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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
 
Commission file number 1-10524
 
UDR, INC.
(Exact name of registrant as specified in its charter)
 
     
Maryland
(State or other jurisdiction of
incorporation or organization)
  54-0857512
(I.R.S. Employer
Identification No.)
 
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
 
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   New York Stock Exchange
6.75% Series G Cumulative Redeemable Preferred Stock
  New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  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.  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 the registrant’s knowledge, in definitive proxy or other 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):
 
             
  Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the shares of common stock held by non-affiliates on June 30, 2008 was approximately $1.8 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 13, 2009 there were 148,816,685 shares of the registrant’s common stock outstanding.
 
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 the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 12, 2009.


 

 
TABLE OF CONTENTS
 
                 
        PAGE
 
      Business     2  
      Risk Factors     12  
      Unresolved Staff Comments     21  
      Properties     21  
      Legal Proceedings     22  
      Submission of Matters to a Vote of Security Holders     22  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     23  
      Selected Financial Data     28  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     29  
      Quantitative and Qualitative Disclosures about Market Risk     45  
      Financial Statements and Supplementary Data     46  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     46  
      Controls and Procedures     46  
      Other Information     46  
 
PART III
      Directors, Executive Officers and Corporate Governance     47  
      Executive Compensation     47  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     47  
      Certain Relationships and Related Transactions, and Director Independence     47  
      Principal Accountant Fees and Services     47  
 
PART IV
      Exhibits, Financial Statement Schedules     48  
 EX-10.53
 EX-12
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


Table of Contents

 
PART I
 
Item 1.   BUSINESS
 
General
 
UDR, Inc. is a self administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. At December 31, 2008, our wholly-owned apartment portfolio included 161 communities located in 23 markets, with a total of 44,388 completed apartment homes. In addition, we have an ownership interest in 4,158 apartment units through joint ventures.
 
We have 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 gain) 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 2008, we declared total distributions on an adjusted basis of $2.11 per common share and a dividend of $0.89 per common share to our stockholders due to our disposition activities during 2008, which on a pre-adjusted dividend basis is $2.28 per common share, inclusive of a special dividend of $0.96 per common share to our stockholders. A detailed discussion of the special dividend and the accounting ramifications is included below under the heading “Special Dividend”.
 
                                 
    Dividends Declared in 2008     Dividends Paid in 2008  
    Unadjusted     Adjusted     Unadjusted     Adjusted  
 
First Quarter
  $ 0.330     $ 0.305     $ 0.330     $ 0.305  
Second Quarter
    0.330       0.305       0.330       0.305  
Third Quarter
    0.330       0.305       0.330       0.305  
Fourth Quarter
    1.290       1.190       0.330       0.305  
                                 
Total
  $ 2.280     $ 2.105     $ 1.320     $ 1.220  
                                 
 
We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our corporate offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado. As of February 12, 2009, we had 1,264 full-time employees and 74 part-time employees.
 
Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty L.P., a Delaware limited partnership, and RE3, our subsidiary that focuses on development, land entitlement and short-term hold investments. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the Company,” or “UDR” refer collectively to UDR, Inc. and its subsidiaries.
 
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, and building 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 ensure predictability of earnings and dividends.


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2008 Accomplishments
 
  •  We closed on a two-year unsecured term loan of $240 million of which $200 million was swapped into a fixed rate of 3.61% and $40 million has a rate of LIBOR plus 85 basis points. Proceeds from this loan were used to redeem maturing debt.
 
  •  We closed on a $400 million credit facility which matures November 2018. At December 31, 2008, we had $224.8 million outstanding on the facility — $70.0 million at a fixed interest rate of 5.85% and $154.8 million at a variable interest rate, fixed with two- and three-year LIBOR swaps at an average rate of 4.32%. The Company has five years to draw on the additional $175.2 million of capacity.
 
  •  We sold 8,661,201 shares of common stock adjusted for the special dividend (8,000,000 shares of common stock on an unadjusted basis) in a public offering, resulting in gross proceeds to us of $194.0 million, which were in part used to reduce corporate debt.
 
  •  We completed development on two wholly-owned communities consisting of 644 apartment homes with an aggregate carrying value of $44.4 million.
 
  •  We acquired 4,558 apartment homes in 13 communities for approximately $976.3 million, two parcels of land for $20.0 million, certain rights held by joint venture partner for $1.5 million and a retail property for $19.2 million.
 
  •  We sold 86 communities with a total of 25,684 apartment homes for gross consideration of $1.7 billion.
 
UDR’s Strategies and Vision
 
UDR previously announced its vision to be the innovative multifamily public real estate investment of choice. We identified the following strategies to guide decision-making and accelerated growth:
 
1. Strengthen our portfolio
 
2. Continually improve operations
 
3. Maintain access to low-cost capital
 
Strengthen our Portfolio
 
UDR is focused on increasing its presence in markets with favorable job formation, low housing affordability, and a favorable demand/supply ratio for multifamily housing. Portfolio decisions consider third-party research, taking into account job growth, multifamily permitting and housing affordability.
 
In 2008, UDR sold a portfolio of properties in 86 communities for total consideration of approximately $1.7 billion. This portfolio sale dramatically accelerated our transformation to focus on markets that have the best growth prospects based on favorable job formation and low single-family home affordability. At December 31, 2008, approximately 56.6% of the Company’s same store net operating income was provided by our communities located in California, Washington, Oregon and Metropolitan Washington, D.C.
 
Acquisitions
 
During 2008, in conjunction with our strategy to strengthen our portfolio, UDR acquired 13 communities with 4,558 apartment homes at a total cost of approximately $976.3 million, including the assumption of secured debt. In addition, we purchased two parcels of land for $20.0 million, acquired certain rights held by a joint venture partner for $1.5 million in a consolidated operating joint venture and acquired a retail property for $19.2 million. UDR targets apartment community acquisitions in markets where job growth expectations are above the national average, home affordability is low, and the demand/supply ratio for multi-family housing is favorable.


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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 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 upgrades and repositioning;
 
  •  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.
 
The following table summarizes our apartment acquisitions and our year-end ownership position for the past five years (dollars in thousands):
 
                                         
    2008     2007     2006     2005     2004  
 
Homes acquired
    4,558       2,671       2,763       2,561       8,060  
Homes owned at December 31
    44,388       65,867       70,339       74,875       78,855  
Total real estate owned, at cost
  $ 5,831,753     $ 5,956,481     $ 5,820,122     $ 5,512,424     $ 5,243,296  
 
Dispositions
 
We regularly monitor and adjust our assets to increase the quality and performance of our portfolio. During 2008, as a major step in our portfolio repositioning, we sold 25,684 of our slower growing, non-core apartment homes while exiting some markets, specifically Arkansas, Delaware, Ohio, and South Carolina in an effort to increase the quality and performance of our portfolio. Proceeds from the disposition program were used primarily to reduce debt and fund acquisitions.
 
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; and
 
  •  markets where we do not intend to establish long-term concentration.


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Development Activities
 
The following wholly owned projects were under development as of December 31, 2008:
 
                                                 
    Number of
    Completed
    Cost to
    Budgeted
    Estimated
    Expected
 
    Apartment
    Apartment
    Date
    Cost
    Cost
    Completion
 
    Homes     Homes     (In thousands)     (In thousands)     Per Home     Date  
 
Riachi at One21 — Phase II
Plano, TX
    200       56     $ 13,602     $ 17,900     $ 89,500       1Q09  
Vintage Lofts
Tampa, FL
    249       109       51,470       52,000       208,835       1Q09  
Belmont
Dallas, TX
    465             32,108       62,900       135,269       2Q10  
Residences at Stadium Village
Surprise, AZ
    382             25,698       47,400       124,084       1Q10  
Tribute
Raleigh, NC
    359             15,242       46,500       129,526       1Q10  
Vitruvian Park
Dallas, TX
    392             19,061       66,500       169,643       3Q10  
Signal Hill
Woodbridge, VA
    360             29,642       82,700       229,722       3Q10  
                                                 
      2,407       165     $ 186,823     $ 375,900     $ 156,170          
                                                 
 
Redevelopment Activities
 
During 2008, we continued to reposition properties in targeted markets where we concluded there was an opportunity to add value. Major renovations totaled $51.8 million or $1,123 per average stabilized home for the year ended December 31, 2008.
 
Joint Venture Activities
 
During 2008, we completed the development of an apartment community located in Marina del Rey, CA with 298 apartment homes and a carrying value of $139.3 million. The apartment community is currently in lease-up. In December 2008, we acquired our joint venture partner’s interest in their profit participation and terminated the property management agreement that had approximately two years remaining on the pre-existing contract.
 
The Company has the following unconsolidated joint venture project under development as of December 31, 2008 (based on UDR’s 49% ownership interest):
 
                                                         
    Number of
    Completed
    Cost to
    Budgeted
    Estimated
    Expected
       
    Apartment
    Apartment
    Date
    Cost
    Cost
    Completion
       
    Homes     Homes     (In thousands)     (In thousands)     Per Home     Date        
 
Ashwood Commons
                                                       
Bellevue, WA
    274           $ 43,128     $ 49,000     $ 178,832       3Q09          
                                                         
 
The Company is also a partner in a joint venture to develop another site in Bellevue, Washington. Upon formation of the joint venture, we owned 49% of the entity that proposes to develop a 430 home high-rise apartment building with ground floor retail space. The project is ongoing and will commence construction once favorable financing has been obtained.
 
UDR through unconsolidated joint ventures owns 4,862 apartment homes (with ownership percentages ranging from 20% to 49%) of which 4,158 are operating and 704 are under development. Our total equity investment at December 31, 2008 was $47.0 million. For additional information, see Note 4 “Joint Ventures” of the Consolidated Financial Statements included in this Report.


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Continually Improve Operations
 
UDR is committed to improving operations through automation and enhancing the customer’s experience. Since adopting our new corporate strategies, UDR has out-sourced a call center and created MyUDR, our resident services portal on our website. UDR customers have access to conduct business with us 24 hours a day, 7 days a week to pay rent on line and to submit a service request. Through transforming operations and engaging technology our residents get the convenience they want and our operating teams become more efficient.
 
In 2008, UDR continually enhanced www.udr.com and individual community websites deploying an innovative 3D interactive photo viewer, customized version of the apartment selector program, and special views or photos that feature specific apartment homes that commands an excellent view from the apartment, floor plans and availability. In addition to UDR.com improvements, we also launched a Quick Response 2D bar code program that can be used on most mobile devices. An industry first iPhone apartment search website was launched, and we established a social media website presence in MySpace.com. These enhancements have increased overall web visitor traffic to over 1.4 million visitors and more than 1.0 million organic search engine visitors which contributed to a 15% year-over-year lead stream increase.
 
Previously, UDR launched a new Spanish-language site, marketing to Latinos, the nation’s fastest-growing ethnic group. The site offers over 4,000 Spanish translated web pages and includes apartments for rent search resources. The website can be found at http://es.udr.com and can also be found on any web-enabled mobile device.
 
Maintaining Access to Low-Cost Capital
 
We seek to 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 layer our debt maturities and to be able to access both secured and unsecured debt.
 
Special Dividend
 
On November 5, 2008, our Board of Directors declared a dividend on a pre-adjusted basis of $1.29 per share (approximately $176.0 million or $1.19 per share on an adjusted basis) payable to holders of our common stock (“the Special Dividend”). The Special Dividend was paid on January 29, 2009 to stockholders of record on December 9, 2008. The dividend represented the Company’s fourth quarter recurring pre-adjusted distribution of $0.33 per share ($0.305 per share on an adjusted basis) and an additional special distribution in the pre-adjusted amount of $0.96 per share ($0.89 per share on an adjusted basis) due to taxable income arising from our dispositions 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 pre-adjusted 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. The effect of the issuance of additional shares of common stock pursuant to the Special Dividend was retroactively reflected in each of the historical periods presented within this Report as if those shares were issued and outstanding at the beginning of the earliest period presented. Accordingly, all activity including share issuances, repurchases and forfeitures have been adjusted to reflect the 8.27% increase in the number of shares, except where otherwise noted.


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Financing Activities
 
As part of our plan to strengthen our capital structure, we utilized proceeds from dispositions, 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 2008:
 
  •  Closed on a $240 million, two-year unsecured term loan facility of which $200 million was swapped into a fixed rate of 3.61% and $40 million has a rate of LIBOR plus 85 basis points. Proceeds were used to redeem $200 million of our 4.5% medium term notes due in March 2008 with the remaining $40 million used for general corporate purposes.
 
  •  Closed on a $400 million credit facility which matures November 2018. At December 31, 2008, we had $224.8 million outstanding on the facility - $70.0 million at a fixed interest rate of 5.85% and $154.8 million at a variable interest rate, fixed with two- and three-year LIBOR swaps at an average rate of 4.32%. The Company has five years to draw on the additional $175.2 million of capacity.
 
  •  Sold 8,661,201 shares of our common stock adjusted for the Special Dividend (8,000,000 shares of common stock on an unadjusted basis) in a public offering, resulting in gross proceeds to us of $194.0 million.
 
  •  Obtained five construction loans for a total of $179.3 million of which the Company has drawn $53.9 million for our development projects. The construction loans all have a two- to three-year initial term with extension provisions ranging from one to two years and incur interest at variable rates which range from LIBOR plus 140 basis points to LIBOR plus 225 basis points.
 
  •  Repaid $216.4 million of secured debt and $793.0 million of unsecured debt (represents the notional amount of debt repaid and excludes the gain on extinguishment). The $793.0 million of unsecured debt consisted of $309.5 million for the revolving credit facility, $275.8 million for maturing debt instruments and $207.7 million for the repurchase of unsecured debt instruments.
 
  •  Repurchased unsecured debt with a notional amount of $207.7 million for $176.2 million resulting in a gain on extinguishment of $29.6 million, net of deferred finance charges. The debt retired by the Company matured in 2011, 2014, 2015 and 2016.
 
  •  Repurchased 969,300 shares of our Series G Cumulative Redeemable Preferred Stock for $20.3 million, less than their liquidation value of $24.2 million.
 
Markets and Competitive Conditions
 
Upon completion of our dispositions activity, approximately 56.6% of the Company’s same store net operating income was generated from apartment homes located in markets of California, Oregon, Washington and Metropolitan Washington D.C. 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 and our competitors 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;


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  •  purchasing power;
 
  •  geographic diversification with a presence in 23 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, 2008, our apartment portfolio included 161 wholly-owned communities having a total of 44,388 completed apartment homes and an additional 2,242 under development. The overall quality of our portfolio has significantly improved with the disposition of non-core apartment homes and our upgrade and rehabilitation programs. The upgrading of the portfolio provides several key benefits related to portfolio profitability. It enables us to raise rents more significantly and to attract residents with higher levels of disposable income who are more likely to accept the transfer of 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.
 
Same Community Comparison
 
We believe that one pertinent qualitative measurement of the performance of our portfolio is tracking the results of our same store community’s net operating income (“NOI”), which is total rental revenue, less rental expenses excluding property management and other operating expenses. Our same store population are operating communities which we own and have stabilized occupancy, revenues and expenses as of the beginning of the prior year. For the year ended December 31, 2008, our same store NOI increased by $10.8 million or 3.8% compared to the prior year. The increase in NOI for the 32,124 apartment homes which make up the same store population was driven by an increase in revenues and physical occupancy at our communities.
 
Revenue growth in 2009 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
 
We have elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, we 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.


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Inflation
 
Substantially all of our leases are for a term of one year or less, which may enable us to realize increased rents upon renewal of existing leases or the beginning of new leases. Such short-term leases generally minimize the risk to us of the adverse effects of inflation, although as a general rule these leases permit residents to leave at the end of the lease term without penalty. Short-term leases and relatively consistent demand allow rents to provide an attractive hedge against inflation.
 
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.
 
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, in all material respects, 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.


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Executive Officers of the Company
 
The following table sets forth information about our executive officers as of February 15, 2009. 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
    48     Chief Executive Officer, President and Director     2001  
Warren L. Troupe
    55     Senior Executive Vice President     2008  
W. Mark Wallis
    58     Senior Executive Vice President     2001  
Richard A Giannotti
    53     Executive Vice President — Redevelopment     1985  
Matthew T. Akin
    41     Senior Vice President — Acquisitions & Dispositions     1994  
Mark M. Culwell, Jr. 
    57     Senior Vice President — Development     2006  
Jerry A. Davis
    46     Senior Vice President — Property Operations     2007  
David L. Messenger
    38     Senior Vice President — Chief Financial Officer     2002  
Katie Miles-Ley
    47     Senior Vice President — Human Resources     2007  
Thomas P. Simon
    48     Senior Vice President — Treasurer     2006  
Dhrubo K. Sircar
    56     Senior Vice President, Chief Information Officer     2007  
Thomas A. Spangler
    48     Senior Vice President — Business Development     1998  
S. Douglas Walker
    53     Senior Vice President — Transactions     2006  
 
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 and Chief Financial Officer. 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 currently serves as a member of the boards of the National Association of Real Estate Investment Trusts (NAREIT) and the National Multi Housing Council (NMHC). He serves on the Board of Governors of the Urban Land Institute (ULI) and serves on the Real Estate Roundtable and is an Oregon State University Foundation Trustee.
 
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.
 
Mr. Wallis oversees the areas of acquisitions, dispositions, asset quality and development. He joined us in April 2001 as Senior Executive Vice President responsible for acquisitions, dispositions, condominium conversions, legal and certain administrative matters. Prior to joining us, Mr. Wallis was the President of Golden Living Communities, a company he established in 1995 to develop senior housing. From 1980 to 1995, Mr. Wallis was Executive Vice President of Finance and Administration at Lincoln Property Company where he handled interim and permanent financing for office, retail, multi-family and mixed-use developments. His responsibilities also included the negotiation of acquisitions, dispositions, and management contracts, and he oversaw the direction of the national accounting and computer services divisions. He currently serves as a member of the Board for NMHC and serves on the Board of Trustees for Harding University.
 
Mr. Giannotti oversees redevelopment projects and acquisition efforts and development projects in the mid-Atlantic region. He joined us in September 1985 as Director of Development and Construction. He was appointed Assistant Vice President in 1988, Vice President in 1989, and Senior Vice President in 1996. In


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1998, he was assigned the additional responsibilities of Director of Development for the Eastern Region. In 2003, Mr. Giannotti was promoted to Executive Vice President.
 
Mr. Akin oversees the Company’s acquisition and disposition efforts. He joined us in 1996 in connection with the merger with SouthWest Property Trust, where he had been a Financial Analyst since 1994.
 
Mr. Culwell oversees all aspects of in-house development, joint venture development and pre-sale opportunities. He joined us in June 2006 as Senior Vice President — Development. Prior to joining us, Mr. Culwell served as Regional Vice President of Development for Gables Residential, where he established a $300 million pipeline of new development and redevelopment opportunities. Before joining Gables Residential, Mr. Culwell had over 30 years of real estate experience, including working for Elsinore Group, LLC, Lexford Residential Trust, Cornerstone Housing Corporation and Trammell Crow Residential Company, where his development and construction responsibilities included site selection and acquisition, construction oversight, asset management, as well as obtaining financing for acquisitions and rehabilitations.
 
Mr. Davis oversees property operations. 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. In June 2008 he was named Chief Financial Officer.
 
Ms. Miles-Ley oversees employee relations, organizational development, succession planning, staffing and recruitment, compensation, training and development, benefits administration, HRIS and payroll. She joined us in June 2007 as Senior Vice President — Human Resources. Prior to joining us, Ms. Miles-Ley was with Starz Entertainment Group LLC from 2001 to 2007 where she served as Vice President, Human Resources & Organizational Development. Ms. Miles-Ley had over twenty years of experience with both domestic and international work forces.
 
Mr. Simon oversees debt origination and treasury management. He joined us in October 2006 as Vice President and Treasurer and was promoted to Senior Vice President and Treasurer in June 2008. Prior to joining us, Mr. Simon was with Prentiss Properties Trust (Prentiss) where he most recently served as Senior Vice President and Treasurer. Mr. Simon began his career at Fox & Company, now Grant Thornton, as a tax accountant.
 
Mr. Sircar oversees all aspects of the Company’s Technology Management. He joined us in July 2007 as Senior Vice President, Chief Information Officer. Prior to joining the Company, Mr. Sircar was with Wachovia Corporation from 1995 to 2007, and when he left he was Senior Vice President, Division Information Officer of Finance Technology.
 
Mr. Spangler oversees utilities management, procurement and non-rental revenue programs. He joined us in August 1998 as Assistant Vice President, Operational Planning and Asset Management, and was promoted to Vice President, Director of Operational Planning and Asset Management that same year. He was promoted to Senior Vice President — Business Development in February 2003. Prior to joining us, Mr. Spangler served for nine years as an Asset Manager for Summit Enterprises, Inc. of Virginia, a private investment management firm.
 
Mr. Walker oversees the Company’s Asset Quality, Kitchen & Bath and “Green Building” programs in addition to all non-residential owned and leased real estate. He joined us in May 2006 as Senior Vice President — Transactions. He has authored “Green Building” articles for industry publications and has been recognized by the EPA and the Department of Energy for his contributions to the commercial real estate industry. Prior to joining us, Mr. Walker served as a consultant to the multi-family industry.


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Available Information
 
We file electronically with the Securities and Exchange Commission our 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.
 
NYSE Certification
 
On June 11, 2008, our Chief Executive Officer submitted to the New York Stock Exchange the annual certification required by Section 303A.12(a) of the NYSE Listed Company Manual regarding our compliance with NYSE corporate governance listing standards. In addition, the certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2, respectively, to this Report.
 
Item 1A.   RISK FACTORS
 
There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this report relating to our financial results, operations and business prospects. Except as required by law, we undertake no obligation to update any such forward-looking statements to reflect events or circumstances after the date on which it is made.
 
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. 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 our 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;
 
  •  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.


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We Are Subject to Certain Risks Associated with Selling Apartment Communities, Which Could Limit Our Operational and Financial Flexibility.  We have periodically disposed 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, and purchasers may not be willing to pay prices acceptable to us. 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 materially 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, so that any related capital gain can be deferred for federal income tax purposes. As a result, we may not have immediate access to all of the cash flow generated from our property sales;
 
  •  federal tax laws limit our ability to profit on the sale of communities that we have owned for fewer than four years, and this limitation may prevent us from selling communities when market conditions are favorable; further
 
  •  in March 2008, we sold a portfolio of properties for total consideration of approximately $1.7 billion, including a note receivable in the amount of $200 million. The note is secured by a pledge, security agreement and a guarantee by the buyer’s parent entity. If we fail to receive payment on this note, or if the payment of the note is delayed, it could have an adverse effect on our financial condition.
 
We May Not Have Access to Proceeds Obtained From the Sale of 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 Code, so that any related capital gain can be deferred for federal income tax purposes. As a result, we may not have immediate access to all of the cash flow generated from our property sales. In addition, federal tax laws limit our ability to profit on the sale of communities that we have owned for fewer than four years, and this limitation may prevent us from selling communities when market conditions are favorable.
 
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 enter into an acquisition agreement for an apartment community, we may be unable to complete the acquisition after incurring certain acquisition-related costs;
 
  •  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


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  communities or personnel will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.
 
We do not expect to acquire apartment communities at the rate we have in prior years, which may limit our growth and have a material adverse effect on our business and the market value of our securities. In the past, other real estate investors, including insurance companies, pension and investment funds, developer partnerships, investment companies and other 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;
 
  •  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.
 
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.
 
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


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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 our stockholders.
 
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 market. 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.
 
Risk of Inflation/Deflation.  Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses. Although inflation has not materially impacted our operations in the recent past, increased inflation could have a more pronounced negative impact on our debt interest and general and administrative expenses, as these costs could increase at a rate higher than our rental rates.
 
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.
 
Property Ownership Through Joint Ventures May Limit Our Ability to Act Exclusively in Our Interest.  We have in the past and may in the future develop and acquire properties in joint ventures with other persons or entities when we believe circumstances warrant the use of such structures. If we use such a structure, we could become engaged in a dispute with one or more of our joint venture partners that might affect our ability to operate a jointly-owned property. Moreover, joint venture partners may have business, economic or other objectives that are inconsistent with our objectives, including objectives that relate to the appropriate timing and terms of any sale or refinancing of a property. In some instances, joint venture partners may have competing interests in our markets that could create conflicts of interest.
 
Compliance or Failure to Comply with the Americans with Disabilities Act of 1990 or Other Safety Regulations and Requirements Could Result in Substantial Costs.  The Americans with Disabilities Act generally requires that public buildings, including our properties, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. From time to time claims may be asserted against us with respect to some of our properties under this Act. If, under the Americans with Disabilities Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations.
 
Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. We do not know whether existing requirements will change or whether compliance with future requirements will require significant unanticipated expenditures that will affect our cash flow and results of operations.


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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.
 
Any Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an Adverse Effect on Our Stock Price.  Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we identify one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price.
 
Our Success Depends on Our Senior Management.  Our success depends upon the retention of our senior management, whose continued service in 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.
 
Risks Related to Our Indebtedness and Financing
 
Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk.  We are subject to the risks normally associated with debt financing, including the risk that our operating income and cash flow will be insufficient to make required payments of principal and interest, or could restrict our borrowing capacity under our line of credit due to debt covenant restraints. Sufficient cash flow may not be available to make all required principal payments and still satisfy our distribution requirements to maintain our status as a REIT for federal income tax purposes, and the full limits of our line of credit may not be available to us if our operating performance falls outside the constraints of our debt covenants. Additionally, we are likely to need to refinance substantially all of our outstanding debt as it matures. We may not be able to refinance existing debt, or the terms of any refinancing may not be as favorable as the terms of the existing debt, which could create pressures to sell assets or to issue additional equity when we would otherwise not choose to do so. In addition, our failure to comply with our debt covenants could result in a requirement to repay our indebtedness prior to its maturity, which could have an adverse effect on our cash flow and increase our financing costs.


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Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to Stockholders.  If our apartment communities do not generate sufficient net rental income to meet rental expenses, our ability to make required payments of interest and principal on our debt securities and to pay distributions to our stockholders will be adversely affected. The following factors, among others, may affect the net rental income generated by our apartment communities:
 
  •  the national and local economies;
 
  •  local real estate market conditions, such as an oversupply of apartment homes;
 
  •  tenants’ perceptions of the safety, convenience, and attractiveness of our communities and the neighborhoods where they are located;
 
  •  our ability to provide adequate management, maintenance and insurance;
 
  •  rental expenses, including real estate taxes and utilities;
 
  •  changes in interest rates and the availability of financing; and
 
  •  changes in tax and housing laws, including the enactment of rent control laws or other laws regulating multi-family housing.
 
Expenses associated with our investment in 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.
 
Debt Level May Be Increased.  Our current debt policy does not contain any limitations on the level of debt that we may incur, although our ability to incur debt is limited by covenants in our bank and other credit agreements. We manage our debt to be in compliance with these debt covenants, but subject to compliance with these covenants, we may increase the amount of our debt at any time without a concurrent improvement in our ability to service the additional debt.
 
Financing May Not Be Available and Could Be Dilutive.  Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. We and other companies in the real estate industry have experienced limited availability of financing from time to time. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted.
 
Financing Could be Impacted by Negative Capital Market Conditions.  Recently, domestic financial markets have experienced unusual volatility and uncertainty. While this condition has occurred most visibly within the “subprime” mortgage lending sector of the credit market, liquidity has tightened in overall domestic financial markets, including the investment grade debt and equity capital markets. Consequently, there is greater risk that the financial institutions we do business with could experience disruptions that would negatively affect our ability to obtain financing.
 
Disruptions in Financial Markets May Adversely Impact Availability and Cost of Credit, Impact Our Tenant Base, and Have other Adverse Effects on Us and the Market Price of Our 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. The United States stock and credit markets have recently 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. 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


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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 our 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 our 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. Current tightening of credit in financial markets and increasing unemployment 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.
 
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.
 
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, 2008, we had approximately $345.7 million of variable rate indebtedness outstanding, which constitutes approximately 10.5% of our total outstanding indebtedness as of such date. An increase in interest rates would increase our interest expenses and increase the costs of refinancing existing indebtedness and of issuing new debt. Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and to make distributions to security holders. 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 our 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.
 
Risks Related to Tax Laws
 
We Would Incur Adverse Tax Consequences if We Fail to Qualify as a REIT.  We have elected to be taxed as a REIT under the Internal Revenue Code. Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex 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


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governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.
 
If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to our stockholders in computing our taxable income. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year in which we first failed to qualify. The additional tax liability from the failure to qualify as a REIT would reduce or eliminate the amount of cash available for investment or distribution to our stockholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In addition, we would no longer be required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.
 
REITs May Pay a Portion of Dividends in Common Stock.  In December 2008, the Internal Revenue Service issued Revenue Procedure 2008-68, providing temporary guidance that assists publicly traded REITs in satisfying their tax-related distribution requirements while conserving cash. This 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 guidance, effective January 1, 2008 and ending on or before December 31, 2009, the Internal Revenue Service will treat a distribution of stock by a publicly traded REIT, pursuant to certain elections to receive stock or cash, as a taxable distribution of property. The amount of such stock distribution will be treated as equal to the amount of cash that could have been received instead. The guidance permits REITs to limit the aggregate amount of cash available to stockholders pursuant to the election to 10% of the aggregate distribution of cash and stock taken together. If we pay a portion of our dividends in shares of our common stock pursuant to this temporary guidance, our stockholders may receive less cash than they received in distributions in prior years and the market value of our securities may decline.
 
We May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which are Subject to Certain Tax Risks.  We have established several taxable REIT subsidiaries. Despite our qualification as a REIT, our taxable REIT subsidiaries must pay income tax on their taxable income. In addition, we must comply with various tests to continue to qualify as a REIT for federal income tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not constitute permissible income and investments for these tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature or are otherwise not respected.
 
REIT Distribution Requirements Limit Our Available Cash.  As a REIT, we are subject to annual distribution requirements, which limit the amount of cash we retain for other business purposes, including amounts to fund our growth. We generally must distribute annually at least 90% of our net REIT taxable income, excluding any net capital gain, in order for our distributed earnings not to be subject to corporate income tax. We intend to make distributions to our stockholders to comply with the requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Code.
 
Certain Property Transfers May Generate Prohibited Transaction Income, Resulting in a Penalty Tax on Gain Attributable to the Transaction.  From time to time, we may transfer or otherwise dispose of some of our properties. Under the Internal Revenue Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction and subject to a 100% penalty tax. Since we acquire properties for investment


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purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction and we may jeopardize our ability to retain future gains on real property sales. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
 
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 we are organized and qualify as a REIT we are generally not subject to federal income taxes, but we are 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 our 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.
 
Risks Related to Our Organization and Our Shares
 
Changes in Market Conditions and Volatility of Stock Prices Could Adversely Affect the Market Price of Our Common Stock.  The stock markets, including the New York Stock Exchange, on which we list our common shares, have experienced significant price and volume fluctuations. As a result, the market price of our common stock could be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects.
 
Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in Our Stockholders’ Best Interests.  Maryland business statutes may limit the ability of a third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws which may have the effect of discouraging offers to acquire our Company and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best interests. The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of our stock representing 10% or more of the voting power without our board of directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 662/3% of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides generally that a person who acquires shares of our equity stock that represents 10% (and certain higher levels) of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote.
 
Limitations on Share Ownership and Limitations on the Ability of Our Stockholders to Effect a Change in Control of Our Company May Prevent Takeovers That are Beneficial to Our Stockholders.  One of the requirements for maintenance of our qualification as a REIT for U.S. federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Our charter contains ownership and transfer restrictions relating to our stock primarily to assist us in complying with this and other REIT ownership requirements; however, the restrictions may have the effect of preventing a change of control, which does not threaten REIT status. These restrictions include a provision that generally limits ownership by any person of more than 9.9% of the value of our outstanding equity stock, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. These provisions may have the effect of


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delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.
 
Item 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
Item 2.   PROPERTIES
 
At December 31, 2008, our wholly-owned apartment portfolio included 161 communities located in 23 markets, with a total of 44,388 completed apartment homes.
 
We lease approximately 28,000 square feet of office space in Highlands Ranch, Colorado, for our corporate headquarters and lease an additional 28,089 square feet for our regional offices throughout the country. The table below sets forth a summary of our real estate portfolio by geographic market at December 31, 2008.
 
SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2008
 
                                                                 
                                              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
    14       4,363       13.6 %   $ 793,915     $ 352,965     $ 181,965       95.0 %     832  
San Francisco, CA
    11       2,339       8.8 %     512,266       27,000       219,011       95.7 %     805  
Los Angeles, CA
    8       1,678       7.3 %     425,413       198,693       253,524       86.3 %     983  
Seattle, WA
    9       1,725       5.1 %     299,035       92,862       173,354       94.3 %     832  
San Diego, CA
    5       1,123       2.9 %     171,177       40,566       152,428       95.0 %     797  
Monterey Peninsula, CA
    7       1,565       2.6 %     149,033             95,229       95.3 %     724  
Inland Empire, CA
    3       1,074       2.6 %     148,952       77,208       138,689       93.8 %     886  
Sacramento, CA
    2       914       1.1 %     66,746       48,563       73,026       91.5 %     820  
Portland, OR
    3       716       1.1 %     66,316       11,313       92,620       94.3 %     918  
MID-ATLANTIC REGION
                                                               
Metropolitan DC
    12       3,985       11.9 %     693,658       163,468       174,067       93.0 %     957  
Baltimore, MD
    10       2,120       4.2 %     243,712       20,010       114,958       96.5 %     952  
Richmond, VA
    7       2,211       3.2 %     187,988       27,685       85,024       95.4 %     966  
Norfolk, VA
    6       1,438       1.4 %     81,493       33,688       56,671       94.4 %     1,016  
Other Mid-Atlantic
    5       1,132       1.3 %     75,073             66,319       94.5 %     830  
SOUTHEASTERN REGION
                                                               
Tampa, FL
    10       3,567       4.7 %     271,486       51,877       76,110       91.8 %     963  
Orlando, FL
    11       3,167       4.6 %     265,514       74,558       83,838       91.5 %     978  
Nashville, TN
    8       2,260       3.0 %     174,892       73,462       77,386       95.3 %     933  
Jacksonville, FL
    5       1,857       2.6 %     152,415       15,656       82,076       92.5 %     913  
Other Florida
    4       1,184       1.9 %     110,097             92,987       93.2 %     1,035  
SOUTHWESTERN REGION
                                                               
Dallas, TX
    9       2,991       5.1 %     299,899       43,167       94,965       93.7 %     872  
Phoenix, AZ
    5       1,363       2.0 %     118,060       35,661       86,618       85.0 %     976  
Austin, TX
    2       640       1.4 %     79,621             124,408       92.4 %     1,141  
Other Texas
    3       811       1.0 %     57,521       35,646       89,316       75.6 %     858  
                                                                 
Total Operating Communities
    159       44,223       93.4 %   $ 5,444,282     $ 1,424,048     $ 123,110       92.4 %     911  
                                                                 
Real Estate Under Development(a)
    2       165       3.2 %     186,823       18,695                          
Land
                  2.6 %     152,015                                
Other
                  0.8 %     48,633       19,728                          
                                                                 
Total Real Estate Owned
    161       44,388       100.0 %   $ 5,831,753     $ 1,462,471                          
                                                                 
 
 
(a) The Company is currently developing seven wholly-owned communities with 2,242 apartment homes that have not yet been completed.


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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.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2008.


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PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Common Stock
 
Our common stock is traded on the New York Stock Exchange under the symbol “UDR.” 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.
 
                                                                 
    2008     2007  
                Adjusted
    Unadjusted
                Adjusted
    Unadjusted
 
                Distributions
    Distributions
                Distributions
    Distributions
 
    High     Low     Declared(a)     Declared     High     Low     Declared(a)     Declared  
 
Quarter ended March 31,
  $ 25.91     $ 18.29     $ 0.305     $ 0.33     $ 34.10     $ 30.01     $ 0.305     $ 0.33  
Quarter ended June 30,
  $ 25.95     $ 22.11     $ 0.305     $ 0.33     $ 31.24     $ 25.76     $ 0.305     $ 0.33  
Quarter ended September 30,
  $ 28.50     $ 21.42     $ 0.305     $ 0.33     $ 27.68     $ 21.03     $ 0.305     $ 0.33  
Quarter ended December 31,
  $ 25.50     $ 10.00     $ 1.190     $ 1.29     $ 26.12     $ 19.51     $ 0.305     $ 0.33  
 
 
(a) Distributions declared per share have been retroactively adjusted for the effect of the Special Dividend, which increased the number of shares outstanding by 8.27%.
 
We declared a Special Dividend on our common stock on November 5, 2008 of $0.96 per share on an unadjusted basis ($0.89 per share adjusted for the Special Dividend) in addition to our quarterly dividend of $0.33 per share ($0.305 per share adjusted for the Special Dividend), which represented an aggregate dividend of approximately $1.29 per share ($1.19 per share adjusted for the Special Dividend) or $177.1 million. The aggregate amount of cash that the Company paid to stockholders related to the fourth quarter distribution was $44.0 million. In connection with the Special Dividend the Company issued 11,358,042 million shares of our common stock to our stockholders.
 
On February 13, 2009, the closing sale price of our common stock was $9.40 per share on the NYSE and there were 5,268 holders of record of the 148,816,685 outstanding shares of our common stock.
 
We have determined that, for federal income tax purposes, approximately 8% of the distributions for 2008 represented ordinary income, 69% represented long-term capital gain, and 23% represented unrecaptured section 1250 gain.
 
We pay regular quarterly distributions to holders of our 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 Internal Revenue Code, and other factors. The annual distribution payment for calendar year 2008 necessary for us to maintain our status as a REIT was approximately $0.19 per share of common stock adjusted for the Special Dividend. We declared total distributions of $2.28 per share of common stock ($2.11 per share adjusted for the Special Dividend) for 2008. For distributions made with respect to taxable years ending on or before December 31, 2009, the IRS will allow REITs to reduce the minimum cash distribution to 10% of the total required distribution.
 
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 one share 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


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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 the Special Dividend, 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 the Special Dividend.
 
Distributions declared on the Series E in 2008 were $1.33 per share or $0.3322 per quarter. The Series E is not listed on any exchange. At December 31, 2008, a total of 2,803,812 shares of the Series E were outstanding, which is 3,035,548 if converted to common stock after adjustment for the Special Dividend.
 
Series F Preferred Stock
 
We are authorized to issue up to 20,000,000 shares of our Series F Preferred Stock (“Series F”). Our 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 our Series F Preferred Stock for each OP Unit held. At December 31, 2008, a total of 666,293 shares of the Series F Preferred Stock were outstanding at a value of $67. Holders of the Series F Preferred Stock are entitled to one vote for each share of the Series F Preferred Stock they hold, voting together with the holders of our common stock, on each matter submitted to a vote of securityholders at a meeting of our stockholders. The Series F Preferred Stock does not entitle its holders to any other rights, privileges or preferences.
 
Dividend Reinvestment and Stock Purchase Plan
 
We have a Dividend 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 dividends as declared. As of February 13, 2009, there were approximately 3,000 participants in the plan.
 
Operating Partnership Units
 
From time to time we issue shares of our common stock in exchange for operating partnership units (“OP Units”) tendered to our operating partnerships, United Dominion Realty, L.P. and Heritage Communities L.P., for redemption in accordance with the provisions of their respective partnership agreements. At December 31, 2008 after taking into account the impact of the Special Dividend there were 7,929,169 OP Units and 185,816 OP Units in United Dominion Realty, L.P. and Heritage Communities L.P., (7,323,853 OP Units and 171,629 OP Units in United Dominion realty, L.P. and Heritage Communities L.P. on an unadjusted basis) respectively, that were owned by limited partners. The holder of the OP Units has the right to require United Dominion Realty, L.P. 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, United Dominion Realty, L.P.’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 shares of our common stock. Heritage Communities L.P. OP Units are convertible into common stock in lieu of cash, at our option, once the holder elects to convert, at an exchange ratio of 1.575 shares for each OP Unit. During 2008, after adjustment for the Special Dividend we issued a total of 1,596,402 shares of common stock (1,474,531 shares of common stock on an unadjusted basis) upon redemption of OP Units.
 
Purchases of Equity Securities
 
In February 2006, our Board of Directors authorized a 10.0 million share repurchase program and in January 2008, our Board of Directors authorized an additional 15.0 million share repurchase program. These programs authorize the repurchase of our common stock in open market purchases, in block purchases, privately negotiated transactions, or otherwise. The number of shares authorized for repurchase was not impacted by the Special Dividend. As reflected in the table below, the Company did not repurchase any shares of common stock under these programs during the quarter ended December 31, 2008.


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The following tables set forth certain information regarding our common stock repurchases during the quarter ended December 31, 2008.
 
Information in the following table has not been adjusted for the Special Dividend.
 
                                 
                Total Number
       
                of Shares
    Maximum Number
 
                Purchased as
    of Shares
 
    Total Number of
    Average
    Part of Publicly
    that May Yet Be
 
    Shares
    Price per
    Announced Plans or
    Purchased Under the
 
Period
  Purchased     Share     Programs     Plans or Programs  
 
Beginning Balance
    9,114,200     $ 23.97       9,114,200       15,885,800  
Month Ended October 31, 2008
                      15,885,800  
Month Ended November 30, 2008
                      15,885,800  
Month Ended December 31, 2008
                      15,885,800  
 
Information in the following table has been adjusted for the Special Dividend.
 
                                 
                Total Number
       
                of Shares
    Maximum Number
 
                Purchased as
    of Share
 
    Total Number of
    Average
    Part of Publicly
    that May Yet Be
 
    Shares
    Price per
    Announced Plans or
    Purchased Under the
 
Period
  Purchased     Share     Programs     Plans or Programs  
 
Beginning Balance
    9,867,490     $ 22.14       9,867,490       15,132,510  
Month Ended October 31, 2008
                      15,132,510  
Month Ended November 30, 2008
                      15,132,510  
Month Ended December 31, 2008
                      15,132,510  
 
Recent Sales of Unregistered Securities
 
As an inducement grant in connection with our hiring of Warren L. Troupe, our Senior Executive Vice President, we issued 176,211 shares of our restricted common stock to Mr. Troupe on March 3, 2008 in a transaction exempt from the registration requirements of the Securities Act of 1933 in a reliance on Section 4(2) of the Securities Act. Subject to Mr. Troupe’s continued employment by UDR, the shares of restricted stock will vest pro rata over four years from the date of grant. Information regarding the issuance of these shares of restricted common stock to Mr. Troupe is set forth in our Current Report on Form 8-K dated February 22, 2008 (Commission File No. 1-10524).


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Comparison of One-, Three- and Five- year Cumulative Total Returns
 
The following graphs compare the one-, three- and 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 comparisons assume that all dividends are reinvested.
 
     
One-year
  Three-year
 
                    Total Return Performance             Total Return Performance                    
 
(PERFORMANCE GRAPH)
 
One-year
 
                                                                                                                         
      Period Ended  
  Index     01/31/08       02/29/08       03/31/08       04/30/08       05/31/08       06/30/08       07/31/08       08/31/08       09/30/08       10/31/08       11/30/08       12/31/08  
UDR, Inc. 
    $ 100.00       $ 97.90       $ 107.40       $ 112.22       $ 109.82       $ 99.34       $ 115.03       $ 111.61       $ 117.78       $ 90.78       $ 69.51       $ 64.83  
 
NAREIT Equity Apartment Index
      100.00         98.93         105.21         108.40         109.56         98.47         110.17         108.49         110.81         81.07         69.04         70.65  
 
MSCI US REITS
      100.00         96.20         102.53         108.73         108.86         96.93         99.99         102.31         102.17         69.67         52.97         62.27  
 
S&P 500
      100.00         96.75         96.33         101.03         102.33         93.71         92.92         94.26         85.86         71.44         66.32         67.02  
 
NAREIT Equity REIT Index
      100.00         96.44         102.45         108.45         109.29         97.40         100.79         103.01         102.81         70.25         54.06         62.92  
 
 
Three-year
 
                                                                       
      Period Ended  
  Index     12/31/05       06/30/06       12/31/06       06/30/07       12/31/07       06/30/08       12/31/08  
UDR, Inc. 
    $ 100.00       $ 122.35       $ 141.84       $ 119.79       $ 92.69       $ 107.69       $ 70.27  
 
NAREIT Equity Apartment Index
      100.00         121.04         139.95         132.56         104.36         108.90         78.14  
 
MSCI US REITS
      100.00         113.48         135.92         127.15         113.06         109.17         70.13  
 
S&P 500
      100.00         102.71         115.79         123.85         122.16         107.60         76.96  
 
NAREIT Equity REIT Index
      100.00         112.92         135.06         127.11         113.87         109.77         70.91  
 


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Five-year Total Return Performance
 
(PERFORMANCE GRAPH)
 
Five-year
 
                                                             
      Period Ended  
 Index     12/31/03       12/31/04       12/31/05       12/31/06       12/31/07       12/31/08  
UDR, Inc. 
    $ 100.00       $ 137.37       $ 136.96       $ 194.20       $ 126.96       $ 102.45  
 
NAREIT Equity Apartment Index
      100.00         134.72         154.46         216.16         161.99         121.28  
 
MSCI US REITS
      100.00         131.49         147.44         200.40         166.70         103.40  
 
S&P 500
      100.00         110.88         116.33         134.70         142.10         89.53  
 
NAREIT Equity REIT Index
      100.00         131.58         147.58         199.32         168.05         104.65  
 
 
The foregoing graphs and charts shall not be deemed incorporated by reference by any general statement incorporating by reference this Report into any filing under the Securities Act or under the Exchange Act, except to the extent we specifically incorporate this information by reference


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Item 6.   SELECTED FINANCIAL DATA
 
The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended December 31, 2008. The table should be read in conjunction with our 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. All historical share and per share data has been adjusted to reflect the impact of shares issued in connection with the Special Dividend.
 
                                         
    Years Ended December 31,
 
    (In thousands, except per share data and
 
    apartment homes owned)  
    2008     2007     2006     2005     2004  
 
OPERATING DATA:
                                       
Rental income
  $ 563,408     $ 501,618     $ 467,511     $ 410,120     $ 309,382  
Operating loss
    (60,089 )     (78,083 )     (82,317 )     (54,068 )     (47,561 )
Income from discontinued operations, net of minority interests
    757,136       172,165       197,363       205,250       140,245  
Net income
    706,929       221,348       128,605       155,166       97,152  
Distributions to preferred stockholders
    12,138       13,910       15,370       15,370       19,531  
Net income available to common stockholders
    697,847       205,177       113,235       139,796       71,892  
Common distributions declared
    175,271       177,540       168,408       163,690       152,203  
Special Dividend declared
    177,074                          
Earnings per share — basic and diluted:
                                       
(Loss)/income from continuing operations available to stockholders, net of minority interest
  $ (0.42 )   $ 0.23     $ (0.58 )   $ (0.44 )   $ (0.49 )
Income from discontinued operations, net of minority interests(a)
    5.37       1.18       1.36       1.39       1.01  
Net income available to common stockholders
    4.95       1.41       0.78       0.95       0.52  
Weighted average number of common share outstanding — basic and diluted
    140,982       145,092       144,785       147,395       138,684  
Weighted average number of common share outstanding, OP Units and common stock equivalents outstanding — diluted
    154,715       159,365       160,212       162,550       157,896  
Common distributions declared
  $ 2.11     $ 1.22     $ 1.15     $ 1.11     $ 1.08  
Balance Sheet Data:
                                       
Real estate owned, at cost
  $ 5,831,753     $ 5,956,481     $ 5,820,122     $ 5,512,424     $ 5,243,296  
Accumulated depreciation
    1,078,689       1,371,759       1,253,727       1,123,829       1,007,887  
Total real estate owned, net of accumulated depreciation
    4,753,064       4,584,722       4,566,395       4,388,595       4,235,409  
Total assets
    5,144,295       4,801,121       4,675,875       4,541,593       4,332,001  
Secured debt
    1,462,471       1,137,936       1,182,919       1,116,259       1,197,924  
Unsecured debt
    1,811,576       2,364,740       2,155,866       2,043,518       1,682,058  
Total debt
    3,274,047       3,502,676       3,338,785       3,159,777       2,879,982  
Stockholders’ equity
    1,570,677       1,019,392       1,055,255       1,107,724       1,195,451  
Number of common shares outstanding
    148,781       144,336       146,189       145,088       147,706  
Other Data:
                                       
Total apartments owned (at end of period)
    44,388       65,867       70,339       74,875       78,855  
Weighted average number of apartment homes owned during the year
    46,149       69,662       73,731       76,069       76,873  
Cash Flow Data
                                       
Cash provided by operating activities
  $ 179,754     $ 269,281     $ 237,881     $ 248,186     $ 251,747  
Cash provided by/(used in) investing activities
    302,304       (90,100 )     (158,241 )     (219,017 )     (595,966 )
Cash (used in)/provided by financing activities
    (472,537 )     (178,105 )     (93,040 )     (21,530 )     347,299  
Funds from Operations(b)
                                       
Funds from operations — basic
    210,710     $ 247,408     $ 244,471     $ 238,254     $ 211,670  
Funds from operations — diluted
    214,434       251,132       248,197       241,980       219,557  
 
(a) Reclassified to conform to current year presentation in accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as described in Note 3 to the consolidated financial statements.


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(b) Funds from operations, or FFO, is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of depreciable property, premiums or original issuance costs associated with preferred stock redemptions, plus 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, land entitlement and short-term hold investments. RE3 tax benefits and gain on sales, net of taxes, is defined as net sales proceeds less a tax provision and the gross investment basis of the asset before accumulated depreciation. We consider FFO with RE3 tax benefits and gain on sales, net of taxes, to be a meaningful supplemental measure of performance because the short-term use of funds produce a profit that differs from the traditional long-term investment in real estate for REITs.
 
For 2008, FFO includes a gain of $29.6 million due to the extinguishment of unsecured debt and $1.6 million of net hurricane related recoveries, partially offset by a charge of $1.7 million incurred for exiting the condominium business, $1.7 million for cancelling a pre-sale contract, $4.7 million related to penalties and the write off of the associated deferred financing costs for debt refinancing and $0.7 million for severance
 
For 2005, FFO includes $2.5 million of hurricane related insurance recoveries. For 2004, FFO includes a charge of $5.5 million to cover hurricane related expenses. For the years ended December 31, 2007 and 2004, distributions to preferred stockholders exclude $2.6 million and $5.7 million, respectively, related to premiums on preferred stock repurchases.
 
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,” “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, unanticipated adverse business developments affecting us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
 
Business Overview
 
We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the Company,” or “UDR” refer collectively to UDR, Inc. and its subsidiaries.
 
At December 31, 2008, our wholly-owned real estate portfolio included 161 communities with 44,388 apartment homes and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 11 communities with 4,158 apartment homes.


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The following table summarizes our market information by major geographic markets as of December 31, 2008.
 
                                                         
                Percentage of
    Total
                   
    Number of
    Number of
    Total
    Carrying
    Average
    Total Income
    Net Operating
 
    Apartment
    Apartment
    Carrying
    Value
    Physical
    per Occupied
    Income
 
    Communities     Homes     Value     (In thousands)     Occupancy     Home (a)     (In thousands)  
 
SAME STORE COMMUNITIES
                                                       
WESTERN REGION
                                                       
Orange County, CA
    13       4,067       12.2 %   $ 706,764       95.0 %   $ 1,588     $ 52,925  
San Francisco, CA
    8       1,768       5.3 %     309,563       96.1 %     1,838       27,017  
Los Angeles, CA
    5       1,052       3.2 %     185,070       95.2 %     1,538       12,699  
Seattle, WA
    7       1,199       2.1 %     118,452       95.3 %     1,130       11,278  
San Diego, CA
    5       1,123       2.9 %     171,177       95.0 %     1,389       12,302  
Monterey Peninsula, CA
    7       1,565       2.6 %     149,033       95.3 %     1,069       13,275  
Inland Empire, CA
    2       660       1.4 %     80,309       92.6 %     1,159       5,627  
Sacramento, CA
    2       914       1.1 %     66,746       91.5 %     926       6,324  
Portland, OR
    3       716       1.1 %     66,316       94.3 %     987       5,526  
MID-ATLANTIC REGION
                                                       
Metropolitan DC
    7       1,879       3.2 %     188,271       96.5 %     1,324       19,009  
Baltimore, MD
    8       1,556       2.6 %     151,818       96.6 %     1,176       14,865  
Richmond, VA
    6       1,958       2.6 %     153,747       95.7 %     1,008       16,202  
Norfolk, VA
    6       1,438       1.4 %     81,493       94.4 %     963       10,578  
Other Mid-Atlantic
    5       1,132       1.3 %     75,073       94.5 %     1,030       9,410  
SOUTHEASTERN REGION
                                                       
Tampa, FL
    9       3,081       3.9 %     226,859       94.2 %     953       20,857  
Orlando, FL
    8       2,140       2.6 %     154,385       92.1 %     970       14,331  
Nashville, TN
    7       1,874       2.4 %     139,667       95.6 %     883       12,439  
Jacksonville, FL
    4       1,557       2.0 %     117,401       94.4 %     865       9,361  
Other Florida
    3       976       1.6 %     94,281       93.6 %     1,069       7,322  
SOUTHWESTERN REGION
                                                       
Phoenix, AZ
    3       914       1.2 %     69,781       94.2 %     952       6,809  
Austin, TX
    1       250       0.3 %     20,279       96.9 %     966       1,713  
Dallas, TX
    1       305       1.1 %     61,469       94.2 %     1,636       3,471  
                                                         
Total/Average Same Store Communities
    120       32,124       58.1 %   $ 3,387,954       94.8 %   $ 1,176     $ 293,340  
                                                         
Non-Matures, Commercial Properties and Other
    39       12,099       38.7 %   $ 2,256,976                          
                                                         
Total Real Estate Held for Investment
    159       44,223       96.8 %   $ 5,644,930                          
                                                         
Real Estate Under Development(b)
    2       165       3.2 %   $ 186,823                          
                                                         
Total
    161       44,388       100.0 %   $ 5,831,753                          
                                                         
 
(a) Total Income per Occupied Home represents total revenues per weighted average number of apartment homes occupied.
 
(b) The Company is currently developing seven wholly-owned communities with 2,242 apartment homes that have not yet been completed.
 
Liquidity and Capital Resources
 
Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale or maturity of existing assets, or by the acquisition of additional funds through capital management. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as


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determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes. We routinely use our unsecured bank credit facility to temporarily fund certain operating, investing, financing and other activities prior to arranging for longer-term financing. During the past several years, proceeds from the sale of real estate have been used for debt repayment, investing and financing activities.
 
We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings under credit arrangements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development properties, and potential property acquisitions, through long-term secured and unsecured borrowings, the disposition of properties, and the issuance of additional debt or equity securities. Dividends and budgeted expenditures for improvements and renovations of certain properties are expected to be funded from cash provided by our unsecured revolving credit facility, other debt and equity issuances and cash flows provided by property operations.
 
We have a shelf registration statement filed with the Securities and Exchange Commission which provides for the issuance of an indeterminate amount of common stock, preferred stock, debt securities, 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 the financing activity.
 
Future Capital Needs
 
Future development expenditures are expected to be funded with proceeds from construction loans, the sale of property, our unsecured revolving credit facility, and to a lesser extent, with cash flows provided by operating activities. Acquisition activity in strategic markets is expected to be largely financed through the reinvestment of proceeds from the sale of properties, the issuance of equity and debt securities, the issuance of operating partnership units, the assumption or placement of secured and/or unsecured debt.
 
During 2009, we have approximately $146.1 million of secured debt and $250.1 million of unsecured debt maturing and we anticipate repaying that debt with proceeds from borrowings under our secured or unsecured credit facilities, proceeds from our note receivable, the issuance of new unsecured debt securities or equity or from disposition proceeds. We also anticipate using contractually provided extensions for 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 requires significant judgment.
 
Capital Expenditures
 
In conformity with GAAP, we capitalize those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
 
During 2008, $131.0 million or $2,838 per home was spent on capital expenditures for all of our communities, excluding development, condominium conversions and commercial properties compared to $194.4 million or $2,829 per home spent in 2007. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as roofs, siding, parking lots, and asset preservation capital expenditures, which aggregated $29.1 million or $630 per home. In addition, revenue enhancing capital expenditures, kitchen and bath upgrades, upgrades to HVAC equipment,


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and other extensive exterior/interior upgrades totaled $50.1 million or $1,085 per home, and major renovations totaled $51.8 million or $1,123 per home for the year ended December 31, 2008.
 
The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, condominium conversions and commercial properties, for the periods presented:
 
                                                 
    Year Ended December 31,
 
    (dollars in thousands, except for per apartment homes)  
                      Per Apartment Home  
    2008     2007     % Change     2008     2007     % Change  
 
Turnover capital expenditures
  $ 9,342     $ 13,362       –30.1 %   $ 202     $ 194       4.1 %
Asset preservation expenditures
    19,737       31,071       –36.5 %     428       452       –5.3 %
                                                 
Total recurring capital expenditures
    29,079       44,433       –34.6 %     630       646       –2.5 %
Revenue enhancing improvements
    50,059       78,209       –36.0 %     1,085       1,138       –4.7 %
Major renovations
    51,823       71,785       –27.8 %     1,123       1,045       7.5 %
                                                 
Total capital expenditures
  $ 130,961     $ 194,427       –32.6 %   $ 2,838     $ 2,829       0.3 %
                                                 
Repair and maintenance expense
  $ 32,679     $ 42,518       –23.1 %   $ 708     $ 619       14.4 %
                                                 
Average Stabilized Home Count
    46,149       68,723                                  
 
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 2009 are currently expected to be approximately $675 per home.
 
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 allocate the purchase price to various components, such as land, buildings, and intangibles related to in-place leases in accordance with FASB Statement No. 141, “Business Combinations.” The purchase price is allocated based on the relative 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 contractual lease period.
 
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


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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, 2008 in our Consolidated Statements of Operations we would have incurred $284.8 million in 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 and net cash provided by/(used in) investing and financing activities that are presented in our Consolidated Statements of Cash Flows.
 
Operating Activities
 
For the year ended December 31, 2008, our net cash flow provided by operating activities was $179.8 million compared to $269.3 million for 2007. During 2008, the decrease in cash flow from operating activities resulted primarily from a reduction in property operating income from our apartment community portfolio. The reduction was driven by the Company completing the sale of a significant component of our portfolio in the first quarter of 2008. A portion of the proceeds from the disposition were reinvested in subsequent quarters which diluted the net cash provided by operations for the period in which the Company held restricted 1031 cash funds in lieu of revenue generating operating communities.
 
For the year ended December 31, 2007, our net cash flow provided by operating activities was $269.3 million compared to $237.9 million for 2006. During 2007, the increase in cash flow from operating activities resulted primarily from the increase in property operating income from the Company’s portfolio performing well on a same community basis for revenues and NOI.
 
Investing Activities
 
For the year ended December 31, 2008, net cash provided by investing activities was $302.3 million compared to net cash used of $90.1 million for 2007. Changes in the level of investing activities from period to period reflects our strategy as it relates to acquisitions, capital expenditures, development and disposition activities, as well as the impact of the capital market environment on these activities, all of which are discussed in further detail throughout this Report.
 
For the year ended December 31, 2007, net cash used in investing activities was $90.1 million compared to $158.2 million for 2006. Changes in the level of investing activities from period to period reflects our strategy as it relates to our acquisition, capital expenditure, development, and disposition programs, as well as the impact of the capital market environment on these activities.
 
Acquisitions
 
For the year ended December 31, 2008, we acquired 13 apartment communities with 4,558 apartment homes, two parcels of land, and one retail property for aggregate consideration of $1.0 billion. Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding our interests in communities located in California, Florida, Metropolitan Washington D.C. and the Washington markets over the past years. Prospectively, we plan to continue to channel new investments into those markets we believe will provide the best investment returns. Markets will be targeted based upon defined criteria including favorable job formation and low housing affordability.


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The following wholly-owned communities were acquired during the year ended December 31, 2008 (dollars in thousands).
 
                                 
                      Purchase
 
Property Name
  Market     Acquisition Date     Units     Price(a)  
 
The Place at Millenia
    Orlando, FL       January 2008       371     $ 50,132  
Dulaney Crescent
    Baltimore, MD       March 2008       264       57,690  
Delancey at Shirlington Village
    Metro D.C.       March 2008       241       85,000  
Edgewater
    San Francisco, CA       March 2008       193       115,000  
Circle Towers
    Metro D.C.       March 2008       606       138,378 (b)
Legacy Village
    Dallas, TX       March 2008       1,043       118,500  
Pine Brook Village II
    Orange County, CA       May 2008       296       87,320  
Hearthstone at Merrill Creek
    Seattle, WA       May 2008       220       38,000  
Island Square
    Seattle, WA       July 2008       235       112,202  
Almaden Lake Village
    San Francisco, CA       July 2008       250       47,270  
Residences at the Domain
    Austin, TX       August 2008       390       59,500  
Waterford
    Phoenix, AZ       August 2008       200       23,666  
Vintage Lofts
    Tampa, FL       August 2008       249       43,672 (c)
                                 
                      4,558     $ 976,330  
                                 
 
(a) The purchase price is the contractual amount paid by UDR to the seller and does not include any costs that the Company incurred as a result of the acquisition of the property.
 
(b) The purchase price does not include the $5.9 million allocated to the commercial space acquired in the transaction.
 
(c) This community was acquired by the Company while under development and is projected to be completed in the first quarter of 2009.
 
For the year ended December 31, 2007, we acquired 13 apartment communities with 2,671 apartment homes, six parcels of land, and an interest in an operating joint venture for an aggregate consideration of $486.5 million. In 2006, we acquired eight apartment communities with 2,763 apartment homes for an aggregate consideration of $327.5 million and two parcels of land for $19.9 million.
 
Real Estate Under Development
 
At December 31, 2008, our development pipeline for wholly-owned communities totaled 2,407 homes with a budget of $375.9 million in which we have a carrying value of $186.8 million. We expect to have the first of the communities complete development during 2009. In addition, we own several parcels of land held for future development in which the Company is seeking entitlements and preparing for development, although we do not anticipate development to commence during 2009.
 
For the year ended December 31, 2008, we invested approximately $160.1 million in development projects, an increase of $58.6 million from our 2007 level of $101.5 million. As a result of our investment in developments, we completed development on two wholly-owned communities with 644 apartment homes that have a carrying value of $44.4 million and acquired three pre-sale communities with 820 apartment homes that have a carrying value of $126.4 million during the year ended December 31, 2008.
 
Consolidated Development Joint Venture
 
In 2006, we entered into a joint venture to develop an apartment community with 298 apartment homes in Marina del Rey, California. Our initial investment was $27.5 million. Our joint venture partner was the managing partner as well as the developer, general contractor and property manager. In December 2008, we acquired for $1.5 million our joint venture partner’s interest in their profit participation and terminated the property management agreement that had approximately two years remaining on the pre-existing contract. As a result of terminating our arrangement, the Company recorded a charge to earnings of $305,000 as the profit component related to the management agreement and capitalized the balance as part of the investment in real estate, which will be depreciated over the average remaining life of the tangible asset. As of December 31, 2008, this property is included as a component of our wholly-owned communities.


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Unconsolidated Joint Ventures
 
UDR is a partner in a joint venture to develop a site in Bellevue, Washington. At closing, we owned 49% of the project that involves building a 430 home high rise apartment building with ground floor retail. The project is currently ongoing and will commence construction once market conditions improve and favorable financing has been obtained. Our investment at December 31, 2008 and 2007 was $10.2 million and $8.1 million, respectively.
 
UDR is a partner in a joint venture which will develop 274 apartment homes in the central business district of Bellevue, Washington. Construction began in the fourth quarter of 2006 and is scheduled for completion in the third quarter of 2009. At closing, we owned 49% of the project. Our investment at December 31, 2008 and 2007 was $9.9 million and $8.9 million, respectively.
 
In January 2007, we entered into a joint venture which owns and operates a recently completed 23-story, 166 apartment home high rise community in the central business district of Bellevue, Washington. At closing, UDR owned 49% of the project. Our investment at December 31, 2008 and 2007 was $10.4 million and $11.2 million, respectively.
 
In November 2007, UDR and an institutional unaffiliated partner formed a joint venture which owns and operates various apartment communities located in Texas. On the closing date, UDR sold nine operating properties, consisting of 3,690 units, and contributed one property under development to the joint venture. The property under development has 302 units and was completed in the third quarter of 2008 and commenced lease up at that time. UDR contributed cash and property equal to 20% of the fair value of the properties. The unaffiliated partner contributed cash equal to 80% of the fair value of the properties comprising the venture, which was then used to purchase the nine operating properties from UDR. Our investment at December 31, 2008 and 2007 was $16.5 million and $20.1 million, respectively. In addition, during 2008 we received payment in full of a note receivable of $18.8 million from the joint venture.
 
Disposition of Investments
 
During the year ended December 31, 2008, UDR sold 86 communities with a total of 25,684 apartment homes, for gross consideration of $1.7 billion, 53 condominiums from two communities with a total of 640 condominiums for gross consideration of $6.9 million, one parcel of land for gross proceeds of $1.6 million and one commercial property for gross proceeds of $6.5 million. We recognized after-tax gains for financial reporting purposes of $786.4 million on these sales. Proceeds from the sales were used primarily to acquire new communities and reduce debt. During 2008, we decided to discontinue sales of units with the two communities identified for condominium conversion until such time that the market conditions turn favorable and it is economically beneficial to sell those units versus operate the residual 525 units of those communities. As a result of our decision to revert the remaining units to operations the Company recorded a charge to earnings of $1.7 million, excluding the catch up for depreciation on the units when they were returned to operations.
 
As a result of our disposition activities in 2008, the Company declared a Special Dividend payable to holders of our common stock for $0.96 per share included with our recurring distribution for the Company’s fourth quarter of 2008 for a total of $1.29 per share ($1.19 per share in the aggregate adjusted for the Special Dividend) payable on January 29, 2009 to stockholders of record on December 9, 2008. Additional information regarding the Special Dividend is set forth in Item 1. Business in Part 1 of this Report.
 
In conjunction with the transaction in which we sold 86 communities for $1.7 billion, we received a note in the amount of $200.0 million. The note, which is secured by a pledge, security agreement and a guarantee from the buyer’s parent entity, bears interest at the rate of 7.5% per annum and matures on March 31, 2014, provided however that the master credit facility agreement pursuant to which the buyer financed the acquisition of the properties provides that the buyer will pay or prepay the note on or before the date that is fourteen (14) months after the Initial Closing Date (May 3, 2009) and further that it is an event of default under the master credit facility agreement if the note is not paid in full by June 1, 2009.


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For the year ended December 31, 2007, UDR sold 21 communities with a total of 7,125 apartment homes for gross consideration of $729.2 million, one parcel of land for $4.5 million, and contributed one property under development, at cost, to a joint venture arrangement in Texas. In addition, we sold 61 condominiums from two communities with a total of 640 condominiums for gross consideration of $10.4 million. We recognized after-tax gains for financial reporting purposes of $239.1 million on these sales. Proceeds from the sales were used primarily to reduce debt.
 
Financing Activities
 
For the year ended December 31, 2008, our net cash used in financing activities was $472.5 million compared to $178.1 million for the comparable period of 2007.
 
The following significant financing activity occurred during the year ended December 31, 2008:
 
  •  Closed on a $240.0 million, two-year unsecured term loan facility of which $200 million was swapped into a fixed rate of 3.61% and $40.0 million has a rate of LIBOR plus 85 basis points. Proceeds were used to redeem $200.0 million of our 4.5% medium term notes due in March 2008 with the remaining $40.0 million used for general corporate purposes.
 
  •  Closed on a $400 million credit facility which matures November 2018. At December 31, 2008, we had $224.8 million outstanding on the facility - $70.0 million at a fixed interest rate of 5.85% and $154.8 million at a variable interest rate, fixed with two- and three-year LIBOR swaps at an average rate of 4.32%. The Company has five years to draw on the additional $175.2 million of capacity. This facility replaced a debt instrument with an outstanding balance of $138.9 million that matured on April 1, 2010 that had a stated rate of 6.09%. As a result of this refinancing the Company incurred a charge to earnings of $4.7 million related to the write off of deferred financing charges and prepayment penalties associated with the retired debt instrument. Some of the incremental proceeds from this note were used to purchase unsecured long term debt at a discount to par.
 
  •  Sold 8,661,201 shares of our common stock adjusted for the Special Dividend (8,000,000 shares of common stock on an unadjusted basis) in a public offering resulting in gross proceeds of $194.0 million.
 
  •  Obtained five construction loans for a total of $179.3 million of which the Company has drawn $53.9 million for our development projects. The construction loans all have a three-year initial terms with an extension provision(s) and incur interest at a variable rates which range from LIBOR plus 140 basis points to LIBOR plus 225 basis points.
 
  •  Repaid $216.4 million of secured debt and $793.0 million of unsecured debt (represents the notional amount of debt repaid and excludes the gain on extinguishment). The $793.0 million of unsecured debt consisted of $309.5 million for the revolving credit facility, $275.8 million for maturing debt and $207.7 million for the repurchase of unsecured debt.
 
  •  Repurchased unsecured debt with a notional amount of $207.7 million for $176.2 million resulting in a gain on extinguishment of $29.6 million, net of deferred finance charges. The unsecured debt repurchased by the Company matured in 2011, 2014, 2015 and 2016, respectively. As a result of these repurchases, the gain is presented as a reduction to interest expense on the Consolidated Statement of Operations.
 
  •  Repurchased 969,300 shares of our Series G Cumulative Redeemable Preferred Stock for $20.3 million, less than their liquidation value of $24.2 million.
 
For the year ended December 31, 2007, our net cash used in financing activities was $178.1 million compared to $93.0 million for the comparable period of 2006. The increase in financing activities was due to the Company repaying additional secured debt, the redemption of our Series B Cumulative Redeemable Preferred Stock, repurchase of common stock in the marketplace which was offset by the issuance of issuance of debt and equity securities and drawing down on our unsecured credit facility.


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Credit Facilities
 
As of December 31, 2008, we have secured revolving credit facilities with Fannie Mae with an aggregate commitment of $1.0 billion with $831.2 million 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 $666.6 million of the funded balance fixed at a weighted average interest rate of 5.5% and the remaining balance on these facilities is currently at a weighted average variable rate of 3.1%.
 
As of December 31, 2007, we had secured revolving credit facilities with Fannie Mae with an aggregate commitment of $748.9 million with $663.9 million outstanding. The Fannie Mae credit facilities are for an initial term of ten 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 had $583.1 million of the funded balance fixed at a weighted average interest rate of 5.9% and the remaining balance on these facilities was at a weighted average variable rate of 5.1%.
 
On July 27, 2007, we amended and restated our existing three-year $500 million unsecured revolving credit facility with a maturity date of May 31, 2008, (which could be extended for an additional year at our option) to increase the facility to $600 million and to extend its maturity to July 26, 2012. Under certain circumstances, we may increase the new $600 million credit facility to $750 million. Based on our current credit ratings, the $600 million credit facility carries an interest rate equal to LIBOR plus a spread of 47.5 basis points, which represents a 10 basis point reduction to the previous $500 million revolving credit facility. Under a competitive bid feature and for so long as we maintain an investment grade rating, we have the right under the new $600 million credit facility to bid out 50% of the commitment amount and we can bid out 100% of the commitment amount once per quarter. As of December 31, 2008 and 2007, there was $0 and $309.5 million, respectively, outstanding on the unsecured revolving credit facility.
 
The Fannie Mae credit facility and the bank revolving credit facility 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 $345.7 million in variable rate debt that is not subject to interest rate swap contracts as of December 31, 2008. If market interest rates for variable rate debt increased by 100 basis point, our interest expense would increase by $3.8 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.
 
Funds from Operations
 
Funds from operations, or FFO, is defined as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable property, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We compute FFO for all periods presented in accordance with the recommendations set forth by the National Association of Real Estate Investment Trust’s (“NAREIT”) April 1, 2002 White Paper. We consider FFO in evaluating property


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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.
 
The following table outlines our FFO calculation and reconciliation to GAAP for the three years ended December 31, 2008 adjusted for the Special Dividend (dollars in thousands):
 
                                 
    For The Year Ended December 31,  
    2008     2007     2006        
 
Net income
  $ 706,929     $ 221,348     $ 128,605          
Adjustments:
                               
Distributions to preferred stockholders
    (12,138 )     (13,910 )     (15,370 )        
Real estate depreciation and amortization, including discontinued operations
    251,984       257,450       243,889          
Minority interest, including discontinued operations
    46,491       11,807       7,360          
Real estate depreciation and amortization on unconsolidated joint ventures
    4,502       1,980                
Net gains on the sale of depreciable property to a joint venture
          (113,799 )              
Net gains on the sale of depreciable property in discontinued operations, excluding RE3
    (787,058 )     (117,468 )     (120,013 )        
                                 
Funds from operations — basic
  $ 210,710     $ 247,408     $ 244,471          
                                 
Distributions to preferred stockholders — Series E (Convertible)
    3,724       3,724       3,726          
                                 
Funds from operations — diluted
  $ 214,434     $ 251,132     $ 248,197          
                                 
Weighted average number of common shares and OP Units outstanding — basic
    150,457       153,496       154,198          
Weighted average number of common shares and OP Units outstanding — diluted
    154,715       159,365       160,212          
 
In the computation of diluted FFO, OP Units, out-performance partnership units, convertible debt, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count.


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RE3 is our subsidiary that focuses on development, land entitlement and short-term hold investments. RE3 tax benefits and gain on sales, net of taxes, is defined as net sales proceeds less a tax provision and the gross investment basis of the asset before accumulated depreciation. We consider FFO with RE3 tax benefits and gain on sales, net of taxes, to be a meaningful supplemental measure of performance because the short-term use of funds produce a profit that differs from the traditional long-term investment in real estate for REITs.
 
The following table is our reconciliation of FFO share information adjusted for the Special Dividend to weighted average common shares outstanding, basic and diluted, reflected on the Consolidated Statements of Operations for the three years ended December 31, 2008 (shares in thousands):
 
                                         
    For the Year Ended December 31,  
          2008     2007     2006        
 
Weighted average number of common shares and OP units outstanding basic
            150,457       153,496       154,198          
Weighted average number of OP units outstanding
            (9,475 )     (8,404 )     (9,413 )        
                                         
Weighted average number of common shares outstanding — basic per the Consolidated Statement of Operations
            140,982       145,092       144,785          
                                         
Weighted average number of common shares, OP units, and common stock equivalents outstanding — diluted
            154,715       159,365       160,212          
Weighted average number of OP units outstanding
            (9,475 )     (8,404 )     (9,413 )        
Weighted average incremental shares from assumed conversion of stock options
            (445 )     (682 )     (833 )        
Weighted average incremental shares from unvested restricted stock
            (777 )     (442 )     (212 )        
Weighted average number of incremental shares from assumed conversion of $250 million convertible debt
                        (74 )        
Weighted average number of Series A OPPSs outstanding
                  (1,709 )     (1,859 )        
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
            140,982       145,092       144,785          
                                         
 
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,  
    2008     2007     2006  
 
Net cash provided by operating activities
  $ 179,754     $ 269,281     $ 237,881  
Net cash provided by/(used in) investing activities
    302,304       (90,100 )     (158,241 )
Net cash used in financing activities
    (472,537 )     (178,105 )     (93,040 )
 
Results of Operations
 
The following discussion includes the results of both continuing and discontinued operations for the periods presented.
 
Net Income Available to Common Stockholders
 
2008 -vs-2007
 
Net income available to common stockholders was $697.8 million ($4.95 per diluted share) for the year ended December 31, 2008 as compared to $205.2 million ($1.41 per diluted share) for the comparable period in the prior year after adjustment for the Special Dividend. The increase in net income available to common


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stockholders for the year ended December 31, 2008 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report.
 
  •  An increase of $547.3 million in the gains on the disposition of our property inclusive of gains on sale to a joint venture;
 
  •  A decrease of $42.1 million in total interest expense due in part to the Company recognizing gains of $29.6 on the extinguishment of certain unsecured debt instruments;
 
  •  An increase of $16.9 million related to interest income generated by the Company; and
 
  •  A gain of $3.1 million related to the repurchase of shares of our Series G Cumulative Redeemable Preferred Stock at less than their liquation value
 
The increases to our net income available to common stockholders were offset by: a reduction in property NOI of $80.2 million due to our dispositions; an increase in minority interest of $34.7 million; and an increase in general and administrative expense of $7.6 million when compared to 2007.
 
2007-vs.-2006
 
Net income available to common stockholders was $205.2 million ($1.41 per diluted share) for the year ended December 31, 2007, compared to $113.2 million ($0.78 per diluted share) for the year ended December 31, 2006 after adjustment for the Special Dividend. The increase for the year ended December 31, 2007, when compared to the same period in 2006, resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
 
  •  $98.7 million more in gains recognized from the sale of depreciable property in 2007;
 
  •  $11.4 million more in apartment community operating results in 2007;
 
  •  $3.2 million less in interest expense in 2007; and
 
  •  $1.5 million less in distributions on preferred shares in 2007.
 
These increases in income were partially offset by: a $13.6 million increase in real estate depreciation and amortization expense; an $8.4 million increase in general and administrative expense; $4.3 million in severance costs and other restructuring charges in 2007; $2.3 million in premiums on preferred stock repurchases in 2007; and a $0.9 million decrease in non-property income during 2007 when compared to 2006.
 
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 for each of the periods presented (dollars in thousands):
 
                                                 
    Year Ended December 31,     Year Ended December 31,  
    2008     2007     % Change     2007     2006     % Change  
 
Property rental income
  $ 601,998     $ 735,293       –18.1 %   $ 735,293     $ 736,329       –0.1 %
Property operating expense(a)
    (205,842 )     (258,895 )     –20.5 %     (258,895 )     (271,297 )     –4.6 %
                                                 
Property NOI
  $ 396,156     $ 476,398       –16.8 %   $ 476,398     $ 465,032       2.4 %
                                                 
 
 
(a) Excludes depreciation, amortization, and property management expenses.


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The following table is our reconciliation of property NOI to net income as reflected on the Consolidated Statements of Operations for the periods presented (dollars in thousands):
 
                         
    December 31,  
    2008     2007     2006  
 
Property NOI
  $ 396,156     $ 476,398     $ 465,032  
Commercial operating income/(loss)
    831       2,713       (350 )
Non-property income
    36,903       21,431       11,858  
Hurricane related expenses
    (1,310 )            
Depreciation and amortization
    (256,850 )     (261,038 )     (246,934 )
Interest
    (135,876 )     (178,020 )     (181,183 )
General and administrative and property management
    (63,762 )     (59,881 )     (51,463 )
Severance costs and other restructuring charges
    (653 )     (4,333 )      
Other operating expenses
    (4,569 )     (1,442 )     (1,238 )
Loss from unconsolidated entities
    (3,612 )     (1,589 )      
Net gain on sale of real estate
    786,364       239,068       140,346  
Minority interests
    (46,693 )     (11,959 )     (7,463 )
                         
Net income per the Consolidated Statement of Operations
  $ 706,929     $ 221,348     $ 128,605  
                         
 
Same Communities
2008-vs.-2007
 
Our same store communities (those acquired, developed, and stabilized prior to January 1, 2007 and held on December 31, 2008) which consisted of 32,124 apartment homes and provided 74% of our property NOI for the year ended December 31, 2008.
 
NOI for our same community properties increased 3.8% or $10.8 million for the year ended December 31, 2008 compared to the same period in 2007. The increase in property NOI was primarily attributable to a 3.6% or $14.8 million increase in rental revenues and other income partially offset by a 3.1% or $4.1 million increase in operating expenses. The increase in revenues was primarily driven by a 1.4% or $6.0 million increase in rental rates, a 13.9% or $2.0 million increase in reimbursement income, and a 76.9% or $4.3 million decrease in rental concessions. Physical occupancy increased 0.3% to 94.8% and total income per occupied home increased $37 to $1,176.
 
The increase in property operating expenses was primarily driven by a 5.9% or $2.3 million increase in real estate taxes due to higher assessed values on our communities and favorable tax appeals in 2007 and a 5.4% or $1.7 million increase in personnel costs.
 
As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property net operating income divided by property rental income) increased to 68.3% as compared to 68.1% in the comparable period in the prior year.
 
2007-vs.-2006
 
Our same communities (those communities acquired, developed, and stabilized prior to January 1, 2006 and held on December 31, 2007, which consisted of 30,686 apartment homes) provided 57% of our property net operating income for the year ended December 31, 2007.
 
Same community property net operating income increased 7.0% or $17.7 million compared to 2006. The increase in property operating income was primarily attributable to a 5.0% or $18.8 million increase in revenues from rental and other income and a 0.9% or $1.1 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 4.2% or $16.2 million increase in


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rental rates, an 11.4% or $3.0 million increase in reimbursement income and fee income, and a 16.2% or $1.0 million decrease in rental concessions. These increases were partially offset by a 6.8% or $1.3 million increase in vacancy loss. Physical occupancy decreased 0.2% to 94.6%.
 
The increase in property operating expenses was primarily driven by a 5.2% or $1.8 million increase in real estate taxes that was partially offset by a 7.6% or $0.8 million 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 operating income divided by property rental income) increased 1.3% to 68.2%.
 
Non-Mature Communities
2008-vs.-2007
 
The remaining $103.6 million and $196.5 million of our NOI during the year ended December 31, 2008 and 2007, 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 includes communities developed or acquired, redevelopment properties, sold properties, properties classified as real estate held for disposition and condominium properties. For the year ended December 31, 2008, we recognized NOI for our developments of $7.5 million, acquired communities of $46.0 million, redeveloped properties of $19.2 million and sold properties of $25.0 million. For the year ended December 31, 2007, we recognized net operating income for our developments of $4.0 million, acquired communities of $6.6 million, redeveloped properties of $14.9 million and sold properties of $146.1 million. In addition, in 2007 the Company sold a portfolio of properties into a joint venture that we continue to manage after the transaction and as such is not deemed discontinued operations. The NOI from those communities was $18.3 million.
 
2007-vs.-2006
 
The non-mature communities net operating income for the years ended December 31, 2007 and 2006 is derived largely from acquisitions, developments, redevelopments and dispositions as the Company executed our strategy to enhance our portfolio in high barrier-to-entry markets.
 
Other Income
 
For the year ended December 31, 2008, significant amounts reflected in other income include: interest income from a note for $200 million that the Company received related to the disposition of 86 properties during 2008; interest from uninvested 1031 proceeds; and fees earned for both recurring and non-recurring items related to the Company’s joint ventures. At December 31, 2008, the Company had redeployed all 1031 proceeds.
 
Tax Benefit for TRS
 
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 years ended December 31, 2008, 2007 and 2006 we have recognized a benefit due to the results of operations and temporary differences associated with the TRS.
 
Other Operating Expenses
 
For the year ended December 31, 2008, the increase in other operating expenses is primarily due to additional costs incurred by the Company related to ground leases. In December 2007 and in July 2008, we


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purchased operating communities that were subject to long-term ground leases. A schedule of future obligations related to ground leases is set forth under “Contractual Obligations” below.
 
Real Estate Depreciation and Amortization
 
For the year ended December 31, 2008, real estate depreciation and amortization on both continuing and discontinued operations decreased 2.1% or $5.5 million as compared to the comparable period in 2007. The decrease in depreciation and amortization for the year ended December 31, 2008 is a result of the Company’s repositioning efforts that included the sale of 86 operating communities. As the properties sold in 2008 did not meet the criteria to be deemed as held-for-sale the communities until late in the fourth quarter of 2008, we did not cease depreciation until that time. With the proceeds from the sale, the Company purchased $1.0 billion of properties. As part of our allocation of fair value associated with the purchase price, we attributed $14.0 million to in-place leases for our multi-family communities, which are generally amortized over an 11 month period. During the year ended December 31, 2008, the Company recorded $3.7 million of depreciation related to two properties that we had previously been marketing as condominiums and classified as held-for-sale when we determined it prudent to operate the communities.
 
For the year ended December 31, 2007, real estate depreciation and amortization on both continuing and discontinued operations increased $13.6 million or 5.6% compared to 2006, primarily due to the significant increase in per home acquisition cost compared to the existing portfolio and other capital expenditures.
 
Interest Expense
 
For the year ended December 31, 2008, interest expense on both continuing and discontinued operations decreased 23.7% or $42.1 million as compared to 2007. This decrease is primarily due to the Company recognizing a gain of $29.6 million on debt extinguishment that was partially offset by a $4.2 million prepayment penalty incurred by the Company in refinancing a secured debt instrument in 2008. The gain on debt extinguishment was a result of the Company repurchasing unsecured debt securities with a notional amount of $207.7 million in the open market throughout the year. In addition, the weighted average interest rate decreased from 5.3% in 2007 to 4.9% in 2008, which further reduced our interest expense. The decrease in the weighted average interest rate during 2008 reflects short-term bank borrowings and variable rate debt that had lower interest rates in 2008 when compared to the same period in 2007.
 
For the year ended December 31, 2007, interest expense on both continuing and discontinued operations decreased 1.7% or $3.2 million compared to 2006. For the year ended December 31, 2007, the weighted average amount of debt outstanding increased 5.9% or $193.8 million compared to 2006 and the weighted average interest rate decreased from 5.4% in 2006 to 5.3% in 2007. The weighted average amount of debt outstanding during 2007 was slightly higher than 2006 as acquisition costs in 2007 have been funded primarily by the issuance of debt. The decrease in the weighted average interest rate during 2007 reflects short-term bank borrowings and variable rate debt that had lower interest rates in 2007 when compared to the same period in 2006.
 
General and Administrative
 
For the year ended December 31, 2008, general and administrative expenses increased 19.2% or $7.6 million as compared to 2007. The increase was due to a number of factors, including the Company writing off acquisition-related costs, the Company no longer pursuing a condominium strategy resulted in writing off $1.7 million in deferred sales charges, the renegotiation and/or cancellation of certain operating leases and/or vendor contracts of $0.8 million, the Company cancelling a contract to acquire a pre-sale property resulting in a charge of $1.7 million and the Company acquiring certain contractual rights related to a joint venture resulted in the Company incurring a charge of $305,000 for the profit component of the contracts.
 
For the year ended December 31, 2007, general and administrative expenses increased $8.4 million or 26.8% compared to 2006. The increase was due to a number of factors, including increases in personnel costs, incentive compensation, and legal and professional fees.


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Severance Costs and Other Restructuring Charges
 
For the year ended December 31, 2008, the Company recognized $653,000 of severance and restructuring charges as the Company continued to consolidate our operations in Highlands Ranch, Colorado. In addition, we announced reductions to certain positions related to both operations and corporate.
 
For the year ended December 31, 2007, UDR recognized $4.3 million in severance costs and other restructuring charges partly as a result of our disposition of 86 communities consisting of 25,684 apartment homes. As a result of a comprehensive review of the organizational structure of UDR and its operations, UDR recorded a charge of $3.6 million during the fourth quarter of 2007 related to workforce reductions, relocation costs, and other related costs. These charges are included in the Consolidated Statements of Operations within the line item “Severance costs and other restructuring charges.” All charges were approved by management and our Board of Directors in October 2007. The Company had a zero balance related to the 2007 charges as of December 31, 2008.
 
Gains on the Sale of Land and Depreciable Property
 
For the years ended December 31, 2008, 2007 and 2006, we recognized after-tax gains for financial reporting purposes of $786.4 million, $239.1 million and $140.3 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. Substantially all of our leases are for a term of one year or less which generally minimizes our risk from the adverse effects of inflation.
 
Off-Balance Sheet Arrangements
 
UDR has entered into one contract to purchase an apartment community of 289 homes in Dallas, Texas for approximately $29.0 million upon completion of its development. This apartment community is expected to be completed in the fourth quarter of 2009.
 
Other than the purchase contract listed above, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2008 (dollars in thousands):
 
                                         
    Payments Due by Period  
Contractual Obligations
  2009     2010-2011     2012-2013     Thereafter     Total  
 
Long-term debt obligations
  $ 396,188     $ 1,010,330     $ 657,123     $ 1,210,406     $ 3,274,047  
Interest on debt obligations
    120,110       216,121       177,692       191,890       705,813  
Unfunded commitments on development projects(a)
    4,829       184,249                     189,078  
Purchase obligations
    29,000                         29,000  
Operating lease obligations:
                                       
Operating space
    1,264       1,978       793             4,035  
Ground leases(b)
    4,520       9,040       9,040       293,702       316,302  
                                         
    $ 555,911     $ 1,421,718     $ 844,648     $ 1,695,998     $ 4,518,275  
                                         


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(a) Any unfunded costs at December 31, 2008 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 2008, we incurred gross interest costs of $177.8 million, of which $14.9 million was capitalized.
 
Factors Affecting Our Business and Prospects
 
There are many factors that affect our business and the results of our operations, some of which are beyond our control. These factors include:
 
  •  general economic factors;
 
  •  unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates;
 
  •  the failure of acquisitions to achieve anticipated results;
 
  •  possible difficulty in selling apartment communities;
 
  •  the timing and closing of planned dispositions under agreement;
 
  •  competitive factors that may limit our ability to lease apartment homes or increase or maintain rents;
 
  •  insufficient cash flow that could affect our debt financing and create refinancing risk;
 
  •  failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders;
 
  •  development and construction risks that may impact our profitability;
 
  •  potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs to us;
 
  •  risks from extraordinary losses for which we may not have insurance or adequate reserves;
 
  •  uninsured losses due to 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 Internal Revenue Code in any taxable year;
 
  •  our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price; and
 
  •  changes in real estate laws, tax laws and other laws affecting our business.
 
A discussion of these and other factors affecting our business and prospects is set forth in Part I, Item 1A. Risk Factors. We encourage investors to review these risk factors.
 
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.


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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 50 of this Report for the Index to Consolidated Financial Statements and Schedule.
 
Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
Item 9A.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As of December 31, 2008, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports.
 
It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. However, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective under circumstances where our disclosure controls and procedures should reasonably be expected to operate effectively.
 
Management’s Report on Internal Control over Financial Reporting
 
UDR’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, our Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO).
 
Based on UDR’s evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2008.
 
Ernst & Young LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this Report, has audited UDR’s internal control over financial reporting as of December 31, 2008. The report of Ernst & Young LLP, which expresses an unqualified opinion on UDR’s internal control over financial reporting as of December 31, 2008, is included under the heading “Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting” contained in this Report.
 
Changes in Internal Control Over Financial Reporting
 
Our Chief Executive Officer and our Chief Financial Officer concluded that during the quarter ended December 31, 2008, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
Item 9B.   OTHER INFORMATION
 
None.


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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-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 our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 12, 2009.
 
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 our Annual Meeting of Stockholders to be held on May 12, 2009. 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-Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation of Directors” and “Compensation Committee Report” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 12, 2009.
 
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 our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 12, 2009.
 
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-Independence of Audit, Compensation and Governance Committees,” and “Executive Compensation” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 12, 2009.
 
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 our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 12, 2009.


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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 Schedule on page 50 of this Report.
 
2. Financial Statement Schedule. See Index to Consolidated Financial Statements and Schedule on page 50 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 26, 2009
  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 26, 2009 by the following persons on behalf of the registrant and in the capacities indicated.
 
         
/s/  Thomas W. Toomey

Thomas W. Toomey
Chief Executive Officer, President, and Director
 
/s/  Robert P. Freeman

Robert P. Freeman
Director
     
/s/  David L. Messenger

David L. Messenger
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
 
/s/  Jon A. Grove

Jon A. Grove
Director
     
/s/  Robert C. Larson

Robert C. Larson
Chairman of the Board
 
/s/  Thomas R. Oliver

Thomas R. Oliver
Director
     
/s/  James D. Klingbeil

James D. Klingbeil
Vice Chairman of the Board
 
/s/  Lynne B. Sagalyn

Lynne B. Sagalyn
Director
     
/s/  Katherine A. Cattanach

Katherine A. Cattanach
Director
 
/s/  Mark J. Sandler

Mark J. Sandler
Director
     
/s/  Eric J. Foss

Eric J. Foss
Director
 
/s/  Thomas C. Wajnert

Thomas C. Wajnert
Director


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
UDR, INC.
 
         
    Page
 
    51  
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
       
    52  
    53  
    54  
    55  
    57  
    59  
SCHEDULE FILED AS PART OF THIS REPORT
       
    93  
 
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 UDR, Inc.’s internal control over financial reporting as of December 31, 2008, 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, 2008, 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, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008 of UDR, Inc. and our report dated February 20, 2009, expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Denver, Colorado
February 20, 2009


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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, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. 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, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, 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, 2008, 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 20, 2009 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Denver, Colorado
February 20, 2009


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UDR, Inc.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
 
                 
    December 31,  
    2008     2007  
 
ASSETS
Real estate owned:
               
Real estate held for investment
  $ 5,644,930     $ 4,186,360  
Less: accumulated depreciation
    (1,078,637 )     (832,598 )
                 
      4,566,293       3,353,762  
Real estate under development (net of accumulated depreciation of $52 and $963)
    186,771       343,768  
Real estate held for disposition (net of accumulated depreciation of $0 and $538,198)
          887,192  
                 
Total real estate owned, net of accumulated depreciation
    4,753,064       4,584,722  
Cash and cash equivalents
    12,740       3,219  
Restricted cash
    7,726       4,847  
Deferred financing costs, net
    29,658       34,136  
Notes receivable
    207,450       12,655  
Investment in unconsolidated joint ventures
    47,048       48,264  
Escrow — 1031 exchange funds
          56,217  
Other assets
    85,842       53,730  
Other assets — real estate held for disposition
    767       3,331  
                 
Total assets
  $ 5,144,295     $ 4,801,121  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt
  $ 1,462,471     $ 910,611  
Secured debt — real estate held for disposition
          227,325  
Unsecured debt
    1,811,576       2,364,740  
Real estate taxes payable
    14,035       8,922  
Accrued interest payable
    20,744       27,999  
Security deposits and prepaid rent
    28,829       22,061  
Distributions payable
    57,144       49,152  
Deferred gains on the sale of depreciable property
    28,845       28,690  
Accounts payable, accrued expenses, and other liabilities
    71,395       52,070  
Other liabilities — real estate held for disposition
    1,204       28,110  
                 
Total liabilities
    3,496,243       3,719,680  
Minority interests
    77,375       62,049  
Stockholders’ equity
               
Preferred stock, no par value; 50,000,000 shares authorized
2,803,812 shares of 8.00% Series E Cumulative Convertible issued and outstanding (2,803,812 shares at December 31, 2007)
    46,571       46,571  
4,430,700 shares of 6.75% Series G Cumulative Redeemable issued and outstanding (5,400,000 shares at December 31, 2007)
    110,768       135,000  
Common stock, $0.01 par value; 250,000,000 shares authorized 148,781,115 shares issued and outstanding (144,336,438 shares at December 31, 2007)
    1,488       1,443  
Additional paid-in capital
    1,818,269       1,753,472  
Distributions in excess of net income
    (393,704 )     (916,280 )
Accumulated other comprehensive loss
    (12,715 )     (814 )
                 
Total stockholders’ equity
    1,570,677       1,019,392  
                 
Total liabilities and stockholders’ equity
  $ 5,144,295     $ 4,801,121  
                 
 
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,  
    2008     2007     2006  
 
REVENUES
                       
Rental income
  $ 563,408     $ 501,618     $ 467,511  
Non-property income:
                       
Other income
    27,190       4,320       3,585  
                         
Total Revenues
    590,598       505,938       471,096  
                         
EXPENSES
                       
Rental expenses:
                       
Real estate taxes and insurance
    68,428       59,036       55,603  
Personnel
    48,672       43,038       41,616  
Utilities
    29,301       26,147       24,717  
Repair and maintenance
    30,333       27,342       26,059  
Administrative and marketing
    14,640       13,009       13,039  
Property management
    15,494       13,792       12,856  
Other operating expenses
    4,563       1,442       1,238  
Hurricane related expenses
    1,310              
Real estate depreciation and amortization
    251,984       191,478       165,499  
Interest
                       
Expense incurred
    158,702       161,761       179,075  
Gain on debt extinguishment
    (29,639 )            
Prepayment penalty on debt restructure
    4,201              
General and administrative
    47,179       39,566       31,198  
Severance costs and other restructuring charges
    653       4,333        
Other depreciation and amortization
    4,866       3,077       2,513  
                         
Total Expenses
    650,687       584,021       553,413  
                         
Operating loss
    (60,089 )     (78,083 )     (82,317 )
Loss from unconsolidated entities
    (3,612 )     (1,589 )      
Tax benefit for the TRS
    9,713       17,110       8,268  
Minority interests of outside partnerships
    (202 )     (152 )     (103 )
Minority interests of unitholders in operating partnerships
    3,983       (1,902 )     5,394  
Net gain on the sale of depreciable property to a joint venture
          113,799        
                         
(Loss)/ income before discontinued operations, net of minority interests
    (50,207 )     49,183       (68,758 )
Income from discontinued operations, net of minority interests
    757,136       172,165       197,363  
                         
Net income
    706,929       221,348       128,605  
Distributions to preferred stockholders — Series B
          (4,819 )     (11,644 )
Distributions to preferred stockholders — Series E (Convertible)
    (3,724 )     (3,724 )     (3,726 )
Distributions to preferred stockholders — Series G
    (8,414 )     (5,367 )      
Discount/(premium) on preferred stock repurchases, net
    3,056       (2,261 )      
                         
Net income available to common stockholders
  $ 697,847     $ 205,177     $ 113,235  
                         
Earnings per weighted average common share — basic and diluted:
                       
(Loss)/income from continuing operations available to common stockholders, net of minority interests
  $ (0.42 )   $ 0.23     $ (0.58 )
Income from discontinued operations, net of minority interests
  $ 5.37     $ 1.18     $ 1.36  
Net income available to common stockholders
  $ 4.95     $ 1.41     $ 0.78  
Common distributions declared per share
  $ 2.11     $ 1.22     $ 1.15  
Weighted average number of common shares outstanding — basic
    140,982       145,092       144,785  
Weighted average number of common shares outstanding — diluted
    140,982       145,092       144,785  
 
See accompanying notes to consolidated financial statements


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UDR, Inc.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
 
                         
    Twelve Months Ended December 31,  
    2008     2007     2006  
 
Operating Activities
                       
Net income
  $ 706,929     $ 221,348     $ 128,605  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    256,850       261,038       246,934  
Net gains on the sale of depreciable property
    (786,181 )     (125,269 )     (140,346 )
Net gains on the sale of land
    (183 )            
Net gains on the sale of depreciable property to a joint venture
          (113,799 )      
Gains on debt extinguishment
    (29,639 )            
Gains on the sale of technology investment
                (796 )
Minority interests
    46,693       11,958       7,463  
Write off of bad debt
    2,411       4,042       3,806  
Loss from unconsolidated entities
    3,612       1,589        
Amortization of deferred financing costs and other
    7,762       7,482       6,063  
Amortization of deferred compensation
    7,024       6,356        
(Refunds)/prepayments on income taxes
    (6,846 )     6,284       (6,288 )
Changes in operating assets and liabilities:
                       
Increase in operating assets
    (27,146 )     (7,495 )     (6,519 )
Decrease in operating liabilities
    (1,532 )     (4,253 )     (1,041 )
                         
Net cash provided by operating activities
    179,754       269,281       237,881  
Investing Activities
                       
Proceeds from sales of real estate investments, net
    1,487,067       737,201       484,476  
Proceeds from note receivable
    18,774       4,000       59,805  
Disbursements related to notes receivable
    (13,569 )     (6,155 )     (5,500 )
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures
    (936,538 )     (435,997 )     (365,606 )
Development of real estate assets
    (160,074 )     (101,460 )     (101,849 )
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (123,234 )     (194,427 )     (215,721 )
Capital expenditures — non-real estate assets
    (23,249 )     (4,547 )     (3,465 )
Investment in unconsolidated joint venture
    (2,396 )     (24,954 )      
Contributions to unconsolidated joint ventures
                (6,823 )
Proceeds from the sale of technology investment
                796  
Purchase deposits on pending real estate acquisitions
    (694 )     (7,544 )     (4,354 )
Change in funds held in escrow from IRC Section 1031 exchanges
    56,217       (56,217 )      
                         
Net cash provided by/(used in) investing activities
    302,304       (90,100 )     (158,241 )


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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data) — (Continued)
 
                         
    Twelve Months Ended December 31,  
    2008     2007     2006  
 
Financing Activities
                       
Payments on secured debt
    (216,354 )     (186,831 )     (70,339 )
Proceeds from the issuance of unsecured debt
    240,000       150,000       375,000  
Proceeds from the issuance of secured debt
    445,162       91,804       78,860  
Payments on unsecured debt
    (452,156 )     (167,255 )     (138,849 )
Net (repayment)/proceeds of revolving bank debt
    (309,500 )     222,300       (123,600 )
Purchase of capped call equity instrument
                (12,588 )
Payment of financing costs
    (6,702 )     (6,772 )     (10,284 )
Proceeds from the exercise of stock options
    2,588       2,524       5,303  
Proceeds from the issuance of common shares through public offering
    184,327              
Proceeds from the (redemption)/issuance of Series G preferred stock, net
    (20,347 )     135,000        
Payment of preferred stock issuance costs
          (4,252 )      
(Repayment)/proceeds from the investment of performance based programs, net
    (944 )     50       400  
Purchase of minority interests owned by Series A LLC
                (2,059 )
Distributions paid to minority interests
    (18,666 )     (12,099 )     (12,729 )
Distributions paid to preferred stockholders
    (12,429 )     (13,312 )     (15,370 )
Distributions paid to common stockholders
    (166,983 )     (175,923 )     (166,785 )
Repurchase of common stock
    (140,533 )     (77,939 )      
Redemption of Series B preferred stock
          (135,400 )      
                         
Net cash used in financing activities
    (472,537 )     (178,105 )     (93,040 )
Net increase/(decrease) in cash and cash equivalents
    9,521       1,076       (13,400 )
Cash and cash equivalents, beginning of year
    3,219       2,143       15,543  
                         
Cash and cash equivalents, end of year
  $ 12,740     $ 3,219     $ 2,143  
                         
Supplemental Information:
                       
Interest paid during the period
  $ 176,087     $ 197,722     $ 174,871  
Non-cash transactions:
                       
Conversion of operating partnership minority interests to common stock (1,596,402 shares in 2008, 1,012,788 shares in 2007 and 412,491 shares in 2006)
    12,176       8,794       7,988  
Issuance of restricted stock awards
    6       1       3  
Issuance of note receivable upon the disposition of real estate
    200,000              
Secured debt assumed with the acquisition of properties, net of fair value adjustment
    95,728       72,680       24,512  
Real estate assets contributed
          10,350        
Non-cash transactions associated with consolidated joint venture:
                       
Real estate assets acquired
                62,059  
Secured debt assumed
                33,627  
Operating liabilities assumed
                3,840  
 
See accompanying notes to consolidated financial statements.


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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data)
 
                                                                 
                                        Accumulated
       
                                  Distributions in
    Other
       
    Preferred Stock     Common Stock     Paid-in
    Excess of
    Comprehensive
       
    Shares     Amount     Shares     Amount     Capital     Net Income     Loss     Total  
 
Balance, December 31, 2005
    8,219,821     $ 181,971       145,088,173     $ 1,451     $ 1,813,046     $ (888,744 )   $     $ 1,107,724  
                                                                 
Comprehensive Income
                                                               
Net income
                                  128,605             128,605  
                                                                 
Comprehensive income
                                            128,605             128,605  
                                                                 
Issuance of common and restricted shares and other
                688,643       7       9,357                   9,364  
Adjustment for conversion of minority interests of unitholders in operating partnerships
                412,491       4       7,984                   7,988  
Adjustment for conversion of minority interests owned by Series A LLC
                            (2,059 )                 (2,059 )
Purchase of capped call equity instrument
                            (12,588 )                 (12,588 )
Common stock distributions declared ($1.145 per share)
                                  (168,408 )           (168,408 )
Preferred stock distributions declared-Series B ($2.15 per share)
                                  (11,644 )           (11,644 )
Preferred stock distributions declared-Series E ($1.33 per share)
                                  (3,726 )           (3,726 )
                                                                 
Balance, December 31,2006
    8,219,821       181,971       146,189,307       1,462       1,815,740       (943,917 )           1,055,256  
                                                                 
Comprehensive Income
                                                               
Net income
                                  221,348             221,348  
Other comprehensive income
                                                               
Unrealized loss on derivative financial instruments
                                        (814 )     (814 )
                                                                 
Comprehensive income
                                            221,348       (814 )     220,534  
                                                                 
Issuance of common and restricted shares
                506,257       5       8,944                   8,949  
Purchase of common shares
                (3,371,914 )     (34 )     (77,905 )                 (77,939 )
Redemption of 8.60% Series B Cumulative Redeemable shares
    (5,416,009 )     (135,400 )                 2,261       (2,261 )           (135,400 )
Issuance of 6.75% Series G Cumulative Redeemable shares
    5,400,000       135,000                   (4,252 )                 130,748  
Adjustment for conversion of minority interests of unitholders in operating partnerships
                1,012,788       10       8,684                   8,694  
Common stock distributions declared ($1.22 per share)
                                  (177,540 )           (177,540 )


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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data) — (Continued)
 
                                                                 
                                        Accumulated
       
                                  Distributions in
    Other
       
    Preferred Stock     Common Stock     Paid-in
    Excess of
    Comprehensive
       
    Shares     Amount     Shares     Amount     Capital     Net Income     Loss     Total  
 
Preferred stock distributions declared-Series B ($1.07 per share)
                                  (4,819 )           (4,819 )
Preferred stock distributions declared-Series E ($1.33 per share)
                                  (3,724 )           (3,724 )
Preferred stock distributions declared-Series G ($1.13 per share)
                                  (5,367 )           (5,367 )
                                                                 
Balance, December 31,2007
    8,203,812       181,571       144,336,438       1,443       1,753,472       (916,280 )     (814 )     1,019,392  
                                                                 
Comprehensive Income
                                                               
Net income
                                  706,929             706,929  
Other comprehensive income Unrealized loss on derivative financial instruments
                                        (11,901 )     (11,901 )
                                                                 
Comprehensive income
                                            706,929       (11,901 )     695,028  
                                                                 
Issuance of common and restricted shares
                682,650       7       9,191                   9,198  
Issuance of common shares
                8,661,201       87       183,085                   183,172  
Purchase of common shares
                (6,495,576 )     (65 )     (140,468 )                 (140,533 )
Redemption of 969,300 shares of 6.75% Series G Cumulative Redeemable shares
    (969,300 )     (24,232 )                 829       3,056             (20,347 )
Adjustment for conversion of minority interests of unitholders in operating partnerships
                1,596,402       16       12,160                   12,176  
Common stock distributions declared ($2.105 per share)
                                  (175,271 )           (175,271 )
Preferred stock distributions declared-Series E ($1.3288 per share)
                                  (3,724 )           (3,724 )
Preferred stock distributions declared-Series G ($1.6875 per share)
                                  (8,414 )           (8,414 )
                                                                 
Balance, December 31, 2008
    7,234,512     $ 157,339       148,781,115     $ 1,488     $ 1,818,269     $ (393,704 )   $ (12,715 )   $ 1,570,677  
                                                                 
 
See accompanying notes to consolidated financial statements.


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UDR, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
 
1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
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, 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, 2008, our apartment portfolio consisted of 161 wholly-owned communities located in 23 markets consisting of 44,388 apartment homes. In addition, the Company has an ownership interest in 4,158 apartment units through joint ventures.
 
On November 5, 2008, our Board of Directors declared a dividend on a pre-adjusted basis of $1.29 per share (“the Special Dividend”) (approximately $132.0 million or $1.19 per share adjusted for the Special Dividend) payable to holders of our common stock. The dividend was paid on January 29, 2009 to stockholders of record on December 9, 2008. The dividend represented the Company’s 2008 fourth quarter recurring distribution of $0.33 per share ($0.305 per share adjusted for the Special Dividend) and an additional special distribution in the amount of $0.96 per share ($0.89 per share adjusted for the Special Dividend) due to taxable income arising from our disposition activity occurring during the year. Subject to the Company’s right to pay the entire 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 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. The effect of the issuance of additional shares of common stock pursuant to the Special Dividend has been retroactively reflected in each of the historical periods presented within this filing as if those shares were issued and outstanding at the beginning of the earliest period presented. Accordingly, all activity including share issuances, repurchases and forfeitures have been adjusted to reflect an 8.27% increase in the number of shares, except where noted otherwise.
 
Basis of presentation
 
The accompanying Consolidated Financial Statements of UDR and its wholly-owned subsidiaries, includes certain joint ventures and variable interest entities where we are the primary beneficiary as defined by FASB Interpretation No. 46 R (“FIN 46 R”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
The Company’s subsidiaries include United Dominion Realty, L.P., (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”), (collectively, “UDR”). As of December 31, 2008, there were 179,848,233 units in the Operating Partnership outstanding, of which 171,919,064 units or 96% were owned by UDR and 7,929,169 units or 4% were owned by limited partners. As of December 31, 2008, there were 6,000,323 units in the Heritage OP outstanding, of which 5,814,507 units or 97% were owned by UDR and 185,816 units or 3% were owned by limited partners. The Consolidated Financial Statements of UDR include the minority interests of the unitholders in the Operating Partnership and the Heritage OP.
 
Investment in joint ventures
 
We use the equity method to account for investments that qualify as variable interest entities, variable interest entities where we are not the primary beneficiary and entities that we do not control or where we do


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UDR, INC.