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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

         
    FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
 
    For the fiscal year ended December 31, 2003    
 
    or    
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
 
    For the transition period from           to    

Commission file number 1-10524

United Dominion Realty Trust, Inc.

(Exact name of registrant as specified in its charter)
     
Maryland
  54-0857512
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices, including zip code)

(720) 283-6120

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

         
Title Of Each Class Name of Exchange on Which Registered


Common Stock, $1 par value
    New York Stock Exchange  
Preferred Stock Purchase Rights
    New York Stock Exchange  
8.60% Series B Cumulative Redeemable Preferred Stock
    New York Stock Exchange  
8.50% Monthly Income Notes Due 2008
    New York Stock Exchange  

Securities registered pursuant to Section 12(g) of the Act: None

     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 and (2) has been subject to filing requirements for at least the past 90 days.     Yes þ          No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or other information statements incorporated by reference into Part III of this Form 10-K.     o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

     The aggregate market value of the shares of common stock held by non-affiliates on June 30, 2003 was approximately $1.8 billion. This calculation excludes shares of common stock held by the registrant’s officers and directors and each person known by the registrant to beneficially own more than 5% of the Registrant’s outstanding shares, as such persons may be deemed to be affiliates. This determination of affiliate status should not be deemed conclusive for any other purpose. As of February 18, 2004 there were 127,422,160 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 4, 2004.




TABLE OF CONTENTS

                 
Page

  PART I.              
 Item 1.    Business     2  
 Item 2.    Properties     16  
 Item 3.    Legal Proceedings     18  
 Item 4.    Submission of Matters to a Vote of Security Holders     18  
  PART II.              
 Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     18  
 Item 6.    Selected Financial Data     21  
 Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations     24  
 Item 7A.    Quantitative and Qualitative Disclosures about Market Risk     40  
 Item 8.    Financial Statements and Supplementary Data     40  
 Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     40  
 Item 9A.    Controls and Procedures     40  
  PART III.              
 Item 10.    Directors and Executive Officers of the Registrant     41  
 Item 11.    Executive Compensation     41  
 Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     41  
 Item 13.    Certain Relationships and Related Transactions     41  
 Item 14.    Principal Accountant Fees and Services     41  
  PART IV.              
 Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K     42  
 Amended and Restated Bylaws
 4.25% Medium-Term Note due January 2009
 Description of Series B Out-Performance Program
 Amended/Restated Agreement of Limited Partnership
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries
 Consent of Independent Auditors
 Rule 13a-14(a) Certification of CEO
 Rule 13a-14(a) Certification of CFO
 Section 1350 Certification of CEO
 Section 1350 Certification of CFO

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PART I

 
Item 1. BUSINESS

General

      United Dominion Realty Trust, Inc. is a self-administered equity real estate investment trust, or REIT, that owns, acquires, renovates, develops and manages middle-market apartment communities nationwide. At December 31, 2003, our apartment portfolio included 264 communities located in 55 markets, with a total of 76,244 completed apartment homes. In addition, we had three apartment communities under development.

      We have elected to be taxed as a REIT under the Internal Revenue Code of 1986. To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate, our income be derived primarily from real estate, and that we distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. As a qualified REIT, we generally will not be subject to federal income taxes on our REIT taxable income to the extent we distribute such income to our stockholders. In 2003, we declared total distributions of $1.14 per share to our stockholders, which represents our 27th year of consecutive dividend increases to our stockholders.

      We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our corporate headquarters is located at 400 East Cary Street, Richmond, Virginia. Our principal executive offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado. As of February 18, 2004, we had 1,832 full-time employees and 180 part-time employees.

      Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty L.P., a limited partnership that changed its state of organization from Virginia to Delaware in February 2004. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.

2003 Accomplishments

  •  We provided a total stockholder return of 25%.
 
  •  We increased our dividend for the 27th consecutive year.
 
  •  We lowered the weighted average interest rate on our debt from 5.9% at December 31, 2002 to 5.2% at December 31, 2003.
 
  •  We increased the size of our unencumbered pool of assets to $2.8 billion, valued on a historical cost basis.
 
  •  We completed over $1 billion of capital transactions in 2003, all of which improved our balance sheet strength and flexibility.
 
  •  We were upgraded by Standard & Poor’s Rating Services to a BBB rating with a Stable outlook, and by Moody’s Investors Service to a Positive outlook on an existing Baa3 rating.
 
  •  We acquired 5,220 apartment homes in 21 communities for approximately $423.7 million.
 
  •  We completed the disposition of seven apartment communities with 1,927 apartment homes for an aggregate sales price of approximately $88.9 million, exiting markets that no longer met our investment criteria. In addition, we sold two commercial properties for an aggregate consideration of $7.3 million.

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Business Objectives and Operating Strategies

      Our principal business objective is to maximize the economic returns of our apartment communities to provide our stockholders with the greatest possible total return and value. To achieve this objective, we intend to continue to pursue the following goals and strategies:

  •  own and operate middle-market apartments across a national platform, thus enhancing stability and predictability of returns to our stockholders,
 
  •  manage real estate cycles by taking an opportunistic approach to buying, selling and building apartment communities,
 
  •  empower site associates to manage our communities efficiently and effectively,
 
  •  measure and reward associates based on specific performance targets, and
 
  •  manage our capital structure to ensure predictability of earnings and dividends.

Acquisitions

      During 2003, using the proceeds from our disposition program and our equity offerings, we acquired 21 communities with 5,220 apartment homes at a total cost of approximately $423.7 million, including the assumption of debt and the use of tax-free exchange funds. In addition, we purchased one parcel of land for $3.1 million.

      When evaluating potential acquisitions, we consider:

  •  population growth, cost of alternative housing, overall potential for economic growth and the tax and regulatory environment of the community in which the property is located,
 
  •  geographic location and type of community, including proximity to our existing communities which can deliver significant economies of scale,
 
  •  construction quality, condition and design of the community,
 
  •  current and projected cash flow of the property and the ability to increase cash flow,
 
  •  potential for capital appreciation of the property,
 
  •  ability to increase the value and profitability of the property through upgrades and repositioning,
 
  •  terms of resident leases, including the potential for rent increases,
 
  •  occupancy and demand by residents for properties of a similar type in the vicinity,
 
  •  prospects for liquidity through sale, financing, or refinancing of the property, and
 
  •  competition from existing multifamily communities and the potential for the construction of new multifamily properties in the area.

      The following table summarizes our apartment acquisitions and year-end ownership position for the past five years (dollars in thousands):

                                         
2003 2002 2001 2000 1999





Homes acquired
    5,220       4,611       1,304       267       1,230  
Homes owned at December 31
    76,244       74,480       77,567       77,219       82,154  
Total real estate owned, at carrying value
  $ 4,351,551     $ 3,967,483     $ 3,907,667     $ 3,836,320     $ 3,953,045  
Total rental income
  $ 614,297     $ 628,869     $ 619,745     $ 625,717     $ 625,105  

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Dispositions

      We regularly monitor and adjust our assets to increase portfolio profitability. During 2003, we sold over 1,900 of our slower growing, non-core apartment homes while exiting some markets in an effort to increase the quality and performance of our portfolio. Proceeds from the disposition program were used primarily to reduce debt and fund acquisitions.

      Factors we consider in deciding whether to dispose of a property include:

  •  current market price for an asset compared to projected economics for that asset,
 
  •  potential increases in new construction in the market area,
 
  •  areas where the economy is not expected to grow substantially, and
 
  •  markets where we do not intend to establish long-term concentration.

      At December 31, 2003, there was one apartment community and one parcel of land classified as real estate held for disposition. We are in the market for replacement properties that will correspond with our expected sales activity to prevent dilution to earnings.

Upgrading and Development Activities

      During 2003, we continued to reposition properties in targeted markets where there was an opportunity to add value and achieve greater than inflationary increases in rents over the long term. In 2003, we spent $12.2 million to develop 178 apartment homes as an additional phase to an existing community. In addition, revenue enhancing capital expenditures, including water sub-metering, the initial installation of microwaves or washer-dryers and extensive interior upgrades totaled $15.4 million or $207 per home for the year ended December 31, 2003.

      The following wholly-owned projects were under development as of December 31, 2003:

                                                           
Number of Completed Estimated Expected Expected
Apartment Apartment Budgeted Cost Completion Stabilized
Homes Homes Cost to Date Cost Per Home Date Return







2000 Post Phase III
                                                       
 
San Francisco, CA
    24           $ 2,500     $ 7,000     $ 291,700       3Q04       6.5% – 7.0%  
Rancho Cucamonga
                                                       
 
Los Angeles, CA
    414           $ 16,200     $ 63,500     $ 153,400       4Q05       7.5% – 8.5%  
Mandalay on the Lake
                                                       
 
Irving, TX
    369           $ 3,900     $ 28,200     $ 76,400       1Q06       7.5% – 8.3%  

      In addition, we owned six parcels of land held for future development aggregating $7.8 million at December 31, 2003. Five of the six parcels represent additional phases to existing properties.

      In September 2002, we entered into a development joint venture with AEGON USA Realty Advisors, Inc. in which we are serving as the managing member. The joint venture is expected to develop approximately eight to ten garden-style apartment communities over the next three years, with a total development cost of up to $210 million. The joint venture will obtain bank construction financing for 65% to 80% of total costs and will provide equity contributions for the balance of the costs with AEGON providing 80% and us providing 20%. We are serving as the developer, general contractor and property manager for the joint venture and have guaranteed those project development costs, excluding financing costs (including fees and interest), which exceed the defined project cost budgeted amounts for each respective project, as they come to fruition. We believe that the likelihood of funding guarantor obligations is remote and that the impact to us would be immaterial. In June 2003, we contributed land with a carrying value of $3.8 million to the joint venture.

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      The following joint venture project was under development as of December 31, 2003:

                                                           
Number of Completed Estimated Expected Expected
Apartment Apartment Budgeted Cost Completion Stabilized
Homes Homes Cost to Date Cost Per Home Date Return







Villa Toscana
                                                       
 
Houston
    504           $ 10,800     $ 28,400     $ 56,300       4Q05       8.0% - 9.0%  

      We will continue to seek out development and redevelopment opportunities in our core markets and may seek to raise equity with other potential joint venture partners to start new development programs over the next five years.

Financing Activities

      As part of our plan to strengthen our capital structure, we utilized proceeds from dispositions, equity offerings and refinancings to extend maturities, pay down existing debt, and acquire apartment communities. The following is a list of our major financing activities in 2003:

  •  Repaid $40.0 million of secured debt and $214.6 million of unsecured debt.
 
  •  Sold 2.0 million shares of common stock at a public offering price of $15.71 per share under our $1 billion shelf registration statement in January 2003. The net proceeds of $31.2 million were used to repay debt and for general corporate purposes.
 
  •  Sold $150 million aggregate principal amount of 4.50% medium-term notes due March 2008 in February 2003 under our medium-term note program. The net proceeds of $149.3 million were used to repay debt.
 
  •  Negotiated a new $500 million unsecured revolving credit facility to replace our $375 million unsecured revolver and $100 million unsecured term loan in March 2003. The credit facility’s interest rate is 25 and 30 basis points lower than the previous unsecured revolver and term loan, respectively.
 
  •  Sold 3.0 million shares of common stock at a public offering price of $16.97 per share under our $1 billion shelf registration statement in April 2003. The net proceeds of $49.2 million were ultimately used to acquire additional apartment communities. We sold an additional 100,000 shares of common stock at a public offering price of $16.97 per share in connection with the exercise of the underwriter’s over-allotment option in May 2003. The net proceeds of $1.6 million were used for general corporate purposes.
 
  •  Exercised our right to redeem 2.0 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock in May 2003. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,923 shares of common stock at a price of $16.25 per share.
 
  •  Issued $56.9 million of our Series E Cumulative Convertible Preferred Stock (“Series E”) and 1,617,815 Preferred OP Units totaling $26.9 million in June 2003 as partial consideration for the purchase of four apartment communities in Southern California. Each share of Series E and each OP Unit was priced at $16.61 per share and dividends on the Series E and OP Units carry a fixed coupon of 8.0% until such time as the common share dividend is equal to or exceeds this amount for four consecutive quarters, at which time the Series E and OP Units will be entitled to receive dividends equivalent to the dividends paid to holders of our common stock.
 
  •  Sold $50 million aggregate principal amount of 4.50% medium-term notes due March 2008 in August 2003 under our medium-term note program. The net proceeds of approximately $49.9 million were used to repay amounts outstanding on our $500 million unsecured revolving credit facility.

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  •  Sold 4.0 million shares of common stock at a public offering price of $18.40 per share under our $1 billion shelf registration statement in September 2003. The net proceeds of approximately $72.3 million were used for general corporate purposes, including funding acquisitions and development, with the balance used to reduce outstanding variable rate debt under our unsecured credit facilities. We sold an additional 600,000 shares of common stock at a public offering price of $18.40 per share in connection with the exercise of the underwriter’s over-allotment option in October 2003. The net proceeds of $10.8 million were used for general corporate purposes, including funding acquisitions and development, with the remaining balance used to reduce outstanding variable rate debt under our unsecured credit facilities.
 
  •  Sold $75 million aggregate principal amount of 5.13% senior unsecured notes due January 2014 in October 2003 under our medium-term note program. The net proceeds of $74.5 million were used to repay amounts outstanding on our $500 million unsecured revolving credit facility.
 
  •  Sold $50 million aggregate principal amount of 4.25% senior unsecured notes due January 2009 in November 2003 under our medium-term note program. The net proceeds of $49.8 million were used to fund acquisitions of apartment communities.
 
  •  Exercised our right to redeem 4.0 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock in December 2003. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 6,154,000 shares of common stock at a price of $16.25 per share.

Markets and Competitive Conditions

      At December 31, 2003, we owned 264 apartment communities in 55 markets in 19 states. Of those markets, 22 markets, or 40%, generated positive same community net operating income growth. We have a geographically diverse portfolio and we believe that this diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of our earnings.

      We believe changing demographics will have a significant impact on the apartment industry over the next two decades. In particular, we believe the annual number of young people entering the workforce and creating households will be significantly higher over the next 10 to 15 years as compared to the number who entered the workforce over the past 10 years. The number of single people and single parent households continues to grow significantly. The immigrant population is also expected to grow at an accelerated pace. Each of these population segments has a high propensity to rent.

      Despite a strengthening United States economy, significant productivity growth has adversely affected employment growth, which is the primary driver of demand in our business. In addition, a sustained low mortgage interest rate environment, combined with government and builder incentives to first time home buyers, has further siphoned off what would traditionally be demand for apartment homes. To maintain occupancy levels during these economic conditions, we have increased our marketing expenses and provided certain concessions to our residents.

      In most of our markets, competition for new residents is intense. Some competing communities offer features that our communities do not have. Competing communities frequently use concessions or lower rents to obtain temporary competitive advantages. Also, some competing communities are larger or newer than our communities. The competitive position of each community is different depending upon many factors including sub-market supply and demand. In addition, other real estate investors compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources, or lower capital costs, than we do.

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      We believe that, in general, we are well-positioned to compete effectively for residents and investments. We believe our competitive advantages include:

  •  a fully integrated organization with property management, development, acquisition, marketing and financing expertise,
 
  •  scalable operating and support systems,
 
  •  purchasing power,
 
  •  geographic diversification with a presence in 55 markets across the country, and
 
  •  significant presence in many of our major markets that allows us to be a local operating expert.

      Moving forward, we will continue to emphasize aggressive lease management, expense control, increased resident retention efforts and the realignment of employee incentive plans tied to our bottom line performance. We believe this plan of operations, coupled with the portfolio’s strengths in targeting the middle-market of renters across a geographically diverse platform, should position us for continued operational improvement.

Communities

      At December 31, 2003, our apartment portfolio included 264 communities having a total of 76,244 completed apartment homes. In addition, we had three apartment communities under development. The overall quality of our portfolio has significantly improved since 2001 with the disposition of non-core apartment homes and the upgrading of most of our communities. The upgrading of the portfolio provides several key benefits related to portfolio profitability. It enables us to raise rents more significantly and to attract residents with higher levels of disposable income who are more likely to accept the transfer of expenses, such as water and sewer costs, from the landlord to the resident. In addition, it potentially reduces recurring capital expenditures per apartment home, and therefore increases future cash flow.

Same Communities

      For 2003, same community property operating income decreased 4.2% or $14.9 million compared to 2002. The overall decrease in property operating income was primarily attributable to a 1.8% or $9.9 million decrease in revenues from rental and other income and a 2.5% or $5.0 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 2.2% or $12.8 million decrease in rental rates. This decrease in income was partially offset by an 11.7% or $1.7 million increase in sub-meter, gas, trash and utility reimbursements, a 5.5% or $1.0 million decrease in concession expense and a 1.7% or $0.7 million decrease in vacancy loss. Physical occupancy remained constant at 93.2% for both 2003 and 2002.

      The increase in property operating expenses was primarily driven by a 17.6% or $1.7 million increase in insurance costs, a 4.3% or $1.4 million increase in utilities expense, a 2.4% or $0.9 million increase in repair and maintenance costs, a 3.9% or $0.8 million increase in administrative and marketing costs, a 0.7% or $0.4 million increase in personnel costs, and a 0.8% or $0.4 million increase in taxes, all of which were partially offset by a 17.6% or $0.2 million decrease in incentive compensation.

Customers

      We focus on the broad middle-market segment of the apartment market that generally consists of renters-by-necessity. This group includes young professionals, blue-collar families, single parent households, older singles, immigrants, non-related parties and families renting while waiting to purchase a home. We believe this segment provides the highest profit potential in terms of rent growth, stability of occupancy and investment opportunities.

      We believe there will be a significant increase in the number of younger renters over the next 10 to 15 years, and that the immigrant population will remain a significant and growing part of the renter base.

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Accordingly, we plan to target some of our incremental investments to communities that will be attractive to younger households or to the immigrant populations. These communities will often be located close to where these residents work, shop and play.

Tax Matters

      We have elected to be taxed as a REIT under the Internal Revenue Code. To continue to qualify as a REIT, we must continue to meet certain tests that, among other things, generally require that our assets consist primarily of real estate, our income be derived primarily from real estate and that we distribute at least 90% of our taxable income (other than our net capital gain) to our stockholders. Provided we maintain our qualification as a REIT, we will generally not be subject to federal income taxes at the corporate level on our net income to the extent net income is distributed to our stockholders.

Inflation

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

Environmental Matters

      To date, compliance with federal, state and local environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position. However, in the past, the issue has been raised regarding the presence of asbestos and other hazardous materials in existing real estate properties, and within the past year there has been an increase in the number of claims of potential health-related issues allegedly caused by the presence of mold in confined spaces. We have a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigations and reports have been completed for each property we own. In addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase or development of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we have abandoned otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. We believe that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a conservative posture toward accepting known risk, we can minimize our exposure to potential liability associated with environmental hazards.

      Federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and imposes treble damages for failure to provide such notification. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.

      We are unaware of any environmental hazards at any of our properties that individually or in the aggregate may have a material adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise aware, of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties. We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on us or our financial condition or results of operations. Future environmental

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laws, regulations, or ordinances, however, may require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on us in the future, the costs of compliance could have a material adverse effect on us and our financial condition.

Insurance

      We carry comprehensive general liability coverage on our communities, with limits of liability customary within the industry to insure against liability claims and related defense costs. We are also insured, in all material respects, against the risk of direct physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.

Factors Affecting Our Business and Prospects

      There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of some of the important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or desired.

      Unfavorable Changes in Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels and Rental Rates. Market and economic conditions in the metropolitan areas in which we operate may significantly affect our occupancy levels and rental rates and, therefore, our profitability. Factors that may adversely affect these conditions include the following:

  •  a reduction in jobs and other local economic downturns,
 
  •  declines in mortgage interest rates, making alternative housing more affordable,
 
  •  government or builder incentives which enable first time homebuyers to put little or no money down, making alternative housing decisions easier to make,
 
  •  oversupply of, or reduced demand for, apartment homes,
 
  •  declines in household formation, and
 
  •  rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.

      The strength of the United States economy has become increasingly susceptible to global events and threats of terrorism. At the same time, productivity enhancements and the increased exportation of labor have resulted in negligible job growth despite an improving economy. Continued weakness in job creation, or any worsening of current economic conditions, generally and in our principal market areas, could have a material adverse effect on our occupancy levels, our rental rates and our ability to strategically acquire and dispose of apartment communities. This may impair our ability to satisfy our financial obligations and pay distributions to our stockholders.

      Acquisitions or New Development May Not Achieve Anticipated Results. We intend to continue to selectively acquire apartment communities that meet our investment criteria. Our acquisition activities and their success are subject to the following risks:

  •  an acquired community may fail to perform as we expected in analyzing our investment, or a significant exposure related to the acquired property may go undetected during our due diligence procedures,
 
  •  when we acquire an apartment community, we often invest additional amounts in it with the intention of increasing profitability. These additional investments may not produce the anticipated improvements in profitability, and
 
  •  new developments may not achieve pro forma rents or occupancy levels, or problems with construction or local building codes may delay initial occupancy dates for all or a portion of a development community.

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      Possible Difficulty of Selling Apartment Communities Could Limit Operational and Financial Flexibility. We periodically dispose of apartment communities that no longer meet our strategic objectives, but market conditions could change and purchasers may not be willing to pay prices acceptable to us. A weak market may limit our ability to change our portfolio promptly in response to changing economic conditions. Furthermore, a significant portion of the proceeds from our overall property sales may be held by intermediaries in order for some sales to qualify as like-kind exchanges under Section 1031 of the Internal Revenue Code, so that any related capital gain can be deferred for federal income tax purposes. As a result, we may not have immediate access to all of the cash flow generated from our property sales. In addition, federal tax laws limit our ability to profit on the sale of communities that we have owned for fewer than four years, and this limitation may prevent us from selling communities when market conditions are favorable.

      Increased Competition Could Limit Our Ability to Lease Apartment Homes or Increase or Maintain Rents. Our apartment communities compete with numerous housing alternatives in attracting residents, including other apartment communities and single-family rental homes, as well as owner occupied single-and multi-family homes. Competitive housing in a particular area could adversely affect our ability to lease apartment homes and increase or maintain rents.

      Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are subject to the risks normally associated with debt financing, including the risk that our operating income and cash flow will be insufficient to make required payments of principal and interest, or could restrict our borrowing capacity under our line of credit due to debt covenant restraints. We cannot assure you that sufficient cash flow will be available to make all required principal payments and still satisfy our distribution requirements to maintain our status as a REIT, nor can we assure you that the full limits of our line of credit will be available to us if our operating performance falls outside the constraints of our debt covenants. Additionally, we are likely to need to refinance substantially all of our outstanding debt as it matures. We may not be able to refinance existing debt, or the terms of any refinancing may not be as favorable as the terms of the existing debt, which could create pressures to sell assets or to issue additional equity when we would otherwise not choose to do so.

      Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to Stockholders. If our apartment communities do not generate sufficient net rental income to meet rental expenses, our ability to make required payments of interest and principal on our debt securities and to pay distributions to our stockholders will be adversely affected. The following factors, among others, may affect the net rental income generated by our apartment communities:

  •  the national and local economies,
 
  •  local real estate market conditions, such as an oversupply of apartment homes,
 
  •  tenants’ perceptions of the safety, convenience and attractiveness of our communities and the neighborhoods where they are located,
 
  •  our ability to provide adequate management, maintenance and insurance, and
 
  •  rental expenses, including real estate taxes and utilities.

      Expenses associated with our investment in a community, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental income from that community. If a community is mortgaged to secure payment of debt and we are unable to make the mortgage payments, we could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgage holder.

      Debt Level May Be Increased. Our current debt policy does not contain any limitations on the level of debt that we may incur, although our ability to incur debt is limited by covenants in our bank and other credit agreements. We manage our debt to be in compliance with these debt covenants, but subject to compliance with these covenants, we may increase the amount of our debt at any time without a concurrent improvement in our ability to service the additional debt.

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      Financing May Not Be Available and Could be Dilutive. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. Debt or equity financing may not be available in sufficient amounts, or on favorable terms or at all. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted.

      Development and Construction Risks Could Impact Our Profitability. We intend to continue to develop and construct apartment communities. Development activities may be conducted through wholly-owned affiliated companies or through joint ventures with unaffiliated parties. Our development and construction activities may be exposed to the following risks:

  •  we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased development costs and could require us to abandon our activities entirely with respect to a project for which we are unable to obtain permits or authorizations,
 
  •  if we are unable to find joint venture partners to help fund the development of a community or otherwise obtain acceptable financing for the developments, our development capacity may be limited,
 
  •  we may abandon development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring such opportunities,
 
  •  we may be unable to complete construction and lease-up of a community on schedule, or incur development or construction costs that exceed our original estimates, and we may be unable to charge rents that would compensate for any increase in such costs, and
 
  •  occupancy rates and rents at a newly-developed community may fluctuate, depending on a number of factors, including market and economic conditions, preventing us from meeting our profitability goals for that community.

      Construction costs have been increasing in our existing markets, and the costs of upgrading acquired communities have, in some cases, exceeded our original estimates. We may experience similar cost increases in the future. Our inability to charge rents that will be sufficient to offset the effects of any increases in these costs may impair our profitability.

      Failure to Succeed in New Markets May Limit Our Growth. We may from time to time make acquisitions outside of our existing market areas if appropriate opportunities arise. We may be exposed to a variety of risks if we choose to enter new markets, and we may not be able to operate successfully in new markets. These risks include, among others:

  •  inability to accurately evaluate local apartment market conditions and local economies,
 
  •  inability to obtain land for development or to identify appropriate acquisition opportunities,
 
  •  inability to hire and retain key personnel, and
 
  •  lack of familiarity with local governmental and permitting procedures.

      Changing Interest Rates Could Increase Interest Costs and Could Affect the Market Price of Our Securities. We currently have, and expect to incur in the future, debt bearing interest at rates that vary with market interest rates. Therefore, if interest rates increase, our interest costs will rise to the extent our variable rate debt is not hedged effectively. In addition, an increase in market interest rates may lead our security holders to demand a higher annual yield, which could adversely affect the market price of our common and preferred stock and debt securities.

      Limited Investment Opportunities Could Adversely Affect Our Growth. We expect that other real estate investors will compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment

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companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources than we do. As a result, we may not be able to make attractive investments on favorable terms, which could adversely affect our growth.

      Failure to Integrate Acquired Communities and New Personnel Could Create Inefficiencies. To grow successfully, we must be able to apply our experience in managing our existing portfolio of apartment communities to a larger number of properties. In addition, we must be able to integrate new management and operations personnel as our organization grows in size and complexity. Failures in either area will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.

      Interest Rate Hedging Contracts May Be Ineffective and May Result in Material Charges. From time to time when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. We may do this to increase the predictability of our financing costs. Also, from time to time we may rely on interest rate hedging contracts to limit our exposure under variable rate debt to unfavorable changes in market interest rates. If the pricing of new debt securities is not within the parameters of, or market interest rates produce a lower interest cost than that which we incur under a particular interest rate hedging contract, the contract is ineffective. Furthermore, the settlement of interest rate hedging contracts has involved and may in the future involve material charges.

      Potential Liability for Environmental Contamination Could Result in Substantial Costs. Under various federal, state and local environmental laws, as a current or former owner or operator of real estate, we could be required to investigate and remediate the effects of contamination of currently or formerly owned real estate by hazardous or toxic substances, often regardless of our knowledge of or responsibility for the contamination and solely by virtue of our current or former ownership or operation of the real estate. In addition, we could be held liable to a governmental authority or to third parties for property damage and for investigation and clean-up costs incurred in connection with the contamination. These costs could be substantial, and in many cases environmental laws create liens in favor of governmental authorities to secure their payment. The presence of such substances or a failure to properly remediate any resulting contamination could materially and adversely affect our ability to borrow against, sell or rent an affected property.

      We are Subject to Certain Tax Risks. We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Internal Revenue Code provisions. Only limited judicial or administrative interpretation exists for these provisions and involves the determination of various factual matters and circumstances not entirely within our control. In addition, U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time. Future legislation, new regulations, administrative interpretations or court decisions may apply to us, potentially with retroactive effect, and could adversely affect our ability to qualify as a REIT or adversely affect our stockholders. We may receive significant non-qualifying income or acquire non-qualifying assets, which as a result, may cause us to approach the income and assets test limits imposed by the Internal Revenue Code. There is a risk that we may not satisfy these tests. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at corporate rates. We may also be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify. This would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.

      Recent Tax Legislation Could Negatively Impact Our Stock Price. In 2003, legislation was enacted that generally reduces the maximum capital gains rate for non-corporate taxpayers from 20% to 15% after May 5, 2003. Under the legislation, the 15% rate is also applicable to “qualified dividend income” from

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certain corporations. In general, dividends payable by REITs are not eligible for the 15% tax rate, except to the extent such dividends are attributable to dividends we received from taxable corporations (such as our taxable REIT subsidiaries) or to REIT “capital gain dividends” as defined in the Internal Revenue Code of 1986. The recent legislation also reduces the maximum tax rate of non-corporate taxpayers on ordinary income from 38.6% to 35%.

      Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable treatment of regular corporate dividends could cause investors who are individuals to consider stock of other corporations that pay dividends as more attractive relative to stock of REITs. It is not possible to predict whether this change in perceived relative value will occur, or what the effect will be on the market price of our stock.

      We may conduct a portion of our business through taxable REIT subsidiaries, which could have adverse tax consequences. We have established several taxable REIT subsidiaries. Despite our qualification as a REIT, our taxable REIT subsidiaries must pay federal income tax on their taxable income. In addition, we must comply with various tests to continue to qualify as a REIT for federal income tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not constitute permissible income and investments for these tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature.

      Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in Our Stockholders’ Best Interests. Maryland business statutes may limit the ability of a third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws which may have the effect of discouraging offers to acquire our company and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best interests. The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of our stock representing 10% or more of the voting power without our board of directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 66 2/3% of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides generally that a person who acquires shares of our equity stock that represent 10% (and certain higher levels) of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote.

      Limitations on Share Ownership and Limitations on the Ability of Our Stockholders to Effect a Change in Control of Our Company May Prevent Takeovers That are Beneficial to Our Stockholders. One of the requirements for maintenance of our qualification as a REIT for federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Our amended and restated articles of incorporation contain ownership and transfer restrictions relating to our stock primarily to assist us in complying with this requirement. These restrictions include a provision that generally limits a person from beneficially owning or constructively owning shares of our outstanding equity stock in excess of a 9.9% ownership interest, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. These provisions may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.

      Under the terms of our shareholder rights plan, our board of directors can, in effect, prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock. Unless our board of directors approves the person’s purchase, after that person acquires more than 15% of our outstanding

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common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person. Our board of directors, however, can prevent the shareholder rights plan from operating in this manner. This gives our board of directors significant discretion to approve or disapprove a person’s efforts to acquire a large interest in us.

Executive Officers of the Company

      The following table sets forth information about our executive officers as of February 18, 2004. The executive officers listed below serve in their respective capacities for approximate one-year terms.

                         
Name Age Office Since




Thomas W. Toomey
    43     Chief Executive Officer, President and Director     2001  
W. Mark Wallis
    53     Senior Executive Vice President       2001  
            Legal, Acquisitions, Dispositions, & Development        
Christopher D. Genry
    43     Executive Vice President
Chief Financial Officer
    2001  
Richard A. Giannotti
    48     Executive Vice President
Asset Quality
      1985  
Ella S. Neyland
    49     Executive Vice President
Treasurer & Investor Relations
    2001  
Martha R. Carlin
    42     Senior Vice President, Director of
Property Operations
    2001  
Lester C. Boeckel
    55     Senior Vice President
Acquisitions & Dispositions
    2001  
Thomas J. Corcoran
    57     Senior Vice President
Human Resources
      1997  
Patrick S. Gregory
    54     Senior Vice President
Chief Information Officer
    1997  
Michael J. Kelly
    36     Senior Vice President
Acquisitions
      2004  
Rodney A. Neuheardt
    42     Senior Vice President
Finance
      2001  
Scott A. Shanaberger
    35     Senior Vice President
Chief Accounting Officer
    1994  
Thomas A. Spangler
    43     Senior Vice President
Business Development Services,
Chief Risk Officer
    1998  
Mark E. Wood
    51     Senior Vice President
Acquisitions and Development
    1994  
Mary Ellen Norwood
    49     Vice President, Legal Administration,
and Secretary
    2001  

      Set forth below is certain biographical information about each of our executive officers.

      Mr. Toomey joined us as Chief Executive Officer, President and a Director in February 2001. Prior to joining us, Mr. Toomey was with Apartment Investment and Management Company, or AIMCO, a publicly traded real estate investment trust, where he served as Chief Operating Officer for two years and Chief Financial Officer for four years. During his tenure at AIMCO, Mr. Toomey was instrumental in the growth of AIMCO from 34,000 apartment units to 360,000 units. He has also served as a Senior Vice President at Lincoln Property Company, a national real estate development, property management and real

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estate consulting company, from 1990 to 1995 and as an Audit Manager serving real estate clients at Arthur Andersen & Co.

      Mr. Wallis joined us in March 2001 as Senior Executive Vice President of Legal, Acquisitions, Dispositions and Development. Prior to joining us, Mr. Wallis was the President of Golden Living Communities, a company he established in 1995, involved in the development of assisted and independent living communities. Prior to founding Golden Living, Mr. Wallis was Executive Vice President of Finance and Administration of Lincoln Property Company.

      Mr. Genry joined us in March 2001 as Executive Vice President and Chief Financial Officer. Mr. Genry had been Chief Financial Officer of Centex Construction Group, a $1 billion subsidiary of the New York Stock Exchange listed Centex Corporation. As Chief Financial Officer, he provided strategic leadership in the development and management of all financial and information systems, the redesign and oversight of internal audit functions, and the identification and evaluation of acquisition opportunities. Prior to joining Centex, he was with Arthur Andersen & Co. in Dallas, Texas.

      Mr. Giannotti joined us as Director of Development and Construction in September 1985. He was promoted to Assistant Vice President in 1988, Vice President in 1989 and Senior Vice President in 1996. In 1998, Mr. Giannotti was promoted to Director of Development-East and was promoted to Executive Vice President of Asset Quality in 2003.

      Ms. Neyland joined us in March 2001 as Executive Vice President and Treasurer and is also responsible for Investor Relations. Ms. Neyland had been Chief Financial Officer of Sunrise Housing, Ltd., a privately owned apartment development company that manufactures modular units for the construction of affordable apartment communities. Previously, she served as an Executive Director with CIBC World Markets and as Senior Vice President of Finance of Lincoln Property Company.

      Ms. Carlin joined us in March 2001 as a Senior Vice President responsible for operational efficiencies and revenue enhancement and was promoted to Senior Vice President, Director of Property Operations in 2003. Ms. Carlin was previously Senior Vice President of Operations for opsXchange, Inc., a real estate procurement technology developer. Previously, she served as Senior Vice President of Ancillary Services at AIMCO and as a member of Arthur Andersen & Co. Real Estate Services Group in Dallas, Texas.

      Mr. Boeckel joined us in July 2001 as Vice President of Acquisitions and Dispositions and was promoted to Senior Vice President in February 2002. Prior to joining us, Mr. Boeckel was the Senior Vice President of Asset Management at AIMCO. Before becoming the Senior Vice President of Asset Management, Mr. Boeckel was a Regional Vice President with operating responsibility for a portfolio of 12,000 apartment homes. Prior to joining AIMCO, Mr. Boeckel had over ten years of real estate experience with various firms including a regional investment banking firm, a regional financial planning firm and a national apartment syndication firm.

      Mr. Corcoran joined us in 1997 as Assistant Vice President of Human Resources and was promoted to Vice President in 1998 and Senior Vice President in 1999. Prior to joining us, Mr. Corcoran was the Vice President of Human Resources for Acordia, Inc., a national insurance brokerage firm from 1993 to 1995.

      Mr. Gregory joined us in 1997 as Vice President and Chief Information Officer and was promoted to Senior Vice President in 1999. From 1976 to 1997, Mr. Gregory was employed by Crestar Bank as a New Technology Analyst.

      Mr. Kelly joined us in 2004 as Senior Vice President of Acquisitions. Prior to joining us, Mr. Kelly was Senior Vice President in charge of national apartment acquisitions for Urdang & Associates, a Philadelphia based pension fund advisor. During his tenure he purchased over 4,100 apartment homes. Prior to Urdang, Mr. Kelly was a Principal with Lend Lease focusing on national apartment acquisitions. From 1993 to 1998, Mr. Kelly was Vice President and part owner of Apartment Realty Advisors, an apartment brokerage company.

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      Mr. Neuheardt joined us in June 2001 as Vice President, Finance and was promoted to Senior Vice President, Finance in February 2003. Prior to joining us, Mr. Neuheardt was Controller and Treasurer of Sunrise Housing, Ltd., a privately owned apartment development company that manufactures modular units for the construction of affordable apartment communities. Previously, Mr. Neuheardt served as controller of several private energy companies, including Continental Emsco Company. Prior to that, Mr. Neuheardt was a Senior Manager in KPMG, LLP’s audit practice.

      Mr. Shanaberger joined us in 1994 as an Accounting Manager and was promoted to Assistant Vice President and Assistant Treasurer in 1997. In 2000, Mr. Shanaberger was promoted to Vice President Corporate Controller and Chief Accounting Officer and was promoted to Senior Vice President in 2002. Prior to joining us, Mr. Shanaberger was employed by Ernst & Young LLP.

      Mr. Spangler joined us as Assistant Vice President, Operational Planning and Asset Management in August 1998 and was promoted to Vice President, Director of Operational Planning and Asset Management that same year. Mr. Spangler was promoted to Senior Vice President, Business Development in February 2003 and Chief Risk Officer in September 2003. Prior to joining us, Mr. Spangler spent nine years as an Asset Manager for Summit Enterprises, Inc. of Virginia, a private investment management firm.

      Mr. Wood joined us as Vice President of Construction in 1994. He was promoted to Senior Vice President and Director of Development-West in 2000.

      Ms. Norwood joined us in 2001 as Vice President, Legal Administration and Secretary. Prior to joining us, Ms. Norwood was employed by Centex Corporation for 15 years, most recently as its Legal Administrator. Centex is a New York Stock Exchange listed company that operates in the home building, financial services, construction products, construction services and investment real estate business segments.

Available Information

      We file electronically with the Securities and Exchange Commission our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports on the day of filing with the SEC on our website at www.udrt.com, or by sending an e-mail message to ir@udrt.com.

 
Item 2. PROPERTIES

      At December 31, 2003, our apartment portfolio included 264 communities located in 55 markets, with a total of 76,244 completed apartment homes. In addition, we had three apartment communities under development. We own approximately 53,000 square feet of office space in Richmond, Virginia, for our corporate offices and we lease approximately 9,700 square feet of office space in Highlands Ranch, Colorado, for our principal executive offices. The table below sets forth a summary of our real estate portfolio by geographic market at December 31, 2003.

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SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET

AT DECEMBER 31, 2003
                                           
Number of Number of Percentage Carrying
Apartment Apartment of Carrying Value (in Encumbrances
Communities Homes Value thousands) (in thousands)





Southern California
    11       2,878       7.0 %   $ 302,216     $ 48,757  
Dallas, TX
    15       5,311       6.4 %     277,928       50,190  
Houston, TX
    23       6,458       6.4 %     277,782       57,954  
Metropolitan DC
    9       2,921       5.6 %     244,551       75,050  
Phoenix, AZ
    11       3,635       5.0 %     218,477       61,371  
Orlando, FL
    14       4,140       4.9 %     212,179       79,290  
Raleigh, NC
    11       3,663       4.8 %     207,865       58,593  
Tampa, FL
    11       3,836       4.4 %     188,616       56,312  
Arlington, TX
    10       3,465       3.7 %     160,674       39,056  
Columbus, OH
    6       2,530       3.5 %     150,684       41,327  
Monterey Peninsula, CA
    9       1,704       3.4 %     149,565        
San Francisco, CA
    4       980       3.3 %     142,044       20,780  
Charlotte, NC
    10       2,711       3.0 %     140,574       11,917  
Richmond, VA
    9       2,636       3.0 %     132,022       66,657  
Nashville, TN
    8       2,220       2.8 %     122,210        
Greensboro, NC
    8       2,123       2.4 %     105,923        
Wilmington, NC
    6       1,868       2.1 %     92,231        
Baltimore, MD
    7       1,470       2.1 %     91,451       27,752  
Atlanta, GA
    6       1,426       1.7 %     73,437       30,446  
Columbia, SC
    6       1,584       1.5 %     63,747       5,000  
Jacksonville, FL
    3       1,157       1.4 %     59,993       23,202  
Norfolk, VA
    6       1,438       1.3 %     55,687       7,359  
Lansing, MI
    4       1,226       1.2 %     51,778       31,570  
Seattle, WA
    3       628       0.8 %     34,627       25,830  
Other Western
    5       2,398       3.5 %     153,744       46,720  
Other Pacific
    8       2,275       2.9 %     125,456       48,905  
Other Southwestern
    7       1,795       2.3 %     99,902       9,765  
Other Florida
    7       1,825       2.1 %     92,451        
Other North Carolina
    8       1,893       1.8 %     77,014       11,550  
Other Southeastern
    4       1,393       1.6 %     70,926       34,762  
Other Midwestern
    8       1,357       1.6 %     68,912       26,320  
Other Mid-Atlantic
    5       928       1.0 %     43,683       12,542  
Other Northeastern
    2       372       0.4 %     18,401       5,167  
Real Estate Under Development
    n/a       n/a       0.5 %     22,592       n/a  
Land
    n/a       n/a       0.3 %     11,606       n/a  
     
     
     
     
     
 
 
Total Apartments(d)
    264       76,244       99.7 %   $ 4,340,948     $ 1,014,144  
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                                   
Average
Annualized Home Size
Cost Physical Average Monthly Concessions Resident (Square
Per Home Occupancy Rental Rates(a) (b) Turnover(c) Feet)






Southern California
  $ 105,009       95.1 %   $ 1,041       1.5%       45.2 %     819  
Dallas, TX
    52,331       95.1 %     660       2.3%       60.5 %     827  
Houston, TX
    43,014       90.2 %     635       2.3%       57.5 %     820  
Metropolitan DC
    83,722       95.9 %     986       1.2%       42.1 %     960  
Phoenix, AZ
    60,104       91.2 %     713       10.5%       73.2 %     924  
Orlando, FL
    51,251       93.4 %     708       1.6%       71.8 %     937  
Raleigh, NC
    56,747       93.1 %     696       4.4%       67.4 %     957  
Tampa, FL
    49,170       93.0 %     710       4.2%       59.2 %     953  
Arlington, TX
    46,371       94.3 %     655       2.8%       59.9 %     809  
Columbus, OH
    59,559       93.6 %     677       2.1%       65.4 %     904  
Monterey Peninsula, CA
    87,773       92.7 %     926       0.9%       54.6 %     727  
San Francisco, CA
    144,943       95.5 %     1,501       3.6%       54.5 %     776  
Charlotte, NC
    51,853       94.5 %     602       3.3%       69.9 %     982  
Richmond, VA
    50,084       94.4 %     712       2.4%       55.8 %     968  
Nashville, TN
    55,050       92.9 %     657       1.8%       67.5 %     943  
Greensboro, NC
    49,893       93.5 %     579       1.1%       57.6 %     981  
Wilmington, NC
    49,374       91.9 %     627       3.2%       74.9 %     952  
Baltimore, MD
    62,211       95.8 %     898       1.7%       55.1 %     905  
Atlanta, GA
    51,499       91.0 %     655       2.2%       62.4 %     908  
Columbia, SC
    40,244       92.9 %     600       2.3%       74.9 %     838  
Jacksonville, FL
    51,852       95.9 %     679       1.8%       61.7 %     896  
Norfolk, VA
    38,725       96.2 %     730       0.8%       68.1 %     1,016  
Lansing, MI
    42,233       93.5 %     653       2.1%       79.1 %     816  
Seattle, WA
    55,139       93.3 %     737       3.7%       72.3 %     823  
Other Western
    64,114       90.4 %     804       7.8%       61.9 %     893  
Other Pacific
    55,145       91.0 %     751       4.5%       66.8 %     915  
Other Southwestern
    55,656       88.8 %     670       4.6%       70.5 %     863  
Other Florida
    50,658       94.2 %     736       2.5%       74.4 %     867  
Other North Carolina
    40,684       94.7 %     577       0.6%       84.7 %     895  
Other Southeastern
    50,916       90.8 %     578       1.4%       61.6 %     893  
Other Midwestern
    50,783       93.3 %     667       2.2%       62.1 %     931  
Other Mid-Atlantic
    47,072       94.9 %     838       1.3%       81.8 %     931  
Other Northeastern
    49,464       95.4 %     711       0.1%       64.2 %     889  
Real Estate Under Development
    n/a       n/a       n/a       n/a       n/a       n/a  
Land
    n/a       n/a       n/a       n/a       n/a       n/a  
     
     
     
     
     
     
 
 
Total Apartments(d)
  $ 56,935       93.2 %   $ 717       3.0%       63.5 %     895  
     
     
     
     
     
     
 

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Number of Number of Percentage Carrying
Apartment Apartment of Carrying Value (in Encumbrances
Communities Homes Value thousands) (in thousands)





Commercial Property
    n/a       n/a       0.1 %     3,255        
Richmond — Corporate
    n/a       n/a       0.2 %     7,348       3,884  
     
     
     
     
     
 
 
Total Real Estate Owned
    264       76,244       100 %   $ 4,351,551     $ 1,018,028  
     
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                                   
Average
Annualized Home Size
Cost Physical Average Monthly Concessions Resident (Square
Per Home Occupancy Rental Rates(a) (b) Turnover(c) Feet)






Commercial Property
    n/a       n/a       n/a       n/a       n/a       n/a  
Richmond — Corporate
    n/a       n/a       n/a       n/a       n/a       n/a  
     
     
     
     
     
     
 
 
Total Real Estate Owned
  $ 56,935       93.2 %   $ 717       3.0%       63.5 %     895  
     
     
     
     
     
     
 


 
(a) Average Monthly Rental Rates represent potential rent collections (gross potential rents less market adjustments), which approximate net effective rents, based on weighted average number of homes.
 
(b) Concessions disclosed as a percentage of gross potential rent.
 
(c) Annualized Resident Turnover represents the percentage of homes that would be turned in the course of the year if the average weekly move-outs experienced throughout the most recent quarter were duplicated for the entire year.
 
(d) Includes real estate held for disposition, real estate under development and land, but excludes commercial property.
 
Item 3. LEGAL PROCEEDINGS

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

 
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2003.

PART II

 
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

      Our common stock is traded on the New York Stock Exchange under the symbol “UDR.” The following tables set forth the quarterly high and low sale prices per common share reported on the NYSE

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for each quarter of the last two years. Distribution information for common stock reflects distributions declared per share for each calendar quarter and paid at the end of the following month.
                         
Distributions
High Low Declared



2003
                       
1st Quarter
  $ 16.7600     $ 15.1300     $ .2850  
2nd Quarter
    17.7200       15.9800       .2850  
3rd Quarter
    18.9600       17.0700       .2850  
4th Quarter
    19.5300       17.3900       .2850  
 
2002
                       
1st Quarter
  $ 16.0100     $ 13.9400     $ .2775  
2nd Quarter
    16.8100       15.2300       .2775  
3rd Quarter
    16.6500       13.1800       .2775  
4th Quarter
    16.4200       13.6600       .2775  

      On February 18, 2004, the closing sale price of our common stock was $18.58 per share on the NYSE and there were 7,287 holders of record of the 127,422,160 outstanding shares of our common stock.

      We have determined that, for federal income tax purposes, approximately 71% of the distributions for each of the four quarters of 2003 represented ordinary income, 9% represented long-term capital gain, 2% represented unrecaptured section 1250 gain and 18% represented return of capital to our stockholders.

      We pay regular quarterly distributions to holders of shares of our common stock. Future distributions will be at the discretion of our board of directors and will depend on our actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, and other factors. The annual distribution payment for calendar year 2003 necessary for us to maintain our status as a REIT was approximately $0.73 per share. We declared total distributions of $1.14 per share for 2003.

Series B Preferred Stock

      The Series B Cumulative Redeemable Preferred Stock has no stated par value and a liquidation preference of $25 per share. The Series B has no voting rights except as required by law. The Series B has no stated maturity and is not subject to any sinking fund or mandatory redemption and is not convertible into any of our other securities. The Series B is not redeemable prior to May 29, 2007. On or after this date, the Series B may be redeemed for cash at our option, in whole or in part, at a redemption price of $25 per share plus accrued and unpaid dividends. The redemption price is payable solely out of the sale proceeds of our other capital stock. All dividends due and payable on the Series B have been accrued or paid as of the end of each fiscal year.

      Distributions declared on the Series B in 2003 were $2.15 per share or $.5375 per quarter. The Series B is listed on the NYSE under the symbol “UDRpfb.”

Series D Preferred Stock

      The Series D Cumulative Convertible Redeemable Preferred Stock has no stated par value and a liquidation preference of $25 per share. The Series D has no voting rights except as required by law. In addition, if Series D dividends are in arrears for any dividend period, the holders of the Series D have rights to notices and voting entitlements of holders of common stock until all accumulated dividends for all past dividend periods and the then current dividend period have been paid or set aside for payment. The Series D has no stated maturity, is not subject to any sinking fund or mandatory redemption, and is convertible into 1.5385 shares of common stock, subject to certain adjustments, at the option of the holder of the Series D at any time. We may, at our option, redeem at any time all or part of the Series D at a

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price per share of $25, payable in cash, plus all accrued and unpaid dividends, provided that the current market price of our common stock at least equals the conversion price, initially set at $16.25 per share. The redemption is payable solely out of the sale proceeds of other capital stock; provided, however, that we may not redeem, in any consecutive twelve-month period, a number of shares of Series D having an aggregate liquidation preference of more than $100 million, subject to certain exceptions.

      In 2003, we exercised our right to redeem 6.0 million shares of our Series D. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 9,230,923 shares of common stock at a price of $16.25 per share. Because the shares of common stock were sold in a transaction not involving a public offering, the transaction is exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of the Securities Act.

      Distributions declared on the Series D in 2003 were $2.04 per share or $.5089 per quarter. The Series D is not listed on any exchange.

Series E Preferred Stock

      The Series E Cumulative Convertible Preferred Stock has no stated par value and a liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each share of the Series E is convertible at any time and from time to time at the holder’s option into one share of our common stock. The holders of the Series E are entitled to vote on an as-converted basis as a single class in combination with the holders of common stock at any meeting of our stockholders for the election of directors or for any other purpose on which the holders of common stock are entitled to vote. The Series E has no stated maturity and is not subject to any sinking fund or any mandatory redemption.

      Distributions declared on the Series E in 2003 were $0.84 per share, $0.18 per share in the second quarter and $0.33 per share in each of the third and fourth quarters. The Series E is not listed on any exchange.

Dividend Reinvestment and Stock Purchase Plan

      We have a Dividend Reinvestment and Stock Purchase Plan under which holders of our common and preferred stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of our common stock. Stockholders who do not participate in the plan continue to receive dividends as declared. As of February 18, 2004, there were 4,000 participants in the plan.

Operating Partnership Units

      From time to time we issue shares of our common stock in exchange for operating partnership units, or OP Units, tendered to our operating partnerships, United Dominion Realty, L.P. and Heritage Communities L.P., for redemption in accordance with the provisions of their respective partnership agreements. At December 31, 2003, there were 10,129,492 OP Units and 269,973 OP Units in United Dominion Realty, L.P. and Heritage Communities L.P., respectively, that were owned by limited partners. The holder of the OP Units has the right to require United Dominion Realty, L.P. to redeem all or a portion of the OP Units held by the holder in exchange for a cash payment based on the market value of our common stock at the time of redemption. However, United Dominion Realty, L.P.’s obligation to pay the cash amount is subject to the prior right of the company to acquire such OP Units in exchange for either the cash amount or shares of our common stock. Heritage Communities L.P. OP Units are convertible into common stock in lieu of cash, at our option, once the holder elects to convert, at an exchange ratio of 1.575 shares for each OP Unit. During 2003, we issued a total of 216,983 shares of common stock in exchange for OP Units.

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Item 6. SELECTED FINANCIAL DATA

      The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended December 31, 2003. The table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Report.

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UNITED DOMINION REALTY TRUST, INC.

SELECTED FINANCIAL DATA

(In thousands, except per share data and apartment homes owned)
                                             
Years Ended December 31,

2003 2002 2001 2000 1999





Operating Data(c)
                                       
 
Rental income
  $ 603,367     $ 582,823     $ 549,890     $ 523,172     $ 482,821  
 
Income before minority interests and discontinued operations
    52,585       12,995       26,091       17,088       28,133  
 
Income from discontinued operations, net of minority interests
    18,801       40,678       37,230       59,586       65,937  
 
Net income
    70,404       53,229       61,828       76,615       93,622  
 
Distributions to preferred stockholders
    26,326       27,424       31,190       36,891       37,714  
 
Net income available to common stockholders
    24,807       25,805       27,142       42,653       55,908  
 
Common distributions declared
    134,876       118,888       108,956       110,225       109,607  
 
Weighted average number of common shares outstanding — basic
    114,672       106,078       100,339       103,072       103,604  
 
Weighted average number of common shares outstanding — diluted
    115,648       106,078       100,339       103,072       103,604  
 
Weighted average number of common shares, OP Units and common stock equivalents — diluted
    136,975       127,838       120,728       123,005       124,127  
 
Per share — basic:
                                       
   
Income/(loss) from continuing operations to common stockholders, net of minority interests
  $ 0.06     $ (0.14 )   $ (0.10 )   $ (0.16 )   $ (0.10 )
   
Income from discontinued operations, net of minority interests
    0.16       0.38       0.37       0.57       0.64  
   
Net income available to common stockholders
    0.22       0.24       0.27       0.41       0.54  
 
Per share — diluted:
                                       
   
Income/(loss) from continuing operations to common stockholders, net of minority interests
    0.05       (0.14 )     (0.10 )     (0.16 )     (0.10 )
   
Income from discontinued operations, net of minority interests
    0.16       0.38       0.37       0.57       0.64  
   
Net income available to common stockholders
    0.21       0.24       0.27       0.41       0.54  
 
Common distributions declared
    1.14       1.11       1.08       1.07       1.06  
Balance Sheet Data(c)
                                       
 
Real estate owned, at carrying value
  $ 4,351,551     $ 3,967,483     $ 3,907,667     $ 3,836,320     $ 3,953,045  
 
Accumulated depreciation
    896,630       748,733       646,366       509,405       395,864  
 
Total real estate owned, net of accumulated depreciation
    3,454,921       3,218,750       3,261,301       3,326,915       3,557,181  
 
Total assets
    3,543,643       3,276,136       3,348,091       3,453,957       3,688,317  
 
Secured debt
    1,018,028       1,015,740       974,177       866,115       1,000,136  
 
Unsecured debt
    1,114,009       1,041,900       1,090,020       1,126,215       1,127,169  
 
Total debt
    2,132,037       2,057,640       2,064,197       1,992,330       2,127,305  
 
Stockholders’ equity
    1,163,436       1,001,271       1,042,725       1,218,892       1,310,212  
 
Number of common shares outstanding
    127,295       106,605       103,133       102,219       102,741  

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Years Ended December 31,

2003 2002 2001 2000 1999





Other Data
                                       
 
Cash Flow Data
                                       
 
Cash provided by operating activities
  $ 234,945     $ 229,001     $ 224,411     $ 224,160     $ 190,602  
 
Cash (used in)/provided by investing activities
    (304,217 )     (67,363 )     (64,055 )     58,705       (103,836 )
 
Cash provided by/(used in) financing activities
    70,944       (163,127 )     (166,020 )     (280,238 )     (105,169 )
 
Funds from Operations(a)
                                       
 
Funds from operations — basic
  $ 192,938     $ 153,016     $ 159,202     $ 162,930     $ 143,070  
 
Funds from operations — diluted
    207,619       168,795       174,630       178,230       158,224  
 
Funds from operations with gains on the disposition of real estate developed for sale — diluted(b)
    208,431       168,795       174,630       178,230       158,224  
 
Apartment Homes Owned
                                       
 
Total apartment homes owned at December 31
    76,244       74,480       77,567       77,219       82,154  
 
Weighted average number of apartment homes owned during the year
    74,550       76,567       76,487       80,253       85,926  


(a)  Funds from operations (“FFO”) is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s definition issued in April 2002. We consider FFO in evaluating property acquisitions and our operating performance and believe that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of our activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. For 2001, FFO includes a non-recurring charge of $8.6 million related to workforce reductions, other severance costs, executive office relocation costs and the write down of seven undeveloped land sites along with our investment in an online apartment leasing company. For 2000, FFO includes a non-recurring charge of $3.7 million related to the settlement of litigation and an organizational charge.
 
(b)  Gains on the disposition of real estate investments developed for sale is defined as net sales proceeds less a tax provision (such development by REITs must be conducted in a taxable REIT subsidiary) and the gross investment basis of the asset before accumulated depreciation. We consider FFO with gains (or losses) on real estate development for sale to be a meaningful supplemental measure of performance because of the short-term use of funds to produce a profit which differs from the traditional long-term investment in real estate for REITs.
 
(c)  Reclassified to conform to current year presentation as described in Note 3 to the consolidated financial statements.

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements

      This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of United Dominion Realty Trust, Inc. to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting us or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.

 
Business Overview

      We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops and manages middle-market apartment communities nationwide. We were formed in 1972 as a Virginia corporation, and we changed our state of incorporation from Virginia to Maryland in June 2003. Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty, L.P., a limited partnership which changed its state of organization from Virginia to Delaware in February 2004. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.

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      At December 31, 2003, our portfolio included 264 communities with 76,244 apartment homes nationwide. The following table summarizes our market information by major geographic markets (includes real estate held for disposition, real estate under development and land, but excludes commercial properties):

                                                   
Year Ended
As of December 31, 2003 December 31, 2003


Number of Number of Percentage of Carrying Average Average
Apartment Apartment Carrying Value Physical Monthly
Communities Homes Value (in thousands) Occupancy Rental Rates






Southern California
    11       2,878       7.0 %   $ 302,216       95.1 %   $ 1,041  
Dallas, TX
    15       5,311       6.4 %     277,928       95.1 %     660  
Houston, TX
    23       6,458       6.4 %     277,782       90.2 %     635  
Metropolitan DC
    9       2,921       5.6 %     244,551       95.9 %     986  
Phoenix, AZ
    11       3,635       5.0 %     218,477       91.2 %     713  
Orlando, FL
    14       4,140       4.9 %     212,179       93.4 %     708  
Raleigh, NC
    11       3,663       4.8 %     207,865       93.1 %     696  
Tampa, FL
    11       3,836       4.4 %     188,616       93.0 %     710  
Arlington, TX
    10       3,465       3.7 %     160,674       94.3 %     655  
Columbus, OH
    6       2,530       3.5 %     150,684       93.6 %     677  
Monterey Peninsula, CA
    9       1,704       3.4 %     149,565       92.7 %     926  
San Francisco, CA
    4       980       3.3 %     142,044       95.5 %     1,501  
Charlotte, NC
    10       2,711       3.2 %     140,574       94.5 %     602  
Richmond, VA
    9       2,636       3.0 %     132,022       94.4 %     712  
Nashville, TN
    8       2,220       2.8 %     122,210       92.9 %     657  
Greensboro, NC
    8       2,123       2.4 %     105,923       93.5 %     579  
Wilmington, NC
    6       1,868       2.1 %     92,231       91.9 %     627  
Baltimore, MD
    7       1,470       2.1 %     91,451       95.8 %     898  
Atlanta, GA
    6       1,426       1.7 %     73,437       91.0 %     655  
Columbia, SC
    6       1,584       1.5 %     63,747       92.9 %     600  
Jacksonville, FL
    3       1,157       1.4 %     59,993       95.9 %     679  
Norfolk, VA
    6       1,438       1.3 %     55,687       96.2 %     730  
Lansing, MI
    4       1,226       1.2 %     51,778       93.5 %     653  
Seattle, WA
    3       628       0.8 %     34,627       93.3 %     737  
Other Western
    5       2,398       3.6 %     153,744       90.4 %     804  
Other Pacific
    8       2,275       2.9 %     125,456       91.0 %     751  
Other Southwestern
    7       1,795       2.3 %     99,902       88.8 %     670  
Other Florida
    7       1,825       2.1 %     92,451       94.2 %     736  
Other North Carolina
    8       1,893       1.8 %     77,014       94.7 %     577  
Other Southeastern
    4       1,393       1.6 %     70,926       90.8 %     578  
Other Midwestern
    8       1,357       1.6 %     68,912       93.3 %     667  
Other Mid-Atlantic
    5       928       1.0 %     43,683       94.9 %     838  
Other Northeastern
    2       372       0.4 %     18,401       95.4 %     711  
Real Estate Under Development
                0.5 %     22,592              
Land
                0.3 %     11,606              
     
     
     
     
     
     
 
 
Total
    264       76,244       100.0 %   $ 4,340,948       93.2 %   $ 717  
     
     
     
     
     
     
 
 
Liquidity and Capital Resources

      Liquidity is the ability to meet present and future financial obligations either through the sale or maturity of existing assets or by the acquisition of additional funds through capital management. Both the coordination of asset and liability maturities and effective capital management are important to the maintenance of liquidity. Our primary source of liquidity is our cash flow from operations as determined by rental rates, occupancy levels and operating expenses related to our portfolio of apartment homes. We

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routinely use our unsecured bank credit facility to temporarily fund certain investing and financing activities prior to arranging for longer-term financing. During the past several years, proceeds from the sale of real estate have been used for both investing and financing activities.

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

      We have a shelf registration statement filed with the Securities and Exchange Commission that provides for the issuance of up to an aggregate of $1 billion in common shares, preferred shares and debt securities to facilitate future financing activities in the public capital markets. Throughout 2003, we completed various financing activities under our $1 billion shelf registration statement. These activities are summarized in the section titled “Financing Activities” that follows. As of December 31, 2003, approximately $506.3 million of equity and debt securities remained available for use under the shelf registration statement. Access to capital markets is dependent on market conditions at the time of issuance. In January 2004, we sold $75 million of 5.13% senior unsecured notes due January 2014 under our $1 billion shelf registration statement. The net proceeds of $73.9 million from the issuance were used to repay secured and unsecured debt obligations maturing in the first quarter of 2004.

      In July 2003, we entered into a sales agreement pursuant to which we may issue and sell through an agent up to a total of five million shares of common stock from time to time in “at the market offerings,” as defined in Rule 415 of the Securities Act of 1933. These sales will be made under our $1 billion shelf registration statement. The sales price of the common stock will be no lower than the minimum price designated by us prior to the sale. As of December 31, 2003, we had not sold any shares of common stock pursuant to the sales agreement.

      In June 2003, Moody’s Investors Service upgraded our rating outlook to Positive from Stable with senior unsecured debt rated at Baa3 and preferred stock rated at Ba1. In September 2003, Standard & Poor’s Rating Services upgraded the rating on our senior unsecured debt to BBB, our preferred stock to BBB-, and our corporate credit rating to BBB/ Stable outlook.

      In November 2003, we increased our medium-term note program from $300 million to $500 million.

 
Future Capital Needs

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

      During 2004, we have approximately $46.8 million of secured debt and $101.1 million of unsecured debt maturing, and we anticipate repaying that debt with proceeds from borrowings under our secured or unsecured credit facilities or the issuance of new unsecured debt securities or equity.

 
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) derivatives and hedging

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activities and (4) real estate investment properties. 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.
 
Capital Expenditures

      In conformity with accounting principles generally accepted in the United States, we capitalize those expenditures related to acquiring new assets, materially enhancing the value of an existing asset or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.

      During 2003, $53.1 million or $714 per home was spent on capital expenditures for all of our communities, excluding development and commercial properties. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as HVAC equipment, roofs, siding, parking lots and other non-revenue enhancing capital expenditures, which aggregated $34.5 million or $464 per home. In addition, revenue enhancing capital expenditures, including water sub-metering, the initial installation of microwaves or washer-dryers and extensive interior upgrades totaled $15.4 million or $207 per home and major renovations totaled $3.2 million or $43 per home for the year ended December 31, 2003.

      The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development and commercial properties for the periods presented:

                                                   
Year Ended December 31, Year Ended December 31,
(dollars in thousands) (per home)


2003 2002 % Change 2003 2002 % Change






Turnover capital expenditures
  $ 15,044     $ 16,474       -8.7 %   $ 202     $ 216       -6.5 %
Other recurring capital expenditures
    19,478       15,867       22.8 %     262       209       25.4 %
     
     
     
     
     
     
 
 
Total recurring capital expenditures
    34,522       32,341       6.7 %     464       425       9.2 %
Revenue enhancing improvements
    15,408       9,405       63.8 %     207       124       66.9 %
Major renovations
    3,216       1,081       197.5 %     43       14       207.1 %
     
     
     
     
     
     
 
 
Total capital improvements
  $ 53,146     $ 42,827       24.1 %   $ 714     $ 563       26.8 %
     
     
     
     
     
     
 
Repair and maintenance
    40,615       40,078       1.3 %     546       527       3.6 %
     
     
     
     
     
     
 
 
Total expenditures
  $ 93,761     $ 82,905       13.1 %   $ 1,260     $ 1,090       15.6 %
     
     
     
     
     
     
 

      Total capital improvements increased $10.3 million or $151 per home in 2003 compared to 2002. 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 2004 are currently expected to be approximately $470 per home.

 
Impairment of Long-Lived Assets

      We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.

      We review the carrying value of our portfolio of assets on a regular basis. During 2002, we pursued our strategy of exiting markets where long-term growth prospects are limited. As a result, 25 apartment communities were placed under contract and two of these assets were ultimately sold at net selling prices

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below their net book values. Accordingly, we recorded an aggregate $2.3 million impairment loss for the write down of a portfolio of apartment communities in Memphis, Tennessee. In 2001, in connection with our analysis of the carrying value of all undeveloped land parcels, we recognized an aggregate $2.8 million impairment loss on seven undeveloped sites in selected markets. An impairment loss was indicated as a result of the net book value of the assets being greater than the estimated fair market value less the cost of disposal.
 
Derivatives and Hedging Activities

      We use derivative financial instruments in the normal course of business to reduce our exposure to fluctuations in interest rates. As of December 31, 2003, we had five interest rate swap agreements with a notional value aggregating $68.5 million that are used to fix the interest rate on a portion of our variable rate debt. These derivatives qualify for hedge accounting as discussed in Note 1 to our consolidated financial statements. While we intend to continue to meet the conditions for hedge accounting, if a particular interest rate swap does not qualify as highly effective, any change in the fair value of the derivative used as a hedge would be reflected in current earnings. Furthermore, should any change in management strategy, or any other circumstance, cause an existing highly effective hedge to become ineffective, the accumulated loss or gain in the value of the derivative instrument since its inception may be required to be immediately reclassified from the stockholders’ equity section of the balance sheet to the income statement.

      Interest rate swaps, where we effectively make fixed rate payments and receive variable rate payments to eliminate our variable rate exposure, are entered into to manage the interest rate risk in our existing balance sheet mix. These instruments are valued using the market standard methodology of netting the discounted future variable cash receipts and the discounted expected fixed cash payments. The variable cash flow streams are based on an expectation of future interest rates derived from observed market interest rate curves. We have not changed our methods of calculating these fair values or developing the underlying assumptions. The values of these derivatives will change over time as cash receipts and payments are made and as market conditions change. Any event that impacts the level of actual and expected future interest rates will impact our swap valuations. The fair value of our existing swap portfolio is likely to fluctuate from year to year based on changing levels of interest rates and shortening swap terms to maturity. Information about the fair values, notional amounts and contractual terms of our interest rate swaps can be found in Note 8 to our consolidated financial statements and the section titled “Interest Rate Risk” that follows.

      Potential losses are limited to counterparty risk in situations where we are owed money; that is, when we hold contracts with positive fair values. We do not expect any losses from counterparties failing to meet their obligations as the counterparties are highly rated credit quality U.S. financial institutions and we believe that the likelihood of realizing material losses from counterparty non-performance is remote. At December 31, 2003, we had unrealized losses totaling $1.6 million on derivative transactions, which if terminated, would require a cash outlay. We presently have no intention to terminate these contracts. There are no credit concerns related to our obligations and we expect to meet those obligations without default.

 
Real Estate Investment Properties

      We purchase real estate investment properties from time to time and allocate the purchase price to various components, such as land, buildings and intangibles related to in-place leases and customer relationships in accordance with FASB Statement No. 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. The fair value of in-place leases is recorded and amortized as amortization expense over the

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remaining contractual lease period. We determine the fair value of in-place leases by considering the cost of acquiring similar leases, the foregoing rents associated with the lease-up period and the carrying costs associated with the lease-up period.

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

 
Operating Activities

      For the year ended December 31, 2003, our cash flow provided by operating activities was $234.9 million compared to $229.0 million for 2002. During 2003, the increase in cash flow from operating activities resulted primarily from a $15.8 million decrease in interest expense and an overall increase in operating liabilities primarily due to increased trade payables and an increase in unsecured interest payables as a result of different payment terms on new financings. These increases in cash flow were partially offset by a $15.5 million decrease in property operating income resulting from the overall decrease in our apartment community portfolio (see discussion under “Apartment Community Operations”) and a reduced level of collections on escrows due to lower refinancing activities.

 
Investing Activities

      For the year ended December 31, 2003, net cash used in investing activities was $304.2 million compared to $67.4 million for 2002. Changes in the level of investing activities from period to period reflects our strategy as it relates to our acquisition, capital expenditure, development and disposition programs, as well as the impact of the capital market environment on these activities, all of which are discussed in further detail below.

 
Acquisitions

      For the year ended December 31, 2003, we acquired 3,514 apartment homes in 11 communities for an aggregate consideration of $347.7 million and one parcel of land for $3.1 million. In addition, we purchased the remaining 47% joint venture partners’ ownership interest in nine communities with 1,706 apartment homes in Salinas and Pacific Grove, California, for $76.0 million in June 2003.

      During the year ended December 31, 2002, we acquired nine communities with 3,041 apartment homes and one parcel of land for approximately $267 million. In addition, in June 2002, we purchased, for approximately $52 million, the remaining two apartment communities with 644 apartment homes that were part of an unconsolidated development joint venture in which we owned a 25% interest and served as the managing partner. In August 2002, we purchased the outside partnership interest in two properties in California containing 926 apartment homes for approximately $17 million.

      Consistent with our long-term strategic plan to achieve greater operating efficiencies by investing in fewer, more concentrated markets, over the last two years, we have been expanding our interests in the fast growing Southern California market. During 2004, we plan to continue to channel new investments into those markets we believe will provide the best investment returns for us over the next ten years. Markets will be targeted based upon defined criteria including past performance, expected job growth, current and anticipated housing supply and demand and the ability to attract and support household formation.

 
Real Estate Under Development

      Development activity is focused in core markets in which we have operations. For the year ended December 31, 2003, we invested approximately $13.6 million in development projects, down $9.2 million from our 2002 level of $22.8 million.

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      The following projects were under development as of December 31, 2003:

                                                         
Number of Completed Cost Budgeted Estimated Expected
Apartment Apartment to Date Cost Cost Completion
Location Homes Homes (In thousands) (In thousands) Per Home Date







2000 Post III
    San Francisco, CA       24           $ 2,500     $ 7,000     $ 291,700       3Q04  
Rancho Cucamonga
    Los Angeles, CA       414             16,200       63,500       153,400       4Q05  
Mandalay on the Lake
    Irving, TX       369             3,900       28,200       76,400       1Q06  
             
     
     
     
     
         
              807           $ 22,600     $ 98,700     $ 122,300          
             
     
     
     
     
         

      In addition, we own six parcels of land that we continue to hold for future development that had a carrying value as of December 31, 2003 of $7.8 million. Five of the six parcels represent additional phases to existing communities as we plan to add apartment homes adjacent to currently owned communities that are in improving markets.

      In December 2003, The Mandolin II, a 178-apartment home community located in Dallas, Texas, was completed. Total development costs for the project as of December 31, 2003, were $12.2 million or $68,500 per home. The community was 65.2% leased at December 31, 2003.

 
Development Joint Venture

      In September 2002, we entered into a development joint venture with AEGON USA Realty Advisors, Inc. in which we serve as the managing member. The joint venture is expected to develop approximately eight to ten garden-style apartment communities over the next three to five years, with a total development cost of up to $210 million. The joint venture will obtain bank construction financing for 65% to 80% of total costs and will provide equity contributions for the balance of the costs with AEGON providing 80% and us providing 20%. We are serving as the developer, general contractor and property manager for the joint venture, and have guaranteed those project development costs, excluding financing costs (including fees and interest), which exceed the defined project cost budgeted amounts for each respective project, as they come to fruition. We believe that the likelihood of funding guarantor obligations is remote and that the impact to us would be immaterial. In June 2003, we contributed land with a carrying value of $3.8 million to the joint venture.

      As of December 31, 2003, Villa Toscana, a 504-apartment home community located in Houston, Texas, was under development and total costs incurred as of December 31, 2003, were $10.8 million. Budgeted costs for the project are estimated to be approximately $28.4 million or $56,300 per apartment home. The project is anticipated to be completed in the fourth quarter of 2005.

 
Disposition of Investments

      For the year ended December 31, 2003, we sold seven communities with 1,927 apartment homes for an aggregate consideration of $88.9 million, one parcel of land for $1.3 million and two commercial properties for an aggregate consideration of $7.3 million. We recognized gains for financial reporting purposes of $15.9 million on these sales. Proceeds from the sales were used primarily to reduce debt.

      For the year ended December 31, 2002, we sold 25 communities with a total of 6,990 apartment homes, one commercial property and one parcel of land for an aggregate sales price of approximately $319 million and recognized gains for financial reporting purposes of $31.5 million. Proceeds from the sales were applied primarily to acquire communities and reduce debt. In addition, during the first quarter of 2002, $3.1 million in proceeds were received on the condemnation of 96 units of a community in Fresno, California that resulted in a gain of $1.2 million.

      During 2004, we plan to continue to pursue our strategy of exiting markets where long-term growth prospects are limited and redeploying capital into markets that would enhance future growth rates and economies of scale. We intend to use proceeds from 2004 dispositions to acquire communities, fund development activity and reduce debt.

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Financing Activities

      Net cash provided by financing activities during 2003 was $70.9 million compared to net cash used in financing activities in 2002 of $163.1 million. As part of the plan to improve our balance sheet, we utilized proceeds from dispositions, equity and debt offerings and refinancings to extend maturities, pay down existing debt and purchase new properties.

      The following is a summary of our financing activities for the year ended December 31, 2003:

  •  Repaid $40.0 million of secured debt and $214.6 million of unsecured debt.
 
  •  Sold 2.0 million shares of common stock at a public offering price of $15.71 per share under our $1 billion shelf registration statement in January 2003. The net proceeds of $31.2 million were used to repay debt and for general corporate purposes.
 
  •  Sold $150 million aggregate principal amount of 4.50% medium-term notes due March 2008 in February 2003 under our medium-term note program. The net proceeds of $149.3 million were used to repay debt.
 
  •  Negotiated a new $500 million unsecured revolving credit facility to replace our $375 million unsecured revolver and $100 million unsecured term loan in March 2003. The credit facility’s interest rate is 25 and 30 basis points lower than the previous unsecured revolver and term loan, respectively.
 
  •  Sold 3.0 million shares of common stock at a public offering price of $16.97 per share under our $1 billion shelf registration statement in April 2003. The net proceeds of $49.2 million were ultimately used to acquire additional apartment communities. We sold an additional 100,000 shares of common stock at a public offering price of $16.97 per share in connection with the exercise of the underwriter’s over-allotment option in May 2003. The net proceeds of $1.6 million were used for general corporate purposes.
 
  •  Exercised our right to redeem 2.0 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock in May 2003. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,923 shares of common stock at a price of $16.25 per share.
 
  •  Issued $56.9 million of our Series E Cumulative Convertible Preferred Stock and 1,617,815 Preferred OP Units totaling $26.9 million in June 2003 as partial consideration for the purchase of four apartment communities in Southern California. Each share of Series E and each OP Unit was priced at $16.61 per share, and dividends on the Series E and OP Units carry a fixed coupon of 8.0% until such time as the common share dividend is equal to or exceeds this amount for four consecutive quarters, at which time the Series E and OP Units will be entitled to receive dividends equivalent to the dividends paid to holders of our common stock.
 
  •  Sold $50 million aggregate principal amount of 4.50% medium-term notes due March 2008 in August 2003 under our medium-term note program. The net proceeds of approximately $49.9 million were used to repay amounts outstanding on our $500 million unsecured revolving credit facility.
 
  •  Sold 4.0 million shares of common stock at a public offering price of $18.40 per share under our $1 billion shelf registration statement in September 2003. The net proceeds of approximately $72.3 million were used for general corporate purposes, including funding acquisitions and development, with the balance used to reduce outstanding variable rate debt under our unsecured credit facilities. We sold an additional 600,000 shares of common stock a public offering price of $18.40 per share in connection with the exercise of the underwriter’s over-allotment option in October 2003. The net proceeds of $10.8 million were used for general corporate purposes, including funding acquisitions and development, with the remaining balance used to reduce outstanding variable rate debt under our unsecured credit facilities.

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  •  Sold $75 million aggregate principal amount of 5.13% senior unsecured notes due January 2014 in October 2003 under our medium-term note program. The net proceeds of $74.5 million were used to repay amounts outstanding on our $500 million unsecured revolving credit facility.
 
  •  Sold $50 million aggregate principal amount of 4.25% senior unsecured notes due January 2009 in November 2003 under our medium-term note program. The net proceeds of $49.8 million were used to fund acquisitions of apartment communities.
 
  •  Exercised our right to redeem 4.0 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock in December 2003. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 6,154,000 shares of common stock at a price of $16.25 per share.
 
Credit Facilities

      We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million and one with Freddie Mac for $72 million. As of December 31, 2003, $676.3 million was outstanding under the Fannie Mae credit facilities leaving $183.7 million of unused capacity. The Fannie Mae credit facilities are for an initial term of ten years, bear interest at floating and fixed rates and can be extended for an additional five years at our discretion. As of December 31, 2003, $70.7 million had been funded under the Freddie Mac credit facility leaving $1.3 million of unused capacity. The Freddie Mac credit facility is for an initial term of five years with an option for us to extend for an additional four-year term at the then market rate. As of December 31, 2003, aggregate borrowings under both the Fannie Mae and Freddie Mac credit facilities were $747 million. We have $305.9 million of the funded balance fixed at a weighted average interest rate of 6.4%. The remaining balance on these facilities is currently at a weighted average variable rate of 1.7%.

      We have a $500 million three-year unsecured revolving credit facility that matures in March 2006. The credit facility replaces our $375 million unsecured revolver and $100 million unsecured term loan. If we receive commitments from additional lenders or if the initial lenders increase their commitments, we will be able to increase the credit facility to $650 million. At our option, the credit facility can be extended one year to March 2007. Based on our current credit ratings, the credit facility bears interest at a rate equal to LIBOR plus 90 basis points. As of December 31, 2003, $137.9 million was outstanding under the credit facility, leaving $362.1 million of unused capacity.

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

 
Derivative Instruments

      As part of our 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. Our derivative transactions used for interest rate risk management include various interest rate swaps with indices that relate to the pricing of specific financial instruments of the company. We believe that we have appropriately controlled our interest rate risk through the use of derivative instruments. During 2003, the fair value of our derivative instruments has improved from an unfavorable $9.6 million at December 31, 2002, to an unfavorable $1.6 million at December 31, 2003. This decrease is primarily due to the maturity and settlement of eight swaps in 2003 and the normal progression of the fair market value of derivative instruments towards zero as they approach expiration.

 
Interest Rate Risk

      We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather, issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate

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sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. A large portion of our market risk is exposure to short-term interest rates from variable rate borrowings outstanding under the unhedged portion of our Fannie Mae and Freddie Mac credit facilities and our bank revolving credit facility, which totaled $441.2 million and $86.4 million, respectively, at December 31, 2003. The impact on our financial statements of refinancing fixed rate debt that matured during 2003 was immaterial.

      At December 31, 2003, the notional value of our derivative products for the purpose of managing interest rate risk was $68.5 million, representing interest rate swaps under which we pay a fixed rate of interest and receive a variable rate. These agreements effectively fix $68.5 million of our variable rate notes payable to a weighted average fixed rate of 8.1%. At December 31, 2003, the fair market value of the interest rate swaps was an unfavorable $1.6 million. If interest rates were 100 basis points more or less at December 31, 2003, the fair market value of the interest rate swaps would have increased or decreased approximately $0.3 million.

      If market interest rates for variable rate debt average 100 basis points more in 2004 than they did during 2003, our interest expense, after considering the effects of our interest rate swap agreements, would increase, and income before taxes would decrease by $5.8 million. Comparatively, if market interest rates for variable rate debt had averaged 100 basis points more in 2003 than in 2002, our interest expense, after considering the effects of our interest rate swap agreements, would have increased, and income before taxes would have decreased by $5.3 million. If market rates for fixed rate debt were 100 basis points higher at December 31, 2003, the fair value of fixed rate debt would have decreased from $1.57 billion to $1.46 billion. If market interest rates for fixed rate debt were 100 basis points lower at December 31, 2003, the fair value of fixed rate debt would have increased from $1.57 billion to $1.58 billion.

      These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost and interest rate swap agreements. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, we would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.

 
Funds from Operations

      Funds from operations (“FFO”) is defined as net income (computed in accordance with generally accepted accounting principles), 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. Adjusted funds from operations (“AFFO”) is defined as FFO less recurring capital expenditures for our stabilized portfolio of $464 per home in 2003 and $425 per home in 2002. We consider FFO and AFFO in evaluating property acquisitions and our operating performance, and believe that FFO and AFFO should be considered along with, but not as an alternative to, net income as a measure of our operating performance and liquidity. 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 generally accepted accounting principles 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 that excludes historical costs depreciation, among other items, from net income based on generally accepted accounting principles. The use of FFO, combined with the required presentations, has been fundamentally beneficial, improving the understanding of operating results

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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 and AFFO are the best measures of economic profitability for real estate investment trusts.

      The following table outlines our FFO calculation and reconciliation to generally accepted accounting principles for the three years ended December 31, 2003 (dollars in thousands):

                           
2003 2002 2001



Net income
  $ 70,404     $ 53,229     $ 61,828  
Adjustments:
                       
 
Distributions to preferred stockholders
    (26,326 )     (27,424 )     (31,190 )
 
Real estate depreciation and amortization, net of outside partners’ interest
    161,402       148,210       132,825  
 
Minority interests of unitholders in operating partnership
    368       (970 )     (732 )
 
Real estate depreciation related to unconsolidated entities
    196       471       1,105  
Discontinued Operations:
                       
 
Real estate depreciation
    1,556       9,519       17,381  
 
Minority interests of unitholders in operating partnership
    1,279       2,679       2,699  
 
Net gains on sales of depreciable property
    (15,941 )     (32,698 )     (24,714 )
     
     
     
 
Funds from operations (“FFO”) — basic
  $ 192,938     $ 153,016     $ 159,202  
     
     
     
 
 
Distributions to preferred stockholders — Series D and E (Convertible)
    14,681       15,779       15,428  
     
     
     
 
Funds from operations — diluted
  $ 207,619     $ 168,795     $ 174,630  
     
     
     
 
 
Gains on the disposition of real estate developed for sale
    812              
     
     
     
 
FFO with gains on the disposition of real estate developed for sale — diluted
  $ 208,431     $ 168,795     $ 174,630  
     
     
     
 
 
Recurring capital expenditures
    (34,522 )     (32,341 )     (31,535 )
     
     
     
 
Adjusted funds from operations (“AFFO”) — diluted
  $ 173,909     $ 136,454     $ 143,095  
     
     
     
 
Weighted average number of common shares and OP Units outstanding — basic
    122,589       113,077       107,741  
Weighted average number of common shares, OP Units and common stock equivalents outstanding — diluted
    136,975       127,838       120,728  

      In the computation of diluted FFO, OP Units, out-performance partnership shares and the shares of Series D Cumulative Convertible Redeemable Preferred Stock and Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count. In 2003, distributions to preferred stockholders exclude $19.3 million related to a premium on preferred shares repurchased.

      Gains on the disposition of real estate investments developed for sale is defined as net sales proceeds less a tax provision (such development by REITs must be conducted in a taxable REIT subsidiary) and the gross investment basis of the asset before accumulated depreciation. We consider FFO with gains (or losses) on real estate developed for sale to be a meaningful supplemental measure of performance because of the short-term use of funds to produce a profit that differs from the traditional long-term investment in real estate for REITs.

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      The following is a reconciliation of GAAP gains on the disposition of real estate developed for sale to gross gains on the disposition of real estate developed for sale for the three years ended December 31, 2003 (dollars in thousands):

                         
2003 2002 2001



GAAP gains on the disposition of real estate developed for sale
  $ 1,249     $     $  
Less: accumulated depreciation
    (437 )            
     
     
     
 
Gains on the disposition of real estate developed for sale
  $ 812     $     $  
     
     
     
 

      FFO also does not represent cash generated from operating activities in accordance with generally accepted accounting principles, 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 generally accepted accounting principles is as follows (dollars in thousands):

                         
2003 2002 2001



Net cash provided by operating activities
  $ 234,945     $ 229,001     $ 224,411  
Net cash used in investing activities
    (304,217 )     (67,363 )     (64,055 )
Net cash provided by/(used in) financing activities
    70,944       (163,127 )     (166,020 )
 
Results of Operations

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

 
Net Income Available to Common Stockholders
 
2003-vs-2002

      Net income available to common stockholders was $24.8 million ($0.21 per diluted share) for the year ended December 31, 2003, compared to $25.8 million ($0.24 per diluted share) for the year ended December 31, 2002, representing a decrease of $1.0 million ($0.03 per diluted share). The decrease in net income available to common stockholders for the year ended December 31, 2003, when compared to the same period in the prior year resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:

  •  a charge of $19.3 million in 2003 for a premium on preferred share repurchases,
 
  •  $16.8 million less in gains recognized from the sale of depreciable property in 2003,
 
  •  a $15.5 million decrease in property operating income in 2003,
 
  •  a $4.2 million increase in depreciation and amortization expense in 2003, and
 
  •  a $1.4 million impairment charge taken in 2003 for the write-off of our investment in Realeum, Inc., an unconsolidated development joint venture.

      These decreases in income were offset by a $15.8 million decrease in interest expense in 2003, $37.0 million less in prepayment penalties and premiums paid in 2003 for the refinancing of mortgage debt and the repurchase of unsecured debt, and a $2.3 million impairment charge taken in 2002 related to a portfolio of properties in Memphis, Tennessee.

 
2002-vs-2001

      Net income available to common stockholders was $25.8 million ($0.24 per diluted share) for the year ended December 31, 2002, compared to $27.1 million ($0.27 per diluted share) for the prior year. The decrease in net income available to common stockholders resulted primarily from charges for prepayment penalties and premiums paid in 2002 in connection with the refinancing of mortgage debt and

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the repurchase of unsecured debt, aggregating $37.0 million before minority interests. These charges were partially offset by the following items, all of which are discussed in further detail elsewhere within this Report:

  •  an $11.4 million decrease in interest expense in 2002,
 
  •  $8.0 million more in gains recognized from the sale of depreciable property in 2002,
 
  •  a charge of $5.4 million in 2001 for restructuring,
 
  •  a $5.4 million charge in 2001 for impairment losses on real estate and investments, and
 
  •  a $4.7 million increase in property operating income in 2002.
 
Apartment Community Operations

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

                                                 
Year Ended December 31, Year Ended December 31,


2003 2002 % Change 2002 2001 % Change






Property rental income
  $ 613,550     $ 627,625       -2.2 %   $ 627,625     $ 617,690       1.6 %
Property operating expense*
    (234,478 )     (233,071 )     0.6 %     (233,071 )     (227,820 )     2.3 %
     
     
     
     
     
     
 
Property operating income
  $ 379,072     $ 394,554       -3.9 %   $ 394,554     $ 389,870       1.2 %
     
     
     
     
     
     
 
Weighted average number of homes
    74,550       76,567       -2.6 %     76,567       76,487       0.1 %
Physical occupancy**
    93.2 %     93.0 %     0.2 %     93.0 %     93.9 %     -0.9 %


Excludes depreciation, amortization, and property management expenses.

**  Based upon weighted average stabilized units.

      The decrease in total property operating income since December 31, 2002 is primarily due to an overall decrease in same community property operating income.

 
2003-vs-2002
Same Communities

      Our same communities (those communities acquired, developed and stabilized prior to January 1, 2002 and held on December 31, 2003, which consisted of 67,814 apartment homes) provided 89% of our property operating income for the year ended December 31, 2003.

      For 2003, same community property operating income decreased 4.2% or $14.9 million compared to 2002. The overall decrease in property operating income was primarily attributable to a 1.8% or $9.9 million decrease in revenues from rental and other income and a 2.5% or $5.0 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 2.2% or $12.8 million decrease in rental rates. This decrease in income was partially offset by an 11.7% or $1.7 million increase in sub-meter, gas, trash and utility reimbursements, a 5.5% or $1.0 million decrease in concession expense and a 1.7% or $0.7 million decrease in vacancy loss. Physical occupancy remained constant at 93.2% for both 2003 and 2002.

      The increase in property operating expenses was primarily driven by a 17.6% or $1.7 million increase in insurance costs, a 4.3% or $1.4 million increase in utilities expense, a 2.4% or $0.9 million increase in repair and maintenance costs, a 3.9% or $0.8 million increase in administrative and marketing costs, a 0.7% or $0.4 million increase in personnel costs, and a 0.8% or $0.4 million increase in taxes, all of which were partially offset by a 17.6% or $0.2 million decrease in incentive compensation.

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      As a result of the percentage changes in property rental income and property operating expenses, the operating margin (property operating income divided by property rental income) decreased 1.6% to 61.7%.

 
Non-Mature Communities

      The remaining 11% of our property operating income during 2003 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed during 2002 and 2003, sold properties, and those properties classified as real estate held for disposition). The 21 communities with 6,935 apartment homes that we acquired during 2002 and 2003 provided $30.6 million of property operating income. The seven communities with 1,927 apartment homes sold during 2003 provided $4.6 million of property operating income. In addition, our development communities, which included 972 apartment homes constructed since January 1, 2002, provided $4.8 million of property operating income during 2003, the one community with 100 apartment homes classified as real estate held for disposition provided $0.7 million of property operating income and other non-mature communities provided $1.7 million of property operating income for the year ended December 31, 2003.

 
2002-vs-2001
Same Communities

      Our same communities (those communities acquired, developed, and stabilized prior to January 1, 2001 and held on December 31, 2002, which consisted of 66,416 apartment homes) provided 87% of our property operating income for the year ended December 31, 2002.

      In 2002, same community property operating income decreased 0.8% or $2.8 million compared to the prior year. The overall decrease in property operating income was primarily driven by a 17.1% or $5.6 million increase in vacancy loss and a 37.1% or $4.5 million increase in concessions. These decreases in income were partially offset by a 32.8% or $3.4 million increase in sub-meter, trash and vacant utility reimbursements, a 0.3% or $1.7 million increase in rental rates and a 13.0% or $2.6 million increase in other income. Physical occupancy declined 0.8% to 93.3% in 2002 compared to 2001.

      For 2002, property operating expenses at these same communities increased 0.9% or $1.7 million compared to 2001. This increase in property operating expenses was primarily driven by a 10.6% or $3.3 million increase in repair and maintenance costs and a 3.4% or $1.6 million increase in real estate taxes, both of which were partially offset by a 5.1% or $1.7 million decrease in utilities expense, a 40.2% or $0.9 million decrease in incentive compensation expense and a 9.5% or $1.0 million decrease in insurance costs.

      As a result of the percentage changes in property rental income and property operating expenses, the operating margin decreased 0.4% to 63.3%.

 
Non-Mature Communities

      The remaining 13% of our property operating income during 2002 was generated from our non-mature communities (primarily those communities acquired or developed during 2001 and 2002, sold properties, and those properties classified as real estate held for disposition). The 16 communities with 4,989 apartment homes that we acquired during 2001 and 2002 provided $19.6 million of property operating income. In addition, our development communities, which included 1,238 apartment homes constructed since January 1, 2001, provided $6.7 million of property operating income during 2002. The 25 communities with 6,990 apartment homes sold during 2002 provided $18.1 million of property operating income, the two communities with 363 apartment homes classified as real estate held for disposition provided $1.9 million of property operating income, and other non-mature communities provided $4.6 million of property operating income for the year ended December 31, 2002.

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Real Estate Depreciation and Amortization

      For the year ended December 31, 2003, real estate depreciation and amortization on both continuing and discontinued operations increased $4.2 million or 2.7% compared to the same period in 2002, regardless of the decrease in the weighted average number of apartment homes experienced from December 31, 2002 to December 31, 2003. The increase was primarily due to the newly acquired properties having a significantly higher per home cost compared to those properties that have been disposed of, and other capital expenditures.

      During the year ended December 31, 2002, real estate depreciation on both continuing and discontinued operations increased $7.3 million or 4.8% compared to 2001. The increase in depreciation expense was attributable to the overall increase in the weighted average number of apartment homes as well as the impact of completed development communities, acquisitions and capital expenditures.

 
Interest Expense

      For the year ended December 31, 2003, interest expense on both continuing and discontinued operations decreased $15.8 million or 11.9% from 2002 primarily due to debt refinancings, decreasing interest rates and an overall decrease in the weighted average level of debt outstanding. For the year ended December 31, 2003, the weighted average amount of debt outstanding decreased 1.1% or $23.9 million compared to the prior year and the weighted average interest rate decreased from 6.1% to 5.4% during 2003. The weighted average amount of debt outstanding during 2003 is lower than 2002 primarily due to the high acquisition volume at the beginning of 2002 that was subsequently mitigated by high disposition activity in the second half of 2002. Furthermore, acquisition costs in 2003 that exceeded disposition proceeds were funded, in most part, by equity and OP Unit issuances. The decrease in the average interest rate during 2003 reflects our ability to take advantage of declining interest rates through refinancing and the utilization of variable rate debt.

      For the year ended December 31, 2002, interest expense on both continuing and discontinued operations decreased $11.4 million or 7.9% from 2001 primarily due to debt refinancings and decreasing interest rates that were partially offset by the overall increase in the weighted average level of debt outstanding. For the year ended December 31, 2002, the weighted average amount of debt outstanding increased 2.0% or $40.4 million from 2001 levels and the weighted average interest rate decreased from 7.1% to 6.1% for 2002. The weighted average amount of debt outstanding during 2002 is higher than 2001 as we borrowed additional funds to acquire apartment communities. The decrease in the average interest rate during 2002 reflects our ability to take advantage of declining interest rates through refinancing and the utilization of variable rate debt.

 
General and Administrative

      For the year ended December 31, 2003, general and administrative expenses increased $1.3 million or 6.6% over 2002 primarily due to an increase in incentive compensation expense. Over the past two years, we have shifted our long-term incentive reward system from stock options to restricted stock, the cost of which is expensed quarterly during the vesting period.

      For the year ended December 31, 2002, general and administrative expenses decreased $2.4 million or 11.0% compared to 2001. The decrease was primarily due to reduced personnel costs and state and local taxes that were partially offset by increased third-party consulting expenses.

 
Impairment Loss on Real Estate and Investments

      In 2003, we recognized a $1.4 million charge for the write-off of our investment in Realeum, Inc., an unconsolidated development joint venture created to develop web-based solutions for multifamily property and portfolio management.

      In 2002, we pursued our strategy of exiting markets where long-term growth prospects are limited and the redeployment of capital would enhance future growth rates and economies of scale. During 2002, we

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sold 25 apartment communities with a total of 6,990 apartment homes, one commercial property and one parcel of land with an aggregate net book value of approximately $285 million. Although these sales resulted in an aggregate net gain of $32.7 million, certain of these assets were sold at net selling prices below their net book values. As a result, we recorded an aggregate $2.3 million impairment loss during 2002 for the write down of a portfolio of apartment communities in Memphis, Tennessee.
 
Gains on Sales of Land and Depreciable Property

      For the years ended December 31, 2003 and 2002, we recognized gains for financial reporting purposes of $15.9 million and $32.7 million, respectively. Changes in the level of gains recognized from period to period reflect the changing level of our divestiture activity from period to period as well as the extent of gains related to specific properties sold.

 
Premium on Preferred Share Repurchases

      In the second quarter of 2003, we exercised our right to redeem 2.0 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,923 shares of common stock at a price of $16.25 per share. In December 2003, we redeemed an additional 4.0 million shares of our Series D. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 6,154,000 shares of common stock at a price of $16.25 per share. As a result, we recognized a $19.3 million premium on preferred share repurchases during 2003. The premium amount recognized to convert these shares represents the cumulative accretion to date between the conversion value of the preferred stock and the value at which it was recorded at the time of issuance.

 
Inflation

      We believe that the direct effects of inflation on our operations have been immaterial. Substantially all of our leases are for a term of one year or less which generally minimizes our risk from the adverse effects of inflation.

 
Off-Balance Sheet Arrangements

      We do not have any 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.

 
Contractual Obligations

      The following table summarizes our contractual obligations as of December 31, 2003 (dollars in thousands):

                                         
Payments Due by Period

Contractual Obligations Total 2004 2005-2006 2007-2008 Thereafter






Long Term Debt Obligations
  $ 2,132,037     $ 147,857     $ 241,896     $ 594,897     $ 1,147,389  
Capital Lease Obligations
                             
Operating Lease Obligations
    29,638       1,555       2,533       2,183       23,367  
Purchase Obligations
                             
Other Long-Term Liabilities Reflected on the Balance Sheet Under GAAP
                             

      During 2003, we incurred interest costs of $119.0 million, of which $1.8 million was capitalized.

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Factors Affecting Our Business and Prospects

      There are many factors that affect our business and the results of our operations, some of which are beyond our control. These factors include:

  •  unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates,
 
  •  the failure of acquisitions to achieve anticipated results,
 
  •  possible difficulty in selling apartment communities,
 
  •  the timing and closing of planned dispositions under agreement,
 
  •  competitive factors that may limit our ability to lease apartment homes or increase or maintain rents,
 
  •  insufficient cash flow that could affect our debt financing and create refinancing risk,
 
  •  failure to generate sufficient revenue, which could impair our debt service payments and distributions to stockholders,
 
  •  development and construction risks that may impact our profitability,
 
  •  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, and
 
  •  the imposition of federal taxes if we fail to qualify as a REIT in any taxable year.
 
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Information required by this item is included in and incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report.

 
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The consolidated financial statements and related financial information required to be filed are attached to this Report. Reference is made to page 44 of this Report for the Index to Consolidated Financial Statements and Schedule.

 
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

      None.

 
Item 9A. CONTROLS AND PROCEDURES

      As of December 31, 2003, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. In addition, our Chief Executive Officer and our Chief Financial Officer concluded that during the year ended

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December 31, 2003, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

      It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART III

 
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The information required by this item is incorporated by reference to the information set forth under the headings “Election of Directors,” “Audit Committee Report” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 4, 2004.

      Information required by this item regarding our executive officers is included in Part I of this Report in the section entitled “Business-Executive Officers of the Company.”

      We have adopted a code of ethics for senior financial officers that applies to our principal executive officer and all members of our finance staff, including the principal financial and accounting officer, and a code of business conduct and ethics that applies to all of our employees. Information regarding our codes is available on our website, www.udrt.com, and is incorporated by reference to the information set forth under the heading “Corporate Governance” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 4, 2004. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of our codes by posting such amendment or waiver on our website.

 
Item 11. EXECUTIVE COMPENSATION

      The information required by this item is incorporated by reference to the information set forth under the heading “Compensation of Executive Officers” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 4, 2004.

 
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

      The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 4, 2004.

 
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this item is incorporated by reference to the information set forth under the heading “Certain Business Relationships” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 4, 2004.

 
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The information required by this item is incorporated by reference to the information set forth under the headings “Audit Fees” and “Audit Fees Pre-Approval Policy” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 4, 2004.

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PART IV

 
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

      (a) The following documents are filed as part of this Report:

        1. Financial Statements. See Index to Consolidated Financial Statements and Schedule on page 44 of this Report.
 
        2. Financial Statement Schedule. See Index to Consolidated Financial Statements and Schedule on page 44 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
 
        3. Exhibits. The exhibits filed with this Report are set forth in the Exhibit Index.

      (b) Reports on Form 8-K.

        We filed or furnished the following Current Reports on Form 8-K during the quarter ended December 31, 2003. The information provided under Item 12. Results of Operations and Financial Condition is not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

  •  Current Report on Form 8-K dated October 27, 2003, furnished to the Securities and Exchange Commission on October 28, 2003, under Item 12. Results of Operations and Financial Condition.
 
  •  Current Report on Form 8-K dated November 7, 2003, filed with the Securities and Exchange Commission on November 12, 2003, under Item 5. Other Events and Item 7. Financial Statements and Exhibits.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

  UNITED DOMINION REALTY TRUST, INC.

  By:  /s/ THOMAS W. TOOMEY
 
  Thomas W. Toomey
  Chief Executive Officer and President

Date: March 10, 2004

      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 10, 2004 by the following persons on behalf of the registrant and in the capacities indicated.

     
/s/ THOMAS W. TOOMEY

Thomas W. Toomey
Chief Executive Officer, President,
and Director
  /s/ ROBERT P. FREEMAN
-----------------------------------------
Robert P. Freeman
Director
 
/s/ CHRISTOPHER D. GENRY

Christopher D. Genry
Executive Vice President and
Chief Financial Officer
  /s/ JON A. GROVE
-----------------------------------------
Jon A. Grove
Director
 
/s/ SCOTT A. SHANABERGER

Scott A. Shanaberger
Senior Vice President and
Chief Accounting Officer
  /s/ JOHN P. MCCANN
-----------------------------------------
John P. McCann
Director
 
/s/ ROBERT C. LARSON

Robert C. Larson
Chairman of the Board
  /s/ THOMAS R. OLIVER
-----------------------------------------
Thomas R. Oliver
Director
 
/s/ JAMES D. KLINGBEIL

James D. Klingbeil
Vice Chairman of the Board
  /s/ LYNNE B. SAGALYN
-----------------------------------------
Lynne B. Sagalyn
Director
 
/s/ ERIC J. FOSS

Eric J. Foss
Director
  /s/ MARK J. SANDLER
-----------------------------------------
Mark J. Sandler
Director
 
    /s/ ROBERT W. SCHARAR
-----------------------------------------
Robert W. Scharar
Director

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

UNITED DOMINION REALTY TRUST, INC.

         
Page

FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
       
Report of Ernst & Young LLP, Independent Auditors
    45  
Consolidated Balance Sheets at December 31, 2003 and 2002
    46  
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003
    47  
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003
    48  
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2003
    49  
Notes to Consolidated Financial Statements
    51  
SCHEDULE FILED AS PART OF THIS REPORT
       
Schedule III — Summary of Real Estate Owned
    77  

      All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

United Dominion Realty Trust, Inc.

      We have audited the accompanying consolidated balance sheets of United Dominion Realty Trust, Inc. (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Dominion Realty Trust, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

      As discussed in Notes 1, 3 and 8 to the consolidated financial statements, the Company changed its method of accounting for gains and losses on the extinguishment of debt in 2003, changed its method of accounting for the disposal of long-lived assets in 2002, and changed its method of accounting for derivative instruments in 2001.

  Ernst & Young LLP

Richmond, Virginia

January 27, 2004

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)
                     
December 31,

2003 2002


ASSETS
               
Real estate owned:
               
 
Real estate held for investment
  $ 4,305,450     $ 3,833,022  
   
Less: accumulated depreciation
    (895,567 )     (734,051 )
     
     
 
      3,409,883       3,098,971  
 
Real estate under development
    30,375       30,624  
 
Real estate held for disposition (net of accumulated depreciation of $1,063 and $14,682)
    14,663       89,155  
     
     
 
 
Total real estate owned, net of accumulated depreciation
    3,454,921       3,218,750  
Cash and cash equivalents
    4,824       3,152  
Restricted cash
    7,540       11,773  
Deferred financing costs, net
    21,425       17,542  
Investment in unconsolidated development joint venture
    1,673        
Funds held in escrow from 1031 exchanges pending the acquisition of real estate
    14,447        
Other assets
    38,605       23,771  
Real estate held for disposition assets
    208       1,148  
     
     
 
 
Total assets
  $ 3,543,643     $ 3,276,136  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Secured debt
  $ 1,018,028     $ 1,015,740  
Unsecured debt
    1,114,009       1,041,900  
Real estate taxes payable
    30,858       28,949  
Accrued interest payable
    12,892       11,908  
Security deposits and prepaid rent
    24,132       20,883  
Distributions payable
    40,623       35,141  
Accounts payable, accrued expenses and other liabilities
    45,372       49,442  
Real estate held for disposition liabilities
    87       1,686  
     
     
 
 
Total liabilities
    2,286,001       2,205,649  
Minority interests
    94,206       69,216  
Stockholders’ equity:
               
 
Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized;
               
   
5,416,009 shares 8.60% Series B Cumulative Redeemable issued and outstanding (5,416,009 in 2002)
    135,400       135,400  
   
2,000,000 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (8,000,000 in 2002)
    44,271       175,000  
   
3,425,217 shares 8.00% Series E Cumulative Convertible issued and outstanding (0 in 2002)
    56,893        
 
Common stock, $1 par value; 250,000,000 shares authorized 127,295,126 shares issued and outstanding (106,605,259 in 2002)
    127,295       106,605  
 
Additional paid-in capital
    1,458,983       1,140,786  
 
Distributions in excess of net income
    (651,497 )     (541,428 )
 
Deferred compensation — unearned restricted stock awards
    (5,588 )     (2,504 )
 
Notes receivable from officer-stockholders
    (459 )     (2,630 )
 
Accumulated other comprehensive loss
    (1,862 )     (9,958 )
     
     
 
   
Total stockholders’ equity
    1,163,436       1,001,271  
     
     
 
 
Total liabilities and stockholders’ equity
  $ 3,543,643     $ 3,276,136  
     
     
 

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
                             
Years Ended December 31,

2003 2002 2001



REVENUES
                       
 
Rental income
  $ 603,367     $ 582,823     $ 549,890  
 
Non-property income
    1,068       1,806       4,593  
     
     
     
 
   
Total revenues
    604,435       584,629       554,483  
EXPENSES
                       
 
Rental expenses:
                       
   
Real estate taxes and insurance
    68,726       63,153       58,401  
   
Personnel
    62,082       59,250       55,673  
   
Utilities
    36,658       33,484       33,581  
   
Repair and maintenance
    39,437       36,659       32,047  
   
Administrative and marketing
    22,596       21,302       19,964  
   
Property management
    16,873       17,240       17,107  
   
Other operating expenses
    1,205       1,203       1,376  
 
Real estate depreciation and amortization
    161,837       149,636       134,464  
 
Interest
    117,185       130,791       139,470  
 
General and administrative
    20,626       19,343       21,730  
 
Other depreciation and amortization
    3,233       4,073       3,308  
 
Impairment loss on investments
    1,392             2,648  
 
Loss on early debt retirement
          35,500       3,219  
 
Severance costs and other organizational charges
                5,404  
     
     
     
 
   
Total expenses
    551,850       571,634       528,392  
     
     
     
 
Income before minority interests and discontinued operations
    52,585       12,995       26,091  
Minority interests of outside partnerships
    (614 )     (1,414 )     (2,225 )
Minority interests of unitholders in operating partnerships
    (368 )     970       732  
     
     
     
 
Income before discontinued operations, net of minority interests
    51,603       12,551       24,598  
Income from discontinued operations, net of minority interests
    18,801       40,678       37,230  
     
     
     
 
Net income
    70,404       53,229       61,828  
Distributions to preferred stockholders — Series A and B
    (11,645 )     (11,645 )     (15,762 )
Distributions to preferred stockholders — Series D (Convertible)
    (12,178 )     (15,779 )     (15,428 )
Distributions to preferred stockholders — Series E (Convertible)
    (2,503 )            
Premium on preferred share repurchases
    (19,271 )           (3,496 )
     
     
     
 
Net income available to common stockholders
  $ 24,807     $ 25,805     $ 27,142  
     
     
     
 
Earnings per common share — basic:
                       
 
Income/(loss) from continuing operations available to common stockholders, net of minority interests
  $ 0.06     $ (0.14 )   $ (0.10 )
 
Income from discontinued operations, net of minority interests
  $ 0.16     $ 0.38     $ 0.37  
 
Net income available to common stockholders
  $ 0.22     $ 0.24     $ 0.27  
Earnings per common share — diluted:
                       
 
Income/(loss) from continuing operations available to common stockholders, net of minority interests
  $ 0.05     $ (0.14 )   $ (0.10 )
 
Income from discontinued operations, net of minority interests
  $ 0.16     $ 0.38     $ 0.37  
 
Net income available to common stockholders
  $ 0.21     $ 0.24     $ 0.27  
Common distributions declared per share
  $ 1.14     $ 1.11     $ 1.08  
Weighted average number of common shares outstanding — basic
    114,672       106,078       100,339  
Weighted average number of common shares outstanding — diluted
    115,648       106,078       100,339  

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
                               
Years Ended December 31,

2003 2002 2001



Operating Activities
                       
 
Net income
  $ 70,404     $ 53,229     $ 61,828  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization
    166,637       163,328       155,327  
   
Impairment loss on real estate and investments
    1,392       2,301       5,436  
   
Gains on sales of land and depreciable property
    (15,941 )     (32,698 )     (24,748 )
   
Minority interests
    2,261       3,122       4,192  
   
Loss on early debt retirement
          36,965       3,471  
   
Amortization of deferred financing costs and other
    6,148       5,256       965  
   
Changes in operating assets and liabilities:
                       
     
(Increase)/decrease in operating assets
    (2,560 )     12,763       21,128  
     
Increase/(decrease) in operating liabilities
    6,604       (15,265 )     (3,188 )
     
     
     
 
Net cash provided by operating activities
    234,945       229,001       224,411  
Investing Activities
                       
 
Proceeds from sales of real estate investments, net
    93,613       282,533       109,713  
 
Acquisition of real estate assets, net of liabilities assumed and equity
    (314,739 )     (282,600 )     (74,372 )
 
Development of real estate assets
    (13,640 )     (22,763 )     (53,607 )
 
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (53,146 )     (42,827 )     (53,096 )
 
Capital expenditures — non-real estate assets
    (1,858 )     (1,706 )     (1,442 )
 
Increase in funds held in escrow from tax free exchanges pending the acquisition of real estate
    (14,447 )            
 
Other investing activities
                8,749  
     
     
     
 
Net cash used in investing activities
    (304,217 )     (67,363 )     (64,055 )
Financing Activities
                       
 
Proceeds from the issuance of secured debt
    37,415       324,282       225,171  
 
Scheduled principal payments on secured debt
    (22,442 )     (11,176 )     (55,130 )
 
Non-scheduled principal payments and prepayment penalties on secured debt
    (17,549 )     (294,662 )     (52,182 )
 
Proceeds from the issuance of unsecured debt
    323,382       198,476        
 
Payments and prepayment premiums on unsecured debt
    (214,591 )     (210,413 )     (21,307 )
 
Net repayment of revolving bank debt
    (37,900 )     (54,400 )     (14,200 )
 
Payment of financing costs
    (6,463 )     (5,510 )     (4,807 )
 
Issuance of note receivable
    (8,000 )            
 
Proceeds from the issuance of common stock
    179,811       60,252       66,319  
 
Proceeds from the repayment of officer loans
    2,171              
 
Proceeds from the issuance of performance shares
    657             1,236  
 
Distributions paid to minority interests
    (9,756 )     (8,926 )     (12,868 )
 
Cash paid to buy out minority interests
                (4,267 )
 
Distributions paid to preferred stockholders
    (27,532 )     (27,424 )     (34,308 )
 
Distributions paid to common stockholders
    (128,188 )     (117,116 )     (108,511 )
 
Repurchases of common and preferred stock
    (71 )     (16,510 )     (151,166 )
     
     
     
 
Net cash provided by/(used in) financing activities
    70,944       (163,127 )     (166,020 )
Net increase/(decrease) in cash and cash equivalents
    1,672       (1,489 )     (5,664 )
Cash and cash equivalents, beginning of year
    3,152       4,641       10,305  
     
     
     
 
Cash and cash equivalents, end of year
  $ 4,824     $ 3,152     $ 4,641  
     
     
     
 
Supplemental Information:
                       
 
Interest paid during the period
  $ 116,057     $ 135,223     $ 148,863  
 
Issuance of restricted stock awards
    5,297       2,904       1,363  
 
Non-cash transactions:
                       
   
Secured debt assumed with the acquisition of properties
    4,865       41,636       18,230  
   
Issuance of preferred stock in connection with acquisitions
    58,811              
   
Issuance of preferred operating partnership units in connection with acquisitions
    26,872              
   
Issuance of operating partnership units in connection with acquisitions
    7,135              
   
Reduction in secured debt from the disposition of properties
          35,885       28,315  
   
Conversion of operating partnership minority interests to common stock
    2,206       1,252       643  
   
(216,983 shares in 2003, 92,159 shares in 2002 and 74,271 shares in 2001)
                       

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except for share data)
                                                                                     
Deferred Accumulated
Preferred Stock Common Stock Distributions in Compensation — Notes Receivable Other


Paid-in Excess of Net Unearned Restricted from Officer — Comprehensive
Shares Amount Shares Amount Capital Income Stock Awards Stockholders Loss Total










Balance, December 31, 2000
    17,408,229     $ 410,206       102,219,250     $ 102,219     $ 1,081,387     $ (366,531 )   $ (828 )   $ (7,561 )   $     $ 1,218,892  
     
     
     
     
     
     
     
     
     
     
 
Comprehensive Income
                                                                               
 
Net income
                                            61,828                               61,828  
 
Other comprehensive income:
                                                                               
   
Cumulative effect of a change in accounting principle
                                                                    (3,848 )     (3,848 )
   
Unrealized loss on derivative financial instruments
                                                                    (11,023 )     (11,023 )
     
     
     
     
     
     
     
     
     
     
 
 
Comprehensive income
                                            61,828                       (14,871 )     46,957  
     
     
     
     
     
     
     
     
     
     
 
 
Issuance of common shares to employees, officers and director-stockholders
                    257,158       258       2,318                                       2,576  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    332,243       332       4,054                                       4,386  
 
Issuance of common shares through public offering
                    4,100,000       4,100       52,316                                       56,416  
 
Purchase of common and preferred stock
    (91,900 )     (2,298 )     (3,962,076 )     (3,962 )     (47,362 )                                     (53,622 )
 
Redemption of Series A preferred stock
    (3,900,320 )     (97,508 )                     3,496       (3,496 )                             (97,508 )
 
Issuance of restricted stock awards
                    112,433       112       1,251               (1,363 )                      
 
Adjustment for cash purchase and conversion of minority interests of unitholders in operating partnerships
                    74,271       74       569                                       643  
 
Principal repayments on notes receivable from officer-stockholders
                                                            3,252               3,252  
 
Common stock distributions declared ($1.08 per share)
                                            (108,956 )                             (108,956 )
 
Preferred stock distributions declared — Series A ($1.05 per share)
                                            (4,111 )                             (4,111 )
 
Preferred stock distributions declared — Series B ($2.15 per share)
                                            (11,651 )                             (11,651 )
 
Preferred stock distributions declared — Series D ($1.93 per share)
                                            (15,428 )                             (15,428 )
 
Amortization of deferred compensation
                                                    879                       879  
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2001
    13,416,009     $ 310,400       103,133,279     $ 103,133     $ 1,098,029     $ (448,345 )   $ (1,312 )   $ (4,309 )   $ (14,871 )   $ 1,042,725  
     
     
     
     
     
     
     
     
     
     
 
Comprehensive Income
                                                                               
 
Net income
                                            53,229                               53,229  
 
Other comprehensive income:
                                                                               
   
Unrealized gain on derivative financial instruments
                                                                    4,913       4,913  
     
     
     
     
     
     
     
     
     
     
 
 
Comprehensive income
                                            53,229                       4,913       58,142  
     
     
     
     
     
     
     
     
     
     
 
 
Issuance of common shares to employees, officers and director-stockholders
                    1,000,592       1,001       10,782                                       11,783  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    152,343       152       2,347                                       2,499  
 
Issuance of common shares through public offering
                    3,166,800       3,167       41,139                                       44,306  
 
Purchase of common stock
                    (1,145,412 )     (1,146 )     (15,369 )                                     (16,515 )
 
Issuance of restricted stock awards
                    205,498       205       2,699               (2,904 )                      
 
Adjustment for cash purchase and conversion of minority interests of unitholders in operating partnerships
                    92,159       93       1,159                                       1,252  
 
Principal repayments on notes receivable from officer-stockholders
                                                            1,679               1,679  

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

(In thousands, except for share data)
                                                                                     
Deferred Accumulated
Preferred Stock Common Stock Distributions in Compensation — Notes Receivable Other


Paid-in Excess of Net Unearned Restricted from Officer — Comprehensive
Shares Amount Shares Amount Capital Income Stock Awards Stockholders Loss Total










 
Common stock distributions declared ($1.11 per share)
                                            (118,888 )                             (118,888 )
 
Preferred stock distributions declared — Series B ($2.15 per share)
                                            (11,645 )                             (11,645 )
 
Preferred stock distributions declared — Series D ($1.98 per share)
                                            (15,779 )                             (15,779 )
 
Amortization of deferred compensation
                                                    1,712                       1,712  
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2002
    13,416,009     $ 310,400       106,605,259     $ 106,605     $ 1,140,786     $ (541,428 )   $ (2,504 )   $ (2,630 )   $ (9,958 )   $ 1,001,271  
     
     
     
     
     
     
     
     
     
     
 
Comprehensive Income
                                                                               
 
Net income
                                            70,404                               70,404  
 
Other comprehensive income:
                                                                               
   
Unrealized gain on derivative financial instruments
                                                                    8,096       8,096  
     
     
     
     
     
     
     
     
     
     
 
 
Comprehensive income
                                            70,404                       8,096       78,500  
     
     
     
     
     
     
     
     
     
     
 
 
Issuance of common shares to employees, officers and director-stockholders
                    1,117,399       1,118       12,185                                       13,303  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    91,190       91       1,520                                       1,611  
 
Issuance of common shares through public offering
                    9,700,000       9,700       154,936                                       164,636  
 
Issuance of 8.00% Series E Cumulative Convertible shares
    3,425,217       56,893                       1,905                                       58,798  
 
Purchase of common stock
                    (4,564 )     (5 )     (66 )                                     (71 )
 
Issuance of restricted stock awards
                    337,936       338       4,959               (5,297 )                      
 
Adjustment for conversion of minority interests of unitholders in operating partnerships
                    216,983       217       1,989                                       2,206  
 
Principal repayments on notes receivable from officer-stockholders
                                                            2,171               2,171  
 
Accretion of premium on Series D redemptions
            19,271                               (19,271 )                              
 
Conversion of 7.50% Series D Cumulative Convertible Redeemable shares
    (6,000,000 )     (150,000 )     9,230,923       9,231       140,769                                        
 
Common stock distributions declared ($1.14 per share)
                                            (134,876 )                             (134,876 )
 
Preferred stock distributions declared — Series B ($2.15 per share)
                                            (11,645 )                             (11,645 )
 
Preferred stock distributions declared — Series D ($2.04 per share)
                                            (12,178 )                             (12,178 )
 
Preferred stock distributions declared — Series E ($0.84 per share)
                                            (2,503 )                             (2,503 )
 
Amortization of deferred compensation
                                                    2,213                       2,213  
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2003
    10,841,226     $ 236,564       127,295,126     $ 127,295     $ 1,458,983     $ (651,497 )   $ (5,588 )   $ (459 )   $ (1,862 )   $ 1,163,436  
     
     
     
     
     
     
     
     
     
     
 

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and formation

      United Dominion Realty Trust, Inc., a Maryland corporation, was formed in 1972. United Dominion operates within one defined business segment with activities related to the ownership, management, development, acquisition, renovation and disposition of multifamily apartment communities nationwide. At December 31, 2003, United Dominion owned 264 communities with 76,244 completed apartment homes and had three communities with 807 apartment homes under development.

Basis of presentation

      The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P., (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”), (collectively, “United Dominion”). As of December 31, 2003, there were 130,386,163 units in the Operating Partnership outstanding, of which 120,256,671 units or 92.2% were owned by United Dominion and 10,129,492 units or 7.8% were owned by limited partners (of which 1,853,204 are owned by the holders of the Series A OPPS, See Note 11). As of December 31, 2003, there were 3,518,857 units in the Heritage OP outstanding, of which 3,248,884 units or 92.3% were owned by United Dominion and 269,973 units or 7.7% were owned by limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the Operating Partnership and the Heritage OP. All significant intercompany accounts and transactions have been eliminated in consolidation.

Income taxes

      United Dominion is operated as, and elects to be taxed as, a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). Generally, a REIT complies with the provisions of the Code if it meets certain requirements concerning its income and assets, as well as if it distributes at least 90% of its REIT taxable income to its stockholders and will not be subject to U.S. federal income taxes if it distributes at least 100% of its income. Accordingly, no provision has been made for federal income taxes. However, United Dominion is subject to certain state and local excise or franchise taxes, for which provision has been made.

      The differences between net income available to common stockholders for financial reporting purposes and taxable income before dividend deductions relate primarily 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 aggregate cost of our real estate assets for federal income tax purposes was approximately $3.6 billion at December 31, 2003.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table reconciles United Dominion’s net income to REIT taxable income for the three years ended December 31, 2003 (dollars in thousands):

                         
2003 2002 2001



Net income
  $ 70,404     $ 53,229     $ 61,828  
Minority interest expense
    (3,364 )     (1,137 )     (1,442 )
Depreciation and amortization expense
    44,108       49,513       45,327  
Gain/(loss) on the disposition of properties
    2,363       (186 )     343  
Revenue recognition timing differences
    1,750       1,272       589  
Impairment loss, not deductible for tax
                2,788  
Investment loss, not deductible for tax
                2,648  
Other expense timing differences
    (1,090 )     (3,914 )     2,787  
REIT taxable income before dividends
  $ 114,171     $ 98,777     $ 114,868  
     
     
     
 
Dividend deduction
  $ 132,722     $ 111,965     $ 140,146  
     
     
     
 

      For income tax purposes, distributions paid to common stockholders consist of ordinary income, capital gains and return of capital, or a combination thereof. For the three years ended December 31, 2003, distributions declared per common share were taxable as follows:

                         
2003 2002 2001



Ordinary income
  $ 0.82     $ 0.55     $ 0.74  
Long-term capital gain
    0.10       0.14       0.11  
Unrecaptured section 1250 gain
    0.02       0.11       0.07  
Return of capital
    0.20       0.31       0.16  
     
     
     
 
    $ 1.14     $ 1.11     $ 1.08  
     
     
     
 

Use of estimates

      The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

      Certain reclassifications have been made to amounts in prior years’ financial statements to conform with current year presentation.

Real estate

      Real estate assets held for investment are carried at historical cost less accumulated depreciation and any recorded impairment losses.

      Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to the acquisition and improvement of real estate assets are capitalized at cost and depreciated over their estimated useful lives if the value of the existing asset will be materially enhanced or the life of the related asset will be substantially extended beyond the original life expectancy.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      United Dominion recognizes impairment losses on long-lived assets used in operations when there is an event or change in circumstance that indicates an impairment in the value of an asset and the undiscounted future cash flows are not sufficient to recover the asset’s carrying value. 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. If such indicators of impairment are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.

      For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the asset less estimated cost to sell is less than the carrying value of the asset. Properties classified as real estate held for disposition generally represent properties that are under contract for sale. Real estate held for disposition is carried at the lower of cost, net of accumulated depreciation, or fair value, less the cost to dispose, determined on an asset by asset basis. Expenditures for ordinary repair and maintenance costs on held for disposition properties are charged to expense as incurred. Expenditures for improvements, renovations and replacements related to held for disposition properties are capitalized at cost. Depreciation is not recorded on real estate held for disposition.

      Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets which is 35 years for buildings, 10 to 35 years for major improvements, and 3 to 10 years for furniture, fixtures, equipment and other assets. The value of acquired in-place leases is amortized over the remaining term of each acquired in-place lease.

      All development projects and related carrying costs are capitalized and reported on the Consolidated Balance Sheet as “Real estate under development.” As each building in a project is completed and becomes available for lease-up, the total cost of the building is transferred to real estate held for investment and the assets are depreciated over their estimated useful lives. The cost of development projects includes interest, real estate taxes, insurance and allocated development overhead during the construction period.

      Interest, real estate taxes and incremental labor and support costs for personnel working directly on the development site are capitalized as part of the real estate under development to the extent that such charges do not cause the carrying value of the asset to exceed its net realizable value. During 2003, 2002 and 2001, total interest capitalized was $1.8 million, $0.9 million and $2.9 million, respectively.

Cash and cash equivalents

      Cash and cash equivalents include all cash and liquid investments with maturities of three months or less when purchased.

Restricted cash

      Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and replacement reserves and security deposits.

Deferred financing costs

      Deferred financing costs include fees and other external costs incurred to obtain debt financings and are generally amortized on a straight-line basis, which approximates the effective interest method, over a period not to exceed the term of the related debt. Unamortized financing costs are written-off when debt is retired before its maturity date. During 2003, 2002 and 2001, amortization expense was $4.7 million, $4.5 million and $3.6 million, respectively.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Investments in unconsolidated development joint ventures

      Investments in unconsolidated joint ventures are accounted for using the equity method when major business decisions require approval by the other partners and United Dominion does not have control of the assets. Investments are recorded at cost and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. United Dominion eliminates intercompany profits on sales of services that are provided to joint ventures. Differences between the carrying value of investments and the underlying equity in net assets of the investee are due to capitalized interest on the investment balance and capitalized development and leasing costs that are recovered by United Dominion through fees during construction.

Revenue recognition

      United Dominion’s apartment homes are leased under operating leases with terms generally of one year or less. Rental income is recognized after it is earned and collectability is reasonably assured.

Advertising costs

      All advertising costs are expensed as incurred and reported on the Consolidated Statements of Operations within the line item “Administrative and marketing.” During 2003, 2002 and 2001, total advertising expense was $10.6 million, $11.0 million and $9.6 million, respectively.

Interest rate swap agreements

      Statements of Financial Accounting Standards No. 133 and No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities” became effective on January 1, 2001. The accounting standards require companies to carry all derivative instruments, including certain embedded derivatives, in the Consolidated Balance Sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based on the exposure being hedged, as either a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. For the three years ended December 31, 2003, all of United Dominion’s derivative financial instruments are interest rate swap agreements that are designated as cash flow hedges of debt with variable interest rate features and are qualifying hedges for financial reporting purposes. For derivative instruments that qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings during the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. The adoption of Statements No. 133 and No. 138 on January 1, 2001 resulted in a cumulative effect of an accounting change of a $3.8 million loss, all of which was recorded directly to other comprehensive income.

      As part of United Dominion’s overall interest rate risk management strategy, we use derivative financial instruments as a means to artificially fix variable rate debt or to hedge anticipated financing transactions. United Dominion’s derivative transactions used for interest rate risk management include various interest rate swaps with indices that relate to the pricing of specific financial instruments of United Dominion. Because of the close correlation between the hedging instrument and the underlying cash flow exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the cash flow of the underlying exposures. As a result, United Dominion believes that it has appropriately controlled the risk so that derivatives used for interest rate risk management will not have a

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

material unintended effect on consolidated earnings. United Dominion does not enter into derivative financial instruments for trading purposes.

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

      When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures, unless the instrument is redesignated as a hedge of another transaction. If a derivative instrument is terminated or the hedging transaction is no longer determined to be effective, amounts held in accumulated other comprehensive income are reclassified into earnings over the term of the future cash outflows on the related debt.

Comprehensive income

      Comprehensive income, which is defined as all changes in equity during each period except for those resulting from investments by or distributions to stockholders, is displayed in the accompanying Statements of Stockholders’ Equity. Other comprehensive income consists of unrealized gains or losses from derivative financial instruments.

Stock-based compensation

      United Dominion has elected to follow the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) in accounting for its employee stock options because the alternative fair value accounting provided for under Statement No. 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of United Dominion’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation cost has been recognized.

Minority interests in operating partnerships

      Interests in operating partnerships held by limited partners are represented by operating partnership units (“OP Units”). The operating partnerships’ income is allocated to holders of OP Units based upon net income available 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 minority interests in accordance with the terms of the individual partnership agreements. OP Units can be exchanged for cash or shares of United Dominion’s common stock on a one-for-one basis, at the option of United Dominion. OP Units, as a percentage of total OP Units and shares outstanding, was 6.4% at December 31, 2003, 6.2% at December 31, 2002 and 6.8% at December 31, 2001.

      During 2003, we issued 1,617,815 Preferred Operating Partnership Units (“Preferred OP Units”) totaling $26.9 million as partial consideration for the purchase of four communities. The Preferred OP

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Units carry a fixed coupon of 8.0% until such time as the common share dividend is equal to or exceeds this amount for four consecutive quarters, at which time the Preferred OP Units will be entitled to receive dividends equivalent to the dividends paid to holders of common stock.

Minority interests in other partnerships

      United Dominion has limited partners in certain real estate partnerships acquired in certain merger transactions. Net income for these partnerships is allocated based upon the percentage interest owned by these limited partners in each respective real estate partnership.

Earnings per share

      Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed based upon common shares outstanding plus the effect of dilutive stock options and other potentially dilutive common stock equivalents. The dilutive effect of stock options and other potentially dilutive common stock equivalents is determined using the treasury stock method based on United Dominion’s average stock price.

      The following table sets forth the computation of basic and diluted earning per share (dollars in thousands, except per share amounts):

                             
2003 2002 2001



Numerator for basic and diluted earnings per share —
                       
 
Net income available to common stockholders
  $ 24,807     $ 25,805     $ 27,142  
Denominator:
                       
Denominator for basic earnings per share —
                       
   
Weighted average common shares outstanding
    114,672       106,078       100,339  
Effect of dilutive securities:
                       
Employee stock options and non-vested restricted stock awards
    976              
     
     
     
 
Denominator for dilutive earnings per share
    115,648       106,078       100,339  
     
     
     
 
Basic earnings per share
  $ 0.22     $ 0.24     $ 0.27  
     
     
     
 
Diluted earnings per share
  $ 0.21     $ 0.24     $ 0.27  
     
     
     
 

      The effect of the conversion of the operating partnership units and convertible preferred stock is not dilutive and is therefore not included as a dilutive security in the earnings per share computation. The weighted average effect of the conversion of the operating partnership units for the years ended December 31, 2003, 2002 and 2001 was 9,690,883 shares, 8,577,918 shares and 7,281,835 shares, respectively. The weighted average effect of the conversion of the convertible preferred stock for the year ended December 31, 2003 was 11,636,293 shares and for the years ended December 31, 2002 and 2001, the weighted average effect was 12,307,692 shares.

Impact of recently issued accounting standards

      In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (FAS 150). The statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. This statement is effective for all financial instruments created or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. In October 2003, the FASB decided to indefinitely defer the

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

effective date of certain provisions of FAS 150 related to finite life entities and also indicated it may modify other guidance in FAS 150. United Dominion believes that its equity and its partner’s equity reported on the Consolidated Balance Sheets as “Minority interests,” are properly classified.

      In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). This statement refines the identification process of variable interest entities and how an entity assesses its interests in a variable interest entity to decide whether to consolidate that entity. United Dominion, from time to time, enters into partnership and joint venture arrangements, which may be required to be consolidated under this statement. The provisions of Interpretation 46 were deferred and are now applicable to joint ventures created before February 1, 2003 for the first reporting period that ends after December 15, 2003. United Dominion adopted FIN 46 as of December 31, 2003, with no effect on its consolidated financial statements.

      On January 1, 2003, United Dominion adopted Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Correction” (FAS 145). The provisions of FAS 145 related to the rescission of FAS No. 4 require United Dominion to reclassify prior period items that do not meet the extraordinary classification into continuing operations. During the three years ended December 31, 2003, United Dominion has incurred such expenses, and in compliance with FAS 145, has reported those expenses as a component of continuing operations for each period presented.

2.     REAL ESTATE OWNED

      United Dominion operates in 55 markets dispersed throughout 19 states. At December 31, 2003, our largest apartment market was Southern California, where we owned 7.0% of our apartment homes, based upon carrying value. Excluding Southern California, United Dominion did not own more than 6.5% of its apartment homes in any one market, based upon carrying value.

      The following table summarizes real estate held for investment at December 31, (dollars in thousands):

                 
2003 2002


Land and land improvements
  $ 847,899     $ 699,313  
Buildings and improvements
    3,231,564       2,927,450  
Furniture, fixtures and equipment
    225,987       206,007  
Construction in progress
          252  
     
     
 
Real estate held for investment
    4,305,450       3,833,022  
Accumulated depreciation
    (895,567 )     (734,051 )
     
     
 
Real estate held for investment, net
  $ 3,409,883     $ 3,098,971  
     
     
 

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following is a reconciliation of the carrying amount of real estate held for investment at December 31, (dollars in thousands):

                         
2003 2002 2001



Balance at beginning of year
  $ 3,833,022     $ 3,461,529     $ 3,758,974  
Real estate acquired
    397,983 (a)     323,990       91,093  
Capital expenditures
    62,288       51,066       58,174  
Transfers from development
    12,157       29,816       51,561  
Transfers to held for disposition, net
          (33,379 )     (495,485 )
Impairment loss on real estate
                (2,788 )
     
     
     
 
Balance at end of year
  $ 4,305,450     $ 3,833,022     $ 3,461,529  
     
     
     
 


(a)  In connection with one of our acquisitions in 2003, United Dominion received a note receivable for $5 million that is due October 2011. The note bears interest of 9.0% that is payable in annual installments.

      The following is a reconciliation of accumulated depreciation for real estate held for investment at December 31, (dollars in thousands):

                         
2003 2002 2001



Balance at beginning of year
  $ 734,051     $ 585,539     $ 506,871  
Depreciation expense for the year(b)
    163,088       160,331       153,113  
Transfers to held for disposition, net
    (1,572 )     (11,819 )     (74,445 )
     
     
     
 
Balance at end of year
  $ 895,567     $ 734,051     $ 585,539  
     
     
     
 


(b)  Includes $1.0 million, $1.2 million and $1.3 million for 2003, 2002 and 2001, respectively, related to depreciation on non-real estate assets located at United Dominion’s apartment communities, classified as “Other depreciation and amortization” on the Consolidated Statements of Operations. Excludes $1.2 million, in 2003, of amortization expense on the fair value of in-place leases at the time of acquisition.

      The following is a summary of real estate held for investment by major geographic markets (in order of carrying value, excluding real estate held for disposition and real estate under development) at December 31, 2003 (dollars in thousands):

                                         
Number of Initial
Apartment Acquisition Carrying Accumulated
Communities Cost Value Depreciation Encumbrances





Southern California
    11     $ 278,306     $ 302,216     $ 19,960     $ 48,757  
Dallas, TX
    15       234,153       277,928       55,803       50,190  
Houston, TX
    23       220,168       277,782       53,541       57,954  
Metropolitan DC
    9       222,478       244,551       22,849       75,050  
Phoenix, AZ
    11       181,479       218,477       45,583       61,371  
Orlando, FL
    14       167,524       212,179       60,413       79,290  
Raleigh, NC
    11       179,935       207,865       50,967       58,593  
Tampa, FL
    11       163,778       188,616       40,652       56,312  
Arlington, TX
    10       142,462       160,674       34,133       39,056  
Columbus, OH
    6       111,315       150,684       27,178       41,327  

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                         
Number of Initial
Apartment Acquisition Carrying Accumulated
Communities Cost Value Depreciation Encumbrances





San Francisco, CA
    4       136,504       142,044       18,547       20,780  
Charlotte, NC
    10       109,961       140,574       43,121       11,917  
Monterey Peninsula, CA
    8       87,924       137,662       14,281        
Richmond, VA
    9       106,325       132,022       39,125       66,657  
Nashville, TN
    8       83,987       122,210       29,916        
Greensboro, NC
    8       85,362       105,923       26,739        
Wilmington, NC
    6       64,213       92,231       27,366        
Baltimore, MD
    7       80,141       91,451       22,427       27,752  
Atlanta, GA
    6       57,669       73,437       22,464       30,446  
Columbia, SC
    6       52,795       63,747       22,155       5,000  
Jacksonville, FL
    3       44,788       59,993       19,116       23,202  
Norfolk, VA
    6       42,741       55,687       22,254       7,359  
Lansing, MI
    4       50,237       51,778       8,134       31,570  
Seattle, WA
    3       31,953       34,627       6,236       25,830  
Other Western
    5       144,232       153,744       21,399       46,720  
Other Pacific
    8       122,608       125,456       19,295       48,905  
Other Southwestern
    7       92,897       99,902       18,988       9,765  
Other Florida
    7       60,565       92,451       26,308        
Other North Carolina
    8       61,677       77,014       28,542       11,550  
Other Southeastern
    4       56,717       70,926       17,513       34,762  
Other Midwestern
    8       62,593       68,912       11,207       26,320  
Other Mid-Atlantic
    5       37,619       43,683       12,185       12,542  
Other Northeastern
    2       14,732       18,401       5,711       5,167  
Richmond Corporate
          6,597