Edgar Filing: UDR, Inc.

e10vq

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 June 30, 2011


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.)
333-156002-01 (United Dominion Realty, L.P.)

UDR, Inc.
United Dominion Realty, L.P.

(Exact name of registrant as specified in its charter)


Maryland (UDR, Inc.)		54-0857512
Delaware (United Dominion Realty, L.P.)		54-1776887
(State or other jurisdiction of		(I.R.S. Employer
incorporation 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.


UDR, Inc.		Yes þ No o
United Dominion Realty, L.P.		Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).


UDR, Inc.		Yes þ No o
United Dominion Realty, L.P.		Yes þ No o

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

UDR, Inc.:


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

United Dominion Realty, L.P.:


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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


UDR, Inc.		Yes o No þ
United Dominion Realty, L.P.		Yes o No þ

The number of shares of UDR, Inc.’s common stock, $0.01 par value, outstanding as of July 29, 2011, was 219,079,564.

UDR, INC.
UNITED DOMINION REALTY, L.P.

INDEX


	PAGE

PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

UDR, INC.:

Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010 (audited)		3

Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)		4

Consolidated Statements of Stockholders’ Equity and Comprehensive Income/(Loss) for the six months ended June 30, 2011 (unaudited)		5

Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)		6

Notes to Consolidated Financial Statements (unaudited)		7

UNITED DOMINION REALTY, L.P.:

Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010 (audited)		33

Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (unaudited)		34

Consolidated Statements of Partners’ Capital and Comprehensive Income/(Loss) for the six months ended June 30, 2011 (unaudited)		35

Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)		36

Notes to Consolidated Financial Statements (unaudited)		37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		55

Item 3. Quantitative and Qualitative Disclosures About Market Risk		78

Item 4. Controls and Procedures		78

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		78

Item 1A. Risk Factors		78

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		92

Item 3. Defaults Upon Senior Securities		93

Item 4. (Removed and Reserved)		93

Item 5. Other Information		93

Item 6. Exhibits		93

Signatures		94

Exhibit 12.1
Exhibit 12.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3
Exhibit 32.4
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2011 of UDR, Inc. a Maryland corporation, and United Dominion Realty, L.P., a Delaware limited partnership, of which UDR is the parent company and sole general partner. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” the “Company”, “UDR” or UDR, Inc. refer collectively to UDR, Inc., together with its consolidated subsidiaries and joint ventures, including the Operating Partnership. Unless the context otherwise requires, the references in this Report to the “Operating Partnership” refer to United Dominion Realty, L.P. together with its consolidated subsidiaries. “Common stock” refers to the common stock of UDR and “stockholders” means the holders of shares of UDR’s common stock and preferred stock. The limited partnership interests of the Operating Partnership are referred to as “OP Units” and the holders of the OP Units are referred to as “unitholders”. This combined Form 10-Q is being filed separately by UDR and the Operating Partnership.

There are a number of differences between our company and our operating partnership, which are reflected in our disclosure in this report. UDR is a real estate investment trust (a “REIT”), whose most significant asset is its ownership interest in the Operating Partnership. UDR also conducts business through other subsidiaries and operating partnerships, including its subsidiary RE³, whose activities include development of land. UDR acts as the sole general partner of the Operating Partnership, holds interests in other operating partnerships, subsidiaries and joint ventures, owns and operates properties, issues securities from time to time and guarantees debt of certain of our subsidiaries. The Operating Partnership conducts the operations of a substantial portion of the business and is structured as a partnership with no publicly traded equity securities. The Operating Partnership has guaranteed certain outstanding securities of UDR.

As of June 30, 2011, UDR owned 110,883 units of the general partnership interests of the Operating Partnership and 174,738,456 units (or approximately 95.8%) of the limited partnership interests of the Operating Partnership (the “OP Units”). UDR conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership, and, by virtue of its ownership of the OP Units and being the Operating Partnership’s sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Separate financial statements and accompanying notes, as well as separate discussions under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are provided for each of UDR and the Operating Partnership. This combined Form 10-Q is being filed separately by UDR and the Operating Partnership.

UDR, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


	June 30,			December 31,
	2011			2010
	(unaudited)			(audited)
ASSETS

Real estate owned:
Real estate held for investment	$	7,141,505		$	6,490,791
Less: accumulated depreciation		(1,726,258	)		(1,566,618	)

Real estate held for investment, net		5,415,247			4,924,173
Real estate under development		157,301			97,912
Real estate held for sale (net of accumulated depreciation of $0 and $71,708)		—			220,936

Total real estate owned, net of accumulated depreciation		5,572,548			5,243,021
Cash and cash equivalents		21,634			9,486
Marketable securities		—			3,866
Restricted cash		20,220			15,447
Deferred financing costs, net		24,747			27,267
Notes receivable		7,800			7,800
Investment in unconsolidated joint ventures		177,404			148,057
Other assets		137,424			74,596

Total assets	$	5,961,777		$	5,529,540


LIABILITIES AND STOCKHOLDERS’ EQUITY

Secured debt	$	1,992,401		$	1,908,068
Secured debt — real estate held for sale		—			55,602
Unsecured debt		1,707,185			1,603,834
Real estate taxes payable		14,525			14,585
Accrued interest payable		23,341			20,889
Security deposits and prepaid rent		30,524			26,046
Distributions payable		42,654			36,561
Deferred fees and gains on the sale of depreciable property		29,011			28,943
Accounts payable, accrued expenses, and other liabilities		104,179			105,925

Total liabilities		3,943,820			3,800,453

Redeemable non-controlling interests in operating partnership		187,309			119,057

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, 2010)		46,571			46,571
3,264,362 shares of 6.75% Series G Cumulative Redeemable issued and outstanding (3,405,562 shares at December 31, 2010)		81,609			85,139
Common stock, $0.01 par value; 250,000,000 shares authorized
196,660,518 shares issued and outstanding (182,496,330 shares at December 31, 2010)		1,967			1,825
Additional paid-in capital		2,782,510			2,450,141
Distributions in excess of net income		(1,075,499	)		(973,864	)
Accumulated other comprehensive income/(loss), net		(10,285	)		(3,469	)

Total UDR, Inc. stockholders’ equity		1,826,873			1,606,343
Non-controlling interest		3,775			3,687

Total equity		1,830,648			1,610,030

Total liabilities and stockholders’ equity	$	5,961,777		$	5,529,540

See accompanying notes to consolidated financial statements.

UDR, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
REVENUES
Rental income	$	176,767		$	146,647		$	340,462		$	290,972
Non-property income:
Other income		2,855			2,056			7,390			3,527

Total revenues		179,622			148,703			347,852			294,499

EXPENSES
Rental expenses:
Real estate taxes and insurance		20,515			18,327			41,355			37,011
Personnel		15,439			13,518			30,168			26,489
Utilities		9,122			7,652			18,133			16,004
Repair and maintenance		9,594			8,177			18,560			15,737
Administrative and marketing		4,317			3,824			8,270			7,521
Property management		4,861			4,033			9,363			8,002
Other operating expenses		1,544			1,457			3,001			2,942
Real estate depreciation and amortization		91,107			70,254			172,625			138,993
Interest
Expense incurred		37,381			35,218			72,969			70,346
Amortization of convertible debt discount		359			928			718			1,895
Other debt charges		40			1,030			4,059			1,030
General and administrative		12,918			10,293			23,593			19,933
Other depreciation and amortization		986			1,308			2,029			2,531

Total expenses		208,183			176,019			404,843			348,434
Loss from operations		(28,561	)		(27,316	)		(56,991	)		(53,935	)
Loss from unconsolidated entities		(1,348	)		(1,185	)		(2,680	)		(1,922	)

Loss from continuing operations		(29,909	)		(28,501	)		(59,671	)		(55,857	)
Income from discontinued operations		44,818			861			45,924			3,191

Consolidated net income/(loss)		14,909			(27,640	)		(13,747	)		(52,666	)
Net (income)/loss attributable to redeemable non-controlling interests in OP		(221	)		1,064			611			2,069
Net income attributable to non-controlling interests		(37	)		(45	)		(88	)		(80	)

Net income/(loss) attributable to UDR, Inc.		14,651			(26,621	)		(13,224	)		(50,677	)
Distributions to preferred stockholders — Series E (Convertible)		(931	)		(931	)		(1,862	)		(1,862	)
Distributions to preferred stockholders — Series G		(1,396	)		(1,441	)		(2,833	)		(2,889	)
(Premium)/discount on preferred stock repurchases, net		(175	)		25			(175	)		25

Net income/(loss) attributable to common stockholders	$	12,149		$	(28,968	)	$	(18,094	)	$	(55,403	)


Earnings per weighted average common share — basic and diluted:
Loss from continuing operations attributable to common stockholders	$	(0.17	)	$	(0.19	)	$	(0.34	)	$	(0.37	)
Income from discontinued operations	$	0.23		$	0.01		$	0.24		$	0.02
Net income/(loss) attributable to common stockholders	$	0.06		$	(0.18	)	$	(0.10	)	$	(0.35	)

Common distributions declared per share	$	0.200		$	0.180		$	0.385		$	0.360

Weighted average number of common shares outstanding — basic and diluted		190,479			160,886			186,527			158,522

See accompanying notes to consolidated financial statements.

UDR, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME/(LOSS)

(In thousands, except share and per share data)

(Unaudited)


																Accumulated
													Distributions in			Other			Non-
	Preferred Stock						Common Stock				Paid-in		Excess of			Comprehensive			controlling
	Shares			Amount			Shares		Amount		Capital		Net Income			Income/(Loss)			interest		Total
Balance, December 31, 2010		6,209,374		$	131,710			182,496,330	$	1,825	$	2,450,141	$	(973,864	)	$	(3,469	)	$	3,687	$	1,610,030
Comprehensive income/(loss)
Net loss		—			—			—		—		—		(13,224	)		—			—		(13,224	)
Net income attributable to non-controlling interests		—			—			—		—		—		—			—			88		88
Other comprehensive income
Unrealized gain on sale of marketable securities reclassified into earnings		—			—			—		—		—		—			(3,492	)		—		(3,492	)
Unrealized gain on derivative financial instruments		—			—			—		—		—		—			(3,553	)		—		(3,553	)
Allocation to redeemable non-controlling interests		—			—			—		—		—		—			229			—		229

Comprehensive income/(loss)														(13,224	)		(6,816	)		88		(19,952	)

Issuance of common and restricted shares		—			—			687,339		6		7,244		—			—			—		7,250
Issuance of common shares through public offering		—			—			13,474,955		134		324,971		—			—			—		325,105
Redemption of 141,200 shares of 6.75% Series G
Redeemable Shares		(141,200	)		(3,530	)		—		—		108		(175	)		—			—		(3,597	)
Adjustment for conversion of non-controlling interest of unitholders in Operating Partnership		—			—			1,894		2		46		—			—			—		48
Common stock distributions declared ($0.385 per share)		—			—			—		—		—		(74,329	)		—			—		(74,329	)
Preferred stock distributions declared-Series E ($0.6644 per share)		—			—			—		—		—		(1,862	)		—			—		(1,862	)
Preferred stock distributions declared-Series G ($0.843715 per share)		—			—			—		—		—		(2,833	)		—			—		(2,833	)
Adjustment to reflect redemption value of redeemable non-controlling interests		—			—			—		—		—		(9,212	)		—			—		(9,212	)

Balance, June 30, 2011		6,068,174		$	128,180			196,660,518	$	1,967	$	2,782,510	$	(1,075,499	)	$	(10,285	)	$	3,775	$	1,830,648

See accompanying notes to consolidated financial statements.

UDR, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for share data)


	Six Months Ended June 30,
	2011			2010
	(unaudited)			(unaudited)
Operating Activities
Consolidated net loss	$	(13,747	)	$	(52,666	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		177,305			148,464
Net gain on sale of marketable securities		(3,123	)		—
Net gain on the sale of depreciable property		(44,699	)		(156	)
Loss on debt extinguishment		4,059			1,030
Write off of bad debt		1,241			1,208
Loss from unconsolidated entities		2,680			1,922
Amortization of deferred financing costs and other		4,238			3,939
Amortization of deferred compensation		5,105			6,008
Amortization of convertible debt discount		719			1,895
Changes in income tax accruals		988			(292	)
Changes in operating assets and liabilities:
(Increase)/decrease in operating assets		(10,642	)		2,973
Decrease in operating liabilities		(9,049	)		(12,546	)

Net cash provided by operating activities		115,075			101,779

Investing Activities
Proceeds from sales of real estate investments, net		29,363			—
Proceeds from sale of marketable securities		3,497			—
Payments related to the buyout of joint venture partner		—			(16,141	)
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures		(109,148	)		—
Asset exchange cash paid		(28,124	)		—
Development of real estate assets		(44,547	)		(61,771	)
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement		(37,691	)		(36,432	)
Capital expenditures — non-real estate assets		(2,477	)		(2,645	)
Investment in unconsolidated joint ventures		(33,245	)		(5,681	)
Distributions received from unconsolidated joint venture		488			479
Purchase deposits on pending real estate acquisitions		(44,176	)		—

Net cash used in investing activities		(266,060	)		(122,191	)

Financing Activities
Payments on secured debt		(204,896	)		(83,845	)
Proceeds from the issuance of secured debt		19,204			51,880
Proceeds from the issuance of unsecured debt		296,964			149,190
Payments on unsecured debt		(167,790	)		(79,488	)
Net proceeds/(repayment) of revolving bank debt		(26,750	)		(55,400	)
Payment of financing costs		(3,380	)		(2,491	)
Issuance of common and restricted stock, net		3,832			4,376
Proceeds from the issuance of common shares through public offering, net		325,106			103,444
Payments for the repurchase of Series G preferred stock, net		(3,597	)		(637	)
Distributions paid to non-controlling interests		(2,952	)		(2,685	)
Distributions paid to preferred stockholders		(4,696	)		(4,751	)
Distributions paid to common stockholders		(67,912	)		(57,092	)

Net cash provided by financing activities		163,133			22,501

Net increase in cash and cash equivalents		12,148			2,089
Cash and cash equivalents, beginning of period		9,486			5,985

Cash and cash equivalents, end of period	$	21,634		$	8,074


Supplemental Information:
Interest paid during the period, net of amounts capitalized	$	83,233		$	78,991
Non-cash transactions:
Properties acquired, including intangibles in asset exchange		268,853			—
Properties disposed in asset exchange, net of accumulated depreciation		192,576			—
OP Units issued in partial consideration for property acquisition		62,878			—
Secured debt assumed in the acquisitions of properties, including asset exchange		247,805			—
Secured debt transferred in asset exchange		55,356			—
Fair market value adjustment of secured debt assumed in acquisitions of properties, including asset exchange		21,915			—
Issuance of restricted stock awards		6			16
Conversion of operating partnership non-controlling interests to common stock (1,894 shares in 2011 and 39,638 shares in 2010)		48			551
Retirement of fully depreciated assets		—			7,183

See accompanying notes to consolidated financial statements.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2011

1. CONSOLIDATION AND BASIS OF PRESENTATION

Consolidation and Basis of Presentation

UDR, Inc., collectively with our consolidated subsidiaries (“UDR”, the “Company”, “we”, “our”, or “us”) is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, redevelops, and manages apartment communities. The accompanying consolidated financial statements include the accounts of UDR and its subsidiaries, including United Dominion Realty, L.P. (the “Operating Partnership”). As of June 30, 2011, there were 182,479,015 units in the Operating Partnership outstanding, of which 174,849,339 units or 95.8% were owned by UDR and 7,629,676 units or 4.2% were owned by limited partners. The consolidated financial statements of UDR include the non-controlling interests of the unitholders in the Operating Partnership.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of June 30, 2011, and results of operations for the three and six months ended June 30, 2011 and 2010 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, 2010, filed with the Securities and Exchange Commission on February 23, 2011.

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.

The Company evaluated subsequent events through the date its financial statements were issued. Except as disclosed in Note 16, Subsequent Events, no other recognized or non-recognized subsequent events were noted.

2. SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies

Revenue and real estate sales gain recognition

Rental income related to leases is recognized on an accrual basis when due from residents in accordance with FASB ASC 840, Leases and SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”. Rental payments are generally due on a monthly basis and recognized when earned. The Company recognizes interest income, management and other fees and incentives when earned, fixed and determinable.

The Company accounts for sales of real estate in accordance with FASB ASC 360-20, Real Estate Sales. For sale transactions meeting the requirements for full accrual profit recognition, such as the Company no longer having continuing involvement in the property, we remove the related assets and liabilities from our Consolidated Balance Sheets and record the gain or loss in the period the transaction closes. For sale transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting. Unless certain limited criteria are met, non-monetary transactions, including property exchanges, are accounted for at fair value.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

Sales to entities in which we retain or otherwise own an interest are accounted for as partial sales. If all other requirements for recognizing profit under the full accrual method have been satisfied and no other forms of continuing involvement are present, we recognize profit proportionate to the outside interest in the buyer and 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.

Marketable Securities

Marketable securities represented common stock in a publicly held company. Marketable securities were classified as “available-for-sale,” and were carried at fair value with unrealized gains and losses reported as a component of stockholders’ equity. During the six months ended June 30, 2011, the Company sold marketable securities for $3.5 million, resulting in a gross realized gain of $3.1 million, which is included in “Other Income” on the Consolidated Statements of Operations. The cost of securities sold was based on the specific identification method. Unrealized gains of $3.5 million were reclassified out of accumulated other comprehensive income/(loss) into earnings during the six months ended June 30, 2011.

The amortization of any discount and interest income on previously held debt securities are included in “Other Income” on the Consolidated Statements of Operations for the three and six months ended June 30, 2010.

Preferred Share repurchases

When repurchasing Preferred Stock, the Company recognizes share issuance costs as a charge to the Preferred Stock on a pro rata basis to the total costs incurred for the Preferred Stock offering as well as any premium or discount on the repurchase. The Company recognized a net decrease attributable to income to common stockholders of ($175,000), during the three and six months ended June 30, 2011, and a net increase of $25,000 during the three and six months ended June 30, 2010, and they are reported in “(Premium)/discount on preferred stock repurchases, net” in the Consolidated Statements of Operations.

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 has elected for certain consolidated subsidiaries to be treated as Taxable REIT Subsidiaries (“TRS”), primarily those engaged in development activities.

Income taxes for our TRS are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rate is recognized in earnings in the period of the enactment date. 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 June 30, 2011, UDR recorded a net current liability of $205,000 and a deferred tax asset of $6.6 million (net of a valuation allowance of $53.1 million). For the three and six months ended June 30, 2011 and 2010, UDR recorded income tax expense of $59,000 and $145,000 and $81,000 and $146,000, respectively, which is classified in “General and Administrative” expenses.

FASB ASC 740, Income Taxes (“Topic 740”) 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. Topic 740 also provides guidance on derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition.

The Company recognizes its 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 that is more likely than not to be realized upon ultimate settlement.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

UDR had no unrecognized tax benefit, accrued interest or penalties at June 30, 2011. UDR and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The tax years 2006 — 2010 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.

3. REAL ESTATE OWNED

Real estate assets owned by the Company consist of income producing operating properties, properties under development, land held for future development, and properties held for sale. As of June 30, 2011 the Company owned and consolidated 170 communities in 11 states plus the District of Columbia totaling 48,556 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of June 30, 2011 and December 31, 2010 (dollar amounts in thousands):


	June 30,			December 31,
	2011			2010

Land	$	1,799,780		$	1,693,775
Depreciable property — held and used:
Building and improvements		5,035,481			4,499,920
Furniture, fixtures and equipment		306,244			297,096
Under development:
Land		78,794			62,410
Construction in progress		78,507			35,502
Held for sale:
Land		—			89,932
Building and improvements		—			196,494
Furniture, fixtures and equipment		—			6,218

Real estate owned		7,298,806			6,881,347
Accumulated depreciation		(1,726,258	)		(1,638,326	)


Real estate owned, net	$	5,572,548		$	5,243,021

The following table summarizes UDR’s real estate community acquisitions for the six months ended June 30, 2011.


					Purchase
Property Name	Market	Acquisition Date	Units		Price (a)

10 Hanover Square	New York, NY	April 2011		493	$	259,750
388 Beale	San Francisco, CA	April 2011		227		90,500
14 North	Boston, MA	April 2011		387		64,500
Inwood West	Boston, MA	April 2011		446		108,000
View 14	Metropolitan D.C.	June 2011		185		105,538

				1,738	$	628,288


(a)		The purchase price is the contractual sales price between UDR and the third party and does not include any costs that the Company incurred in the pursuit of the property.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

In April 2011, the Company and the Operating Partnership closed on the acquisition of 10 Hanover Square. The community was acquired for $259.8 million, which included assumed debt of $192.0 million (with a fair value of $208.1 million), and the issuance of 2,569,606 operating partnership units (“OP Units”) of the Operating Partnership. The OP Units were deemed to have a value equal to the greater of $25.00 or the closing price per share of the Company’s common stock for the 10 day period ended on (and including) the date one business day prior to the settlement date. For purchase price accounting purposes, the fair value of these OP units was $24.47.

In April 2011, the Company and the Operating Partnership completed a $500 million asset exchange whereby UDR acquired 388 Beale, and the Operating Partnership acquired 14 North, and Inwood West. The communities acquired were valued at $263.0 million representing their estimated fair value. The Company paid $28.1 million of cash and assumed debt of $55.8 million (with a fair value of $61.7 million). UDR sold two multifamily apartment communities (434 homes) and the Operating Partnership sold four multifamily apartment communities (984 homes) located in California as part of the transaction. (See Note 4, Discontinued Operations, for further discussion of real estate community dispositions.)

The Company allocates the purchase price to the tangible and identifiable intangible assets acquired based on their estimated fair value. When allocating cost to an acquired community, the Company first allocates costs to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the community is vacant. The primary, although not only, identifiable intangible asset associated with our portfolio is the value of existing lease agreements. The Company estimates the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. The fair value allocated to land is generally based on relevant market data. The building is valued using the direct capitalization method. The fair values for the land, real estate assets and in place leases incorporate significant unobservable inputs, and therefore are considered to be Level 3 prices within the fair value hierarchy.

The $628.3 million purchase price, which is gross of the difference between the value of the OP Units of $25.00 and the fair value of $24.47, was allocated $114.5 million to land; $506.8 million to buildings and improvements; $3.4 million to furniture, fixtures, and equipment; $25.4 million to intangible assets; and $23.2 million to intangible liabilities. The purchase price allocation of the View 14 acquisition is subject to change as the Company obtains more complete information during the measurement period.

The Company’s results of operations include operating revenues of $10.8 million and loss from continuing operations of $6.7 million of the acquired properties from the acquisition dates to June 30, 3011.

The unaudited pro forma information below summarizes the Company’s combined results of operations for the three and six months ended June 30, 2011 and 2010 as though the acquisitions of 10 Hanover Square and the asset exchange were completed at January 1, 2010. The information for the three and six months ended June 30, 2011 includes pro forma results for the portion of the period prior to the acquisition date and actual results from the date of acquisition through the end of the period. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods (in thousands except for per share amounts).


	Three months ended June 30,					Six months ended June 30,
	2011		2010			2011			2010

Pro forma revenues	$	179,152	$	164,268		$	356,019		$	328,535
Pro forma income/(loss) attributable to common stockholders		12,076		(24,113	)		(24,909	)		(48,225	)
Proforma income/(loss) attributable to common stockholders — basic		0.06		(0.15	)		(0.13	)		(0.30	)
Pro forma income/(loss) attributable to common stockholders — diluted		0.06		(0.15	)		(0.13	)		(0.30	)

The Company did not have any acquisitions during the three and six months ended June 30, 2010.

The Company incurred $2.1 million and $2.7 million of acquisition related costs during the three and six months ended June 30, 2011, respectively. These expenses are classified on the Consolidated Statements of Operations in the line item entitled “General and administrative,” and have been excluded from the pro forma results as the costs do not have a continuing impact on the results of operations.

All development projects and related carrying costs are capitalized and reported on the Consolidated Balance Sheets as “Real estate under development.” The costs of development projects which include interest, real estate taxes, insurance, and allocated development overhead related to support costs for personnel working directly on the development site are capitalized during the construction period. During the three and six months ended June 30, 2011 and 2010, total interest capitalized was $3.5 million and $6.1 million and $3.3 million and $7.3 million, respectively.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

4. 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 been 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 classified as held for sale are presented separately on the Consolidated Balance Sheets at the lower of their carrying amount or their estimated fair value less the costs to sell the assets.

As discussed in Note 3, Real Estate Owned, in conjunction with the asset exchange that closed on April 5, 2011, UDR sold six multifamily apartment communities (1,418 homes). In May 2011, UDR also sold an apartment community (289 homes) located in Dallas, Texas. During the three and six months ended June 30, 2011, UDR recognized gains for financial reporting purposes of $44.7 million on these transactions, which are included in discontinued operations. The results of operations for the following properties are classified on the Consolidated Statements of Operations in the line item entitled “Income from discontinued operations.”

The Company did not dispose of any communities during the three and six months ended June 30, 2010. Discontinued operations for the three and six months ended June, 2010 also includes operating activities related to one 149 unit community sold during the third quarter of 2010.

The following is a summary of income from discontinued operations for the three months ended June 30, 2011 and 2010 (dollars in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010

Rental income	$	451	$	7,274	$	7,258	$	14,578
Non-property income		—		—		1		1,849

		451		7,274		7,259		16,427
Rental expenses		161		2,169		2,367		4,511
Property management fee		12		200		199		401
Real estate depreciation		54		3,472		2,651		6,940
Interest		64		769		817		1,540

		291		6,610		6,034		13,392
Income before net gain on the sale of depreciable property		160		664		1,225		3,035
Net gain on the sale of depreciable property		44,658		197		44,699		156

Income from discontinued operations	$	44,818	$	861	$	45,924	$	3,191

5. 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, and are included in investment in unconsolidated joint ventures on our Consolidated Balance Sheets. The Company would 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 would 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 without cause.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

UDR’s joint ventures are funded with a combination of debt and equity. Our losses are limited to our investment and except as noted below, the Company does not guarantee any debt, capital payout or other obligations associated with our joint venture portfolio.

Consolidated Joint Ventures

UDR is a partner with an unaffiliated third party in a joint venture (“989 Elements”) which owns and operates a 23-story, 166 home high-rise apartment community in the central business district of Bellevue, Washington. In March 2010, the Company paid $7.7 million to acquire our partner’s 49% interest in the joint venture. At June 30, 2011 and December 31, 2010, the Company’s interest in 989 Elements was 98%.

UDR is a partner with an unaffiliated third party in a joint venture (“Elements Too”) which owns and operates a 274 home apartment community in the central business district of Bellevue, Washington. Construction began in the fourth quarter of 2006 and was completed in the first quarter of 2010. In March 2010, the Company paid $3.2 million to acquire our partner’s 49% interest in the joint venture. At June 30, 2011 and December 31, 2010, the Company’s interest in Elements Too was 98%.

UDR is a partner with an unaffiliated third party in a joint venture (“Bellevue”) which owns an operating retail site in Bellevue, Washington. The Company initially planned to develop a 430 home high rise apartment building with ground floor retail on an existing operating retail center. However, the joint venture subsequently decided to continue to operate the retail property as opposed to developing a high rise apartment building on the site. In March 2010, the Company paid $5.2 million to acquire our partner’s 49% interest in the joint venture. At June 30, 2011 and December 31, 2010, the Company’s interest in Bellevue was 98%.

Unconsolidated Joint Ventures

The Company recognizes earnings or losses from our investments in unconsolidated joint ventures consisting of our proportionate share of the net earnings or loss of the joint ventures. In addition, we may earn fees for providing management services to the unconsolidated joint ventures. As of June 30, 2011, UDR had investments in the following unconsolidated joint ventures which are accounted for under the equity method of accounting.

In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests in the Hanover/MetLife Master Limited Partnership (the “UDR/MetLife Partnership”) at a cost of $100.8 million. The UDR/MetLife Partnership owns a portfolio of 26 operating communities containing 5,748 apartment homes and 10 land parcels with the potential to develop approximately 2,000 additional apartment homes. Under the terms of the UDR/MetLife Partnership, UDR acts as the general partner and earns fees for property and asset management and financing transactions.

UDR has a weighted average ownership interest of 12.27% in the operating communities and 4.11% in the land parcels. The initial investment of $100.8 million consisted of $71.8 million in cash, which included associated transaction costs, and a $30 million payable (includes present value discount of $1 million) to Hanover. UDR agreed to pay the $30 million balance to Hanover in two interest free installments in the amounts of $20 million and $10 million on the first and second anniversaries of the closing, respectively. The $30 million payable was recorded at its present value of $29 million using an effective interest rate of 2.67%. At June 30, 2011 and December 31, 2010, the net carrying value of the payable was $29.5 million and $29.1 million, respectively. Interest expense of $196,000 and $391,000 was recorded during the three and six months ended June 30, 2011, respectively. At June 30, 2011 and December 31, 2010, the Company’s investment was $129.5 million and $122.2 million, respectively.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

UDR’s total cost of its equity investment of $100.8 million differed from the proportionate share in the underlying net assets of the UDR/MetLife Partnership of $111.4 million. The difference of $10.6 million was attributable to certain assets and adjustments that were allocated to UDR’s proportionate share in the UDR/MetLife Partnership’s buildings of $8.4 million, land of $3.9 million, and ($1.6 million) of lease intangible assets. With the exception of land, the difference related to buildings is amortized and recorded as a component of loss from unconsolidated entities over 45 years and the difference related to lease intangible assets is amortized and recorded as a component of loss from unconsolidated entities over 11 months with the offset to the Company’s carrying value of its equity investment. During the three and six months ended June 30, 2011, the Company recorded $395,000 and $791,000 of amortization, respectively.

In connection with the purchase of Hanover’s interests in the UDR/MetLife Partnership, UDR agreed to indemnify Hanover from liabilities arising from Hanover’s guaranty of $333 million in loans ($209 million outstanding at June 30, 2011) which are secured by a security interest in the operating communities subject to the respective loans. The loans are to the sub-tier partnerships which own the 26 operating communities. The Company anticipates that the balance of these loans will be refinanced by the UDR/MetLife Partnership over the next twelve months.

In October 2010, the Company entered into a joint venture with an affiliate of Hanover to develop a 240-home community in Stoughton, Massachusetts. At June 30, 2011 and December 31, 2010, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $10 million. Our investment at June 30, 2011 and December 31, 2010 was $17.2 million and $10.3 million, respectively.

In May 2011, the Company entered into a joint venture with an affiliate of Hanover to develop a 263-home community in San Diego, California. At June 30, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $9.9 million and our investment at June 30, 2011 was $10.3 million.

In June 2011, the UDR/MetLife Partnership sold a parcel of land to a joint venture, which the Company entered into with an affiliate of Hanover, to develop a 256-home community in College Park, Maryland. At June 30, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $7.1 million and our investment at June 30, 2011 was $6.9 million.

UDR is a partner with an unaffiliated third party, which formed a joint venture for the investment of up to $450 million in multifamily properties located in key, high barrier to entry markets. The partners will contribute equity of $180 million of which the Company’s maximum equity will be 30% or $54 million when fully invested. In 2010, the joint venture acquired its first property (151 homes) located in Metropolitan Washington D.C. At June 30, 2011 and December 31, 2010, the Company owned a 30% interest in the joint venture. Our investment at June 30, 2011 and December 31, 2010 was $5.0 million and $5.2 million, respectively.

UDR is a partner with an unaffiliated third party which owns and operates 10 operating properties located in Texas (3,992 homes). UDR contributed cash and a property equal to 20% of the fair value of the properties. The unaffiliated member contributed cash equal to 80% of the fair value of the properties comprising the joint venture, which was then used to purchase the nine operating properties from UDR. Our initial investment was $20.4 million. Our investment at June 30, 2011 and December 31, 2010 was $8.5 million and $10.3 million, respectively.

We evaluate our investments in unconsolidated joint ventures when events or changes in circumstances indicate that there may be an other-than-temporary decline in value. We consider various factors to determine if a decrease in the value of the investment is other-than-temporary. The Company did not recognize any other-than-temporary decrease in the value of its other investments in unconsolidated joint ventures during the three months ended June 30, 2011 and 2010.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

Combined summary financial information relating to all of the unconsolidated joint ventures operations (not just our proportionate share), is presented below for the three and six months ended June 30, (dollars in thousands):


	2011		2010

For the three months ended June 30,
Revenues	$	48,414	$	10,629
Real estate depreciation and amortization		16,737		5,526
Net loss		3,142		5,051
UDR recorded loss from unconsolidated entities		1,348		1,185

For the six months ended June 30,
Revenues	$	95,005	$	20,632
Real estate depreciation and amortization		33,338		10,569
Net loss		8,731		8,665
UDR recorded loss from unconsolidated entities		2,680		1,922

Combined summary balance sheets relating to all of the unconsolidated joint ventures (not just our proportionate share) are presented below as of June 30, 2011 and December 31, 2010 (dollars in thousands):


	June 30,		December 31,
	2011		2010
Real estate, net	$	2,682,663	$	2,692,167
Total assets		2,845,697		2,807,886
Amount due to UDR		3,177		672
Third party debt		1,493,145		1,524,872
Total liabilities		1,519,299		1,580,733
Non-controlling interest		14,572		14,537
Equity		1,311,826		1,212,616

As of June 30, 2011, the Company had deferred fees and deferred profit from the sale of properties to a joint venture of $29.0 million, the majority of which the Company will not recognize until the underlying property is sold to a third party. The Company recognized $2.7 million and $3.9 million and $689,000 and $1.1 million of management fees during the three and six months ended June 30, 2011 and 2010, respectively, for our management of the joint ventures. The management fees are classified in “Other Income” in the Consolidated Statements of Operations.

The Company may, in the future, make additional capital contributions to certain of our joint ventures should additional capital contributions be necessary to fund acquisitions and operating shortfalls.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

6. 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 a fixed interest rate for the underlying debt instrument. Secured debt, including debt related to real estate held for sale, which encumbers $3.1 billion or 42.2% of UDR’s total real estate owned based upon gross book value ($4.2 billion or 57.8% of UDR’s real estate owned based on gross book value is unencumbered) consists of the following as of June 30, 2011 (dollars in thousands):


					Six Months Ended June 30, 2011
	Principal Outstanding				Weighted			Weighted		Number of
	June 30,		December		Average			Average		Communities
	2011		2010		Interest Rate			Years to Maturity		Encumbered
Fixed Rate Debt
Mortgage notes payable	$	564,129	$	292,236		4.95	%		4.0		10
Tax-exempt secured notes payable		—		13,325		N/A			—		—
Fannie Mae credit facilities		895,920		897,318		5.32	%		5.9		14

Total fixed rate secured debt		1,460,049		1,202,879		5.18	%		5.2		24

Variable Rate Debt
Mortgage notes payable		177,201		405,641		1.94	%		2.6		8
Tax-exempt secured note payable		94,700		94,700		0.83	%		11.1		2
Fannie Mae credit facilities		260,451		260,450		1.61	%		4.6		32

Total variable rate secured debt		532,352		760,791		1.58	%		5.1		42

Total secured debt	$	1,992,401	$	1,963,670		4.22	%		5.1		66

UDR has five secured credit facilities with Fannie Mae with an aggregate commitment of $1.4 billion at June 30, 2011. 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 $895.9 million of the outstanding balance fixed at a weighted average interest rate of 5.32% and the remaining balance on these facilities is currently at a weighted average variable interest rate of 1.61%.


	June 30, 2011			December 31, 2010
	(dollar amounts in thousands)

Borrowings outstanding	$	1,156,371		$	1,157,768
Weighted average borrowings during the period ended		1,156,957			1,198,771
Maximum daily borrowings during the period ended		1,157,557			1,209,739
Weighted average interest rate during the period ended		4.5	%		4.6	%
Weighted average interest rate at the end of the period		4.5	%		4.5	%

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 a net premium of $21.5 million and $694,000 at June 30, 2011 and December 31, 2010, respectively.

Fixed Rate Debt

Mortgage notes payable. Fixed rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2011 through May 2019 and carry interest rates ranging from 1.93% to 6.60%. Mortgage notes payable includes debt associated with development activities.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

Secured credit facilities. At June 30, 2011, the Company had $895.9 million outstanding of fixed rate secured credit facilities with Fannie Mae with a weighted average fixed interest rate of 5.32%.

Variable Rate Debt

Mortgage notes payable. Variable rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from August 2011 through April 2016. The mortgage notes payable are based on LIBOR plus some basis points, which translate into interest rates ranging from 0.93% to 3.45% at June 30, 2011.

Tax-exempt secured notes payable. The variable rate mortgage notes payable that secure tax-exempt housing bond issues mature at various dates from August 2019 and March 2030. Interest on these notes is payable in monthly installments. The variable mortgage notes have interest rates ranging from 0.77% to 0.86% as of June 30, 2011.

Secured credit facilities. At June 30, 2011, the Company had $260.5 million outstanding of variable rate secured credit facilities with Fannie Mae with a weighted average floating interest rate of 1.61%.

The aggregate maturities, including amortizing principal payments, of our secured debt due during each of the next five calendar years and thereafter are as follows (dollars in thousands):


	Fixed				Variable
	Mortgage		Credit		Mortgage		Tax-Exempt		Credit		Total
Year	Notes		Facilities		Notes		Notes Payable		Facilities		Secured

2011	$	42,281	$	1,411	$	41,430	$	—	$	39,513	$	124,635
2012		61,610		177,944		1,053		—		59,529		300,136
2013		16,511		38,631		53,181		—		—		108,323
2014		73,316		3,328		36,076		—		—		112,720
2015		193,177		3,522		16,415		—		—		213,114
Thereafter		177,234		671,084		29,046		94,700		161,409		1,133,473

Total	$	564,129	$	895,920	$	177,201	$	94,700	$	260,451	$	1,992,401

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

7. UNSECURED DEBT

A summary of unsecured debt as of June 30, 2011 and December 31, 2010 is as follows (dollars in thousands):


	June 30,		December 31,
	2011		2010
Commercial Banks

Borrowings outstanding under an unsecured credit facility due July 2012 ( a )	$	5,000	$	31,750

Senior Unsecured Notes
3.625% Convertible Senior Notes due September 2011 (net of Subtopic 470-20 discount of $419 and $1,138) ( b ), ( g )		96,680		95,961
5.00% Medium-Term Notes due January 2012		100,000		100,000
2.95% Term Notes due December 2013		100,000		100,000
6.05% Medium-Term Notes due June 2013		122,500		122,500
5.13% Medium-Term Notes due January 2014		184,000		184,000
5.50% Medium-Term Notes due April 2014 (net of discount of $192 and $226 )		128,308		128,274
5.25% Medium-Term Notes due January 2015 (includes discount of $455 and $519) ( c )		324,721		324,656
5.25% Medium-Term Notes due January 2016		83,260		83,260
2.27% Term Notes due January 2016 ( e )		—		150,000
3.48% Term Notes due January 2016 ( e )		250,000		100,000
8.50% Debentures due September 2024		15,644		15,644
4.00% Convertible Senior Notes due December 2035 ( f ), ( g )		—		167,750
4.25% Medium-Term Notes due June 2018 (net of discount of $2,965) (d)		297,035		—
Other		37		39

		1,702,185		1,572,084


	$	1,707,185	$	1,603,834


(a)		Our unsecured credit facility provides us with an aggregate borrowing capacity of $600 million, which at our election we can increase to $750 million under certain circumstances. Our unsecured credit facility with a consortium of financial institutions carries an interest rate equal to LIBOR plus a spread of 47.5 basis points (0.8% and 0.9% interest rate at June 30, 2011 and December 31, 2010, respectively) and matures in July 2012. In addition, the unsecured credit facility contains a provision that allows us to bid up to 50% of the commitment and we can bid out the entire unsecured credit facility once per quarter so long as we maintain an investment grade rating.

(b)		Subject to the restrictions on ownership of our common stock and certain other conditions, at any time on or after July 15, 2011 and prior to the close of business on the second business day prior to the maturity date of September 15, 2011, and also following the occurrence of certain events, holders of outstanding 3.625% notes may convert their notes into cash and, if applicable, shares of our common stock, at the conversion rate in effect at such time. Upon conversion of the notes, UDR will deliver cash and common stock, if any, based on a daily conversion value calculated on a proportionate basis for each trading day of the relevant 30 trading day observation period. The initial conversion rate for each $1,000 principal amount of notes was 26.6326 shares of our common stock (equivalent to an initial conversion price of approximately $37.55 per share), subject to adjustment under certain circumstances. If UDR undergoes certain change in control transactions, holders of the 3.625% notes may require us to repurchase their notes in whole or in part for cash equal to 100% of the principal amount of the notes to be repurchased plus any unpaid interest accrued to the repurchase date. In connection with the issuance of the 3.625% notes, UDR entered into a capped call transaction covering approximately 6.7 million shares of our common stock, subject to anti-dilution adjustments similar to those contained in the notes. The capped call expires on the maturity date of the 3.625% notes. The capped call transaction combines a purchased call option with a strike price of $37.548 with a written call option with a strike price of $43.806. The capped call transaction effectively increased the initial conversion price to $43.806 per share, representing a 40% conversion premium. The net cost of approximately $12.6 million of the capped call transaction was included in stockholders’ equity.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011


(c)		On December 7, 2009, the Company entered into an Amended and Restated Distribution Agreement with respect to the issue and sale by the Company from time to time of its Medium-Term Notes, Series A Due Nine Months or More From Date of Issue. During the three months ended March 31, 2010, the Company issued $150 million of 5.25% senior unsecured medium-term notes under the Amended and Restated Distribution Agreement. These notes were priced at 99.46% of the principal amount at issuance and had a discount of $455,000 at June 30, 2011.

(d)		On May 3, 2011, the Company entered into a Second Amended and Restated Distribution Agreement with respect to the issue and sale by the Company from time to time of its Medium-Term Notes, Series A Due Nine Months or More From Date of Issue. During the three months ended June 30, 2011, the Company issued $300 million of 4.25% senior unsecured medium-term notes under the Amended and Restated Distribution Agreement. These notes were priced at 98.988% of the principal amount at issuance and had a discount of $3.0 million at June 30, 2011.

(e)		During the three months ended March 31, 2011, the Company entered into a new interest rate swap agreement for the remaining $150 million balance. As a result, the $250 million term notes carry a fixed interest rate of 3.48% at June 30, 2011.

(f)		During the three months ended March 31, 2011, holders of the 4.00% Convertible Senior Notes due 2035 tendered $10.8 million of Notes. As a result, the Company retired debt with a notional value of $10.8 million and wrote off unamortized financing costs of $207,000.

		On March 2, 2011, the Company called all of its outstanding 4.00% Convertible Senior Notes due 2035. The redemption date for the Notes was April 4, 2011, and the redemption price was 100% of the principal amount of the outstanding Notes, plus accrued and unpaid interest on the Notes to, but not including, the date of redemption. Subject to and in accordance with the terms and conditions set forth in the Indenture governing the Notes dated as of December 19, 2005, holders of Notes had the right to convert their Notes at any time until March 31, 2011, at a conversion rate of 38.8650 shares of our common stock per $1,000 principal amount of Notes (equivalent to a conversion price of approximately $25.73 per share). The Company accelerated the amortization of the remaining financing costs of $3.0 million to the April 4, 2011 redemption date during the three months ended March 31, 2011.


(g)		ASC Subtopic 470-20 applies to all convertible debt instruments that have a “net settlement feature”, which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. This guidance requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate. The guidance impacted the historical accounting for the 3.625% convertible senior notes due September 2011 and the 4.00% convertible senior notes due December 2035, and resulted in increased interest expense of $359,000 and $718,000 and $928,000 and $1.9 million for the three and six months ended June 30, 2011 and 2010, respectively.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

The following is a summary of short-term bank borrowings under UDR’s bank credit facility at June 30, 2011 and December 31, 2010 (dollars in thousands):


	June 30,			December 31,
	2011			2010

Total revolving credit facility	$	600,000		$	600,000
Borrowings outstanding at end of period (1)		5,000			31,750
Weighted average daily borrowings during the period ended		125,719			161,260
Maximum daily borrowings during the period ended		335,300			337,600
Weighted average interest rate during the period ended		0.7	%		0.8	%
Interest rate at end of the period		0.8	%		0.9	%


(1)		Excludes $1.7 million of letters of credit at June 30, 2011.

The convertible notes are convertible at the option of the holder, and as such are presented as if the holder will convert the debt instrument at the earliest available date. The aggregate maturities of unsecured debt for the five years subsequent to June 30, 2011 are as follows (dollars in thousands):


	Bank		Unsecured		Total
Year	Lines		Debt		Unsecured

2011	$	—	$	96,373	$	96,373
2012		5,000		99,385		104,385
2013		—		221,885		221,885
2014		—		311,930		311,930
2015		—		324,744		324,744
Thereafter		—		647,868		647,868

Total	$	5,000	$	1,702,185	$	1,707,185

We were in compliance with the covenants of our debt instruments at June 30, 2011.

In 2010, the Operating Partnership guaranteed certain outstanding debt securities of UDR, Inc. These guarantees provide that the Operating Partnership, as primary obligor and not merely as surety, irrevocably and unconditionally guarantees to each holder of the applicable securities and to the trustee and their successors and assigns under the respective indenture (a) the full and punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all obligations of the Company under the respective indenture whether for principal or interest on the securities (and premium, if any), and all other monetary obligations of the Company under the respective indenture and the terms of the applicable securities and (b) the full and punctual performance within the applicable grace periods of all other obligations of the Company under the respective indenture and the terms of applicable securities.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

8. EARNINGS/(LOSS) PER SHARE

Basic and diluted loss per common share are computed based upon the weighted average number of common shares outstanding during the periods as the effect of adding stock options and other common stock equivalents such as the non-vested restricted stock awards is anti-dilutive.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Numerator for earnings per share — basic and diluted:
Net earnings/(loss) attributable to common stockholders	$	12,149		$	(28,968	)	$	(18,094	)	$	(55,403	)


Denominator for earnings per share — basic and diluted:
Weighted average common shares outstanding		191,758			162,525			187,832			159,873
Non-vested restricted stock awards		(1,279	)		(1,639	)		(1,305	)		(1,351	)


Denominator for basic and diluted earnings per share		190,479			160,886			186,527			158,522


Net earnings/(loss) attributable to common stockholders- basic and diluted	$	0.06		$	(0.18	)	$	(0.10	)	$	(0.35	)

The effect of the conversion of the OP Units, convertible preferred stock, convertible debt, stock options and restricted stock is not dilutive and is therefore not included in the above calculations as the Company reported a loss from continuing operations.

If the OP Units were converted to common stock, the additional weighted average common shares outstanding for the three and six months ended June 30, 2011 and 2010 would be 7,630,342 and 6,353,248 and 5,963,669 and 5,969,784, respectively.

If the convertible preferred stock were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2011 and 2010 would be 3,035,548 weighted average common shares.

The dilution from stock options and unvested restricted stock and stock options would be an additional 2,043,257 and 1,997,222 and 2,223,682 and 1,957,850 weighted average common shares for the three and six months ended June 30, 2011 and 2010, respectively.

9. NONCONTROLLING INTERESTS

Redeemable noncontrolling interests in operating partnerships

Interests in operating partnerships held by limited partners are represented by operating partnership units (“OP Units”). The income is allocated to holders of OP Units based upon net income attributable to common stockholders and the weighted average number of OP Units outstanding to total common shares plus OP Units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to non-controlling interests in accordance with the terms of the individual partnership agreements.

Limited partners have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount as defined in the limited partnership agreement of the Operating Partnership (the “Partnership Agreement”), provided that such OP Units have been outstanding for at least one year. UDR, as the general partner of the Operating Partnership may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of the Company for each OP Unit), as defined in the Partnership Agreement. Accordingly, the Company records the OP Units outside of permanent equity and reports the OP Units at their redemption value using the Company’s stock price at each balance sheet date.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

The following table sets forth redeemable noncontrolling interests in the Operating Partnership for the following period (dollars in thousands):


Redeemable noncontrolling interests in the OP, December 31, 2010	$	119,057
Mark to market adjustment to redeemable noncontrolling interests in the OP		9,212
Conversion of OP Units to Common Stock		(48	)
Net loss attributable to redeemable noncontrolling interests in the OP		(611	)
OP units issued for partial consideration in community acquisition		62,879
Distributions to redeemable noncontrolling interests in the OP		(2,951	)
Allocation of other comprehensive (loss)/income		(229	)


Redeemable noncontrolling interests in the OP, June 30, 2011	$	187,309

The following sets forth net loss attributable to common stockholders and transfers from redeemable noncontrolling interests in the Operating Partnership for the following periods (dollars in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011			2010
Net income/(loss) attributable to common stockholders	$	12,149	$	(28,968	)	$	(18,094	)	$	(55,403	)
Conversion of OP units to UDR Common Stock		48		336			48			551


Change in equity from net (loss)/income attributable to common stockholders and conversion of OP units to UDR Common Stock	$	12,197	$	(28,632	)	$	(18,046	)	$	(54,852	)

Non-controlling interests

Non-controlling interests represent interests of unrelated partners in certain consolidated affiliates, and is presented as part of equity in the Consolidated Balance Sheets since these interests are not redeemable. During the three and six months ended June 30, 2011 and 2010, net income attributable to non-controlling interests was $37,000 and $88,000 and $45,000 and $80,000, respectively.

10. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS

Fair value is 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. A three-level valuation hierarchy 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.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

•

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 in 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 estimated fair values of the Company’s financial instruments either recorded or disclosed on a recurring basis as of June 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

Fair Value at June 30, 2011 Using

Quoted Prices in

Active Markets

Significant

for Identical

Other

Significant

Assets or

Observable

Unobservable

Liabilities

Inputs

June 30, 2011

(Level 1)

(Level 2)

(Level 3)

Description:

Derivatives- Interest rate contracts (c)

148

—

148

—

Total assets

148

—

148

—

Derivatives- Interest rate contracts (c)

9,979

—

9,979

—

Contingent purchase consideration (d)

5,402

—

5,402

Secured debt instruments- fixed rate: (a)

Mortgage notes payable

597,645

—

597,645

Fannie Mae credit facilities

931,648

—

931,648

Secured debt instruments- variable rate: (a)

Mortgage notes payable

177,201

—

177,201

Tax-exempt secured notes payable

94,700

—

94,700

Fannie Mae credit facilities

260,451

—

260,451

Unsecured debt instruments: (b)

Commercial bank

5,000

—

5,000

Senior Unsecured Notes

1,778,649

97,099

—

1,681,550

Total liabilities

3,860,675

97,099

9,979

3,753,597

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011


			Fair Value at December 31, 2010 Using
			Quoted Prices in
			Active Markets		Significant
			for Identical		Other		Significant
			Assets or		Observable		Unobservable
			Liabilities		Inputs		Inputs
	December 31, 2010		(Level 1)		(Level 2)		(Level 3)

Description:

Available-for-sale equity securities	$	3,866	$	3,866	$	—	$	—
Derivatives- Interest rate contracts (c)		514		—		514		—

Total assets	$	4,380	$	3,866	$	514	$	—


Derivatives- Interest rate contracts (c)	$	6,597	$	—	$	6,597	$	—
Contingent purchase consideration (d)		5,402		—		—		5,402
Secured debt instruments- fixed rate: (a)
Mortgage notes payable		306,515		—		—		306,515
Tax-exempt secured notes payable		13,885		—		—		13,885
Fannie Mae credit facilities		927,413		—		—		927,413
Secured debt instruments- variable rate: (a)
Mortgage notes payable		405,641		—		—		405,641
Tax-exempt secured notes payable		94,700		—		—		94,700
Fannie Mae credit facilities		260,450		—		—		260,450
Unsecured debt instruments: (b)
Commercial bank		31,750		—		—		31,750
Senior Unsecured Notes		1,625,492		264,849		—		1,360,643

Total liabilities	$	3,677,845	$	264,849	$	6,597	$	3,406,399


(a)		See Note 6, “Secured Debt”

(b)		See Note 7, “Unsecured Debt”

(c)		See Note 11, “Derivatives and Hedging Activity”

(d)		In the first quarter of 2010, the Company accrued a liability of $6 million related to a contingent purchase consideration on one of its properties. The contingent consideration was determined based on the fair market value of the related asset which is estimated using Level 3 inputs utilized in a third party appraisal. During the year ended December 31, 2010, the Company paid approximately $635,000 of the liability, and the outstanding balance is due January 2012.

Financial Instruments Carried at Fair Value

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2011 and 2010, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

We estimate the fair value of our Convertible Senior Unsecured Notes based on Level 1 inputs which utilize quoted prices in active markets where we have the ability to access value for identical liabilities.

Redeemable non-controlling interests in the Operating Partnership have a redemption feature and are marked to its redemption value. The redemption value is based on the fair value of the Company’s Common Stock at the redemption date, and therefore, is calculated based on the fair value of the Company’s Common Stock at the balance sheet date. Since the valuation is based on observable inputs such as quoted prices for similar instruments in active markets, redeemable non-controlling interests in the Operating Partnership are classified as Level 2.

Financial Instruments Not Carried at Fair Value

At June 30, 2011, the fair values of cash and cash equivalents, restricted cash, notes receivable, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

We estimate the fair value of our debt instruments by discounting the remaining cash flows of the debt instrument at a discount rate equal to the replacement market credit spread plus the corresponding treasury yields. Factors considered in determining a replacement market credit spread include general market conditions, borrower specific credit spreads, time remaining to maturity, loan-to-value ratios and collateral quality (Level 3).

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 value. Our estimates of fair value represent our best estimate based upon Level 3 inputs such as industry trends and reference to market rates and transactions.

We consider various factors to determine if a decrease in the value of our investments in an unconsolidated joint venture is other-than-temporary. These factors include, but are not limited to, age of the venture, our intent and ability to retain our investment in the entity, the financial condition and long-term prospects of the entity, and the relationships with the other joint venture partners and its lenders. Based on the significance of the unobservable inputs, we classify these fair value measurements within Level 3 of the valuation hierarchy. The Company did not incur any other-than-temporary decrease in the value of its other investments in unconsolidated joint ventures during the three and six months ended June 30, 2011 and 2010, respectively.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

After determining an other-than-temporary decrease in the value of an equity method investment has occurred, we estimate the fair value of our investment by estimating the proceeds we would receive upon a hypothetical liquidation of the investment at the date of measurement. Inputs reflect management’s best estimate of what market participants would use in pricing the investment giving consideration to the terms of the joint venture agreement and the estimated discounted future cash flows to be generated from the underlying joint venture assets. The inputs and assumptions utilized to estimate the future cash flows of the underlying assets are based upon the Company’s evaluation of the economy, market trends, operating results, and other factors, including judgments regarding costs to complete any construction activities, lease up and occupancy rates, rental rates, inflation rates, capitalization rates utilized to estimate the projected cash flows at the disposition, and discount rates.

11. DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in “Accumulated Other Comprehensive Income/(Loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2011 and 2010, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2011 and 2010, the Company recorded less than a $1,000 loss from ineffectiveness in earnings attributable to reset date and index mismatches between the derivative and the hedged item, and the fair value of interest rate swaps that were not zero at inception of the hedging relationship.

Amounts reported in “Accumulated Other Comprehensive Income/(Loss)” related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Through June 30, 2012, the Company estimates that an additional $8.0 million will be reclassified as an increase to interest expense.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

As of June 30, 2011, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollar amounts in thousands):


	Number of
Interest Rate Derivative	Instruments		Notional
Interest rate swaps		16	$	633,287

Interest rate caps		3		137,004

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of FASB ASC 815, Derivatives and Hedging. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and resulted in gains of $86,000 and $36,000 for the three and six months ended June 30, 2011, respectively, and losses of $330,000 and $647,000 for the three and six months ended June 30, 2010, respectively. As of June 30, 2011, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollar amounts in thousands):


	Number of
Product	Instruments		Notional
Interest rate caps		5	$	309,984

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (amounts in thousands):


	Asset Derivatives					Liability Derivatives
		Fair Value at:					Fair Value at:
	Balance			December 31,		Balance			December 31,
	Sheet Location	June 30, 2011		2010		Sheet Location	June 30, 2011		2010

Derivatives designated as hedging instruments:
Interest Rate Products	Other Assets	$	71	$	243	Other Liabilities	$	9,979	$	6,597


Total		$	71	$	243		$	9,979	$	6,597


Derivatives not designated as hedging instruments:

Interest Rate Products	Other Assets	$	77	$	271	Other Liabilities	$	—	$	—


Total		$	77	$	271		$	—	$	—

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the three months and six months ended June 30, 2011 and 2010 (dollar amounts in thousands):


															Amount of Gain or (Loss)
														Location of Gain or (Loss)	Recognized in Income on
	Amount of Gain or (Loss)						Location of Gain or	Amount of Gain or (Loss)						Recognized in Income on	Derivative (Ineffective
	Recognized in OCI on						(Loss) Reclassified	Reclassified from						Derivative (Ineffective	Portion and Amount
	Derivative (Effective						from Accumulated	Accumulated OCI into						Portion and Amount	Excluded from
Derivatives in Cash Flow	Portion)						OCI into Income	Income (Effective Portion)						Excluded from	Effectiveness Testing)
Hedging Relationships	2011			2010			(Effective Portion)	2011			2010			Effectiveness Testing)	2011		2010

For the three months ended June 30,

Interest Rate Products	$	(9,276	)	$	(3,155	)	Interest expense	$	(2,441	)	$	(1,552	)	Other expense	$	—	$	(1	)


Total	$	(9,276	)	$	(3,155	)		$	(2,441	)	$	(1,552	)		$	—	$	(1	)


For the six months ended June 30,

Interest Rate Products	$	(7,903	)	$	(6,469	)	Interest expense	$	(4,350	)	$	(3,632	)	Other expense	$	—	$	(1	)


Total	$	(7,903	)	$	(6,469	)		$	(4,350	)	$	(3,632	)		$	—	$	(1	)


Derivatives Not	Location of Gain or (Loss)	Amount of Gain or (Loss)
Designated as Hedging	Recognized in Income on	Recognized in Income on Derivative
Instruments	Derivative	2011		2010

For the three months ended June 30,
Interest rate products	Other income/(expense)	$	86	$	(330	)


Total		$	86	$	(330	)


For the six months ended June 30,

Interest rate products	Other income/(expense)	$	36	$	(647	)


Total		$	36	$	(647	)

Credit-risk-related Contingent Features

The Company has agreements with some of its derivative counterparties that contain a provision where (1) if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations; or (2) the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness.

Certain of the Company’s agreements with its derivative counterparties contain provisions where if there is a change in the Company’s financial condition that materially changes the Company’s creditworthiness in an adverse manner, the Company may be required to fully collateralize its obligations under the derivative instrument.

The Company also has an agreement with a derivative counterparty that incorporates the loan and financial covenant provisions of the Company’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with these covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

As of June 30, 2011, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $10.7 million. As of June 30, 2011, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2011, it would have been required to settle its obligations under the agreements at their termination value of $10.7 million.

12. OTHER COMPREHENSIVE INCOME/(LOSS)

Components of other comprehensive income/(loss) during the three and six months June 30, 2011 and 2010 are as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Other comprehensive income/(loss):
Net income/(loss) attributable to UDR, Inc.	$	14,651		$	(26,621	)	$	(13,224	)	$	(50,677	)
Change in equity due to non-controlling interests		37			45			88			80
Gain on marketable securities reclassified to earnings		—			—			(3,492	)		—
Change in marketable securities		—			(680	)		—			(904	)
Unrealized loss on derivative financial instruments		(6,835	)		(1,604	)		(3,553	)		(2,838	)
Allocation to redeemable non-controlling interests		246			82			229			135

Comprehensive income/(loss)	$	8,099		$	(28,778	)	$	(19,952	)	$	(54,204	)

13. STOCK BASED COMPENSATION

During the three and six months ended June 30, 2011 and 2010, we recognized $2.4 million and $5.1 million, $3.1 million and $6.0 million, respectively, as stock based compensation expense, which is inclusive of awards granted to our outside directors.

14. COMMITMENTS AND CONTINGENCIES

Commitments

Real Estate Under Development

The following summarizes the Company’s real estate commitments at June 30, 2011 (dollars in thousands):


	Number of		Costs Incurred		Expected Costs
	Properties		to Date		to Complete

Wholly owned — under development		5	$	157,301	$	268,624

Contingencies

Litigation and Legal Matters

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. The Company cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. The Company 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.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

15. REPORTABLE SEGMENTS

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

•

Same communities represent those communities acquired, developed, and stabilized prior to April 1, 2010, and held as of June 30, 2011. 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 2009 or 2010, 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.

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 under GAAP as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Company’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 six months ended June 30, 2011 and 2010.

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

The accounting policies applicable to the operating segments described above are the same as those described in Note 2, Significant Accounting Policies. The following table details rental income and NOI for UDR’s reportable segments for the three and six months ended June 30, 2011 and 2010, and reconciles NOI to loss from continuing operations per the Consolidated Statements of Operations (dollars in thousands):


	June 30,						June 30,
	2011			2010			2011			2010

Reportable apartment home segment rental income
Same Communities
Western Region	$	54,323		$	52,432		$	107,459		$	104,404
Mid-Atlantic Region		39,105			37,622			77,547			74,636
Southeastern Region		32,468			31,484			64,664			62,991
Southwestern Region		15,196			14,696			30,249			29,454
Non-Mature communities/Other		36,126			17,687			67,801			34,065

Total segment and consolidated rental income	$	177,218		$	153,921		$	347,720		$	305,550


Reportable apartment home segment NOI
Same Communities
Western Region	$	38,078		$	36,216		$	74,339		$	71,764
Mid-Atlantic Region		26,883			25,820			53,049			50,667
Southeastern Region		20,167			19,359			40,280			39,030
Southwestern Region		9,402			8,585			18,250			17,430
Non-Mature communities/Other		23,540			10,274			42,949			19,386

Total segment and consolidated NOI		118,070			100,254			228,867			198,277


Reconciling items:
Non-property income		2,855			2,056			7,391			5,376
Property management		(4,873	)		(4,233	)		(9,562	)		(8,403	)
Other operating expenses		(1,544	)		(1,457	)		(3,001	)		(2,942	)
Depreciation and amortization		(91,161	)		(73,726	)		(175,276	)		(145,933	)
Interest		(37,844	)		(37,945	)		(78,563	)		(74,811	)
General and administrative		(12,918	)		(10,293	)		(23,593	)		(19,933	)
Other depreciation and amortization		(986	)		(1,308	)		(2,029	)		(2,531	)
Loss from unconsolidated entities		(1,348	)		(1,185	)		(2,680	)		(1,922	)
Redeemable non-controlling interests in OP		(221	)		1,064			611			2,069
Non-controlling interests		(37	)		(45	)		(88	)		(80	)
Net gain on sale of depreciable property		44,658			197			44,699			156

Net income/(loss) attributable to UDR	$	14,651		$	(26,621	)	$	(13,224	)	$	(50,677	)

UDR, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (Continued)

JUNE 30, 2011

The following table details the assets of UDR’s reportable segments as of June 30, 2011 and December 31, 2010 (dollars in thousands):


	June 30,			December 31,
Reportable apartment home segment assets:	2011			2010
Same communities:
Western Region	$	2,317,600		$	2,308,491
Mid-Atlantic Region		1,269,193			1,264,314
Southeastern Region		1,059,639			1,054,130
Southwestern Region		555,424			553,176
Non-mature communities/Other		2,096,950			1,701,236

Total segment assets		7,298,806			6,881,347
Accumulated depreciation		(1,726,258	)		(1,638,326	)

Total segment assets — net book value		5,572,548			5,243,021


Reconciling items:
Cash and cash equivalents		21,634			9,486
Marketable securities		—			3,866
Restricted cash		20,220			15,447
Deferred financing costs, net		24,747			27,267
Notes receivable		7,800			7,800
Investment in unconsolidated joint ventures		177,404			148,057
Other assets		137,424			74,596

Total consolidated assets	$	5,961,777		$	5,529,540

Capital expenditures related to our same communities totaled $12.5 million and $20.5 million and $13.8 million and $22.1 million for the three and six months ended June 30, 2011 and 2010, respectively. Capital expenditures related to our non-mature/other communities totaled $1.2 million and $2.1 million and $1.6 million and $2.2 million for the three and six months ended June 30, 2011 and 2010, respectively.

Markets included in the above geographic segments are as follows:

Western — Orange County, San Francisco, Seattle, Monterey Peninsula, Los Angeles, San Diego, Inland Empire, Sacramento, and Portland

ii.

Mid-Atlantic — New York, Boston, Metropolitan DC, Richmond, Baltimore, Norfolk, and Other Mid-Atlantic

iii.

Southeastern — Tampa, Orlando, Nashville, Jacksonville, and Other Florida

iv.

Southwestern — Dallas, Phoenix, Austin, and Houston

16. SUBSEQUENT EVENTS

On July 18, 2011, the Company closed on a public offering of 20,700,000 shares of its common stock, including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately $496.3 million after underwriting discounts and commissions and estimated offering expenses.

On July 19, 2011, the Company closed on the acquisition of a 706-home community referred to as Rivergate, located in New York, New York. The community was acquired for $443.4 million.

[This page is intentionally left blank.]

UNITED DOMINION REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for unit data)


	June 30,			December 31,
	2011			2010
	(unaudited)			(audited)
ASSETS

Real estate owned:
Real estate held for investment	$	3,978,879		$	3,516,918
Less: accumulated depreciation		(919,971	)		(835,892	)

		3,058,908			2,681,026
Real estate sold or held for sale (net of accumulated depreciation of $0 and $48,191)		—			141,075

Total real estate owned, net of accumulated depreciation		3,058,908			2,822,101
Cash and cash equivalents		7,692			920
Restricted cash		12,516			8,022
Deferred financing costs, net		8,886			7,465
Other assets		40,343			22,887

Total assets	$	3,128,345		$	2,861,395


LIABILITIES AND CAPITAL

Secured debt	$	1,269,853		$	1,014,459
Secured debt — real estate held for sale		—			55,602
Note payable due to General Partner		78,271			78,271
Real estate taxes payable		5,576			5,245
Accrued interest payable		2,124			518
Security deposits and prepaid rent		16,001			13,158
Distributions payable		36,743			33,559
Deferred gains on the sale of depreciable property		63,838			63,838
Accounts payable, accrued expenses, and other liabilities		38,550			35,122

Total liabilities		1,510,956			1,299,772

Capital:
Partners’ capital:
Operating partnership units: 182,479,015 OP units outstanding at June 30, 2011 and 179,909,408 at December 31, 2010
General partner: 110,883 OP units outstanding at June 30, 2011 and December 31, 2010		1,324			1,363
Limited partners: 182,368,132 OP units outstanding at June 30, 2011 and 179,798,525 OP units outstanding at December 31, 2010		2,044,440			2,046,380
Accumulated other comprehensive loss		(5,959	)		(5,502	)

Total partners’ capital		2,039,805			2,042,241
Receivable due from General Partner		(434,566	)		(492,709	)
Non-controlling interest		12,150			12,091

Total capital		1,617,389			1,561,623

Total liabilities and capital	$	3,128,345		$	2,861,395

See accompanying notes to the consolidated financial statements.

UNITED DOMINION REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

REVENUES
Rental income	$	95,944		$	82,975		$	181,628		$	165,044


Total revenues		95,944			82,975			181,628			165,044


EXPENSES
Rental expenses:
Real estate taxes and insurance		10,470			10,072			21,151			20,624
Personnel		7,962			6,752			15,377			13,361
Utilities		4,820			3,910			9,383			8,527
Repair and maintenance		4,749			4,218			9,227			8,201
Administrative and marketing		2,094			1,670			3,935			3,332
Property management		2,639			2,282			4,995			4,539
Other operating expenses		1,447			1,160			2,805			2,761
Real estate depreciation and amortization		50,225			39,644			89,819			79,024
Interest expense:
Interest on secured debt		13,557			12,090			24,533			24,293
Interest on note payable due to General Partner		223			106			446			212
General and administrative		6,294			3,614			10,874			7,494

Total expenses		104,480			85,518			192,545			172,368

Loss from continuing operations		(8,536	)		(2,543	)		(10,917	)		(7,324	)
Income/(loss) from discontinued operations		16,044			(9	)		16,421			1,839

Consolidated net income/(loss)		7,508			(2,552	)		5,504			(5,485	)
Net income attributable to non-controlling interests		(32	)		(18	)		(59	)		(35	)

Net income/(loss) attributable to OP unitholders	$	7,476		$	(2,570	)	$	5,445		$	(5,520	)


Earnings per OP unit- basic and diluted:
Loss from continuing operations attributable to OP unitholders	$	(0.05	)	$	(0.01	)	$	(0.06	)	$	(0.04	)
Income from discontinued operations	$	0.09		$	(0.00	)	$	0.09		$	0.01
Net income/(loss) attributable to OP unitholders	$	0.04		$	(0.01	)	$	0.03		$	(0.03	)

Weighted average OP units outstanding		182,479			179,909			181,201			179,909

See accompanying notes to the consolidated financial statements.

UNITED DOMINION REALTY, L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL AND COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)


																			Receivable
	Class A						UDR, Inc.						Accumulated Other			Total			due from			Non-
	Limited			Limited			Limited			General			Comprehensive			Partner’s			General			Controlling
	Partner			Partners			Partner			Partner			Income/(Loss)			Capital			Partner			Interest		Total

Balance, January 1, 2011	$	41,199		$	77,858		$	1,927,323		$	1,363		$	(5,502	)	$	2,042,241		$	(492,709	)	$	12,091	$	1,561,623

Distributions		(1,164	)		(1,788	)		(67,308	)		(42	)		—			(70,302	)		—			—		(70,302	)

OP Unit Redemptions for common shares of UDR		—			(46	)		46			—			—			—			—			—		—

OP Units issued for real estate		—			62,878			—			—			—			62,878			—			—		62,878

Adjustment to reflect limited partners’ capital at redemption value		2,917			5,228			(8,145	)		—			—			—			—			—		—

Other comprehensive income/(loss):

Unrealized loss on derivative financial instruments		—			—			—			—			(457	)		(457	)		—			—		(457	)

Net income		52			175			5,215			3			—			5,445			—			59		5,504


Total comprehensive income		52			175			5,215			3			(457	)		4,988			—			59		5,047

Net change in receivable due from General Partner		—			—			—			—			—			—			58,143			—		58,143

Balance, June 30, 2011	$	43,004		$	144,305		$	1,857,131		$	1,324		$	(5,959	)	$	2,039,805		$	(434,566	)	$	12,150	$	1,617,389

See accompanying notes to the consolidated financial statements.

UNITED DOMINION REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, except for unit data)

(Unaudited)


	Six Months Ended June 30,
	2011			2010

Operating Activities
Consolidated net income/(loss)	$	5,504		$	(5,485	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		91,383			83,123
Net gain on the sale of depreciable property		(16,038	)		(97	)
Write off of bad debt		799			718
Amortization of deferred financing costs and other		1,045			748
Changes in operating assets and liabilities:
(Increase)/decrease in operating assets		(7,244	)		2,253
Increase/(decrease) in operating liabilities		4,228			(859	)

Net cash provided by operating activities		79,677			80,401

Investing Activities
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures		(3,285	)		—
Asset exchange — cash paid		(15,407	)		—
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement		(29,767	)		(28,248	)

Net cash used in investing activities		(48,459	)		(28,248	)

Financing Activities
Payments to General Partner		(6,022	)		(59,087	)
Proceeds from the issuance of secured debt		925			11,326
Payments on secured debt		(15,542	)		(1,281	)
Payment of financing costs		(855	)		(104	)
OP unit redemption		—			(327	)
Distributions paid to partnership unitholders		(2,952	)		(2,764	)

Net cash used in financing activities		(24,446	)		(52,237	)

Net increase/(decrease) in cash and cash equivalents		6,772			(84	)
Cash and cash equivalents, beginning of period		920			442

Cash and cash equivalents, end of period	$	7,692		$	358


Supplemental Information:
Interest paid during the period, net of amounts capitalized	$	27,102		$	26,155
Non-cash transactions:
Properties acquired, including intangibles in asset exchange		178,353			—
Properties disposed in asset exchange, net of accumulated depreciation		139,725			—
OP Units issued in partial consideration for property acquisition		62,878			—
Secured debt assumed in the acquisitions of properties, including asset exchange		247,805			—
Secured debt transferred in asset exchange		55,356			—
Fair market value adjustment of secured debt assumed in acquisitions of properties, including asset exchange		21,915			—

See accompanying notes to the consolidated financial statements.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
(Unaudited)

1. CONSOLIDATION AND BASIS OF PRESENTATION

United Dominion Realty, L.P. (“UDR, L.P.”, the “Operating Partnership”, “we” or “our”) is a Delaware limited partnership, that owns, acquires, renovates, redevelops, manages, and disposes of multifamily apartment communities generally located 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. UDR, L.P. is a subsidiary of UDR, Inc. (“UDR” or the “General Partner”), a self-administered real estate investment trust, or REIT, through which UDR conducts a significant portion of its business. During the three and six months ended June 30, 2011, revenues of the Operating Partnership represented 53% and 52% of the General Partner’s consolidated revenues, respectively. During the three and six months ended June 30, 2010, revenues of the Operating Partnership represented 56% of the General Partner’s consolidated revenues. At June 30, 2011, the Operating Partnership’s apartment portfolio consisted of 80 communities located in 21 markets consisting of 23,693 apartment homes.

Interests in UDR, L.P. are represented by operating partnership units (“OP Units”). The Operating Partnership’s net income is allocated to the partners, which is initially based on their respective distributions made during the year and secondly, their percentage interests. Distributions are made in accordance with the terms of the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. (the “Operating Partnership Agreement”), on a per unit basis that is generally equal to the dividend per share on UDR’s common stock, which is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “UDR”.

As of June 30, 2011, there were 182,479,015 OP Units outstanding, of which, 174,849,339 or 95.8% were owned by UDR and affiliated entities and 7,629,676 or 4.2% were owned by non-affiliated limited partners. See Note 9, Capital Structure.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations necessary for the fair presentation of our financial position as of June 30, 2011, and results of operations for the three and six months ended June 30, 2011 and 2010 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 included in the Form 10-K for the year ended December 31, 2010 filed by UDR and the Operating Partnership with the SEC on February 23, 2011.

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 intercompany accounts and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

The Operating Partnership evaluated subsequent events through the date its financial statements
were issued. No recognized or non-recognized subsequent events were noted.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

2. SIGNIFICANT ACCOUNTING POLICIES

Accounting Policies

Revenue and real estate sales gain recognition

Rental income related to leases is recognized on an accrual basis when due from residents in accordance with FASB ASC 840, Leases and SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Rental payments are generally due on a monthly basis and recognized when earned. The Operating Partnership recognizes interest income, management and other fees and incentives when earned, fixed and determinable.

The Operating Partnership accounts for sales of real estate in accordance with FASB ASC 360-20, Real Estate Sales. For sale transactions meeting the requirements for full accrual profit recognition, such as the Operating Partnership no longer having continuing involvement in the property, we remove the related assets and liabilities from our Consolidated Balance Sheets and record the gain or loss in the period the transaction closes. For sale transactions that do not meet the full accrual sale criteria due to our continuing involvement, we evaluate the nature of the continuing involvement and account for the transaction under an alternate method of accounting. Non-monetary transactions are accounted for at fair value.

Sales to entities in which we or our General Partner 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 or our General Partner retain. The Operating Partnership 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.

Income taxes

The taxable income or loss of the Operating Partnership is reported on the tax returns of the partners. Accordingly, no provision has been made in the accompanying financial statements for federal or state income taxes on income that is passed through to the partners. However, any state or local revenue, excise or franchise taxes that result from the operating activities of the Operating Partnership are recorded at the entity level. The Operating Partnership’s tax returns are subject to examination by federal and state taxing authorities. Net income for financial reporting purposes differs from the net income for income tax reporting purposes primarily due to temporary differences, principally real estate depreciation and the tax deferral of certain gains on property sales. The differences in depreciation result from differences in the book and tax basis of certain real estate assets and the differences in the methods of depreciation and lives of the real estate assets.

The Operating Partnership adopted certain accounting guidance within ASC Topic 740, Income Taxes, with respect to how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. The guidance requires the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing the Operating Partnership’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management of the Operating Partnership is required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which include federal and certain states. The Operating Partnership has no examinations in progress and none are expected at this time.

Management of the General Partner has reviewed all open tax years (2006-2010) and major jurisdictions and concluded the adoption of the new accounting guidance resulted in no impact to the Operating Partnership’s financial position or results of operations. There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken in future tax returns.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

Earnings per OP unit

Basic earnings per OP Unit is computed by dividing net income/(loss) attributable to general and limited partner units by the weighted average number of general and limited partner units (including redeemable OP Units) outstanding during the year. Diluted earnings per OP Unit reflects the potential dilution that could occur if securities or other contracts to issue OP Units were exercised or converted into OP Units or resulted in the issuance of OP Units that shared in the earnings of the Operating Partnership. For the three and six months ended June 30, 2011 and 2010, there were no dilutive instruments outstanding, and therefore, diluted earnings per OP Unit and basic earnings per OP Unit are the same.

3. REAL ESTATE OWNED

Real estate assets owned by the Operating Partnership consists of income producing operating properties, properties held for sale, properties under development, and land held for future development. At June 30, 2011, the Operating Partnership owned and consolidated 80 communities in 8 states plus the District of Columbia totaling 23,693 apartment homes. The following table summarizes the carrying amounts for our real estate owned (at cost) as of June 30, 2011 and December 31, 2010 (dollar amounts in thousands):


	June 30,			December 31,
	2011			2010
Land	$	1,004,190		$	925,326
Depreciable property — held and used
Buildings and improvements		2,828,622			2,452,746
Furniture, fixtures and equipment		118,962			112,831
Sold or held for sale:
Land		—			64,598
Buildings and improvements		—			121,175
Furniture, fixtures and equipment		—			3,493
Under development
Land		16,385			—
Construction in progress		8,275			—
Land held for future development		2,445			26,015

Real estate owned		3,978,879			3,706,184
Accumulated depreciation		(919,971	)		(884,083	)


Real estate owned, net	$	3,058,908		$	2,822,101

The following table summarizes the Operating Partnership’s real estate community acquisitions for the three and six months ended June 30, 2011.


					Purchase
Property Name	Market	Acquisition Date	Units		Price (a)

10 Hanover Square	New York, NY	April 2011		493	$	259,750
14 North	Boston, MA	April 2011		387		64,500
Inwood West	Boston, MA	April 2011		446		108,000

				1,326	$	432,250


(a)		The purchase price is the contractual sales price by the Operating Partnership and the third party and does not include any costs that the Operating Partnership incurred in the pursuit of the property.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

On April 1, 2011, UDR, through the Operating Partnership closed on the acquisition of 10 Hanover Square. The community was acquired for $259.8 million, which included assumed debt of $192.0 million (with a fair value of $208.1 million), and the issuance of 2,569,606 OP Units of the Operating Partnership. The OP Units were deemed to have a value equal to the greater of $25.00 or the closing price per share of the Company’s common stock for the 10 day period ended on (and including) the date one business day prior to the settlement date. For purchase price accounting purposes, the fair value of these OP units was $24.47.

On April 5, 2011, UDR and the Operating Partnership completed a $500 million asset exchange with an unaffiliated third party whereby UDR acquired 388 Beale, and the Operating Partnership acquired 14 North, and Inwood West. The communities acquired were valued at $263.0 million representing their estimated fair value. The Company and the Operating Partnership paid $28.1 million of cash and assumed debt of $55.8 million (with a fair value of $61.7 million). UDR sold two multifamily apartment communities (434 homes) and the Operating Partnership sold four multifamily apartment communities (984 homes) located in California as part of the transaction. (See Note 4, Discontinued Operations, for further discussion of real estate community dispositions.)

The Operating Partnership allocates the purchase price to the tangible and identifiable intangible assets acquired based on their estimated fair value. When allocating cost to an acquired community, the Operating Partnership first allocates costs to the estimated intangible value of the existing lease agreements and then to the estimated value of the land, building and fixtures assuming the community is vacant. The primary, although not only, identifiable intangible asset associated with our portfolio is the value of existing lease agreements. The Operating Partnership estimates the intangible value of the lease agreements by determining the lost revenue associated with a hypothetical lease-up. The fair value allocated to land is generally based on relevant market data. The building is valued using the direct capitalization method. The fair values for the land, real estate assets and in place leases incorporate significant unobservable inputs, and therefore are considered to be Level 3 prices within the fair value hierarchy.

The $432.3 million purchase price, which is gross of the difference between the value of the OP Units of $25.00 and the fair value of $24.47, was allocated $73.2 million to land; $355.3 million to buildings and improvements; $2.8 million to furniture, fixtures, and equipment; $22.9 million to intangible assets; and $23.3 million to intangible liabilities.

Operating revenues and loss from operations of the acquired properties included in the Operating Partnership’s results of operations from the acquisition dates to June 30, 2011 were $8.7 million and $6.6 million, respectively.

The unaudited pro forma information below summarizes the Operating Partnership’s combined results of operations for the three and six months ended June 30, 2011 and 2010 as though the acquisitions of 10 Hanover Square and the asset exchange were completed on January 1, 2010. The information for the three and six months ended June 30, 2011 includes pro forma results for the portion of the period prior to the acquisition date and actual results from the date of acquisition through the end of the period. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations would have been assuming the transaction had been completed as set forth above, nor do they purport to represent the Operating Partnership’s results of operations for future periods (in thousands except for per share amounts).


	Three months ended					Six months ended
	June 30,					June 30,
	2011		2010			2011			2010

Pro forma revenues	$	96,124	$	91,652		$	190,662		$	183,303
Pro forma income/(loss) attributable to OP unitholders		7,397		(6,677	)		(1,332	)		(13,354	)

Pro forma earnings per OP unit- basic:
Net income/(loss) attributable to OP unitholders	$	0.04	$	(0.04	)	$	(0.01	)	$	(0.07	)

Earnings per common share- diluted:
Net income/(loss) attributable to OP unitholders	$	0.04	$	(0.04	)	$	(0.01	)	$	(0.07	)

The Operating Partnership did not have any acquisitions during the three and six months ended June 30, 2010.

The Operating Partnership incurred $1.7 million and $2.1 million of acquisition related costs during the three and six months ended June 30, 2011, respectively. There were no acquisition costs during the three and six months ended June 30, 2010. These expenses are classified on the Consolidated Statements of Operations line item entitled “General and administrative.”

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

4. DISCONTINUED OPERATIONS

Discontinued operations represent properties that the Operating Partnership 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 Operating Partnership whereby the Operating Partnership 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 Operating Partnership. Once a property is deemed as held for sale, depreciation is no longer recorded. However, if the Operating Partnership determines that the property no longer meets the criteria of held for sale, the Operating Partnership 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.

As discussed in Note 3, Real Estate Owned, in conjunction with the asset exchange that closed on April 5, 2011, the Operating Partnership sold four multifamily apartment communities (984 homes). During the three and six months ended June 30, 2011, the Operating Partnership recognized gains for financial reporting purposes of $16.0 million on these transactions, which is included in discontinued operations. The results of operations for the following properties are classified on the Consolidated Statements of Operations in the line item entitled “Income from discontinued operations.”

The Operating Partnership had no apartment homes classified as held for disposition at June 30, 2011. The Operating Partnership did not dispose of any communities during the three and six months ended June 30, 2010.


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010

Rental income	$	188	$	4,120		$	4,334	$	8,251
Non-Property income		—		—			—		1,849

		188		4,120			4,334		10,100

Rental expenses		113		1,234			1,453		2,496
Property management fee		5		113			119		227
Real estate depreciation		—		2,048			1,564		4,099
Interest		64		770			815		1,536

		182		4,165			3,951		8,358

Income before net gain on the sale of property		6		(45	)		383		1,742
Net gain on the sale of property		16,038		36			16,038		97

Income/(loss) from discontinued operations	$	16,044	$	(9	)	$	16,421	$	1,839

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

5. DEBT


					2011
	Principal Outstanding				Weighted			Weighted		Number of
	June 30,		December 31		Average			Average		Communities
	2011		2010		Interest Rate			Years to Maturity		Encumbered
Fixed Rate Debt
Mortgage notes payable	$	436,595	$	192,205		5.39	%		4.3		7
Tax-exempt secured notes payable		—		13,325		N/A			—		—
Fannie Mae credit facilities		560,993		560,993		5.21	%		5.9		9

Total fixed rate secured debt		997,588		766,523		5.29	%		5.2		16

Variable Rate Debt
Mortgage notes payable		69,317		100,590		2.16	%		3.3		3
Tax-exempt secured note payable		27,000		27,000		0.77	%		18.7		1
Fannie Mae credit facilities		175,948		175,948		1.86	%		4.2		17

Total variable rate secured debt		272,265		303,538		1.83	%		5.4		21

Total secured debt	$	1,269,853	$	1,070,061		4.55	%		5.2		37

As of June 30, 2011, the General Partner had secured credit facilities with Fannie Mae with an aggregate commitment of $1.4 billion with $1.2 billion outstanding. The Fannie Mae credit facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and certain variable rate facilities can be extended for an additional five years at the General Partner’s option. At June 30, 2011, $895.9 million of the outstanding balance was fixed at a weighted average interest rate of 5.32% and the remaining balance of $260.5 million on these facilities had a weighted average variable interest rate of 1.61%. $736.9 million of these credit facilities were allocated to the Operating Partnership at June 30, 2011 based on the ownership of the assets securing the debt.


	June 30, 2011			December 31, 2010
	(dollar amounts in thousands)

Borrowings outstanding	$	736,941		$	736,941
Weighted average borrowings during the period ended		737,314			763,040
Maximum daily borrowings during the period		737,697			770,021
Weighted average interest rate during the period ended		4.5	%		4.5	%
Interest rate at the end of the period		4.4	%		4.4	%

The Operating Partnership may 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 value adjustment of the fixed rate debt instruments on the Operating Partnership’s properties was a net premium/(discount) of $19.8 million and ($1.1 million) at June 30, 2011 and December 31, 2010, respectively.

Fixed Rate Debt

Secured credit facilities. At June 30, 2011, the General Partner had borrowings against its fixed rate facilities of $895.9 million of which $561.0 million was allocated to the Operating Partnership based on the ownership of the assets securing the debt. As of June 30, 2011, the fixed rate Fannie Mae credit facilities allocated to the Operating Partnership had a weighted average fixed interest rate of 5.21%.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

Variable Rate Debt

Mortgage notes payable. Variable rate mortgage notes payable are generally due in monthly installments of principal and interest and mature at various dates from July 2013 through April 2016. Interest on the variable rate mortgage notes is based on LIBOR plus some basis points, which translated into interest rates ranging from 1.06% to 3.45% at June 30, 2011.

Tax-exempt secured note payable. The variable rate mortgage note payable that secures tax-exempt housing bond issues matures in March 2030. Interest on this note is payable in monthly installments. The mortgage note payable has an interest rate of 0.77% as of June 30, 2011.

Secured credit facilities. At June 30, 2011, the General Partner had borrowings against its variable rate facilities of $260.5 million of which $175.9 million was allocated to the Operating Partnership based on the ownership of the assets securing the debt. As of June 30, 2011, the variable rate borrowings under the Fannie Mae credit facilities allocated to the Operating Partnership had a weighted average floating interest rate of 1.86%.

The aggregate maturities of the Operating Partnership’s secured debt due during each of the next five calendar years and thereafter are as follows (dollars in thousands):


	Fixed				Variable
	Mortgage		Credit		Mortgage		Tax Exempt		Credit
	Notes		Facilities		Notes		Notes Payable		Facilities		Total
2011	$	11,665	$	—	$	317	$	—	$	30,886	$	42,868
2012		53,836		136,792		633		—		59,529		250,790
2013		15,871		27,739		38,050		—		—		81,660
2014		7,656		—		635		—		—		8,291
2015		192,496		—		636		—		—		193,132
Thereafter		155,071		396,462		29,046		27,000		85,533		693,112

Total	$	436,595	$	560,993	$	69,317	$	27,000	$	175,948	$	1,269,853

Guarantor on Unsecured Debt

The Operating Partnership is a guarantor on the General Partner’s unsecured credit facility, with an aggregate borrowing capacity of $600 million, a $250 million term loan, a $100 million term loan, and $300 million of medium-term notes. At June 30, 2011 and December 31, 2010, the outstanding balance under the unsecured credit facility was $5.0 million and $31.8 million, respectively.

On September 30, 2010, the Operating Partnership guaranteed certain outstanding debt securities of the General Partner. These guarantees provide that the Operating Partnership, as primary obligor and not merely as surety, irrevocably and unconditionally guarantees to each holder of the applicable securities and to the trustee and their successors and assigns under the respective indenture (a) the full and punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all obligations of the General Partner under the respective indenture whether for principal or interest on the securities (and premium, if any), and all other monetary obligations of the General Partner under the respective indenture and the terms of the applicable securities and (b) the full and punctual performance within the applicable grace periods of all other obligations of the General Partner under the respective indenture and the terms of applicable securities.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

6. RELATED PARTY TRANSACTIONS

Receivable due from the General Partner

The Operating Partnership participates in the General Partner’s central cash management program, wherein all the Operating Partnership’s cash receipts are remitted to the General Partner and all cash disbursements are funded by the General Partner. In addition, other miscellaneous costs such as administrative expenses are incurred by the General Partner on behalf of the Operating Partnership. As a result of these various transactions between the Operating Partnership and the General Partner, the Operating Partnership had net receivable balances of $434.6 million and $492.7 million at June 30, 2011 and December 31, 2010, respectively, which is reflected as a reduction of capital on the Consolidated Balance Sheets.

Allocation of General and Administrative Expenses

The General Partner provides various general and administrative and other overhead services for the Operating Partnership including legal assistance, acquisitions analysis, marketing and advertising, and allocates these expenses to the Operating Partnership first on the basis of direct usage when identifiable, with the remainder allocated based on its pro-rata portion of UDR’s total apartment homes. During the three and six months ended June 30, 2011 and 2010, the general and administrative expenses allocated to the Operating Partnership by UDR were $7.1 million and $13.6 million and $5.9 million and $12.0 million, respectively, and are included in “General and Administrative” and “Property Management” expenses on the consolidated statements of operations. In the opinion of management, this method of allocation reflects the level of services received by the Operating Partnership from the General Partner.

Guaranty by the General Partner

The Operating Partnership provided a “bottom dollar” guaranty to certain limited partners as part of their original contribution to the Operating Partnership. The guaranty protects the tax basis of the underlying contribution and is reflected on the OP unitholder’s Schedule K-1 tax form. The guaranty was made in the form of a loan from the General Partner to the Operating Partnership at an annual interest rate of 1.14% at June 30, 2011 and 0.593% at December 31, 2010. Interest payments are made monthly and the note is due December 31, 2011. At June 30, 2011 and December 31, 2010, the note payable due to the General Partner was $78.3 million.

7. FAIR VALUE OF DERIVATIVES AND FINANCIAL INSTRUMENTS

•

Level 1 — Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

•

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

The estimated fair values of the Operating Partnership’s financial instruments either recorded or disclosed on a recurring basis as of June 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):

Fair Value at June 30, 2011 Using

Quoted Prices in

Active Markets

for Identical

Significant Other

Significant

Assets or

Observable

Unobservable

Liabilities

Inputs

June 30, 2011

(Level 1)

(Level 2)

(Level 3)

Description:

Derivatives- Interest rate contracts (b)

108

—

108

—

Total assets

108

—

108

—

Derivatives- Interest rate contracts (b)

5,436

—

5,436

—

Contingent purchase consideration (c)

5,402

—

5,402

Secured debt instruments- fixed rate: (a)

Mortgage notes payable

467,855

—

467,855

Fannie Mae credit facilities

564,988

—

564,988

Secured debt instruments- variable rate: (a)

Mortgage notes payable

69,317

—

69,317

Tax-exempt secured notes payable

27,000

—

27,000

Fannie Mae credit facilities

175,948

—

175,948

Total liabilities

1,315,946

—

5,436

1,310,510


			Fair Value at December 31, 2010 Using
			Quoted Prices in
			Active Markets
			for Identical		Significant Other		Significant
			Assets or		Observable		Unobservable
			Liabilities		Inputs		Inputs
	December 31, 2010		(Level 1)		(Level 2)		(Level 3)

Description:

Derivatives- Interest rate contracts (b)	$	376	$	—	$	376	$	—

Total assets	$	376	$	—	$	376	$	—


Derivatives- Interest rate contracts (b)	$	5,111	$	—	$	5,111	$	—
Contingent purchase consideration (c)		5,402		—		—		5,402
Secured debt instruments- fixed rate: (a)
Mortgage notes payable		205,750		—		—		205,750
Tax-exempt secured notes payable		13,885		—		—		13,885
Fannie Mae credit facilities		576,069		—		—		576,069
Secured debt instruments- variable rate: (a)
Mortgage notes payable		100,590		—		—		100,590
Tax-exempt secured notes payable		27,000		—		—		27,000
Fannie Mae credit facilities		175,948		—		—		175,948

Total liabilities	$	1,109,755	$	—	$	5,111	$	1,104,644

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)


(a)		See Note 5, Debt

(b)		See Note 8, Derivatives and Hedging Activity

(c)		During the first quarter of 2010, the Operating Partnership accrued a liability of $6.0 million related to a contingent purchase consideration on one of its properties. The contingent consideration was determined based on the fair market value of the related asset which is estimated using Level 3 inputs utilized in a third party appraisal. During the year ended December 31, 2010, the Company paid approximately $635,000 of the liability, and the outstanding balance is due January 2012.

Financial Instruments Carried at Fair Value

The Operating Partnership incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Operating Partnership has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Operating Partnership has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2011 and December 31, 2010, the Operating Partnership has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Operating Partnership has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Financial Instruments Not Carried at Fair Value

At June 30, 2011, the fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaids, real estate taxes payable, accrued interest payable, security deposits and prepaid rent, distributions payable and accounts payable approximated their carrying values because of the short term nature of these instruments. The estimated fair values of other financial instruments were determined by the Operating Partnership using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Operating Partnership would realize on the disposition of the financial instruments. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value amounts.

The General Partner estimates the fair value of our debt instruments by discounting the remaining cash flows of the debt instrument at a discount rate equal to the replacement market credit spread plus the corresponding treasury yields. Factors considered in determining a replacement market credit spread include general market conditions, borrower specific credit spreads, time remaining to maturity, loan-to-value ratios and collateral quality (Level 3).

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

The Operating Partnership records 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. Cash flow estimates are based upon historical results adjusted to reflect management’s best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair value. The General Partner’s estimates of fair value represent management’s estimates based upon Level 3 inputs such as industry trends and reference to market rates and transactions.

8. DERIVATIVES AND HEDGING ACTIVITY

Risk Management Objective of Using Derivatives

The Operating Partnership is exposed to certain risk arising from both its business operations and economic conditions. The General Partner principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The General Partner manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the General Partner enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The General Partner’s and the Operating Partnership’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the General Partner’s known or expected cash receipts and its known or expected cash payments principally related to the General Partner’s investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

The General Partner’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the General Partner primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the General Partner making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up front premium.

A portion of the General Partner’s interest rate derivatives have been allocated to the Operating Partnership based on the General Partner’s underlying debt instruments allocated to the Operating Partnership. (See Note 5, Debt.)

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in “Accumulated Other Comprehensive Income/(Loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and six months ended June 30, 2011 and 2010, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2011 and 2010, the Operating Partnership recorded less than $1,000 of ineffectiveness in earnings attributable to reset date and index mismatches between the derivative and the hedged item.

Amounts reported in “Accumulated Other Comprehensive Income/(Loss)” related to derivatives will be reclassified to interest expense as interest payments are made on the General Partner’s variable-rate debt that is allocated to the Operating Partnership. During the next twelve months through June 30, 2012, we estimate that an additional $3.8 million will be reclassified as an increase to interest expense.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

As of June 30, 2011, the Operating Partnership had the following outstanding interest rate derivatives designated as cash flow hedges of interest rate risk (dollar amounts in thousands):


	Number of
Interest Rate Derivative	Instruments		Notional
Interest rate swaps		6	$	261,532

Interest rate caps		2	$	108,628

As of June 30, 2011, we had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (dollar amounts in thousands):


	Number of
Product	Instruments		Notional
Interest rate caps		4	$	217,173

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Operating Partnership’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010.


	Asset Derivatives					Liability Derivatives
		Fair Value at:					Fair Value at:
	Balance	June 30,		December 31,		Balance	June 30,		December 31,
	Sheet Location	2011		2010		Sheet Location	2011		2010
Derivatives designated as hedging instruments:
Interest Rate Products	Other Assets	$	65	$	217	Other Liabilities	$	5,436	$	5,111


Total derivatives designated as hedging instruments		$	65	$	217		$	5,436	$	5,111


Derivatives not designated as hedging instruments:

Interest Rate Products	Other Assets	$	43	$	159	Other Liabilities	$	—	$	—


Total derivatives not designated as hedging instruments		$	43	$	159		$	—	$	—

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations

The tables below present the effect of the derivative financial instruments on the Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (dollar amounts in thousands):


							Location of Loss
							Reclassified from	Amount of Gain or (Loss) Reclassified
	Amount of Gain or (Loss) Recognized in						Accumulated OCI into	from Accumulated OCI into Income
Derivatives in Cash Flow	OCI on Derivative (Effective Portion)						Income (Effective	(Effective Portion)
Hedging Relationships	2011			2010			Portion)	2011			2010

For the three months ended June 30,

Interest Rate Products	$	(3,108	)	$	(1,203	)	Interest expense	$	(1,212	)	$	(2,737	)


Total	$	(3,108	)	$	(1,203	)		$	(1,212	)	$	(2,737	)


For the six months ended June 30,

Interest Rate Products	$	(2,838	)	$	(1,850	)	Interest expense	$	(2,381	)	$	(4,749	)


Total	$	(2,838	)	$	(1,850	)		$	(2,381	)	$	(4,749	)



	Location of Gain or (Loss)	Amount of Gain or (Loss) Recognized
Derivatives Not Designated as	Recognized in Income on	in Income on Derivative
Hedging Instruments	Derivative	2011			2010

For the three months ended June 30,

Interest Rate Products	Other income / (expense)	$	(94	)	$	(182	)


Total		$	(94	)	$	(182	)


For the six months ended June 30,

Interest Rate Products	Other income / (expense)	$	(116	)	$	(675	)


Total		$	(116	)	$	(675	)

Credit-risk-related Contingent Features

The General Partner has agreements with some of its derivative counterparties that contain a provision where (1) if the General Partner defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the General Partner could also be declared in default on its derivative obligations; or (2) the General Partner could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the General Partner’s default on the indebtedness.

Certain of the General Partner ‘s agreements with its derivative counterparties contain provisions where if there is a change in the General Partner’s financial condition that materially changes the General Partner ‘s creditworthiness in an adverse manner, the General Partner may be required to fully collateralize its obligations under the derivative instrument.

The General Partner also has an agreement with a derivative counterparty that incorporates the loan and financial covenant provisions of the General Partner’s indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with these covenant provisions would result in the General Partner being in default on any derivative instrument obligations covered by the agreement.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

As of June 30, 2011, the fair value of derivatives in a net liability position that were allocated to the Operating Partnership, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $6.1 million. As of June 30, 2011, the General Partner has not posted any collateral related to these agreements. If the General Partner had breached any of these provisions at June 30, 2011, it would have been required to settle its obligations under the agreements at their termination value of $6.1 million.

9. CAPITAL STRUCTURE

General Partnership Units

The General Partner has complete discretion to manage and control the operations and business of the Operating Partnership, which includes but is not limited to the acquisition and disposition of real property, construction of buildings and making capital improvements, and the borrowing of funds from outside lenders or UDR and its subsidiaries to finance such activities. The General Partner can generally authorize, issue, sell, redeem or purchase any OP Unit or securities of the Operating Partnership without the approval of the limited partners. The General Partner can also approve, with regard to the issuances of OP units, the class or one or more series of classes, with designations, preferences, participating, optional or other special rights, powers and duties including rights, powers and duties senior to limited partnership interests without approval of any limited partners except holder of Class A Partnership Units. There were 110,883 General Partnership units outstanding at June 30, 2011 and December 31, 2010, all of which were held by UDR.

Limited Partnership Units

At June 30, 2011 and December 31, 2010, there were 182,368,132 and 179,798,525 limited partnership units outstanding, of which 1,751,671 were Class A Limited Partnership units. UDR owned 174,738,456 or 95.8% at June 30, 2011 and 174,736,557 or 97.2% at December 31, 2010, respectively. The remaining 7,629,676 or 4.2% OP Units outstanding were held by non-affiliated partners at June 30, 2011 and 5,061,968 or 2.8% at December 31, 2010 of which 1,751,671, respectively, were Class A Limited Partnership units.

The limited partners have the right to require the Operating Partnership to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the Operating Partnership Agreement), provided that such OP Units have been outstanding for at least one year. UDR, as general partner of the Operating Partnership may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Share Amount (generally one share of common stock of UDR for each OP Unit), as defined in the Operating Partnership Agreement.

The non-affiliated limited partners’ capital is adjusted to redemption value at the end of each reporting period with the corresponding offset against UDR’s limited partner capital account based on the redemption rights noted above. The aggregate value upon redemption of the then-outstanding OP Units held by limited partners was $187.3 million and $119.1 million as of June 30, 2011 and December 31, 2010, respectively, based on the value of UDR’s common stock at each period end. A limited partner has no right to receive any distributions from the Operating Partnership on or after the date of redemption of its OP Units.

Class A Limited Partnership Units

Class A Partnership units have a cumulative, annual, non-compounded preferred return, which is equal to 8% based on a value of $16.61 per Class A Partnership unit.

Holders of the Class A Partnership Units exclusively possess certain voting rights. The Operating Partnership may not do the following without approval of the holders of the Class A Partnership Units: (i) increase the authorized or issued amount of Class A Partnership Units, (ii) reclassify any other partnership interest into Class A Partnership Units, (iii) create, authorize or issue any obligations or security convertible into or the right to purchase any Class Partnership units, without the approval of the holders of the Class A Partnership Units, (iv) enter into a merger or acquisition, or (v) amend or modify the Agreement of Limited Partnership of the Operating Partnership in a manner that adversely affects the relative rights, preferences or privileges of the Class A Partnership Units.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

Allocation of profits and losses

Profit of the Operating Partnership is allocated in the following order: (i) to the General Partner and the Limited Partners in proportion to and up to the amount of cash distributions made during the year, and (ii) to the General Partner and Limited Partners in accordance with their percentage interests. Losses and depreciation and amortization expenses, non-recourse liabilities are allocated to the General Partner and Limited Partners in accordance with their percentage interests. Losses allocated to the Limited Partners are capped to the extent that such an allocation would not cause a deficit in the Limited Partners capital account. Such losses are, therefore, allocated to the General Partner. If any Partner’s capital balance were to fall into a deficit any income and gains are allocated to each Partner sufficient to eliminate its negative capital balance.

10. OTHER COMPREHENSIVE INCOME/(LOSS)

Components of other comprehensive income(loss) during the three and six months June 30, 2011 and 2010 are as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Comprehensive income/(loss):
Net income/(loss) attributable to OP unitholders	$	7,476		$	(2,570	)	$	5,445		$	(5,520	)
Net income attributable to non-controlling interests		32			18			59			35
Other comprehensive income:
Unrealized gain/(loss) on derivative financial instruments		(1,896	)		(4,264	)		(457	)		(2,899	)

Comprehensive income/(loss)	$	5,612		$	(6,816	)	$	5,047		$	(8,384	)

11. COMMITMENTS AND CONTINGENCIES

Contingencies

Litigation and Legal Matters

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

12. REPORTABLE SEGMENTS

FASB ASC Topic 280, Segment Reporting, 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. The Operating Partnership has the same chief operating decision maker as that of its parent, the General Partner. The chief operating decision maker consists of several members of UDR’s executive management team who use several generally accepted industry financial measures to assess the performance of the business for our reportable operating segments.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

The Operating Partnership 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 of the Operating Partnership’s apartment communities are rental income and net operating income (“NOI”), and are included in the chief operating decision maker’s assessment of UDR’s performance on a consolidated basis. 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. The chief operating decision maker of the General Partner utilizes NOI as the key measure of segment profit or loss.

The Operating Partnership’s two reportable segments are same communities and non-mature/other communities:

•

Same communities represent those communities acquired, developed, and stabilized prior to April 1, 2011 and held as of June 30, 2011. 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 2009 or 2010, sold properties, redevelopment properties, properties classified as real estate held for sale, condominium conversion properties, joint venture properties, properties managed by third parties, and the non-apartment components of mixed use properties.

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 Topic 280 as each of our apartment communities generally has similar economic characteristics, facilities, services, and tenants. Therefore, the Operating Partnership’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 the Operating Partnership’s total revenues during the three and six months ended June 30, 2011 and 2010.

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

The accounting policies applicable to the operating segments described above are the same as those described in Note 2, “Significant Accounting Policies.” The following table details rental income and NOI for the Operating Partnership’s reportable segments for the three and six months ended June 30, 2011 and 2010, and reconciles NOI to income from continuing and discontinued operations per the consolidated statement of operations (dollars in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Reportable apartment home segment rental income
Same Communities
Western Region	$	46,736		$	45,076		$	92,376		$	89,720
Mid-Atlantic Region		15,946			15,269			31,620			30,230
Southeastern Region		10,569			10,209			21,041			20,379
Southwestern Region		6,810			6,591			13,553			13,165

Non-Mature communities/Other		16,071			9,950			27,372			19,801


Total segment and consolidated rental income	$	96,132		$	87,095		$	185,962		$	173,295


Reportable apartment home segment NOI
Same Communities
Western Region	$	32,956		$	31,227		$	64,282		$	61,836
Mid-Atlantic Region		11,063			10,418			21,761			20,499
Southeastern Region		6,514			6,414			13,142			12,828
Southwestern Region		4,481			4,081			8,502			8,188
Non-Mature communities/Other		10,910			7,099			17,749			13,403


Total segment and consolidated NOI		65,924			59,239			125,436			116,754


Reconciling items:
Non-property income		—			—			—			1,849
Property management		(2,644	)		(2,395	)		(5,114	)		(4,766	)
Other operating expenses		(1,447	)		(1,160	)		(2,805	)		(2,761	)
Depreciation and amortization		(50,225	)		(41,692	)		(91,383	)		(83,123	)
Interest		(13,844	)		(12,966	)		(25,794	)		(26,041	)
General and administrative		(6,294	)		(3,614	)		(10,874	)		(7,494	)
Net gain on the sale of real estate		16,038			36			16,038			97
Non-controlling interests		(32	)		(18	)		(59	)		(35	)

Net (loss)/income attributable to OP unit holders	$	7,476		$	(2,570	)	$	5,445		$	(5,520	)

UNITED DOMINION REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- (continued)
JUNE 30, 2011
(Unaudited)

The following table details the assets of the Operating Partnership’s reportable segments as of June 30, 2011 and December 31, 2010 (dollars in thousands):


	June 30,			December 31,
	2011			2010

Reportable apartment home segment assets
Same Store Communities
Western Region	$	1,933,232		$	1,924,700
Mid-Atlantic Region		695,116			693,564
Southeastern Region		356,589			354,861
Southwestern Region		255,607			254,485
Non-Mature communities/Other		738,335			478,574


Total segment assets		3,978,879			3,706,184
Accumulated depreciation		(919,971	)		(884,083	)


Total segment assets — net book value		3,058,908			2,822,101


Reconciling items:
Cash and cash equivalents		7,692			920
Restricted cash		12,516			8,022
Deferred financing costs, net		8,886			7,465
Other assets		40,343			22,887


Total consolidated assets	$	3,128,345		$	2,861,395

Capital expenditures related to the Operating Partnership’s same communities totaled $6.8 million and $12.3 and $7.8 million and $12.6 million for the three months and six ended June 30, 2011 and 2010, respectively. Capital expenditures related to the Operating Partnership’s non-mature/other communities totaled $253,000 and $510,000 and $452,000 and $739,000 for the three and six months ended June 30, 2011 and 2010, respectively.

Markets included in the above geographic segments are as follows:

Western — Orange County, San Francisco, Monterey Peninsula, Los Angeles, Seattle, Sacramento, Inland Empire, Portland, and San Diego

ii.

Mid-Atlantic — New York, Boston, Metropolitan DC and Baltimore

iii.

Southeastern — Nashville, Tampa, Jacksonville, and Other Florida

iv.

Southwestern — Dallas and Phoenix


Item 2.		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.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

	•		general economic conditions;

	•		unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates;

	•		the failure of acquisitions to achieve anticipated results;

	•		possible difficulty in selling apartment communities;

	•		competitive factors that may limit our ability to lease apartment homes or increase or maintain rents;

	•		insufficient cash flow that could affect our debt financing and create refinancing risk;

	•		failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders;

	•		development and construction risks that may impact our profitability;

	•		potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs to us;

	•		risks from extraordinary losses for which we may not have insurance or adequate reserves;

	•		uninsured losses due to insurance deductibles, self-insurance retention, uninsured claims or casualties, or losses in excess of applicable coverage;

	•		delays in completing developments and lease-ups on schedule;

	•		our failure to succeed in new markets;

	•		changing interest rates, which could increase interest costs and affect the market price of our securities;

	•		potential liability for environmental contamination, which could result in substantial costs to us;

	•		the imposition of federal taxes if we fail to qualify as a REIT under the Code in any taxable year;

	•		our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price; and

	•		changes in real estate laws, tax laws and other laws affecting our business.

A discussion of these and other factors affecting our business and prospects is set forth in Part II, Item 1A. Risk Factors. We encourage investors to review these risk factors.

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

Forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Report, and we expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based, except to the extent otherwise required by law.

UDR, INC.:

Business Overview

UDR, Inc. is a self- administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities. We were formed in 1972 as a Virginia corporation. In September 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include an operating partnership United Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the Company,” or “UDR” refer collectively to UDR, Inc., its subsidiaries and its consolidated joint ventures.

At June 30, 2011, our consolidated real estate portfolio included 170 communities with 48,556 apartment homes and our total real estate portfolio, inclusive of our unconsolidated communities, included an additional 37 communities with 9,891 apartment homes.

The following table summarizes our market information by major geographic markets as of June 30, 2011.


											Three Months Ended					Six Months Ended
	As of June 30, 2011										June 30, 2011					June 30, 2011(a)
					Percentage			Total
	Number of		Number of		of Total			Carrying			Average			Total Income		Average			Total Income
	Apartment		Apartment		Carrying			Value			Physical			per Occupied		Physical			per Occupied
Same Communities	Communities		Homes		Value			(in thousands)			Occupancy			Home (a)		Occupancy			Home (b)

Western Region
Orange Co, CA		12		3,989		10.2	%	$	741,400			95.6	%	$	1,513		95.2	%	$	1,506
San Francisco, CA		8		1,607		5.2	%		381,447			97.2	%		2,034		96.9	%		2,004
Monterey Peninsula, CA		7		1,565		2.1	%		153,260			94.5	%		1,109		93.2	%		1,086
Los Angeles, CA		5		919		4.0	%		292,635			95.7	%		1,915		95.7	%		1,914
San Diego, CA		3		689		1.4	%		99,930			94.9	%		1,291		95.5	%		1,284
Seattle, WA		10		1,891		4.9	%		359,770			96.2	%		1,262		96.2	%		1,216
Inland Empire, CA		3		1,074		2.1	%		150,738			94.6	%		1,253		94.6	%		1,246
Sacramento, CA		2		914		0.9	%		68,484			92.3	%		884		93.1	%		881
Portland, OR		3		716		1.0	%		69,936			95.8	%		989		96.1	%		979

Mid-Atlantic Region
Metropolitan DC		10		3,516		9.1	%		663,477			97.2	%		1,652		97.2	%		1,640
Richmond, VA		6		2,211		2.6	%		188,091			96.2	%		1,040		96.1	%		1,029
Baltimore, MD		10		2,121		3.5	%		253,318			96.8	%		1,309		96.7	%		1,300
Norfolk VA		6		1,438		1.2	%		84,910			95.5	%		987		95.6	%		978
Other Mid-Atlantic		5		1,132		1.1	%		79,397			96.3	%		1,039		96.1	%		1,031

Southeastern Region
Tampa, FL		11		3,804		4.6	%		336,058			95.1	%		980		95.5	%		971
Orlando, FL		11		3,167		3.7	%		272,263			94.7	%		925		94.7	%		910
Nashville, TN		8		2,260		2.5	%		181,213			96.8	%		880		96.5	%		874
Jacksonville, FL		5		1,857		2.2	%		157,507			94.3	%		837		94.4	%		836
Other Florida		4		1,184		1.5	%		112,598			93.5	%		1,006		93.9	%		1007

Southwestern Region
Dallas, TX		10		3,175		4.5	%		327,576			96.4	%		951		96.3	%		948
Phoenix, AZ		5		1,362		1.6	%		121,424			95.2	%		892		95.3	%		889
Austin, TX		1		390		0.8	%		60,288			95.9	%		1,166		95.7	%		1,148
Houston, TX		2		644		0.6	%		46,136			95.0	%		917		95.5	%		909


Total/Average Same Communities		147		41,625		71.3	%		5,201,856			95.7	%	$	1,181		95.6	%	$	1,172


Non Matures, Commercial Properties & Other		23		6,931		26.9	%		1,939,649


Total Real Estate Held for Investment		170		48,556		98.2	%		7,141,505


Real Estate Under Development (c)		—		—		1.8	%		157,301


Total Real Estate Owned		170		48,556		100.0	%		7,298,806


Total Accumulated Depreciation									(1,726,258	)


Total Real Estate Owned, Net of Accumulated Depreciation								$	5,572,548


(a)		The same community population for the six months ended June 30, 2011 includes 41,088 homes.

(b)		Total Income per Occupied Home represents total monthly revenues divided by the product of occupancy and the number of mature apartment homes.

(c)		The Company is currently developing five wholly-owned communities with 1,250 apartment homes, none of which have been completed.

We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same Communities segment includes those communities acquired, developed, and stabilized prior to April 1, 2010 and held as of June 30, 2011. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. Our Non-Mature/Other Communities segment includes those communities that were acquired or developed in 2010 or 2011, sold properties, redevelopment properties, properties classified as real estate held for sale, condominium conversion properties, joint venture properties, properties managed by third parties, and the non-apartment components of mixed use properties.

Liquidity and Capital Resources

Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt and equity. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes and borrowings under credit agreements. We routinely use our unsecured credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. Historically, proceeds from the sale of real estate have been used for both investing and financing activities as we repositioned our portfolio.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings under credit agreements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities, the repayment of financing on development activities, and potential property acquisitions, through secured and unsecured borrowings, the issuance of debt or equity securities, and the disposition of properties. We believe that our net cash provided by operations and borrowings under credit agreements will continue to be adequate to meet both operating requirements and the payment of dividends by the Company in accordance with REIT requirements. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings under credit agreements, and the issuance of debt or equity securities, and dispositions of properties.

We have a shelf registration statement filed with the Securities and Exchange Commission, or “SEC” which provides for the issuance of an indeterminate amount of common stock, preferred stock, guarantees of debt securities, warrants, subscription rights, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of issuance.

In September 2009, the Company entered into an equity distribution agreement under which the Company may offer and sell up to 15 million shares of its common stock over time to or through its sales agents. During the three months ended June 30, 2011, we settled on 351,855 shares of common stock sold during the three months ended March 31, 2011. During the six months ended June 30, 2011, we sold 4,395,601 shares of common stock through this program for aggregate gross proceeds of approximately $104.5 million at a weighted average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $2.1 million, were approximately $102.4 million.

In March 2011, the Company entered into a new equity distribution agreement under which the Company may offer and sell up to 20 million shares of its common stock over time to or through its sales agents. During the three and six months ended June 30, 2011, we sold 9,079,354 shares of common stock through this program for aggregate gross proceeds of approximately $227.5 million at a weighted average price per share of $25.06. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $4.5 million, were approximately $223.0 million. An additional 277,600 shares were sold prior to, and settled subsequent to June 30, 2011.

In July 2011, the Company closed on a public offering of 20,700,000 shares of its common stock, including 2,700,000 shares sold as a result of the underwriters’ exercise of their overallotment option in full at the closing, at a price of $25.00 per share, for net proceeds of approximately $496.3 million after underwriting discounts and commissions and estimated offering expenses.

Proceeds from the sale of shares through these programs are expected to fund potential and recent acquisitions, for working capital, and for general corporate purposes.

Future Capital Needs

Future development and redevelopment expenditures may be funded through joint ventures, unsecured or secured credit facilities, proceeds from the issuance of equity or debt securities, the sale of properties and to a lesser extent, with cash flows provided by operating activities. Acquisition activity in strategic markets is expected to be largely financed by the reinvestment of proceeds from the sale of properties, through the issuance of equity or debt securities, the issuance of operating partnership units, and the assumption or placement of secured and/or unsecured debt.

During the remainder of 2011, we have approximately $12.4 million of secured debt maturing, inclusive of principal amortization and net of extension rights of $112.2 million and $96.4 million of unsecured debt maturing.

We anticipate repaying that debt with cash flow from our operations, proceeds from debt and equity offerings, proceeds from the sale of properties, and by exercising extension rights with respect to the secured debt.

Critical Accounting Policies and Estimates

Our critical accounting policies are those having the most impact on the reporting of our financial condition and results and those requiring significant judgments and estimates. These policies include those related to (1) capital expenditures, (2) impairment of long-lived assets, (3) real estate investment properties, and (4) revenue recognition.

Our other critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in UDR’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 23, 2011. There have been no significant changes in our critical accounting policies from those reported in our Form 10-K filed with the SEC on February 23, 2011. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.

Statements of Cash Flow

The following discussion explains the changes in net cash provided by operating activities, net cash used in investing activities, and net cash provided by financing activities that are presented in our Consolidated Statements of Cash Flows.

Operating Activities

For the six months ended June 30, 2011, our net cash flow provided by operating activities was $115.1 million compared to $101.8 million for the comparable period in 2010. The increase in cash flow from operating activities is primarily due to an increase in property net operating income.

Investing Activities

For the six months ended June 30, 2011, net cash used in investing activities was $266.1 million compared to $122.2 million for the comparable period in 2010. The change in cash used for investing activities was due to changes in the level of investment activities, which reflect our strategy as it relates to acquisitions, dispositions, capital expenditures, and development activities, all of which are discussed in further detail throughout this Report.

Acquisitions and Dispositions

In April 2011, the Company, through the Operating Partnership, closed on an acquisition of a 493-home multifamily apartment community referred to as 10 Hanover Square, located in New York City, New York. The community was acquired for $259.8 million, which included assumed debt of $192.0 million (with a fair value of $208.1 million) and the issuance of 2,569,606 OP Units. The OP Units were deemed to have a value equal to the greater of $25.00 or the closing price per share of the Company’s common stock for the 10 day period ended on (and including) the date one business day prior to the settlement date. For purchase price accounting purposes, the fair value of these OP units was $24.47.

In April 2011, the Company and the Operating Partnership completed a $500 million asset exchange whereby UDR acquired one multifamily apartment community (227 homes), and the Operating Partnership acquired two multifamily apartment communities (833 homes). The acquired assets are: 388 Beale in San Francisco, CA (227 homes); 14 North in Peabody, MA (387 homes); and Inwood West in Woburn, MA (446 homes). The communities acquired were valued at $263.0 million representing their estimated fair value. The Company paid $28.1 million of cash and assumed debt of $55.8 million (with a fair value of $61.7 million). UDR sold two multifamily apartment communities (434 homes) and the Operating Partnership sold four multifamily apartment communities (984 homes) located in California as part of the transaction. The communities are: Crest at Phillips Ranch, Villas at San Dimas, Villas at Bonita, The Arboretum, Rancho Vallecitos and Milazzo.

In May 2011, the Company sold an apartment community (289 homes) located in Dallas, Texas

In June 2011, the Company closed on an acquisition of a multifamily apartment community referred to as View 14, located in Metropolitan, D.C. The 185-home community was acquired for $105.5 million.

The Company did not acquire or dispose of any properties during the three and six months ended June 30, 2010.

Our long-term strategic plan is to continue achieving greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been seeking to expand our interests in communities located in the Boston, California, Metropolitan D.C., New York, and Washington state markets over the past years. Prospectively, we plan to channel new investments into those markets we believe will provide the best investment returns. Markets will be targeted based upon defined criteria including favorable job formation, low single-family home affordability and favorable demand/supply ratio for multifamily housing.

Capital Expenditures

In conformity with GAAP, we capitalize those expenditures that materially enhance the value of an existing asset or substantially extend the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.

During the six months ended June 30, 2011, $19.0 million or $400 per home was spent on recurring capital expenditures. These include revenue enhancing capital expenditures, exterior/interior upgrades, turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as exterior paint, roofs, siding, parking lots, and asset preservation capital expenditures. In addition, major renovations totaled $15.6 million for the six months ended June 30, 2011. Total capital expenditures, which in aggregate include recurring capital expenditures and major renovations, of $34.5 million or $728 per home was spent on all of our communities, excluding development and commercial properties, for the six months ended June 30, 2011.

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 six months ended June 30, 2011 and 2010:


	Total							Per Home
	Six Months Ended June 30,
	(dollars in thousands)							Six Months Ended June 30,
	2011		2010		% Change			2011		2010		% Change
Revenue enhancing improvements	$	2,870	$	9,389		-69.4	%	$	60	$	212		-71.7	%
Turnover capital expenditures		5,201		4,048		28.5	%		110		91		20.9	%
Asset preservation expenditures		10,900		10,057		8.4	%		230		227		1.3	%

Total recurring capital expenditures		18,971		23,494		-19.3	%	$	400		530		-24.5	%

Major renovations		15,567		12,921		20.5	%		328		292		12.3	%

Total capital expenditures	$	34,538	$	36,415		-5.2	%	$	728	$	822		-11.4	%


Repair and maintenance expense	$	17,975	$	15,443		16.4	%	$	379	$	348		8.9	%


Average stabilized home count		47,451		44,316

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 2011 are currently expected to be approximately $1,050 per home.

Development

At June 30, 2011, our development pipeline for wholly-owned communities totaled 1,250 homes with a budget of $425.9 million in which we have a carrying value of $157.3 million. We anticipate the completion of these communities through the fourth quarter of 2013.

Consolidated Joint Ventures

For additional information regarding these joint ventures, see Note 5, Joint Ventures, in the Consolidated Financial Statements of UDR, Inc. included in this Report.

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 may earn fees for providing management services to the unconsolidated joint ventures. As of June 30, 2011, UDR had investments in the following unconsolidated joint ventures which are accounted for under the equity method of accounting.

In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests in the Hanover/MetLife Master Limited Partnership (the “UDR/MetLife Partnership”). The UDR/MetLife Partnership owns a portfolio of 26 operating communities containing 5,748 apartment homes and 10 land parcels with the potential to develop approximately 2,000 additional apartment homes. Under the terms of the UDR/MetLife Partnership, UDR acts as the general partner and earns fees for property and asset management and financing transactions.

UDR acquired a weighted average ownership interest of 12.27% in the operating communities and 4.14% in the land parcels for $100.8 million. The initial investment of $100.8 million consisted of $71.8 million in cash, which included associated transaction costs, and a $30 million payable (includes discount of $1 million) to Hanover. UDR agreed to pay the $30 million balance to Hanover in two interest free installments in the amounts of $20 million and $10 million on the first and second anniversaries of the closing, respectively. The $30 million payable was recorded at its present value of $29 million using an effective interest rate of 2.67%. At June 30, 2011 and December 31, 2010, the net carrying value of the payable was $29.5 million and $29.1 million, respectively. Interest expense of $196,000 and $391,000 was recorded during the three and six months ended June 30, 2011. At June 30, 2011 and December 31, 2010, the Company’s investment was $129.5 million and $122.2 million, respectively.

UDR’s total cost of its equity investment of $100.8 million differed from its proportionate share in the underlying net assets of the UDR/MetLife Partnership of $111.4 million. The difference of $10.6 million was attributable to certain assets and adjustments were allocated to UDR’s proportionate share in the UDR/MetLife Partnership’s buildings of $8.4 million, land of $3.9 million, and ($1.6 million) of lease intangible assets. With the exception of land, the difference related to buildings is amortized and recorded as a component of loss from unconsolidated entities over 45 years and the difference related to lease intangible assets is amortized and recorded as a component of loss from unconsolidated entities over 11 months with the offset to the Company’s carrying value of its equity investment. During the three and six months ended June 30, 2011, the Company recorded $395,000 and $791,000 of amortization, respectively.

In connection with the purchase of Hanover’s interests in the UDR/MetLife Partnership, UDR agreed to indemnify Hanover from liabilities from Hanover’s guaranty of $333 million in loans ($209 million outstanding at June 30, 2011) which are secured by a security interest in the operating communities subject to the loans. The loans are to the sub-tier partnerships which own the 26 operating communities. The Company anticipates that the balance of these loans will be refinanced by the UDR/MetLife Partnership over the next twelve months.

In May 2011, the Company entered into a joint venture with an affiliate of Hanover to develop a 263-home community in San Diego, California. At June 30, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $9.9 million. Our investment at June 30, 2011 was $10.3 million.

In June 2011, the UDR/MetLife Partnership sold a parcel of land to a joint venture, which the Company entered into with an affiliate of Hanover to develop a 256-home community in College Park, Maryland. At June 30, 2011 and at closing, UDR owned a noncontrolling interest of 95% in the joint venture. Our initial investment was $7.1 million. Our investment at June 30, 2011 was $6.9 million.

For additional information regarding these joint ventures, see Note 5, Joint Ventures, in the Consolidated Financial Statements of UDR, Inc. included in this Report.

Disposition of Investments

During the three and six months ended June 30, 2011, the Company disposed of seven apartment communities in California and Texas. We plan to continue transforming our portfolio and pursuing our strategy of owning apartment homes in markets characterized by above average job growth, low home affordability and limited new supply — three key drivers to strong rental growth.

Financing Activities

For the six months ended June 30, 2011, our net cash provided by financing activities was $163.1 million compared to $22.5 million for the comparable period of 2010.

The following significant financing activities occurred during the six months ended June 30, 2011:

•

repaid $204.9 million of secured debt. The $204.9 million of secured debt includes $187.3 million of construction loans, repayment of $13.3 million in tax exempt bonds, repayment of $1.4 million of credit facilities and $2.9 million of mortgage payments;

•

received proceeds of $19.2 million from secured debt financings. The $19.2 million includes $15.3 million in variable rate mortgages and $3.9 million in fixed rate mortgages;

•

net repayments of $26.8 million were applied toward the Company’s $600 million revolving credit facility;

•

certain holders submitted their outstanding 4.00% Convertible Senior Notes due 2035 to the Company for redemption. As a result, we repurchased notes with a notional value of $10.8 million, representing approximately 6.44% of the $167.8 million in aggregate principal amount outstanding, and expensed $207,000 of unamortized financing costs during the three months ended March 31, 2011. On March 2, 2011 the Company called the remaining outstanding notes with a notional value of $156.9 million. The notes were redeemed on April 4, 2011 and unamortized financing costs of $3.0 million were written off;

•

issued $300 million in 4.25% Medium Term Notes due 2018;

•

in September 2009, the Company initiated an “At the Market” equity distribution program pursuant to which we may sell up to 15 million shares of common stock from time to time to or through sales agents, by means of ordinary brokers’ transactions on the New York Stock Exchange at prevailing market prices at the time of sale, or as otherwise agreed with the applicable agent. During the three months ended June 30, 2011, we settled on 351,855 shares of common stock sold during the three months ended March 31, 2011. During the six months ended June 30, 2011, we sold 4,395,601 shares of common stock through this program for aggregate gross proceeds of approximately $104.5 million at a weighted average price per share of $23.78. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $2.1 million, were approximately $102.4 million;

•

in March 2011, the Company entered into a new equity distribution agreement pursuant to which the Company may offer and sell up to 20 million shares of its common stock over time to or through its sales agents by means of ordinary brokers’ transactions on the New York Stock Exchange at prevailing market prices at the time of sale, or as otherwise agreed with the applicable agent. During the three and six months ended June 30, 2011, we sold 9,079,354 shares of common stock through this program for aggregate gross proceeds of approximately $227.5 million at a weighted average price per share of $25.06. Aggregate net proceeds from such sales, after deducting related expenses, including commissions paid to the sales agents of approximately $4.5 million, were approximately $223.0 million. An additional 277,600 shares were sold prior to, and settled subsequent to June 30, 2011.

Credit Facilities

As of June 30, 2011, we have secured credit facilities with Fannie Mae with an aggregate commitment of $1.4 billion with $1.2 billion outstanding. The Fannie Mae credit facilities are for an initial term of 10 years, bear interest at floating and fixed rates, and certain variable rate facilities can be extended for an additional five years at our option. We have $895.9 million of the funded balance fixed at a weighted average interest rate of 5.32% and the remaining balance on these facilities is currently at a weighted average variable rate of 1.61%.

We have a $600 million unsecured revolving credit facility that matures on July 26, 2012. Under certain circumstances, we may increase the $600 million credit facility to $750 million. Based on our current credit rating, the $600 million credit facility carries an interest rate equal to LIBOR plus 47.5 basis points. In addition, the unsecured credit facility contains a provision that allows us to bid up to 50% of the commitment and we can bid out the entire unsecured credit facility once per quarter so long as we maintain an investment grade rating. As of June 30, 2011, we had $5.0 million of borrowings outstanding under the credit facility leaving $595.0 million of unused capacity (excluding $1.7 million of letters of credit at June 30, 2011).

The Fannie Mae credit facilities and the bank revolving credit facility are subject to customary financial covenants and limitations.

Derivative Instruments

As part of UDR’s overall interest rate risk management strategy, we use derivatives as a means to fix the interest rates of variable rate debt obligations or to hedge anticipated financing transactions. UDR’s derivative transactions used for interest rate risk management include interest rate swaps with indexes that relate to the pricing of specific financial instruments of UDR. We believe that we have appropriately controlled our interest rate risk through the use of derivative instruments to minimize any unintended effect on consolidated earnings. Derivative contracts did not have a material impact on the results of operations during the three months ended June 30, 2011 (see Note 11, Derivatives and Hedging Activity in the Consolidated Financial Statements of UDR, Inc. included in this Report).

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 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, 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 and six months ended June 30, 2011 and 2010 (dollars in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

Net income/(loss) attributable to UDR, Inc.	$	14,651		$	(26,621	)	$	(13,224	)	$	(50,677	)

Distributions to preferred stockholders		(2,327	)		(2,372	)		(4,695	)		(4,751	)
Real estate depreciation and amortization, including discontinued operations		91,161			73,726			175,276			145,933
Non-controlling interest		258			(1,019	)		(523	)		(1,989	)
Real estate depreciation and amortization on unconsolidated joint ventures		2,844			1,151			5,692			2,160
Net gain on the sale of depreciable property in discontinued operations, excluding TRS		(43,767	)		(162	)		(43,808	)		(121	)
(Premium)/discount on preferred stock repurchases, net		(175	)		25			(175	)		25

Funds from operations (“FFO”) — basic	$	62,645		$	44,728		$	118,543		$	90,580


Distribution to preferred stockholders — Series E (Convertible)		931			931			1,862			1,862


Funds from operations — diluted	$	63,576		$	45,659		$	120,405		$	92,442


FFO per common share — basic	$	0.32		$	0.27		$	0.61		$	0.55

FFO per common share — diluted	$	0.31		$	0.27		$	0.61		$	0.55


Weighted average number of common shares and OP Units outstanding — basic		198,109			166,850			192,880			164,492
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted		203,188			172,109			197,913			169,485

In the computation of diluted FFO, OP Units, unvested restricted stock, stock options, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count.

RE³ is our subsidiary whose activities include development and land entitlement. RE³ tax benefits and gain on sales, net of taxes, is defined as net sales proceeds less a tax provision and the gross investment basis of the asset before accumulated depreciation. We consider FFO with RE³ tax benefits and gain on sales, net of taxes, to be a meaningful supplemental measure of performance because the short-term use of funds produce a profit that differs from the traditional long-term investment in real estate for REITs.

The following table is our reconciliation of FFO share information to weighted average common shares outstanding, basic and diluted, reflected on the Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (shares in thousands):


	Three Months Ended						Six Months Ended
	June 31,						June 31,
	2011			2010			2011			2010

Weighted average number of common shares and OP units outstanding basic		198,109			166,850			192,880			164,492
Weighted average number of OP units outstanding		(7,630	)		(5,964	)		(6,353	)		(5,970	)

Weighted average number of common shares outstanding - basic per the Consolidated Statements of Operations		190,479			160,886			186,527			158,522


Weighted average number of common shares, OP units, and common stock equivalents outstanding — diluted		203,188			172,109			197,913			169,485
Weighted average number of OP units outstanding		(7,630	)		(5,964	)		(6,353	)		(5,970	)
Weighted average incremental shares from assumed conversion of stock options		(1,327	)		(1,693	)		(1,295	)		(1,525	)
Weighted average incremental shares from unvested restricted stock		(716	)		(530	)		(702	)		(432	)
Weighted average number of Series E preferred shares outstanding		(3,036	)		(3,036	)		(3,036	)		(3,036	)


Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations		190,479			160,886			186,527			158,522

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):


	Six Months Ended June 30,
	2011			2010

Net cash provided by operating activities	$	115,075		$	101,779
Net cash used in investing activities		(266,060	)		(122,191	)
Net cash used provided by financing activities		163,133			22,501

Results of Operations

The following discussion includes the results of both continuing and discontinued operations for the periods presented.

Net Income/(Loss) Attributable to Common Stockholders

Net income attributable to common stockholders was $12.1 million ($0.06 per diluted share) for the three months ended June 30, 2011 as compared to net loss attributable to common stockholders of $29.0 million ($0.18 per diluted share) for the comparable period in the prior year. The increase in net income attributable to common stockholders for the three months ended June 30, 2011 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

•

an increase in our net operating income primarily due to community acquisitions; and

•

an increase in net gain on the sale of depreciable property primarily related to the disposition of seven communities in April 2011.

These were partially offset by:

•

an increase in depreciation expense primarily due to the Company’s acquisition of five operating communities in the second quarter of 2011 and five operating communities in the third quarter of 2010, and the completion of redevelopment and development communities during 2010.

Net loss attributable to common stockholders was $18.1 million ($0.10 per diluted share) for the six months ended June 30, 2011 as compared to net loss attributable to common stockholders of $55.4 million ($0.35 per diluted share) for the comparable period in the prior year. The decrease in net loss attributable to common stockholders for the six months ended June 30, 2011 resulted primarily from the same items discussed above.

Apartment Community Operations

Our net operating income is primarily generated from the operation of our apartment communities. The following table summarizes the operating performance of our total apartment portfolio which includes discontinued operations and excludes commercial operating income and expense for each of the periods presented (dollars in thousands):


	Three Months Ended June 30,									Six Months Ended June 30,
	2011			2010			% Change			2011			2010			% Change

Property rental income	$	174,756		$	152,340			14.7	%	$	342,637		$	302,285			13.3	%
Property operating expense (a)		(58,088	)		(53,367	)		8.8	%		(116,692	)		(106,074	)		10.0	%

Property net operating income (“NOI”)	$	116,668		$	98,973			17.9	%	$	225,945		$	196,211			15.2	%


(a)		Excludes depreciation, amortization, and property management expenses.

The following table is our reconciliation of property NOI to net loss attributable to UDR as reflected, for both continuing and discontinued operations, for the periods presented (dollars in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Property net operating income	$	116,668		$	98,973		$	225,945		$	196,211
Other income		1,402			1,281			2,922			2,066
Non-property income		2,855			2,056			7,391			5,376
Real estate depreciation and amortization		(91,161	)		(73,726	)		(175,276	)		(145,933	)
Interest expense		(37,844	)		(37,945	)		(78,563	)		(74,811	)
General and administrative and property management		(17,791	)		(14,526	)		(33,155	)		(28,336	)
Other depreciation and amortization		(986	)		(1,308	)		(2,029	)		(2,531	)
Other operating expenses		(1,544	)		(1,457	)		(3,001	)		(2,942	)
Loss from unconsolidated entities		(1,348	)		(1,185	)		(2,680	)		(1,922	)
Redeemable non-controlling interests in OP		(221	)		1,064			611			2,069
Non-controlling interests		(37	)		(45	)		(88	)		(80	)
Net gain on sale of properties		44,658			197			44,699			156

Net income/(loss) attributable to UDR, Inc.	$	14,651		$	(26,621	)	$	(13,224	)	$	(50,677	)

Same Communities

Our same community properties (those acquired, developed, and stabilized prior to April 1, 2010 and held on June 30, 2011) consisted of 41,625 apartment homes and provided 81% of our total property NOI for the three months ended June 30, 2011.

NOI for our same community properties increased 5.1% or $4.6 million for the three months ended June 30, 2011 compared to the same period in 2010. The increase in property NOI was attributable to a 3.6% or $4.9 million increase in property rental income, which was partially offset by a 0.7% or $308,000 increase in operating expenses. The increase in revenues was primarily driven by a 3.9% or $5.1 million increase in rental rates and a 4.2% or $472,000 increase in reimbursement and fee income, partially offset by an 11.0% or $537,000 increase in vacancy loss. Physical occupancy decreased 0.1% to 95.7% and total monthly income per occupied home increased 1.5% to $1,181.

The increase in property operating expenses was primarily driven by a 6.6% or $453,000 increase in utilities, a 6.0% or $146,000 increase in insurance expense and a 4.6% and $133,000 increase in administrative and marketing expense. These increases were partially offset by a decrease of 3.9% or $563,000 in real estate taxes.

As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property net operating income divided by property rental income) increased to 67.0% for the three months ended June 30, 2011 as compared to 66.0% for the comparable period in 2010.

Our same community properties (those acquired, developed, and stabilized prior to January 1, 2010 and held on June 30, 2011) consisted of 41,088 apartment homes and provided 81% of our total property NOI for the six months ended June 30, 2011.

NOI for our same community properties increased 3.9% or $6.8 million for the six months ended June 30, 2011 compared to the same period in 2010. The increase in property NOI was attributable to a 3.0% or $8.2 million increase in property rental income, which was partially offset by a 1.5% or $1.3 million increase in operating expenses. The increase in revenues was primarily driven by a 2.9% or $7.6 million increase in rental rates and a 5.3% or $1.1 million increase in reimbursement and fee income. This increase was partially offset by a 10.4% or $1.0 million increase in vacancy loss. Physical occupancy decreased 0.1% to 95.6% and total monthly income per occupied home increased 3.1% to $1,172.

The increase in property operating expenses was primarily driven by a 4.2% or $600,000 increase in utilities expense, a 3.5% or $495,000 increase in repair and maintenance, and a 1.9% or $438,000 in personnel costs. These increases were partially offset by a 2.6% or $735,000 decrease in real estate tax expense.

As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property net operating income divided by property rental income) increased to 66.5% for the six months ended June 30, 2011 as compared to 66.0% for the comparable period in 2010.

Non-Mature/Other Communities

The remaining $22.1 million or 19% and $42.2 million and 19% of our total NOI during the three and six months ended June 30, 2011 was generated from our “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, non-apartment components of mixed use properties, properties classified as real estate held for disposition and condominium properties. For the three and six months ended June 30, 2011, we recognized NOI from our developments of $4.4 million and $8.3 million, NOI from our sold communities of $290,000 and $4.9 million, NOI from acquired communities of $13.0 million and $20.4 million, and NOI from redeveloped properties of $3.2 million and $6.0 million.

Other Income

During the six months ended June 30, 2011, the Company sold marketable securities for $3.5 million, resulting in a gain of $3.1 million, which is included in other income. For the three months and six months ended June 30, 2011 and 2010, other income on continuing operations includes fees earned from the Company’s joint ventures of $2.7 million and $3.9 million and $689,000 and $1.1 million, respectively. Other income on continuing operations for the three and six months ended June 30, 2010 also includes interest income and discount amortization from an interest in a convertible debt security of $957,000 and $1.9 million. The six months ended June 30, 2010 also includes $1.8 million for a recovery from real estate tax accruals, which is included in discontinued operations.

Real Estate Depreciation and Amortization

For the three and six months ended June 30, 2011, real estate depreciation and amortization on both continuing and discontinued operations increased 23.6% or $17.4 million and 20.1% and $29.3 million, respectively, as compared to the comparable periods in 2010. The increase in depreciation and amortization for the three and six months ended June 30, 2011 is primarily the result of acquisitions of five apartment communities during the second quarter of 2011, acquisitions of five apartment communities during the third quarter of 2010, development and redevelopment activity during 2011 and 2010, and additional capital expenditures. As part of the Company’s acquisition activity a portion of the purchase price is attributable to the fair value of intangible assets which are typically amortized over a period of less than one year.

Interest Expense

For the three months ended June 30, 2011, interest expense on both continuing and discontinued operations did not significantly change as compared to the comparable period in 2010. For the six months ended June 30, 2011, interest expense on both continuing and discontinued operations increased 5.0% or $3.8 million. This increase in interest expense was primarily due to the write off of $4.0 million of deferred financing costs related to the prepayment of debt.

General and Administrative

For the three and six months ended June 30, 2011, general and administrative expenses increased 25.5% or $2.6 million and 18.4% or $3.7 million as compared to the same period in 2010. The increase was primarily due to an increase in acquisition costs related to the Company’s acquisitions of five operating communities that closed during the second quarter of 2011.

Inflation

We believe that the direct effects of inflation on our operations have been immaterial. While the impact of inflation primarily impacts our results through wage pressures, utilities and material costs, the majority of our leases are for a term of fourteen months or less, which generally enables us to compensate for any inflationary effects by increasing rents on our apartment homes. Although an extreme escalation in energy and food costs could have a negative impact on our residents and their ability to absorb rent increases, we do not believe this has had a material impact on our results for the three months and six ended June 30, 2011.

Off-Balance Sheet Arrangements

In November 2010, the Company acquired The Hanover Company’s (“Hanover”) partnership interests in the Hanover/MetLife Master Limited Partnership (the“UDR/MetLife Partnership”). The UDR/MetLife Partnership owns a portfolio of 26 operating communities containing 5,748 apartment homes and 10 land parcels with the potential to develop approximately 2,000 additional apartment homes. Under the terms of the UDR/MetLife Partnership, UDR acts as the general partner and earn fees for property and asset management and financing transactions.

In connection with the purchase of Hanover’s interests in the UDR/MetLife Partnership, UDR agreed to indemnify Hanover from liabilities from Hanover’s guaranty of $209 million in loans which are secured by a security interest in the operating communities subject to the loan. The loans are to the sub-tier partnerships which own the 26 operating communities. The Company anticipates that the balance of these loans will be refinanced by the UDR/MetLife Partnership over the next twelve months.

We do not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

UNITED DOMINION REALTY, L.P.:

Business Overview

United Dominion Realty, L.P. (the “Operating Partnership” or “UDR, L.P.”), is a Delaware limited partnership formed in February 2004 and organized pursuant to the provisions of the Delaware Revised Uniform Limited Partnership Act (as amended from time to time, or any successor to such statute, the “Act”). The Operating Partnership is the successor-in-interest to United Dominion Realty, L.P., a limited partnership formed under the laws of Virginia, which commenced operations on November 4, 1995. Our sole general partner is UDR, Inc., a Maryland corporation (“UDR” or the “General Partner”), which conducts a substantial amount of its business and holds a substantial amount of its assets through the Operating Partnership. At June 30, 2011, the Operating Partnership’s real estate portfolio included 80 communities located in 9 states plus the District of Columbia, with a total of 23,693 apartment homes.

As of June 30, 2011, UDR owned 110,883 units of our general limited partnership interests and 174,738,456 units of our limited partnership interests (the “OP Units”), or approximately 95.8% of our outstanding OP Units. By virtue of its ownership of our OP Units and being our sole general partner, UDR has the ability to control all of the day-to-day operations of the Operating Partnership. Unless otherwise indicated or unless the context requires otherwise, all references in this Report to the Operating Partnership or “we,” “us” or “our” refer to UDR, L.P. together with its consolidated subsidiaries. We refer to our General Partner together with its consolidated subsidiaries (including us) and the General Partner’s consolidated joint ventures as “UDR” or the “General Partner.”

UDR operates as a self-administered real estate investment trust, or REIT. UDR focuses on owning, acquiring, renovating, developing, and managing apartment communities nationwide. The General Partner was formed in 1972 as a Virginia corporation and changed its state of incorporation from Virginia to Maryland in September 2003. At June 30, 2011, the General Partner’s consolidated real estate portfolio included 170 communities located in 11 states and the District of Columbia with a total of 48,556 apartment homes. In addition, the General Partner has an ownership interest in 37 communities with 9,891 completed apartment homes through unconsolidated joint ventures.

The following table summarizes our market information by major geographic markets as of June 30, 2011.


											Three Months Ended					Six Months Ended
	As of June 30, 2011										June 30, 2011					June 30, 2011 (a)
					Percentage			Total
	Number of		Number of		of Total			Carrying			Average			Total Income		Average			Total Income
	Apartment		Apartment		Carrying			Value			Physical			per Occupied		Physical			per Occupied
Same Communities	Communities		Homes		Value			(in thousands)			Occupancy			Home		Occupancy			Home (b)

Western Region
Orange Co, CA		11		3,899		18.1	%	$	721,083			95.6	%	$	1,508		95.2	%	$	1,502
San Francisco, CA		7		1,583		9.3	%		368,954			97.1	%		2,032		96.9	%		2,001
Monterey Peninsula, CA		7		1,565		3.9	%		153,260			94.5	%		1,109		93.2	%		1,086
Los Angeles, CA		3		463		3.1	%		124,751			95.8	%		1,752		95.8	%		1,753
San Diego, CA		3		689		2.5	%		99,930			94.9	%		1,291		95.5	%		1,284
Seattle, WA		5		932		5.2	%		207,292			97.0	%		1,258		96.8	%		1,240
Inland Empire, CA		2		834		3.0	%		119,541			94.7	%		1,279		94.6	%		1,273
Sacramento, CA		2		914		1.7	%		68,484			92.3	%		884		93.1	%		881
Portland, OR		3		716		1.8	%		69,936			95.8	%		989		96.1	%		979

Mid-Atlantic Region
Metropolitan DC		7		2,378		13.8	%		548,605			96.6	%		1,755		96.6	%		1,739
Baltimore, MD		5		994		3.7	%		146,511			96.3	%		1,341		95.9	%		1,337

Southeastern Region
Tampa, FL		3		1,154		2.8	%		109,713			95.9	%		1,036		96.5	%		1,027
Nashville, TN		6		1,612		3.2	%		127,750			96.6	%		857		96.5	%		850
Jacksonville, FL		1		400		1.1	%		42,460			94.0	%		879		93.7	%		874
Other Florida		1		636		1.9	%		76,667			92.5	%		1,207		93.3	%		1,203

Southwestern Region
Dallas, TX		2		1,348		4.6	%		183,429			96.1	%		1,160		96.1	%		1,153
Phoenix, AZ		3		914		1.8	%		72,178			95.3	%		880		95.4	%		877


Total/Average Same Communities		71		21,031		81.5	%		3,240,544			95.6	%	$	1,327		95.5	%	$	1,316


Non Matures, Commercial Properties & Other		9		2,662		18.5	%		738,335


Total Real Estate Held for Investment		80		23,693		100.0	%		3,978,879


Total Accumulated Depreciation									(919,971	)


Total Real Estate Owned, Net of Accumulated Depreciation								$	3,058,908


(a)		The same community population for the six months ended June 30, 2011 includes 21,031 homes.

(b)		Total Income per Occupied Home represents total monthly revenues divided by the product of occupancy and the number of mature apartment homes.

We report in two segments: Same Communities and Non-Mature/Other Communities. Our Same Communities segment includes those communities acquired, developed, and stabilized prior to April 1, 2010, and held as of June 30, 2011. These communities were owned and had stabilized occupancy and operating expenses as of the beginning of the prior year, there is no plan to conduct substantial redevelopment activities, and the community is not held for disposition within the current year. A community is considered to have stabilized occupancy once it achieves 90% occupancy for at least three consecutive months. Our Non-Mature/Other Communities segment includes those communities that were acquired or developed in 2010 or 2011, sold properties, redevelopment properties, properties classified as real estate held for sale, condominium conversion properties, joint venture properties, properties managed by third parties, and the non-apartment components of mixed use properties.

Liquidity and Capital Resources

Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale of properties, and the issuance of debt. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. The Operating Partnership’s primary source of liquidity is cash flow from operations as determined by rental rates, occupancy levels, and operating expenses related to our portfolio of apartment homes and borrowings allocated to us under the General Partner’s credit agreements. The General Partner will routinely use its unsecured credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing or the issuance of equity or debt securities. Historically, proceeds from the sale of real estate have been used for both investing and financing activities as we repositioned our portfolio.

We expect to meet our short-term liquidity requirements generally through net cash provided by operations and borrowings allocated to us under the General Partner’s credit agreements. We expect to meet certain long-term liquidity requirements such as scheduled debt maturities and potential property acquisitions through borrowings and the disposition of properties. We believe that our net cash provided by operations and borrowings will continue to be adequate to meet both operating requirements and the payment of distributions. Likewise, the budgeted expenditures for improvements and renovations of certain properties are expected to be funded from property operations, borrowings allocated to us under the General Partner’s credit agreements the Operating Partnership is a party to, loans from the General Partner, and proceeds from sales of properties.

Future Capital Needs

Future capital expenditures are expected to be funded with proceeds from the issuance of secured debt, the sale of properties, the borrowings allocated to us under our General Partner’s credit agreements, and to a lesser extent, with cash flows provided by operating activities, loans from the General Partner and proceeds from sales of properties. Acquisition activity in strategic markets is expected to be largely financed by the reinvestment of proceeds from the sale of properties, the issuance of OP units and the assumption or placement of secured debt.

During the remainder of 2011, the Operating Partnership has approximately $34.6 million of secured debt maturing, inclusive of principal amortization and net extension rights of $8.3 million. We anticipate that we will repay that debt with operating cash flows, proceeds from borrowings allocated to us under our General Partner’s credit agreements, borrowings from the General Partner, proceeds from sales of properties, or by exercising extension rights on such secured debt, as applicable. The repayment of debt will be recorded as an offset to the “Receivable due from General Partner”.

Critical Accounting Policies and Estimates

Statements of Cash Flows for the Six Months Ended June 30, 2011

The following discussion explains the changes in net cash provided by operating activities, and net cash used in investing activities and financing activities that ar