A confusion in an ARM assembly instruction
Your wording is weird, so I can't decide whether you have the correct interpretation or a wrong one.

Physically, all ARM registers are in the CPU. They hold (32 bit) values. In the instruction you ask about the value in R1 is used as a memory address. The value at that address in memory (and the next 3 addresses, because the memory is byte-addressed and the LDR loads 32 bits) is loaded into register R2.

This is the sheet from my ARM assembler course that illustrates this instruction. It is partly in Dutch, and covers the more general case where an offset is applied to the R1 value.

The green block at the left is the CPU with its registers, the enclosing yellowish block is the microcontroller, which contains both the CPU and the (RAM) memory.