UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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.

Maryland		54-0857512
(State or other jurisdiction of		(I.R.S. Employer
incorporation of organization)		Identification No.)

1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)

(720) 283-6120
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of November 1, 2008, was 136,180,801.

 

 

UDR, Inc.

INDEX

		PAGE
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007			3
Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)			4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)			5
Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the nine months ended September 30, 2008 (unaudited)			6
Notes to Consolidated Financial Statements (unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28
Item 3. Quantitative and Qualitative Disclosures About Market Risk			45
Item 4. Controls and Procedures			45
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 3. Defaults Upon Senior Securities			55
Item 4. Submission of Matters to a Vote of Security Holders			55
Item 5. Other Information			55
Item 6. Exhibits			55
Signatures			56
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Item 1. FINANCIAL STATEMENTS

UDR, Inc.

		September 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Real estate owned:
Real estate held for investment		$	5,555,281			$	4,129,460
Less: accumulated depreciation			(999,679	)			(821,991	)
			4,555,602				3,307,469
Real estate under development (net of accumulated depreciation of $0 and $963)			121,557				343,768
Real estate held for disposition (net of accumulated depreciation of $9,056 and $548,805)			39,000				929,545
Total real estate owned, net of accumulated depreciation			4,716,159				4,580,782
Cash and cash equivalents			2,861				3,219
Restricted cash			10,070				6,295
Deferred financing costs, net			30,575				34,136
Notes receivable			207,450				12,655
Investment in unconsolidated joint ventures			46,859				48,264
Escrow — 1031 exchange funds			—				56,217
Other assets			84,339				54,636
Other assets — real estate held for disposition			1,899				4,917
Total assets		$	5,100,212			$	4,801,121
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt		$	1,315,075			$	910,611
Secured debt — real estate held for disposition			—				227,325
Unsecured debt			2,035,454				2,364,740
Real estate taxes payable			28,836				8,808
Accrued interest payable			24,724				27,999
Security deposits and prepaid rent			31,141				21,897
Distributions payable			47,154				49,152
Deferred gains on the sale of depreciable property			28,849				28,690
Accounts payable, accrued expenses, and other liabilities			37,136				51,989
Other liabilities — real estate held for disposition			2,139				28,468
Total liabilities			3,550,508				3,719,679
Minority interests			100,327				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
128,091,103 shares issued and outstanding (133,317,706 shares at December 31, 2007)			1,281				1,333
Additional paid-in capital			1,489,071				1,620,541
Distributions in excess of net income			(198,951	)			(783,238	)
Accumulated other comprehensive income/(loss), net			637				(814	)
Total stockholders’ equity			1,449,377				1,019,393
Total liabilities and stockholders’ equity		$	5,100,212			$	4,801,121

See accompanying notes to consolidated financial statements.

UDR, Inc.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
REVENUES
Rental income		$	146,291			$	128,192			$	410,690			$	373,287
Non-property income:
Other income			10,798				6,295				27,029				15,387
Total Revenues			157,089				134,487				437,719				388,674
EXPENSES
Rental expenses:
Real estate taxes and insurance			19,133				15,242				48,417				44,865
Personnel			12,542				10,767				36,074				32,325
Utilities			7,977				7,204				21,661				19,518
Repair and maintenance			8,219				7,264				22,278				20,388
Administrative and marketing			3,551				3,365				10,068				9,680
Property management			4,023				3,525				11,294				10,265
Other operating expenses			1,158				321				3,182				946
Real estate depreciation and amortization			65,551				48,228				180,493				140,428
Interest (net of gains on debt extinguishment of $2.5 million, $0, $8.9 million and $0, respectively)			37,361				42,170				109,858				120,126
General and administrative			9,835				8,788				29,535				28,350
Other depreciation and amortization			1,140				712				3,013				2,236
Other expenses			833				—				833				—
Total Expenses			171,323				147,586				476,706				429,127
Operating loss			(14,234	)			(13,099	)			(38,987	)			(40,453	)
Loss from unconsolidated entities			(1,897	)			(335	)			(3,286	)			(869	)
Minority interests of outside partnerships			(39	)			(45	)			(136	)			(112	)
Minority interests of unitholders in operating partnerships			860				949				2,454				3,086
Loss before discontinued operations, net of minority interests			(15,310	)			(12,530	)			(39,955	)			(38,348	)
Income from discontinued operations, net of minority interests			6,937				91,359				757,706				155,706
Net (loss)/income			(8,373	)			78,829				717,751				117,358
Distributions to preferred stockholders — Series B			—				—				—				(4,819	)
Distributions to preferred stockholders — Series E (Convertible)			(931	)			(931	)			(2,793	)			(2,793	)
Distributions to preferred stockholders — Series G			(1,989	)			(2,329	)			(6,545	)			(3,114	)
Discount/(premium) on preferred stock repurchases, net			3,056				—				3,056				(2,261	)
Net (loss)/income available to common stockholders		$	(8,237	)		$	75,569			$	711,469			$	104,371
(Loss)/Earnings per weighted average common share — basic and diluted:
Loss from continuing operations available to common stockholders, net of minority interests		$	(0.11	)		$	(0.12	)		$	(0.36	)		$	(0.38	)
Income from discontinued operations, net of minority interests		$	0.05			$	0.68			$	5.89			$	1.16
Net (loss)/income available to common stockholders		$	(0.06	)		$	0.56			$	5.53			$	0.78
Common distributions declared per share		$	0.3300			$	0.3300			$	0.9900			$	0.9900
Weighted average number of common shares outstanding — basic			126,845				133,854				128,634				134,362
Weighted average number of common shares outstanding — diluted			126,845				133,854				128,634				134,362

See accompanying notes to consolidated financial statements

UDR, Inc.

Nine Months Ended September 30,		2008				2007
Operating Activities
Net income		$	717,751			$	117,358
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			183,506				195,890
Net gains on the sale of depreciable property			(786,917	)			(137,256	)
Net gains on the sale of land			(183	)			—
Gains on debt extinguishment			(8,855	)			—
Minority interests			48,911				6,135
Amortization of deferred financing costs and other			7,108				5,593
Amortization of deferred compensation			5,346				4,699
(Refunds)/prepayments on income taxes			(4,047	)			5,296
Changes in operating assets and liabilities:
Decrease/(increase) in operating assets			(7,295	)			459
Decrease in operating liabilities			(19,921	)			(3,099	)
Net cash provided by operating activities			135,404				195,075
Investing Activities
Proceeds from sales of real estate investments, net			1,485,100				408,233
Proceeds from note receivable			44,774				4,000
Disbursements related to note receivable			(39,569	)			—
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures			(909,764	)			(197,791	)
Development of real estate assets			(101,952	)			(69,069	)
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement			(101,128	)			(151,765	)
Capital expenditures — non-real estate assets			(21,347	)			(3,438	)
Investment in unconsolidated joint venture			1,405				(3,532	)
Purchase deposits on pending real estate acquisitions			(928	)			(14,817	)
Change in funds held in escrow from IRC Section 1031 exchanges			56,217				—
Net cash provided by/(used in) investing activities			412,808				(28,179	)
Financing Activities
Payments on secured debt			(75,473	)			(100,228	)
Proceeds from the issuance of unsecured debt			240,000				150,000
Proceeds from the issuance of secured debt			156,885				80,394
Payments on unsecured debt			(367,031	)			(167,255	)
Net (repayment)/proceeds of revolving bank debt			(193,400	)			82,500
Payment of financing costs			(2,957	)			(7,438	)
Proceeds from the issuance of common stock			2,491				1,930
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			(766	)			87
Distributions paid to minority interests			(8,923	)			(9,295	)
Distributions paid to preferred stockholders			(9,629	)			(10,103	)
Distributions paid to common stockholders			(128,887	)			(131,463	)
Repurchase of common stock			(140,533	)			(51,163	)
Redemption of Series B preferred stock			—				(135,400	)
Net cash (used in) financing activities			(548,570	)			(166,686	)
Net (decrease)/increase in cash and cash equivalents			(358	)			210
Cash and cash equivalents, beginning of period			3,219				2,143
Cash and cash equivalents, end of period		$	2,861			$	2,353
Supplemental Information:
Interest paid during the period		$	93,627			$	147,291
Non-cash transactions:
Conversion of operating partnership minority interests to common stock (150,061 shares in 2008 and 919,709 shares in 2007)			1,380				8,611
Issuance of restricted stock awards			4				2
Issuance of note receivable upon the disposition of real estate			200,000				—
Secured debt assumed with the acquisition of properties, net of fair value adjustment			95,728				72,680

See accompanying notes to consolidated financial statements.

UDR, Inc.

																										Accumulated
																						Distributions in				Other
		Preferred Stock								Common Stock								Paid-in				Excess of				Comprehensive
		Shares				Amount				Shares				Amount				Capital				Net Income				Income/(Loss)				Total
Balance, December 31, 2007			8,203,812			$	181,571				133,317,706			$	1,333			$	1,620,541			$	(783,238	)		$	(814	)		$	1,019,393
Comprehensive Income
Net income			—				—				—				—				—				717,751				—				717,751
Other comprehensive income
Unrealized gain on derivative financial instruments			—				—				—				—				—				—				1,451				1,451
Comprehensive income																							717,751				1,451				719,202
Issuance of common and restricted shares			—				—				623,036				6				6,794				—				—				6,800
Purchase of common shares			—				—				(5,999,700	)			(60	)			(140,473	)			—				—				(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			—				—				150,061				2				1,380				—				—				1,382
Common stock distributions declared ($0.9900 per share)			—				—				—				—				—				(127,182	)			—				(127,182	)
Preferred stock distributions declared-Series E ($0.9922 per share)			—				—				—				—				—				(2,793	)			—				(2,793	)
Preferred stock distributions declared-Series G ($0.9900 per share)			—				—				—				—				—				(6,545	)			—				(6,545	)
Balance, September 30, 2008			7,234,512			$	157,339				128,091,103			$	1,281			$	1,489,071			$	(198,951	)		$	637			$	1,449,377

See accompanying notes to consolidated financial statements

UDR, Inc.

1. CONSOLIDATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Consolidation and Basis of Presentation

UDR, Inc., collectively with our consolidated subsidiaries (“we”, “our”, “us”, “the Company” or “UDR”) is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. The accompanying consolidated financial statements include the accounts of UDR and its subsidiaries, including United Dominion Realty, L.P. (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”). As of September 30, 2008, there were 166,146,042 units in the Operating Partnership outstanding, of which 157,639,390 units or 95% were owned by UDR and 8,506,652 units or 5% were owned by limited partners. As of September 30, 2008, there were 5,542,200 units in the Heritage OP outstanding, of which 5,232,349 units or 94% were owned by UDR and 309,851 units or 6% were owned by limited partners. The consolidated financial statements of UDR include the minority interests of the unitholders in the Operating Partnership and the Heritage OP.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of September 30, 2008, and results of operations for the three and nine months ended September 30, 2008 and 2007 have been included. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year. The accompanying interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes appearing in UDR’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 26, 2008.

The accompanying interim unaudited consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles (“GAAP”). GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the interim unaudited consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

Accounting Policies

Income Taxes

Due to the structure of the Company as a REIT and the nature of the operations for the operating properties, no provision for federal income taxes has been provided for at UDR. Historically, the Company has generally incurred only state and local income, excise and franchise taxes. UDR elected for certain consolidated subsidiaries to be treated as Taxable REIT Subsidiaries (“TRS”) relating to the Company’s developer, RE3 and condominium conversion activities.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

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. The Company’s deferred tax assets are generally the result of differing depreciable lives on capitalized assets and timing of expense recognition for certain accrued liabilities. As of September 30, 2008, UDR has recorded a current and deferred tax asset of approximately $14.0 million and recorded an income tax benefit, which is reflected in other income on the Company’s interim unaudited Consolidated Statements of Operations of $829,000 and $5.7 million, respectively for the three and nine months ended September 30, 2008.

UDR adopted the Financial Accounting Standards Board (“FASB”) Interpretation 48, “Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

The Company recognizes our tax positions and evaluates them using a two-step process. First, we determine whether a tax position is more likely than not (greater than 50 percent probability) to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Then the Company will determine the amount of benefit to recognize and record the amount of the benefit that is more likely than not to be realized upon ultimate settlement.

As a result of the implementation of FIN 48, UDR recognized no material adjustments to liabilities related to unrecognized income tax benefits. At the adoption date, UDR’s TRS had $538,000 of net unrecognized tax benefits, which would favorably impact our effective tax rate if recognized. During the nine months ended September 30, 2008, due to the Company no longer meeting the measurement criteria the liability was reversed. As such, UDR had no unrecognized tax benefits, accrued interest or penalties. UDR and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years 2004 — 2007 remain open to examination by the major taxing jurisdictions to which we are subject. When applicable, UDR recognizes interest and/or penalties related to uncertain tax positions in income tax expense.

Real Estate Sales

The Company accounts for sales of real estate in accordance with FASB Statement of Financial Accounting Standards (SFAS) No. 66, “Accounting for Sales of Real Estate” (“SFAS 66”). For sales transactions meeting the requirements for full accrual profit recognition, such as the Company no longer having continuing involvement in the property, we remove the related assets and liabilities from our consolidated balance sheet and record the gain or loss in the period the transaction closes. For sales transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting.

Sales of real estate to entities in which we retain or otherwise own an interest are accounted for as partial sales. If all other requirements for recognizing profit under the full accrual method have been satisfied and no other forms of continuing involvement are present, we recognize profit proportionate to the outside interest in the buyer and will defer the gain on the interest we retain. The Company will recognize any deferred gain when the property is then sold to a third party. In transactions accounted by us as partial sales, we determine if the buyer of the majority equity interest in the venture was provided a preference as to cash flows in either an operating or a capital waterfall. If a cash flow preference has been provided, we recognize profit only to the extent that proceeds from the sale of the majority equity interest exceed costs related to the entire property.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), that became effective for our fiscal year beginning January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurement. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements but does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), that delays the effective date of SFAS 157’s fair value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of SFAS 157 for financial assets and liabilities, as of January 1, 2008, did not have a material impact on our financial position or operations. Fair value measurements identified in FSP 157-2 will be effective for our fiscal year beginning January 1, 2009. We are currently assessing the impact of FSP 157-2 for nonfinancial assets and liabilities on our consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), that became effective for our fiscal year beginning January 1, 2008. SFAS 159 allows an entity to elect to measure certain financial instruments at fair value. If this irrevocable election is made, an entity may apply SFAS 159 on an instrument by instrument basis with a few exceptions and report any change in the fair value of the instrument in earnings. The Company opted to not adopt SFAS 159.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. We believe that the adoption of SFAS 141R could materially impact our future consolidated financial position and results of operations depending on the Company’s acquisition activity as certain acquisition costs that have historically been capitalized as part of the basis of the real estate and amortized over the real estate’s useful life will now be expensed as incurred.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the non-controlling interest with disclosure of both amounts on the consolidated statement of operations. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently assessing what impact the adoption of SFAS 160 will have on our consolidated financial position and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 requires enhanced disclosures related to derivatives and hedging activities. SFAS 161 will require disclosures relating to: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 must be applied prospectively and will be effective for our fiscal year beginning January 1, 2009, although early adoption is allowed. We believe that the adoption of SFAS 161 will not have a material impact on our consolidated financial statements.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

In May 2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion” (“APB 14-1”). APB 14-1 requires entities that issued certain convertible debt instruments that may be settled or partially settled in cash on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the entity’s nonconvertible debt borrowing rate. APB 14-1 requires that an entity determine the estimated fair value of a similar debt instrument as of the date of the issuance without the conversion feature but inclusive of any other embedded features such as puts and calls and assign that value to the debt component of the instrument, which would result in a discount being recorded. The debt would subsequently be accreted to its par value over its expected life using the market rate at the date of issuance. The residual value between the initial proceeds and the value allocated to the debt would be reflected in equity as additional paid in capital. APB 14-1 is effective for fiscal years beginning after December 15, 2008 and would be applied retrospectively to both new and existing convertible instruments. We are currently assessing what impact the adoption of APB 14-1 will have on our financial position and results of operations.

In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 provides the framework for selecting the principles to be used in the preparation of financial statement in conformity with generally accepted accounting principles. SFAS 162 will become effective 60 days following the Securities and Exchange Commission’s approval. We believe that the adoption of SFAS 162 will not have a material impact on our consolidated financial statements.

2. REAL ESTATE

Real estate assets owned by the Company consist of income producing operating properties, properties under development, land held for future development and properties deemed as held for sale. As of September 30, 2008, the Company owned and consolidated 159 communities in 10 states plus the District of Columbia totaling 44,223 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of September 30, 2008 and December 31, 2007 (dollar amounts in thousands):

		September 30, 2008				December 31, 2007
Land		$	1,545,809			$	1,129,730
Depreciable property — held for investment:
Building and improvements			3,801,853				2,830,894
Furniture, fixtures and equipment			207,619				168,836
Under development:
Land			31,618				227,357
Construction in progress			89,939				117,374
Held for disposition:
Land			13,087				249,130
Building and improvements			32,958				1,094,908
Furniture, fixtures and equipment			2,011				134,312
Real estate owned		$	5,724,894			$	5,952,541
Accumulated depreciation			(1,008,735	)			(1,371,759	)
Real estate owned, net		$	4,716,159			$	4,580,782

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

The following table summarizes the Company’s real estate community acquisitions for the nine months ended September 30, 2008 (dollar amounts in thousands):

								Purchase
Market		Acquisition Date		Units				Price (a)
Orlando, FL		January 2008			371			$	50,132
Baltimore, MD		March 2008			264				57,690
Metro D.C.		March 2008			241				85,000
San Francisco, CA		March 2008			193				115,000
Metro D.C.		March 2008			606				138,378	(b)
Dallas, TX		March 2008			1,043				118,500
Orange County, CA		May 2008			296				87,320
Seattle, WA		May 2008			220				38,000
Seattle, WA		July 2008			235				112,202
San Francisco, CA		July 2008			250				47,270
Austin, TX		August 2008			390				59,500
Phoenix, AZ		August 2008			200				23,666
Tampa, FL		August 2008			249				43,672	(c)
					4,558			$	976,330

The purchase prices of certain recent acquisitions were allocated to land; building and improvements; furniture, fixtures and equipment; and intangible assets based on preliminary estimates and are subject to change as we obtain more complete information.

The purchase of three of the communities during the nine months ended September 30, 2008 relate to the pre-sale agreements previously entered into by UDR, which contain provisions that will require the Company and the builder to jointly agree upon the fair market value of each property at a later point in time (generally within 2 years of stabilization). A percentage of the increase in the fair market value over cost will then be paid to the developer, ranging from 50% to 70%, which is not included in the initial purchase price listed in the table above nor is the contingent obligation accrued for by the Company.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

3. DISCONTINUED OPERATIONS

Discontinued operations represent properties that UDR has either sold or which management believes meet the criteria to be classified as held for sale. In order to be classified as held for sale and reported as discontinued operations, a property’s operations and cash flows have or will be divested to a third party by the Company whereby UDR will not have any significant continuing involvement in the ownership or operation of the property after the sale or disposition. The results of operations of the property are presented as discontinued operations for all periods presented and do not impact the net earnings reported by the Company. Once a property is deemed as held for sale, depreciation is no longer recorded. However, if the Company determines that the property no longer meets the criteria of held for sale the Company will recapture any unrecorded depreciation for the property. The assets and liabilities of properties deemed as held for sale are presented separately on the Consolidated Balance Sheets. Properties deemed as held for sale are reported at the lower of their carrying amount or their estimated fair value less the costs to sell the assets.

For the nine months ended September 30, 2008, UDR sold 86 communities, one commercial property, one parcel of land, and 53 condominiums from two communities with a total of 640 condominiums. UDR recognized after-tax gains for financial reporting purposes of $787.1 million on these sales. At September 30, 2008, UDR had two communities with a total of 526 condominiums and a net book value of $39.0 million included in real estate held for disposition. For the nine months ended September 30, 2007, UDR sold 12 communities and 50 condominiums from two communities with a total of 640 condominiums, and one parcel of land. We recognized after-tax gains for financial reporting purposes of $124.5 million on these sales. The results of operations for these properties are classified on the Consolidated Statements of Operations in the line item titled “Income from discontinued operations, net of minority interests” for the three and nine months ended September 30, 2008 and 2007.

In conjunction with the sale of the 86 properties during 2008, UDR received a note in the amount of $200 million. The note matures on March 31, 2014, may be pre-paid beginning on May 3, 2009, bears interest at a fixed rate of 7.5% per annum and is secured by a pledge and security agreement and a guarantee from the buyer’s parent company.

UDR has elected TRS status for certain of its corporate subsidiaries, primarily those engaged in condominium conversion and development activities. For the three months ended September 30, 2008 and 2007, UDR recognized an income tax benefit of $829,000 and a tax provision of $673,000 respectively and a tax benefit of $5.9 million and $4.9 million for the nine months ended September 30, 2008 and 2007, respectively. Of the balance, UDR allocated an income tax benefit of zero and an income tax provision of $5.2 million, respectively for the three months ended September 30, 2008 and 2007 and an income tax benefit of $161,000 and an income tax provision of $8.8 million for the nine months ended September 30, 2008 and 2007, respectively to discontinued operations.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

The income attributable to discontinued operations is summarized as follows (dollars in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Rental income		$	1,149			$	61,352			$	42,862			$	185,233
Non-property income			—				—				183				—
			1,149				61,352				43,045				185,233
Rental expenses			413				23,667				17,230				73,631
Property management fee			32				1,686				1,179				5,092
Real estate depreciation			—				16,562				—				52,839
Interest			(4	)			3,960				2,612				12,956
Other expenses			—				125				6				390
			441				46,000				21,027				144,908
Income before net gain on the sale of depreciable property and minority interests			708				15,352				22,018				40,325
Net gain on the sale of depreciable property, excluding RE3			6,566				77,267				787,555				117,086
RE3 gain/(loss) on sale of real estate, net of tax			139				4,016				(638	)			7,405
Income before minority interests			7,413				96,635				808,935				164,816
Minority interests on income from discontinued operations			(476	)			(5,276	)			(51,229	)			(9,110	)
Income from discontinued operations, net of minority interests		$	6,937			$	91,359			$	757,706			$	155,706

4. JOINT VENTURES

UDR has entered into joint ventures with unrelated third parties for real estate assets that are either consolidated and included in real estate owned on our Consolidated Balance Sheets or are accounted for under the equity method of accounting, which are not consolidated and included in investment in unconsolidated joint ventures on our Consolidated Balance Sheets. The Company will consolidate an entity in which we own less than 100% but control the joint venture as well as any variable interest entity where we are the primary beneficiary. In addition, the Company will consolidate any joint venture in which we are the general partner or managing member and the third party does not have the ability to substantively participate in the decision-making process nor do they have the ability to remove us as general partner or managing member, respectively without cause.

Consolidated Joint Venture

In June 2006, we completed the formation of a development joint venture that has invested approximately $138 million to develop one apartment community with 298 apartment homes in Marina del Rey, California. UDR is the financial partner and is responsible for funding the costs of development, which will result in the Company receiving a preferred return ranging from 7% to 8.5% depending on the operating results of the joint venture before our partner receives a 50% participation in the returns of the joint venture. Our initial investment was $27 million. Our investment in the joint venture as of September 30, 2008 was $25.9 million with the consolidated joint venture having incurred $138.1 million of costs with the project completed in the third quarter of 2008 and is currently in lease up.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

Unconsolidated Joint Ventures

The Company recognizes earnings or losses from our investments in unconsolidated joint ventures consisting of our proportionate share of the net earnings or loss of the joint venture. In addition, we earn fees for providing management and development services to the unconsolidated joint ventures. As of September 30, 2008, UDR had investments in the following unconsolidated development joint ventures which are accounted for under the equity method of accounting:

UDR is a partner in a joint venture to develop a site in Bellevue, Washington. At closing, we owned 49% of the joint venture which the Company proposes to develop that involves building a 430 home high rise apartment building with ground floor retail. Our initial investment was $5.7 million. The project is currently ongoing and will commence construction once favorable financing has been obtained. Our investment at September 30, 2008 and December 31, 2007 was $10.3 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 joint venture. Our initial investment was $10.0 million. Our investment at September 30, 2008 and December 31, 2007 was $9.2 million and $8.9 million, respectively.

UDR is a partner with an unaffiliated third party in a joint venture which owns and operates a recently completed 23-story, 166 home high rise apartment community in the central business district of Bellevue, Washington. At closing, UDR owned 49% of the joint venture. Our initial investment was $11.8 million. Our investment at September 30, 2008 and December 31, 2007 was $10.6 million and $11.2 million, respectively.

UDR and an unaffiliated third party in November 2007 formed a joint venture which owns and operates various properties located in Texas. On the closing date, UDR sold nine operating properties, consisting of 3,690 units, and contributed one property under development to the joint venture. The property under development 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 member contributed cash equal to 80% of the fair value of the properties comprising the joint venture, which was then used to purchase the nine operating properties from UDR. Our initial investment was $20.4 million. Our investment at September 30, 2008 and December 31, 2007 was $16.8 million and $20.1 million, respectively. In addition, during the three months ended September 30, 2008 UDR received payment in full for a note receivable of $18.8 million from the joint venture.

The operating results of the properties sold to the Texas joint venture are included as a component of continuing operations on the Consolidated Statement of Operations as UDR will continue to recognize significant cash flows from the disposed properties via management fees over the term of the joint venture.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

Summarized financial information relating to 100% of all the unconsolidated joint ventures entity’s operations and not just our proportionate share is presented below (dollars in thousands).

		2008				2007
For the three months ended September 30th:
Revenues		$	10,412			$	1,047
Net loss		$	(8,508	)		$	(486	)
For the nine months ended September 30th:
Revenues		$	31,107			$	2,830
Net loss		$	(16,190	)		$	(1,056	)
As of September 30, 2008 and December 31, 2007:
Real estate		$	481,920			$	476,476
Total assets		$	495,024			$	484,217
Amount due to UDR		$	4,170			$	2,662
Third party debt		$	344,013			$	324,193
Total liabilities		$	360,777			$	329,053
Equity		$	134,247			$	155,164

As of September 30, 2008, the Company had deferred profit from the sale of properties of $28.8 million, which the Company will not recognize until the underlying property is sold to a third party. For the three and nine months ended September 30, 2008, the Company reported a loss from unconsolidated entities of $1.9 million and $3.3 million, respectively due in large part to depreciation and a loss of $900,000 related to losses incurred by a joint venture as a result of Hurricane Ike.

5. SECURED DEBT

Our secured debt instruments generally feature either monthly interest and principal or monthly interest-only payments with balloon payments due at maturity. For purposes of classification of the following table, variable rate debt with a derivative financial instrument designated as a cash flow hedge is deemed as fixed rate debt due to the Company having effectively established the interest rate for the underlying debt instrument. Secured debt on continuing and discontinued operations, which encumbers $2.0 billion or 35% of UDR’s real estate owned based upon book value ($3.7 billion or 65% of UDR’s real estate owned is unencumbered) consists of the following as of September 30, 2008 (dollars in thousands):

										Weighted				Weighted				Number of
		Principal Outstanding								Average				Average				Communities
		September 30,				December 31,				Interest Rate				Years to Maturity				Encumbered
		2008				2007				2008				2008				2008
Fixed Rate Debt
Mortgage notes payable		$	457,250			$	324,059				5.05	%			3.2				17
Tax-exempt secured notes payable			13,325				18,230				5.30	%			22.4				1
Fannie Mae credit facilities			581,342				583,071				5.94	%			4.7				26
Total fixed rate secured debt			1,051,917				925,360				5.54	%			4.3				44
Variable Rate Debt
Mortgage notes payable			91,655				124,023				3.81	%			2.9				6
Tax-exempt secured note payable			27,000				7,770				2.75	%			21.5				1
Fannie Mae credit facilities			144,503				80,783				3.56	%			5.8				6
Total variable rate secured debt			263,158				212,576				3.56	%			6.4				13
Total secured debt		$	1,315,075			$	1,137,936				5.14	%			4.7				57

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

Approximate principal payments due during each of the next five calendar years and thereafter, as of September 30, 2008, are as follows (dollars in thousands):

										Total
		Fixed Rate				Variable Rate				Secured
Year		Maturities				Maturities				Maturities
2008		$	1,590			$	—			$	1,590
2009			129,734				15,938				145,672
2010			223,079				33,679				256,758
2011			111,728				44,136				155,864
2012			234,833				39,990				274,823
Thereafter			350,953				129,415				480,368
		$	1,051,917			$	263,158			$	1,315,075

The Company will from time to time acquire properties subject to fixed rate debt instruments. In those situations, management will record the secured debt at its estimated fair value and amortize any difference between the fair value and par to interest expense over the life of the underlying debt instrument. The unamortized fair market adjustment was an asset of $756,000 and a liability of $1.6 million at September 30, 2008 and December 31, 2007, respectively.

6. UNSECURED DEBT

A summary of unsecured debt as of September 30, 2008 and December 31, 2007 is as follows (dollars in thousands):

		September 30,				December 31,
		2008				2007
Commercial Banks
Borrowings outstanding under an unsecured credit facility due July 2012 (a)		$	116,100			$	309,500
Borrowings outstanding under an unsecured term loan due February 2010 (b)			240,000				—
Senior Unsecured Notes — Other
4.50% Medium-Term Notes due March 2008			—				200,000
8.50% Monthly Income Notes due November 2008			29,081				29,081
4.25% Medium-Term Notes due January 2009			50,000				50,000
6.50% Notes due June 2009			200,000				200,000
3.90% Medium-Term Notes due March 2010			50,000				50,000
3.625% Convertible Senior Notes due September 2011(c)			250,000				250,000
5.00% Medium-Term Notes due January 2012			100,000				100,000
6.05% Medium-Term Notes due June 2013			125,000				125,000
5.13% Medium-Term Notes due January 2014(d)			184,000				200,000
5.50% Medium-Term Notes due April 2014(d)			128,500				150,000
5.25% Medium-Term Notes due January 2015(d)			175,175				250,000
5.25% Medium-Term Notes due January 2016(d)			83,260				100,000
8.50% Debentures due September 2024			54,118				54,118
4.00% Convertible Senior Notes due December 2035(e)			250,000				250,000
Other			150				158
			1,679,284				2,008,357
Unsecured Notes — Other
ABAG Tax-Exempt Bonds due August 2008			—				46,700
Unsecured Notes — Premiums & Discount
Premium on $50 million Medium-Term Notes due March 2010			229				344
Premium on $250 million Medium-Term Notes due January 2015(d)			221				343
Discount on $150 million Medium-Term Notes due April 2014(d)			(380	)			(504	)
			70				183
Total Unsecured Debt		$	2,035,454			$	2,364,740

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

If we were to settle the convertible notes in shares at the conversion rates specified above, UDR would be required to issue approximately 15.5 million shares to settle the principal component of the convertible notes. The Company believes that the conversion spread (the amount in excess of the principal balance of the convertible notes) will be settled in cash or, at UDR’s option in our common shares. If the conversion spread becomes dilutive to our earning per share, which occurs at $37.55 and $28.33, respectively for the convertible notes included in the above table, we will include the shares in our computation of diluted earnings per share.

Our debt instruments contain covenants that we were in compliance with at September 30, 2008.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

7. (LOSS)/EARNINGS PER SHARE

Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed based upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents such as the non-vested restricted stock awards.

The following table sets forth the computation of basic and diluted earnings per share for the periods presented (dollars in thousands, except per share data):

		Three months ended								Nine months ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator for (loss)/earnings per share — basic and diluted:
Net (loss)/earnings attributable to common stockholders		$	(8,237	)		$	75,569			$	711,469			$	104,371
Denominator for (loss)/earnings per share — basic and diluted:
Weighted average common shares outstanding			128,028				134,733				129,775				135,235
Non-vested restricted stock awards			(1,183	)			(879	)			(1,141	)			(873	)
Denominator for basic and diluted (loss)/earnings per share			126,845				133,854				128,634				134,362
(Loss)/earnings per share — basic and diluted		$	(0.06	)		$	0.56			$	5.53			$	0.78

The effect of the conversion of the operating partnership units, Out-Performance Partnership Shares, convertible preferred stock, and convertible debt, is not dilutive and is therefore not included in the above calculations as the Company reported a loss from continuing operations.

If the operating partnership units were converted to common stock, the additional weighted average common shares outstanding for the three and nine months ended September 30, 2008 and 2007, would be 8,840,390 and 8,896,860 and 7,456,153 and 7,805,328, respectively.

At September 30, 2008, if the measurement periods had ended on that date, no Series D or E Out-Performance Partnership Shares would have been issued had each Program terminated on that date. Accordingly, no additional operating partnership units would have been issued at that date nor are included in the diluted earnings per share calculation (see Note 11 — Commitments and Contingencies). The Series C Out-Performance Program expired during the nine months ended September 30, 2008, and were forfeited.

If the Series A Out-Performance Partnership Shares were converted to common stock, the additional shares of common stock outstanding for the three and nine months ended September 30, 2007 would be 1,627,769 and 1,627,852 weighted average common shares, respectively.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

At September 30, 2007, if the measurement periods had ended on that date, no Series D or E Out-Performance Partnership Shares would have been issued if each Program terminated on that date. Accordingly, no additional operating partnership units, respectively, would have been issued had the measurement periods ended on that date.

During the three and nine months ended September 30, 2008, the Company redeemed 969,300 shares of our 6.75% Series G Cumulative Redeemable Shares at less than their liquidation value of $25 per share. As a result the Company recognized the $3.1 million discount, net of issuance costs in our Consolidated Statement of Operations as a component of the net income available to common stockholders.

8. FINANCIAL INSTRUMENTS

UDR accounts for its derivative instruments in accordance with SFAS No 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities.” At September 30, 2008, UDR’s derivative financial instruments include swap agreements on two of our unconsolidated development joint ventures in which UDR has a 49% interest as well as two interest rate swap agreements on consolidated subsidiaries or joint ventures that are designated as cash flow hedges with variable interest rate features on UDR’s term loan and variable rate secured debt. These swaps are qualifying cash flow hedges for financial reporting purposes. For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings during the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The Company also has a cap on a variable rate instrument acquired during the three months ended September 30, 2008 that we did not designate for hedge accounting.

The fair value of UDR’s derivative instruments is reported on the Consolidated Balance Sheet at its current fair value. Estimated fair values for interest rate swaps rely on prevailing market interest rates. The fair value amount should not be viewed in isolation, but rather in relation to the value of the underlying hedged transaction and investment and to the overall reduction in exposure to adverse fluctuations in interest rates. The interest rate swap agreement is designated with a portion of the principal balance and term of a specific debt obligation. The interest rate swap involves the periodic exchange of payments over the life of the related agreement. Amounts received or paid on the interest rate swap are recorded on an accrual basis as an adjustment to the related interest expense of the outstanding debt based on the accrual method of accounting. The related amounts payable to and receivable from counterparties are included in other liabilities and other assets, respectively.

The following table presents the fair value of UDR’s derivative financial instruments outstanding, based on external market quotations, as of September 30, 2008 (dollars in thousands):

Notional

Strike

Type of

Effective

Contract

Fair

Amount

Rate

Contract

Date

Maturity

Value

Unsecured Debt — Term Loan

$200,000

2.76

%

swap

3/03/08

2/01/10

$

983

Secured Debt

$94,000

2.59

%

swap

2/15/08

11/15/08

$

98

Secured Debt

$25,379

6.78

%

cap

4/01/05

4/15/10

$

24

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

During the three and nine months ended September 30, 2008, UDR recognized a $135,000 unrealized losses and $1.5 million of unrealized gains, respectively on derivative financial instruments in other comprehensive income.

Effective January 1, 2008, UDR adopted SFAS 157, which defines fair value based on the price that would be received to sell an asset or the exit price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

	•		Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
	•		Level 2 — Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities markets that are not active; or other inputs that are observable or can be corroborated with observable market data.
	•		Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The Company’s’ derivative contracts are the only assets or liabilities that are measured and recognized at fair value using the SFAS 157 hierarchy. The derivative contracts use the Level 2 hierarchy and are recorded in Other Assets in the Consolidated Balance Sheet for $1.1 million as of September 30, 2008.

9. OTHER COMPREHENSIVE INCOME

Other comprehensive income consists of unrealized gains from derivative financial instruments on our unconsolidated development joint ventures in which UDR has a 49% interest as well as interest rate swap agreements that the Company designated as a cash flow hedge. The difference between net income and other comprehensive income reported by the Company is due to the change in fair value for these interest rate swaps being reflected in other comprehensive income. Total other comprehensive (loss)/income for the three and nine months ended September 30, 2008, was ($135,000) and $1.5 million, respectively. UDR had no derivative instruments outstanding during the nine months ended September 30, 2007.

10. STOCK BASED COMPENSATION

UDR accounts for stock based compensation in accordance with SFAS 123R, “Share Based Payment”, which the Company adopted on January 1, 2006, utilizing the modified prospective method. During the nine months ended September 30, 2008 and 2007, we recognized $5.3 million and $4.7 million, respectively as stock based compensation expense, which is inclusive of awards granted to our outside directors. The amounts reported are net of $422,000 and $544,000 in 2008 and 2007, respectively that we capitalized due to our development activities.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

11. COMMITMENTS AND CONTINGENCIES

Commitments

Real Estate Under Development

UDR is committed to completing our unfunded real estate projects under development and our development joint ventures. The following summarizes the Company’s real estate commitments at September 30, 2008 (dollars in thousands)

		Number of				Costs Incurred				Expected Costs				Ownership
		Properties				to Date				to Complete				Stake
Wholly owned — under development			6			$	121,557			$	171,643				100	%
Joint Ventures
Unconsolidated joint venture (a)			1				36,528				12,472				49	%
						$	158,085			$	184,115

UDR has entered into two contracts with third parties to purchase apartment communities upon completion of their development, which will be recorded at that time. Provided that the developers of the respective properties meet certain conditions, UDR will purchase these communities for an aggregate of approximately $93.0 million. These apartment communities are expected to be completed at various times between the fourth quarter of 2009 and the fourth quarter of 2010.

UDR in conjunction with our real estate under development will from time to time be required to post a standby letter of credit. The balance for these letters of credit, which are not reflected in our Consolidated Balance Sheets as of September 30, 2008 was $9.5 million. The letters of credit mature at various points throughout 2009 and 2010.

Contingencies

Series C Out-Performance Program

In May 2005, the stockholders of UDR approved a new Out-Performance Program and the first series of new Out-Performance Partnership Shares under the program are the Series C Out-Performance Units (the “Series C Program”) pursuant to which certain executive officers and other key employees of UDR (the “Series C Participants”) were given the opportunity to invest indirectly in UDR by purchasing interests in UDR Out-Performance III, LLC, a Delaware limited liability company (the “Series C LLC”), the only asset of which is a special class of partnership units of the Operating Partnership (“Series C Out-Performance Partnership Shares” or “Series C OPPSs”). The purchase price for the Series C OPPSs was determined by the Compensation Committee of UDR’s board of directors to be $750,000, assuming 100% participation, and was based upon the advice of an independent valuation expert. UDR’s performance for the Series C Program was measured over the 36-month period from June 1, 2005 to May 31, 2008.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

The Series C Program was designed to provide participants with the possibility of substantial returns on their investment if the cumulative total return on UDR’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).

At the conclusion of the measurement period, if UDR’s cumulative total return satisfied these criteria, the Series C LLC as holder of the Series C OPPSs would receive (for the indirect benefit of the Series C Participants as holders of interests in the Series C LLC) distributions and allocations of income and loss from the Operating Partnership equal to the distributions and allocations that would be received on the number of OP Units obtained by:

	i.		determining the amount by which the cumulative total return of UDR’s common stock over the measurement period exceeds the Minimum Return (such excess being the “Excess Return”);
	ii.		multiplying 2% of the Excess Return by UDR’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, common stock equivalents and OP Units); and
	iii.		dividing the number obtained in clause (ii) by the market value of one share of UDR’s common stock on the valuation date, computed as the volume-weighted average price per day of common stock for the 20 trading days immediately preceding the valuation date.

For the Series C OPPSs, the number determined pursuant to (ii) above was capped at 1% of market capitalization.

If, on the valuation date, the cumulative total return of UDR’s common stock does not meet the Minimum Return, then the Series C Participants will forfeit their entire initial investment.

At the conclusion of the measurement period, May 31, 2008, the total cumulative return on UDR’s common stock did not meet the minimum return threshold. As a result, there were no payouts under the Series C OPPSs program and the investment made by the holders of the Series C OPPs was forfeited.

Series D Out-Performance Program

In February 2006, the board of directors of UDR approved the Series D Out-Performance Program (the “Series D Program”) pursuant to which certain executive officers of UDR (the “Series D Participants”) were given the opportunity to invest indirectly in UDR by purchasing interests in UDR Out-Performance IV, LLC, a Delaware limited liability company (the “Series D LLC”), the only asset of which is a special class of partnership units of the Operating Partnership (“Series D Out-Performance Partnership Shares” or “Series D OPPSs”). The Series D Program is part of the New Out-Performance Program approved by UDR’s stockholders in May 2005. The Series D LLC has agreed to sell 830,000 membership units to certain members of UDR’s senior management at a price of $1.00 per unit. The aggregate purchase price of $830,000 for the Series D OPPSs, assuming 100% participation, is based upon the advice of an independent valuation expert. The Series D Program will measure the cumulative total return on our common stock over the 36-month period beginning January 1, 2006 and ending December 31, 2008.

The Series D Program is designed to provide participants with the possibility of substantial returns on their investment if the cumulative total return on UDR’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

At the conclusion of the measurement period, if UDR’s cumulative total return satisfies these criteria, the Series D LLC as holder of the Series D OPPSs will receive (for the indirect benefit of the Series D Participants as holders of interests in the Series D LLC) distributions and allocations of income and loss from the Operating Partnership equal to the distributions and allocations that would be received on the number of OP Units obtained by:

	i.		determining the amount by which the cumulative total return of UDR’s common stock over the measurement period exceeds the Minimum Return (such excess being the “Excess Return”);
	ii.		multiplying 2% of the Excess Return by UDR’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, OP Units, common stock equivalents and OP Units); and
	iii.		dividing the number obtained in (ii) by the market value of one share of UDR’s common stock on the valuation date, computed as the volume-weighted average price per day of the common stock for the 20 trading days immediately preceding the valuation date.

For the Series D OPPSs, the number determined pursuant to clause (ii) above is capped at 1% of market capitalization.

If, on the valuation date, the cumulative total return of UDR’s common stock does not meet the Minimum Return, then the Series D Participants will forfeit their entire initial investment.

Based on the results through September 30, 2008, no Series D OPPSs would have been issued had the Program terminated on that date. However, since the ultimate determination of Series D OPPSs to be issued will not occur until December 31, 2008, and the number of Series D OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events. Accordingly, the contingently issuable Series D OPPSs will only be included in basic earnings per share after the measurement period has ended and the applicable hurdle has been met. Furthermore, the Series D OPPSs will only be included in common stock and common stock equivalents in the calculation of diluted earnings per share after the hurdle has been met at the end of the reporting period (if any), assuming the measurement period ended at the end of the reporting period.

Series E Out-Performance Program

In February 2007, the board of directors of UDR approved the Series E Out-Performance Program (the “Series E Program”) pursuant to which certain executive officers of UDR (the “Series E Participants”) were given the opportunity to invest indirectly in UDR by purchasing interests in UDR Out-Performance V, LLC, a Delaware limited liability company (the “Series E LLC”), the only asset of which is a special class of partnership units of the Operating Partnership (“Series E Out-Performance Partnership Shares” or “Series E OPPSs”). The Series E Program is part of the New Out-Performance Program approved by UDR’s stockholders in May 2005. The Series E LLC has agreed to sell 805,000 membership units to certain members of UDR’s senior management at a price of $1.00 per unit. The aggregate purchase price of $805,000 for the Series E OPPSs, assuming 100% participation, is based upon the advice of an independent valuation expert. The Series E Program will measure the cumulative total return on our common stock over the 36-month period beginning January 1, 2007 and ending December 31, 2009.

The Series E Program is designed to provide participants with the possibility of substantial returns on their investment if the cumulative total return on UDR’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

At the conclusion of the measurement period, if UDR’s cumulative total return satisfies these criteria, the Series E LLC as holder of the Series E OPPSs will receive (for the indirect benefit of the Series E Participants as holders of interests in the Series E LLC) distributions and allocations of income and loss from the Operating Partnership equal to the distributions and allocations that would be received on the number of OP Units obtained by:

	i.		determining the amount by which the cumulative total return of UDR’s common stock over the measurement period exceeds the Minimum Return (such excess being the “Excess Return”);
	ii.		multiplying 2% of the Excess Return by UDR’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, OP Units, common stock equivalents and OP Units); and
	iii.		dividing the number obtained in (ii) by the market value of one share of UDR’s common stock on the valuation date, computed as the volume-weighted average price per day of the common stock for the 20 trading days immediately preceding the valuation date.

For the Series E OPPSs, the number determined pursuant to clause (ii) above is capped at 0.5% of market capitalization.

If, on the valuation date, the cumulative total return of UDR’s common stock does not meet the Minimum Return, then the Series E Participants will forfeit their entire initial investment.

Based on the results through September 30, 2008, no Series E OPPSs would have been issued had the Program terminated on that date. However, since the ultimate determination of Series E OPPSs to be issued will not occur until December 31, 2009, and the number of Series E OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events. Accordingly, the contingently issuable Series E OPPSs will only be included in basic earnings per share after the measurement period has ended and the applicable hurdle has been met. Furthermore, the Series E OPPSs will only be included in common stock and common stock equivalents in the calculation of diluted earnings per share after the hurdle has been met at the end of the reporting period (if any), assuming the measurement period ended at the end of the reporting period.

Litigation and Legal Matters

UDR is subject to various legal proceedings and claims arising in the ordinary course of business. UDR cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. UDR believes that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition, results of operations or cash flow.

12. REPORTABLE SEGMENTS

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS 131”), requires that segment disclosures present the measure(s) used by the chief operating decision maker to decide how to allocate resources and for purposes of assessing such segments’ performance. UDR’s chief operating decision maker is comprised of several members of its executive management team who use several generally accepted industry financial measures to assess the performance of the business for our reportable operating segments.

UDR owns and operates multifamily apartment communities throughout the United States that generate rental and other property related income through the leasing of apartment homes to a diverse base of tenants. The primary financial measures for UDR’s apartment communities are rental income and net operating income (“NOI”). Rental income represents gross market rent less adjustments for concessions, vacancy loss and bad debt. NOI is defined as total revenues less direct property operating expenses. UDR’s chief operating decision maker utilizes NOI as the key measure of segment profit or loss.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

UDR’s two reportable segments are same communities and non-mature/other communities:

	•		Same communities represent those communities acquired, developed, and stabilized prior to September 30, 2007, and held as of September 30, 2008. A comparison of operating results from the prior year is meaningful as these communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months.
	•		Non-mature/other communities represent those communities that were acquired or developed in 2007 and 2008, sold properties, redevelopment properties, properties classified as real estate held for disposition, condominium conversion properties, joint venture properties, properties managed by third parties, and the non-apartment components of mixed use properties.

Executive management evaluates the performance of each of our apartment communities on a same community and non-mature/other basis, as well as individually and geographically. This is consistent with the aggregation criteria of SFAS 131 as each of our apartment communities generally have similar economic characteristics, facilities, services, and tenants. Therefore, UDR’s reportable segments have been aggregated by geography in a manner identical to that which is provided to the chief operating decision maker.

All revenues are from external customers and no single tenant or related group of tenants contributed 10% or more of UDR’s total revenues during the three and nine months ended September 30, 2008 and 2007.

UDR, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)

Certain reclassifications have been made to prior year amounts to conform to current year presentation. These reclassifications primarily represent presentation changes related to discontinued operations as described in Note 3, “Income from Discontinued Operations.” The accounting policies applicable to the operating segments described above are the same as those described in Note 1, “Summary of Significant Accounting Policies,” in UDR’s Annual Report on Form 10-K for the year ended December 31, 2007. The following table details rental income and NOI for UDR’s reportable segments for the three and nine months ended September 30, 2008 and 2007, and reconciles NOI to net income per the Consolidated Statement of Operations (dollars in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Reportable apartment home segment rental income
Same Communities
Western Region		$	54,975			$	52,123			$	162,395			$	152,104
Mid-Atlantic Region			26,861				25,979				79,690				75,527
Southeastern Region			26,466				26,570				79,739				79,373
Southwestern Region			4,577				4,461				13,722				13,051
Non-Mature communities/Other			34,561				80,411				118,006				238,465
Total segment and consolidated rental income		$	147,440			$	189,544			$	453,552			$	558,520
Reportable apartment home segment NOI
Same Communities
Western Region		$	38,393			$	36,418			$	114,622			$	105,239
Mid-Atlantic Region			18,168				18,137				55,052				52,308
Southeastern Region			16,151				16,779				50,520				50,137
Southwestern Region			2,864				2,811				8,910				8,240
Non-Mature communities/Other			20,029				47,890				68,720				142,189
Total segment and consolidated NOI			95,605				122,035				297,824				358,113
Reconciling items:
Non-property income			10,798				6,295				27,029				15,387
Property management			(4,055	)			(5,211	)			(12,473	)			(15,357	)
Other operating expenses			(1,158	)			(321	)			(3,188	)			(946	)
Depreciation and amortization			(65,551	)			(64,790	)			(180,493	)			(193,267	)
Interest			(37,357	)			(46,130	)			(112,470	)			(133,082	)
General and administrative			(9,835	)			(8,788	)			(29,535	)			(28,350	)
Other depreciation and amortization			(1,140	)			(837	)			(3,013	)			(2,626	)
Other expenses			(833	)			—				(833	)			—
Loss from unconsolidated entities			(1,897	)			(335	)			(3,286	)			(869	)
Minority interests			345				(4,372	)			(48,911	)			(6,136	)
Net gain on the sale of land and depreciable property			6,705				81,283				787,100				124,491
Consolidated net (loss)/income		$	(8,373	)		$	78,829			$	717,751			$	117,358