
Vice Chair of the Board of the General Partner
  Director of the General Partner    
 
       
/s/ Katherine A. Cattanach
  /s/ Thomas C. Wajnert    
 
Katherine A. Cattanach
 
 
Thomas C. Wajnert
   
Director of the General Partner
  Director of the General Partner    

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
         
    PAGE  
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
       
 
       
UDR, INC.:
       
 
       
    74  
 
       
    76  
 
       
    77  
 
       
    78  
 
       
    79  
 
       
    80  
 
       
UNITED DOMINION REALTY, L.P.:
       
 
       
    119  
 
       
    120  
 
       
    121  
 
       
    122  
 
       
    123  
 
       
    124  
 
       
SCHEDULES FILED AS PART OF THIS REPORT
       
 
       
UDR, INC.:
       
 
       
    149  
 
       
UNITED DOMINION REALTY, L.P.:
       
 
       
    154  
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.

 

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of UDR, Inc.
We have audited the accompanying consolidated balance sheets of UDR, Inc. (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, cash flows, and changes in equity for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of UDR, Inc. at December 31, 2011 and 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), UDR, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Denver, Colorado
February 27, 2012
`

 

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of UDR, Inc.
We have audited UDR, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). UDR, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, UDR, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of UDR, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of operations, cash flows, and changes in equity for each of the three years in the period ended December 31, 2011 of UDR, Inc. and our report dated February 27, 2012, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Denver, Colorado
February 27, 2012

 

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UDR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
                 
    December 31,  
    2011     2010  
 
ASSETS
               
Real estate owned:
               
Real estate held for investment
  $ 7,825,725     $ 6,198,667  
Less: accumulated depreciation
    (1,831,157 )     (1,505,626 )
 
           
Real estate held for investment, net
    5,994,568       4,693,041  
Real estate under development (net of accumlated depreciation of $570 and $0)
    248,176       97,912  
Real estate held for sale (net of accumulated depreciation of $0 and $132,700)
          452,068  
 
           
Total real estate owned, net of accumulated depreciation
    6,242,744       5,243,021  
Cash and cash equivalents
    12,503       9,486  
Marketable securities
          3,866  
Restricted cash
    24,634       15,447  
Deferred financing costs, net
    30,068       27,267  
Notes receivable
          7,800  
Investment in unconsolidated joint ventures
    213,040       148,057  
Other assets
    198,365       74,596  
 
           
Total assets
  $ 6,721,354     $ 5,529,540  
 
           
 
LIABILITIES AND EQUITY
               
 
Liabilities:
               
Secured debt
  $ 1,891,553     $ 1,808,746  
Secured debt — real estate held for sale
          154,924  
Unsecured debt
    2,026,817       1,603,834  
Real estate taxes payable
    13,397       14,585  
Accrued interest payable
    23,208       20,889  
Security deposits and prepaid rent
    35,516       26,046  
Distributions payable
    51,019       36,561  
Deferred fees and gains on the sale of depreciable property
    29,100       28,943  
Accounts payable, accrued expenses, and other liabilities
    95,485       105,925  
 
           
Total liabilities
    4,166,095       3,800,453  
 
Redeemable non-controlling interests in operating partnership
    236,475       119,057  
 
Equity
               
Preferred stock, no par value; 50,000,000 shares authorized 2,803,812 shares of 8.00% Series E Cumulative Convertible issued and outstanding (2,803,812 shares at December 31, 2010)
    46,571       46,571  
3,264,362 shares of 6.75% Series G Cumulative Redeemable issued and outstanding (3,405,562 shares at December 31, 2010)
    81,609       85,139  
Common stock, $0.01 par value; 350,000,000 shares authorized 219,650,225 shares issued and outstanding (182,496,330 shares at December 31, 2010)
    2,197       1,825  
Additional paid-in capital
    3,340,470       2,450,141  
Distributions in excess of net income
    (1,142,895 )     (973,864 )
Accumulated other comprehensive loss, net
    (13,902 )     (3,469 )
 
           
Total stockholders’ equity
    2,314,050       1,606,343  
Non-controlling interest
    4,734       3,687  
 
           
Total equity
    2,318,784       1,610,030  
 
           
Total liabilities and equity
  $ 6,721,354     $ 5,529,540  
 
           
See accompanying notes to consolidated financial statements.

 

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UDR, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
                         
    Years Ended December 31,  
    2011     2010     2009  
 
REVENUES
                       
Rental income
  $ 691,263     $ 574,084     $ 547,820  
Non-property income:
                       
Other income
    17,422       12,502       14,274  
 
                 
Total revenues
    708,685       586,586       562,094  
 
                       
EXPENSES
                       
Rental expenses:
                       
Real estate taxes and insurance
    84,007       70,762       67,533  
Personnel
    56,617       51,696       47,121  
Utilities
    37,405       31,564       29,153  
Repair and maintenance
    37,155       32,386       29,095  
Administrative and marketing
    15,411       14,643       12,920  
Property management
    19,009       15,788       15,066  
Other operating expenses
    5,990       5,773       6,473  
Real estate depreciation and amortization
    356,011       275,615       252,952  
Interest
                       
Expense incurred
    151,144       140,869       135,317  
Amortization of convertible debt discount
    1,077       3,530       4,283  
Other debt charges/(gains)
    4,602       1,204       (3,511 )
General and administrative
    45,915       45,243       39,035  
Severance costs and other restructuring charges
    1,342       6,803        
Other depreciation and amortization
    3,931       4,843       5,161  
 
                 
Total expenses
    819,616       700,719       640,598  
 
                 
Loss from operations
    (110,931 )     (114,133 )     (78,504 )
Loss from unconsolidated entities
    (6,352 )     (4,204 )     (18,665 )
Tax benefit/(expense) of taxable REIT subsidiary
    5,647       2,533       (311 )
 
                 
Loss from continuing operations
    (111,636 )     (115,804 )     (97,480 )
Income from discontinued operations, net of tax
    132,221       9,216       5,857  
 
                 
Consolidated net income/(loss)
    20,585       (106,588 )     (91,623 )
Net (income)/loss attributable to redeemable non-controlling interests in OP
    (395 )     3,835       4,282  
Net income attributable to non-controlling interests
    (167 )     (146 )     (191 )
 
                 
Net income/(loss) attributable to UDR, Inc.
    20,023       (102,899 )     (87,532 )
Distributions to preferred stockholders — Series E (Convertible)
    (3,724 )     (3,726 )     (3,724 )
Distributions to preferred stockholders — Series G
    (5,587 )     (5,762 )     (7,188 )
(Premium)/discount on preferred stock repurchases, net
    (175 )     25       2,586  
 
                 
Net income/(loss) attributable to common stockholders
  $ 10,537     $ (112,362 )   $ (95,858 )
 
                 
 
                       
Earnings per weighted average common share — basic and diluted:
                       
Loss from continuing operations attributable to common stockholders
  $ (0.60 )   $ (0.73 )   $ (0.68 )
Income from discontinued operations
  $ 0.66     $ 0.06     $ 0.04  
Net income/(loss) attributable to common stockholders
  $ 0.05     $ (0.68 )   $ (0.64 )
Common distributions declared per share
  $ 0.80     $ 0.73     $ 0.85  
Weighted average number of common shares outstanding — basic and diluted
    201,294       165,857       149,090  
See accompanying notes to consolidated financial statements.

 

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UDR, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
                         
    Years Ended December 31,  
    2011     2010     2009  
 
Operating Activities
                       
Consolidated net income/(loss)
  $ 20,585     $ (106,588 )   $ (91,623 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
                       
Depreciation and amortization
    374,274       308,289       283,552  
Net gain on sale of marketable securities
    (3,123 )     (4,725 )      
Net gain on sale of cost investments
    (3,946 )            
Net gains on the sale of depreciable property
    (125,928 )     (4,083 )     (2,424 )
Gain on consolidation of joint ventures
                (1,912 )
Write off of the fair market adjustment for debt paid off on consolidated joint venture
                1,552  
Loss/(gain) on debt extinguishment
    4,602       1,204       (9,849 )
Write off of bad debt
    3,613       2,838       3,570  
Write off of note receivable and other assets
                1,354  
Loss from unconsolidated entities
    6,352       4,204       18,665  
Amortization of deferred financing costs and other
    8,696       8,957       7,953  
Amortization of deferred compensation
    9,815       11,411       7,605  
Amortization of convertible debt discount
    1,077       3,530       4,283  
Changes in income tax accruals
    1,424       (865 )     2,854  
Changes in operating assets and liabilities:
                       
Decrease/(increase) in operating assets
    (40,623 )     (5,332 )     3,512  
(Decrease)/increase in operating liabilities
    (12,582 )     (4,660 )     291  
 
                 
Net cash provided by operating activities
    244,236       214,180       229,383  
 
                       
Investing Activities
                       
Proceeds from sales of real estate investments, net
    321,803       20,738        
Proceeds from the sale of marketable securities
    9,799       39,488        
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures
    (989,029 )     (347,582 )     (28,528 )
Cash paid in nonmonetary asset exchange
    (28,124 )            
Development of real estate assets
    (98,683 )     (92,142 )     (183,157 )
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (91,476 )     (73,977 )     (85,403 )
Capital expenditures — non-real estate assets
    (13,267 )     (4,342 )     (6,269 )
Payments related to the buyout of joint venture partner
          (16,141 )      
Investment in unconsolidated joint ventures
    (102,810 )     (110,921 )     (24,988 )
Distributions received from/(paid to) unconsolidated joint venture
    11,202       1,125       1,741  
Proceeds from note receivable
    7,800             200,000  
Purchase deposits on pending real estate acquisitions
    (80,397 )            
Disbursements related to notes receivable
                (500 )
Purchase of marketable securities
                (30,941 )
 
                 
Net cash used in investing activities
    (1,053,182 )     (583,754 )     (158,045 )
 
                       
Financing Activities
                       
Payments on secured debt
    (336,004 )     (187,308 )     (159,612 )
Proceeds from the issuance of secured debt
    30,728       68,380       560,436  
Proceeds from the issuance of unsecured debt
    296,964       399,190       100,000  
Payments on unsecured debt
    (264,829 )     (79,236 )     (641,759 )
Net (repayment)/proceeds of revolving bank debt
    389,250       (157,550 )     189,300  
Payment of financing costs
    (13,465 )     (8,244 )     (8,650 )
Issuance of common and restricted stock, net
    3,866       5,446       398  
Proceeds from the issuance of common shares through public offering, net
    879,754       467,565       67,151  
Payments for the repurchase of Series G preferred stock, net
    (3,597 )     (637 )     (21,505 )
Distributions paid to non-controlling interests
    (10,947 )     (4,314 )     (7,275 )
Distributions paid to preferred stockholders
    (9,311 )     (9,488 )     (11,203 )
Distributions paid to common stockholders
    (150,446 )     (120,729 )     (144,576 )
Repurchase of common stock
                (798 )
 
                 
Net cash provided by/(used in) financing activities
    811,963       373,075       (78,093 )
See accompanying notes to consolidated financial statements.

 

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UDR, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands, except for share data)
                         
    Years Ended December 31,  
    2011     2010     2009  
Net increase/(decrease) in cash and cash equivalents
    3,017       3,501       (6,755 )
Cash and cash equivalents, beginning of year
    9,486       5,985       12,740  
 
                 
Cash and cash equivalents, end of year
  $ 12,503     $ 9,486     $ 5,985  
 
                 
 
                       
Supplemental Information:
                       
Interest paid during the year, net of amounts capitalized
  $ 168,577     $ 154,843     $ 164,357  
Non-cash transactions:
                       
Real estate acquired in asset exchange
    268,853              
Real estate disposed in asset exchange
    192,576              
Contingent consideration accrued in business combination
    3,000              
OP Units issued in partial consideration for property acquisitions
    111,034              
Secured debt assumed in the acquisitions of properties, including asset exchange
    278,657       91,442        
Secured debt transferred in asset exchange
    55,356              
Fair market value adjustment of secured debt assumed in acquisitions of properties, including asset exchange
    26,880       1,820        
Fair market value of land contributed by non-controlling interest
    4,078              
Non-cash consideration to acquire non-real estate asset
    6,864              
Conversion of operating partnership non-controlling interests to Common Stock (12,511 in 2011; 923,944 in 2010; and 2,130,452 in 2009)
    287       18,429       21,117  
Retirement of fully depreciated assets
          8,680       4,407  
Issuance of restricted stock awards
    6       16       2  
Payment of Special Dividend through the issuance of 11,358,042 shares of Common Stock
                132,787  
See accompanying notes to consolidated financial statements.

 

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UDR, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except per share data)
                                                                         
                                                    Accumulated              
                                            Distributions in     Other              
    Preferred Stock     Common Stock     Paid-in     Excess of     Comprehensive     Non-controlling        
    Shares     Amount     Shares     Amount     Capital     Net Income     Income/(Loss)     interest     Total  
Balance, December 31, 2008
    7,234,512     $ 157,339       137,423,074     $ 1,374     $ 1,717,940     $ (448,737 )   $ (11,927 )   $ 3,350     $ 1,419,339  
Comprehensive (loss)/income
                                                                       
Net loss attributable to UDR, Inc.
                                  (87,532 )                 (87,532 )
Net income attributable to non-controlling interest
                                              191       191  
Other comprehensive income:
                                                                       
Change in fair value of marketable securities
                                        4,584             4,584  
Unrealized gain on derivative financial instruments
                                        8,133             8,133  
Allocation to redeemable non-controlling interests
                                        (788 )           (788 )
 
                                                     
Comprehensive income/(loss)
                                  (87,532 )     11,929       191       (75,412 )
 
                                                     
Issuance of common and restricted shares
                193,882       2       8,262                         8,264  
Issuance of common shares through public offering, net of issuance costs
                4,460,032       45       67,186                               67,231  
Redemption of 997,738 shares of 6.75% Series G Cumulative Redeemable Shares
    (997,738 )     (24,944 )                 853       2,586                   (21,505 )
Purchase of common shares
                (100,000 )     (1 )     (797 )                       (798 )
Adjustment for conversion of non-controlling interest in Series B and C LLC Series C, D and E LLC
                            1,456                         1,456  
Adjustment for conversion of non-controlling interests of unitholders in operating partnerships
                2,130,452       21       21,096                         21,117  
Issuance of common shares through special dividend
                11,358,042       114       132,673                         132,787  
Common stock distributions declared ($0.845 per share)
                                  (127,066 )                 (127,066 )
Preferred stock distributions declared-Series E ($1.3288 per share)
                                  (3,724 )                 (3,724 )
Preferred stock distributions declared-Series G ($1.6875 per share)
                                  (7,188 )                 (7,188 )
Adjustment to reflect redeemable non-controlling redemption value
                                  (15,519 )                   (15,519 )
 
                                                     
Balance, December 31, 2009
    6,236,774       132,395       155,465,482       1,555       1,948,669       (687,180 )     2       3,541       1,398,982  
 
                                                     
Comprehensive (loss)/income
                                                                       
Net loss attributable to UDR, Inc.
                                  (102,899 )                   (102,899 )
Net income attributable to non-controlling interest
                                              146       146  
Other comprehensive income:
                                                                       
Change in fair value of marketable securities
                                        (1,092 )           (1,092 )
Unrealized loss on derivative financial instruments
                                        (2,497 )           (2,497 )
Allocation to redeemable non-controlling interests
                                        118             118  
 
                                                     
Comprehensive income/(loss)
                                  (102,899 )     (3,471 )     146       (106,224 )
 
                                                     
Issuance of common and restricted shares
                1,562,537       16       15,710                         15,726  
Issuance of common shares through public offering
                24,544,367       245       467,319                               467,564  
Repurchase of 27,400 shares of 6.75% Series G Cumulative Redeemable Shares
    (27,400 )     (685 )                     23       25                   (637 )
Adjustment for conversion of non-controlling interests of unitholders in operating partnerships
                923,944       9       18,420                         18,429  
Common stock distributions declared ($0.73 per share)
                                  (126,086 )                 (126,086 )
Preferred stock distributions declared-Series E ($1.3288 per share)
                                  (3,726 )                 (3,726 )
Preferred stock distributions declared-Series G ($1.6875 per share)
                                  (5,762 )                 (5,762 )
Adjustment to reflect redeemable non-controlling redemption value
                                  (48,236 )                   (48,236 )
 
                                                     
Balance, December 31, 2010
    6,209,374     $ 131,710       182,496,330       1,825       2,450,141       (973,864 )     (3,469 )     3,687       1,610,030  
 
                                                     
Comprehensive (loss)/income
                                                                       
Net income attributable to UDR, Inc.
                                  20,023                     20,023  
Net income attributable to non-controlling interest
                                              167       167  
Other comprehensive income:
                                                                       
Change in fair value of marketable securities
                                        (3,492 )           (3,492 )
Unrealized loss on derivative financial instruments
                                        (7,345 )           (7,345 )
Allocation to redeemable non-controlling interests
                                        404             404  
 
                                                     
Comprehensive income/(loss)
                                  20,023       (10,433 )     167       9,757  
 
                                                     
Issuance of common and restricted shares
                615,752       6       10,996                         11,002  
Issuance of common shares through public offering
                36,525,632       366       879,388                               879,754  
Repurchase of 141,200 shares of 6.75% Series G Cumulative Redeemable Shares
    (141,200 )     (3,530 )                     108       (175 )                 (3,597 )
Adjustment for conversion of non-controlling interests of unitholders in operating partnerships
                12,511             287                         287  
Acquistion of noncontrolling interest
                            (450 )                       (450 )
Increase in non-controlling interest from business combination, net
                                              880       880  
Common stock distributions declared ($0.80 per share)
                                  (165,590 )                 (165,590 )
Preferred stock distributions declared-Series E ($1.3288 per share)
                                  (3,724 )                 (3,724 )
Preferred stock distributions declared-Series G ($1.6875 per share)
                                  (5,587 )                 (5,587 )
Adjustment to reflect redeemable non-controlling redemption value
                                  (13,978 )                   (13,978 )
 
                                                     
Balance, December 31, 2011
    6,068,174     $ 128,180       219,650,225     $ 2,197     $ 3,340,470     $ (1,142,895 )   $ (13,902 )   $ 4,734     $ 2,318,784  
 
                                                     
See accompanying notes to consolidated financial statements.

 

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011
1. CONSOLIDATION AND BASIS OF PRESENTATION
Organization, formation and special dividend
UDR, Inc. (“UDR”, the “Company” “we” or “our”) is a self-administered real estate investment trust, or REIT, that owns, operates, acquires, renovates, develops, redevelops, and manages apartment communities generally in high barrier-to-entry markets located in the United States. The high barrier-to-entry markets are characterized by limited land for new construction, difficult and lengthy entitlement process, expensive single-family home prices and significant employment growth potential. At December 31, 2011, our apartment portfolio consisted of 163 consolidated communities located in 22 markets consisting of 47,343 apartment homes. In addition, the Company has an ownership interest in 10,496 apartment homes through unconsolidated joint ventures.
On November 5, 2008, our Board of Directors declared a dividend of $1.29 per share (“the Special Dividend”) payable to holders of our Common Stock. The Special Dividend was paid on January 29, 2009 to stockholders of record on December 9, 2008. The Special Dividend represented the Company’s 2008 fourth quarter recurring distribution of $0.33 per share and an additional special distribution in the amount of $0.96 per share due to taxable income arising from our disposition activity occurring during the year. Subject to the Company’s right to pay the entire Special Dividend in cash, stockholders had the option to make an election to receive payment in cash or in shares, however, the aggregate amount of cash payable to stockholders, other than cash payable in lieu of fractional shares, would not be less than $44.0 million.
The Special Dividend, totaling $177.1 million was paid on 137,266,557 Common Shares issued and outstanding on the record date. Approximately $133.1 million of the Special Dividend was paid through the issuance of 11,358,042 shares of Common Stock, which was determined based on the volume weighted average closing sales price of our Common Stock of $11.71 per share on the NYSE on January 21, 2009 and January 22, 2009.
Basis of presentation
The accompanying Consolidated Financial Statements of UDR includes its wholly-owned and/or controlled subsidiaries (see Note 5, Joint Ventures, for further discussion). All significant intercompany accounts and transactions have been eliminated in consolidation.
The Company’s subsidiaries include United Dominion Realty, L.P. (the “Operating Partnership”). As of December 31, 2011 and 2010, there were 184,281,253 and 179,909,408 units in the Operating Partnership outstanding, of which 174,859,951 units or 94.9% and 174,847,440 units or 97.2% were owned by UDR and 9,421,302 units or 5.1% and 5,061,968 units or 2.8% were owned by limited partners, respectively. The consolidated financial statements of UDR include the non-controlling interests of the unitholders in the Operating Partnership. The consolidated financial statements of UDR include the non-controlling interests of the unitholders in the Heritage OP prior to UDR’s ownership of 100% of 6,264,260 units outstanding in Heritage Communities LP as of December 31, 2009.
The Company evaluated subsequent events through the date its financial statements were issued. Except as disclosed in Note 18, Subsequent Events, no other recognized or non-recognized subsequent events were noted.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220), which provides that an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in equity. The ASU does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This requirement is effective for fiscal years and interim periods beginning after December 15, 2011 for the Company. The Company does not expect a material impact on its consolidated financial position, results of operations, or cash flows as a result of this new guidance.
The FASB recently issued ASU Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASC 820), which clarifies Topic 820, but also includes some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Finance Reporting Standards (“IFRS”). This is effective for periods beginning after December 15, 2011 for the Company. The Company does not expect a material impact on its consolidated financial position, results of operations, or cash flows as a result of this new guidance.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29), which addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in ASU 2010-29 also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The Company adopted the requirements of in ASU 2010-29, which were effective prospectively for the Company’s business combinations occurring during the year ended December 31, 2011. See Note 3, Real Estate Owned, for these disclosures.
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements an amendment to ASC Topic 820, Fair Value Measurements and Disclosures (ASU 2010-06). This amendment provides for more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. With the exception for the requirement to disclose activity in Level 3 fair value measurements, which include purchases, sales, issuances and settlements in the rollforward activity, ASU 2010-06 was effective for the Company for our fiscal year beginning in January 1, 2010. Disclosures of rollforward activity in Level 3 fair value measurements was effective for the Company for the interim periods within and for the fiscal year beginning in January 1, 2011, and did not have a material impact on our consolidated financial position, results of operations or cash flows during the year ended December 31, 2011.

 

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
Real estate
Real estate assets held for investment are carried at historical cost and consist of land, buildings and improvements, furniture, fixtures and equipment and other costs incurred during their development, acquisition and redevelopment.
Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to the acquisition and/or improvement of real estate assets are capitalized and depreciated over their estimated useful lives if the expenditures qualify as a betterment or the life of the related asset will be substantially extended beyond the original life expectancy.
UDR purchases real estate investment properties and records the tangible and identifiable intangible assets and liabilities acquired based on their estimated fair value. The primary, although not only, identifiable intangible asset associated with our portfolio is the value of existing lease agreements. When recording the acquisition of a community, we first assign fair value to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the community is vacant. The Company estimates the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. Depreciation on the building is based on the expected useful life of the asset and the in-place leases are amortized over their remaining average contractual life. Property acquisition costs are expensed as incurred.
Quarterly or when changes in circumstances warrant, UDR will assess our real estate portfolio for indicators of impairment. In determining whether the Company has indicators of impairment in our real estate assets, we assess whether the long-lived asset’s carrying value exceeds the community’s undiscounted future cash flows, which is representative of projected net operating income (“NOI”) plus the residual value of the community. Our future cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. If such indicators of impairment are present and the carrying value exceeds the undiscounted cash flows of the community, an impairment loss is recognized equal to the excess of the carrying amount of the asset over its estimated fair value. Our estimates of fair market value represent our best estimate based primarily upon unobservable inputs related to rental rates, operating costs, growth rates, discount rates, capitalization rates, industry trends and reference to market rates and transactions.
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the asset less estimated cost to sell is less than the carrying value of the asset. Properties classified as real estate held for sale generally represent properties that are actively marketed or contracted for sale with the closing expected to occur within the next twelve months. Real estate held for sale is carried at the lower of cost, net of accumulated depreciation, or fair value, less the cost to sell, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held for sale properties are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to held for sale properties are capitalized at cost. Depreciation is not recorded on real estate held for sale.
Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which are 35 years for buildings, 10 to 35 years for major improvements, and 3 to 10 years for furniture, fixtures, equipment, and other assets. As of December 31, 2011 and 2010, the amount of our net intangible assets which are reflected in “Other assets” was $21.4 million and $13.3 million, respectively. As of December 31, 2011 and 2010, the amount of our net intangible liabilities which are reflected in “Accounts payable, accrued expenses, and other liabilities” was $5.9 million and $3.9 million in our Consolidated Balance Sheets. The balances are being amortized over the remaining life of the respective intangible.
All development projects and related costs are capitalized and reported on the Consolidated Balance Sheets as “Real estate under development”. As each building in a project is completed and becomes available for lease-up, the Company ceases capitalization and the assets are depreciated over their estimated useful life. The costs of development projects which include interest, real estate taxes, insurance, and allocated development overhead related to support costs for personnel working directly on the development site are capitalized during the construction period. During the years ended 2011, 2010, and 2009, total interest capitalized was $13.0 million, $12.5 million, and $16.9 million, respectively.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, demand deposits with financial institutions and short-term, highly liquid investments. We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The majority of the Company’s cash and cash equivalents are held at major commercial banks.
Restricted cash
Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and replacement reserves, and security deposits.
Marketable Securities
Marketable securities represented common stock in a publicly held company and were classified as “available-for-sale”. At December 31, 2010, the marketable securities were carried at an estimated fair value of $3.9 million, which consisted of a cost of $374,000 and gross unrealized gains of $3.5 million that was reported as a component of stockholders’ equity.
During the year ended December 31, 2011, the Company sold the marketable securities for $3.5 million, resulting in a gross realized gain of $3.1 million, which is included in “Other Income” on the Consolidated Statements of Operations. The cost of securities sold was based on the specific identification method. As a result of the sale, unrealized gains of $3.5 million were reclassified out of accumulated other comprehensive income/(loss) into earnings during the year ended December 31, 2011.
During the year ended December 31, 2010, the Company sold previously held corporate debt securities, which were classified as “available-for-sale”. Proceeds from the sale of these securities were $39.5 million, resulting in gross realized gains of $4.7 million. These gains are included in “Other income” in the Consolidated Statements of Operations. The amortization of any discount and interest income on these securities are also included in “Other Income” on the Consolidated Statements of Operations for the year ended December 31, 2010 and 2009.
Investment in joint ventures
We use the equity method to account for investments that qualify as variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do not own a majority of the economic interest but have the ability to exercise significant influence over the operating and financial policies of the investee. Throughout these financial statements we use the term “joint venture” when referring to investments in entities in which we do not have a 100% ownership interest. The Company also uses the equity method when we function as the managing member and our joint venture partner has substantive participating rights or where we can be replaced by our joint venture partner as managing member without cause. For a joint venture accounted for under the equity method, our share of net earnings or losses is reflected as income/loss when earned/incurred and distributions are credited against our investment in the joint venture as received.
In determining whether a joint venture is a variable interest entity, the Company considers: the form of our ownership interest and legal structure; the size of our investment; the financing structure of the entity, including necessity of subordinated debt; estimates of future cash flows; ours and our partner’s ability to participate in the decision making related to acquisitions, disposition, budgeting and financing of the entity; obligation to absorb losses and preferential returns; nature of our partner’s primary operations; and the degree, if any, of disproportionally between the economic and voting interests of the entity. As of December 31, 2011, the Company did not assess any of our joint ventures as variable interest entities where UDR was the primary beneficiary.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
We evaluate our investments in unconsolidated joint ventures for events or changes in circumstances that indicate there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, the fair value of the property of the joint venture, and the relationships with the other joint venture partners and its lenders. The amount of loss recognized is the excess of the investment’s carrying amount over its estimated fair value. If we believe that the decline in fair value is temporary, no impairment is recorded. The aforementioned factors are taken into consideration as a whole by management in determining the valuation of our equity method investments. Should the actual results differ from management’s judgment, the valuation could be negatively affected and may result in a negative impact to our Consolidated Financial Statements.
Derivative financial instruments
The Company utilizes derivative financial instruments to manage interest rate risk and generally designates these financial instruments as cash flow hedges. Derivative financial instruments are recorded on our Consolidated Balance Sheets as either an asset or liability and measured quarterly at their fair value. The changes in fair value for cash flow hedges that are deemed effective are reflected in other comprehensive income and for non-designated derivative financial instruments in earnings. The ineffective component of cash flow hedges, if any, is recorded in earnings.
Redeemable noncontrolling interests in the Operating Partnership
Interests in the Operating Partnership held by limited partners are represented by Operating Partnership units (“OP Units”). Income is allocated to holders of OP Units based upon net income available to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to non-controlling interests in accordance with the terms of the individual partnership agreements.
Limited partners have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the limited partnership agreement of the Operating Partnership (the “Partnership Agreement”)), provided that such OP Units have been outstanding for at least one year. UDR, as the general partner of the Operating Partnership may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of Common Stock of the Company for each OP Unit), as defined in the Partnership Agreement. Accordingly, the Company records the OP Units outside of permanent equity and reports the OP Units at their redemption value, equivalent to the fair value of a share of UDR common stock, at each balance sheet date.
Revenue and real estate sales gain recognition
Rental income related to leases is recognized on an accrual basis when due from residents in accordance with FASB ASC 840, Leases and SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”. Rental payments are generally due on a monthly basis and recognized when earned. The Company recognizes interest income, management and other fees and incentives when earned, fixed and determinable.
The Company accounts for sales of real estate in accordance with FASB ASC 360-20, Real Estate Sales. 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 Sheets and record the gain or loss in the period the transaction closes. For sale transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
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 defer the gain on the interest we retain. The Company recognizes any deferred gain when the property is 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.
Income taxes
UDR is operated as, and elects to be taxed as a REIT. Generally, a REIT complies with the provisions of the Internal Revenue Code if it meets certain requirements concerning its income and assets, as well as if it distributes at least 90% of its REIT taxable income to its stockholders and will not be subject to U.S. federal income taxes if it distributes at least 100% of its income. Accordingly, no provision has been made for federal income taxes of the REIT. UDR is subject to certain state and local excise or franchise taxes, for which provision has been made. If we fail to qualify as a REIT in any taxable year, our taxable income will be subject to United States Federal income tax at regular corporate rates (including any applicable alternative minimum tax). Even if we qualify as a REIT, we may be subject to certain state and local income taxes and to United States Federal income tax. We also will be required to pay a 100% tax on non-arms length transactions between us and a taxable REIT subsidiary and on any net income from sales of property that the IRS successfully asserts was property held for sale to customers in the ordinary course.
UDR elected for certain consolidated subsidiaries to be treated as Taxable REIT Subsidiaries (“TRS”) relating to the Company’s development activities. Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date.
Discontinued operations
For properties accounted for under FASB ASC 360, Property, Plant and Equipment (“Topic 360”), the results of operations for those properties sold during the year or classified as held-for-sale at the end of the current year are classified as discontinued operations in the current and prior periods pursuant to FASB ASC 205-20, Presentation of Financial Statements — Discontinued Operations (“Topic 205-20”). Further, to meet the discontinued operations criteria, the Company will not have any significant continuing involvement in the ownership or operation of the property after the sale or disposition. Once a property is classified as held-for-sale, depreciation is no longer recorded. However, if the Company determines that the property no longer meets the criteria for held-for-sale, the Company will recapture any unrecorded depreciation on the property. (See Note 4, Discontinued Operations for further discussion).
Earnings per share
Basic earnings per Common Share is computed based upon the weighted average number of Common Shares outstanding during the year. 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. The dilutive effect of OP units, stock options and other potentially dilutive Common Stock equivalents is determined using the treasury stock method based on UDR’s average stock price.

 

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
The following table sets forth the computation of basic and diluted earning per share (dollars in thousands, except per share amounts):
                         
    Years Ended December 31,  
    2011     2010     2009  
 
Numerator for earnings per share — basic and diluted:
                       
Net income/(loss) attributable to common stockholders
  $ 10,537     $ (112,362 )   $ (95,858 )
 
                 
 
                       
Denominator for earnings per share — basic and diluted:
                       
Weighted average common shares outstanding
    202,573       167,365       150,067  
Non-vested restricted stock awards
    (1,279 )     (1,508 )     (977 )
 
                 
 
                       
Denominator for basic and diluted earnings per share
    201,294       165,857       149,090  
 
                 
 
                       
Net income/(loss) attributable to common stockholders — basic and diluted
  $ 0.05     $ (0.68 )   $ (0.64 )
 
                 
The effect of the conversion of the OP Units, convertible Preferred Stock, convertible debt, stock options, and restricted stock is not dilutive and is therefore not included in the above calculations as the Company reported a loss from continuing operations for the years ended December 31, 2011, 2010, 2009.
If the operating partnership units were converted to Common Stock, the additional shares of Common Stock outstanding for the years ended December 31, 2011, 2010, and 2009 would be 7,601,693; 5,711,275; and 6,705,624 weighted average Common Shares, respectively.
If the convertible Preferred Stock were converted to Common Stock, the additional shares of Common Stock outstanding would be 3,035,548 weighted average Common Shares for the years ended December 31, 2011, 2010 and 2009.
If the stock options and unvested restricted stock were converted to Common Stock, the additional weighted average Common Shares outstanding using the treasury stock method for the three years ended December 31, 2011, 2010, and 2009 would be 2,154,739; 2,296,097; and 729,592 weighted average Common Shares, respectively.
Stock-based employee compensation plans
UDR accounts for its stock-based employee compensation plans in accordance with FASB ASC 718, Compensation- Stock Compensation. This standard requires an entity to measure the cost of employee services received in exchange for an award of an equity instrument based on the award’s fair value on the grant date and recognize the cost over the period during which the employee is required to provide service in exchange for the award, which is generally the vesting period. The fair value for stock options issued by the Company is calculated utilizing the Black-Scholes-Merton formula. For performance based awards, the Company remeasures the fair value each balance sheet date with adjustments made on a cumulative basis until the award is settled and the final compensation is known.
Advertising costs
All advertising costs are expensed as incurred and reported on the Consolidated Statements of Operations within the line item “Administrative and marketing”. During 2011, 2010, and 2009, total advertising expense was $5.4 million, $6.4 million, and $5.7 million, respectively.

 

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UDR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
Cost of raising capital
Costs incurred in connection with the issuance of equity securities are deducted from stockholders’ equity. Costs incurred in connection with the issuance or renewal of debt are subject to the provisions of FASB ASC 470-50, Debt Modification and Extinguishment. Accordingly, if the terms of the renewed or modified debt instrument are deemed to be substantially different (i.e. a 10 percent or greater difference in the cash flows between instruments), all unamortized financing costs associated with the extinguished debt are charged to earnings in the current period. When the cash flows are not substantially different, the costs associated with the renewal or modification are capitalized and amortized into interest expense over the remaining term of the related debt instrument and other related costs are expensed. The balance of any unamortized financing costs associated with retired debt is expensed upon retirement. Deferred financing costs for new debt instruments include fees and costs incurred by the Company to obtain financing. Deferred financing costs are generally amortized on a straight-line basis, which approximates the effective interest method, over a period not to exceed the term of the related debt.
Comprehensive income
Comprehensive income, which is defined as all changes in equity during each period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Consolidated Statements of Changes in Equity. For each of the three years ended December 31, 2011, 2010, and 2009 other comprehensive income/(loss) consisted of the change in fair value of marketable securities, the change in the fair value of effective cash flow hedges, and the allocation of other comprehensive income/(loss) to redeemable non-controlling interests.
Use of estimates
The preparation of these financial statements in accordance with 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 financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates.
Reclassifications
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.
Market concentration risk
The Company is subject to increased exposure from economic and other competitive factors specific to markets where the Company holds a significant percentage of the carrying value of its real estate portfolio. At December 31, 2011, the Company held greater than 10% of the carrying value of its real estate portfolio in the Orange County, California; Metropolitan DC; and
New York, New York markets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
DECEMBER 31, 2011
3. REAL ESTATE OWNED
Real estate assets owned by the Company consist of income producing operating properties, properties under development, land held for future development and properties deemed as held for sale. As of December 31, 2011, the Company owned and consolidated 163 communities in 11 states and the District of Columbia totaling 47,343 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of December 31, 2011 and 2010 (dollar amounts in thousands):
                 
    December 31,  
    2011     2010  
 
Land
  $ 1,919,249     $ 1,611,740  
Depreciable property — held and used:
               
Building and improvements
    5,612,513       4,313,338  
Furniture, fixtures and equipment
    293,963       273,589  
Under development:
               
Land
    116,051       62,410  
Construction in progress
    132,695       35,502  
Held for sale:
               
Land
          171,967  
Building and improvements
          383,076  
Furniture, fixtures and equipment
          29,725  
 
           
Real estate owned
    8,074,471       6,881,347  
Accumulated depreciation
    (1,831,727 )     (1,638,326 )
 
           
Real estate owned, net
  $ 6,242,744     $ 5,243,021  
 
           
The following table summarizes UDR’s real estate community acquisitions for the year ended December 31, 2011 (dollar amounts in thousands):
                                 
                            Purchase  
Property Name   Market     Acquisition Date     Units     Price (a)  
 
                               
10 Hanover Square
  New York, NY   April 2011     493     $ 259,750  
388 Beale
  San Francisco, CA   April 2011     227       90,500  
14 North
  Boston, MA   April 2011     387       64,500  
Inwood West
  Boston, MA   April 2011     446       108,000  
View 14
  Metropolitan D.C.   June 2011     185       105,538  
Rivergate
  New York, NY   July 2011     706       443,403  
21 Chelsea
  New York, NY   August 2011     210       138,930  
95 Wall
  New York, NY   August 2011     507       328,914  
 
                           
 
                    3,161     $ 1,539,535