UDR (UDR)

UDR is an apartment real estate investment trust (REIT) that owns, operates, acquires, develops, and renovates middle-market apartment communities. Although it has assets across the country,UDR's exposure is mostly in the Western and Mid-Atlantic US. As of June 30, 2008 the company had ownership interests in 43,045 apartment units, including 4,991 units under development and 1,133 units under contract for development. UDR is included in the S&P Mid-Cap 400 Index. The company's six largest markets are Orange County (17.3% of portfolio NOI YTD), San Francisco (8.9%), Tampa (7.0%), Metropolitan DC (6.4%), Orlando (5.7%) and Richmond (5.4%).

UDR is still among the best-positioned apartment REITs, as most of its portfolio, post sale, are now in California, Florida and on the Atlantic Coast. These are areas where housing costs have soared in the past few years, and despite the drop in home values, the rent vs. own spread still remains high. In the 2nd quarter, 19 of UDR's 22 markets reported positive y/y revenue growth. The housing meltdown will continue to help apartment REITs and we expect this sector to remain relatively stable in the upcoming quarters. More and more people are putting off home purchases in part do difficulty obtaining financing. The company continues to push rental rates while maintaining high overall occupancy, a by-product of a deteriorating national housing market. We do think that the company's ability to increase rental rates and hold occupancy will subside in the coming quarters due to national job growth trends which have been negative all year. While operations among all REITs will be negatively affected by the economy and rapid slowdown in consumer spending, multi family is one of the safest sectors to be in at the moment. YTD, multi family has outperformed office, retail, industrial, and lodging. Despite the expected slowdown, the company expects to grow SS revenue for 4-4.5% for the full year, in line with peer group averages.

2Q08 FFO was $0.36 per share compared to $0.45 per share in 2Q07. YTD, FFO was $0.75 per share, down from $0.84 per share in the same period last year. The decrease was mostly due to dilution from the large asset sale earlier in the year. Operationally, the company had a good 2nd quarter and outperformed most peers. 2Q SS NOI increased 7.1% compared to the year-earlier quarter, driven by same-store revenue growth of 4.4% and a decline in expenses of 1.2%. Effective rents in 2Q08 increased 3.4% and average occupancy was 94.9% - up 20 basis points from 2Q07. Revenue per occupied home increased to approximately $1,200. We have lowered our full year estimates to $1.53 per share due to dilution the company has been sitting on more cash and buying lower yielding assets in better long term markets. UDR reiterated its earlier 2008 FFO guidance of $1.50 to $1.55 per share.

All major regions reported same-store revenue increases compared to the year-earlier period. The top growth markets were Dallas (up 14.4% versus 2Q07), Monterey Peninsula (12.1%), San Francisco (9.9%), Inland Empire (7.4%), Austin (6.8%), Seattle (6.7%), Los Angeles (6.4%), and San Diego (6.3%). Same-store NOI was also positive in all the markets, except Tampa. UDR's top performing same-store NOI markets were Dallas (up 26.9% versus 2Q07), Austin (20.7%), Monterey Peninsula (18.4%), Portland (15.0%), Seattle (13.1%), San Francisco (12.5%), Richmond (11.7%), San Diego (10.8%), Los Angeles (9.6%), Inland Empire (9.2%), and Nashville (8.7%). By region, same-store revenue and NOI was up (2Q08 vs. 2Q07) in the Western US (6.8%, 9.5%), Mid-Atlantic (3.5%, 5.2%), Southeastern (0.0%, 2.8%), and the Southwestern (7.4%, 13.6%). The company's Florida markets continue to struggle as the housing market has put more competition into the rental pool. Owners who can't sell are now renting. Tampa, Orlando and the company's smaller Florida markets reported same-store revenue declines in 2Q08 compared to the year-earlier quarter.

In March of this year, UDR closed on the sale of 86 communities (25,684 units) for $1.7 billion. The company has been using the proceeds to pay down debt, buy back shares and buy apartments in higher growth markets. Since the end of the 1st quarter, UDR has acquired $280 million of assets on the West Coast in Seattle, San Jose, and Orange County, CA. Average cap rates on the new acquisitions are in the 5% range, which will be dilutive in the near term although it upgrades the overall composition of the company's portfolio. The portfolio sale left the company heavily positioned on the West Coast, Washington D.C., and Florida historically, three of the highest growth areas of the country.

UDR also has as an active development and redevelopment pipeline. Currently, the company has $34.9 million under redevelopment (756 units) and $751 million (5,057 units) of wholly owned properties under development. In addition, the company is developing $395 million (1,304 units) in joint ventures and has over $1 billion of future potential development in planning. Redevelopment is a good use of capital in a still-tough acquisition environment, and with projected yields on invested capital approaching 9%, the company's redevelopment initiatives should materially add to NOI in 2008.

UDR has a healthy balance sheet with adequate coverage ratios and low overall debt. Debt to market cap is in line with sector averages at quarter end debt to market cap was approximately 49%, although this has increased to 56% due to recent share price declines. Fixed charge and interest coverage at quarter end was 2.15x and 2.43x. About 90.5% of the company's debt is fixed, with an average interest rate of 5.25%. UDR has manageable maturities through 2009 with only 15% of total debt maturing. About 65% of the company's assets are unencumbered, which gives the company plenty of capacity to raise capital if needed. YTD, UDR has repurchased 963,000 shares along with a $35 million of debt. In October, UDR priced a 5.7 million share offering at $24.25 per share which is expected to raise over $180 million which will be used to pay down debt.

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