e10vq
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the quarterly period ended June 30, 2004
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 of organization)
  (I.R.S. Employer
Identification No.)

1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129

(Address of principal executive offices — zip code)

(720) 283-6120

(Registrant’s telephone number, including area code)

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

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

     The number of shares of the issuer’s common stock, $1 par value, outstanding as of August 3, 2004 was 127,904,170.




UNITED DOMINION REALTY TRUST, INC.

FORM 10-Q
INDEX
             
Page

PART I — FINANCIAL INFORMATION
Item 1.
 
Consolidated Financial Statements (unaudited)
       
        2  
        3  
        4  
        5  
        6-14  
      15-27  
      27  
      28  
 
 PART II — OTHER INFORMATION
      28  
      29  
      29  
 Signatures     30  
 4.30% Medium-Term Note due July 2007 dated June 25, 2004
 Computation of Ratio of Earnings to Fixed Charges
 Rule 13a-14(a) Certification of the Chief Executive Officer
 Rule 13a-14(a) Certification of the Chief Financial Officer
 Section 1350 Certification of the Chief Executive Officer
 Section 1350 Certification of the Chief Financial Officer

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)
                         
June 30, December 31,
2004 2003


ASSETS
Real estate owned:
               
   
Real estate held for investment
  $ 4,362,196     $ 4,157,837  
     
Less: accumulated depreciation
    (935,677 )     (852,461 )
     
     
 
      3,426,519       3,305,376  
   
Real estate under development
    58,069       30,375  
   
Real estate held for disposition (net of accumulated depreciation of $14,068 and $44,169)
    47,921       119,170  
     
     
 
   
Total real estate owned, net of accumulated depreciation
    3,532,509       3,454,921  
Cash and cash equivalents
    753       4,824  
Restricted cash
    6,364       7,540  
Deferred financing costs, net
    21,131       21,425  
Investment in unconsolidated development joint venture
    809       1,673  
Funds held in escrow from 1031 exchanges pending the acquisition of real estate
    2,339       14,447  
Notes receivable
    44,586       13,000  
Other assets
    32,385       25,553  
Other assets — real estate held for disposition
    96       260  
     
     
 
   
Total assets
  $ 3,640,972     $ 3,543,643  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt
  $ 999,658     $ 1,018,028  
Unsecured debt
    1,267,650       1,114,009  
Real estate taxes payable
    24,274       30,334  
Accrued interest payable
    15,042       12,892  
Security deposits and prepaid rent
    21,715       23,156  
Distributions payable
    41,782       40,623  
Deferred gain on sale of depreciable property
    11,413        
Accounts payable, accrued expenses, and other liabilities
    39,990       45,080  
Other liabilities — real estate held for disposition
    666       1,879  
     
     
 
       
Total liabilities
    2,422,190       2,286,001  
 
Minority interests
    89,813       94,206  
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 2003)
    135,400       135,400  
       
2,000,000 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (2,000,000 in 2003)
    47,396       44,271  
       
3,425,217 shares 8.00% Series E Cumulative Convertible issued and outstanding (3,425,217 in 2003)
    56,893       56,893  
   
Common stock, $1 par value; 250,000,000 shares authorized 127,771,383 shares issued and outstanding (127,295,126 in 2003)
    127,771       127,295  
   
Additional paid-in capital
    1,465,452       1,458,983  
   
Distributions in excess of net income
    (695,840 )     (651,497 )
   
Deferred compensation — unearned restricted stock awards
    (8,103 )     (5,588 )
   
Notes receivable from officer-stockholders
          (459 )
   
Accumulated other comprehensive loss
          (1,862 )
     
     
 
       
Total stockholders’ equity
    1,128,969       1,163,436  
     
     
 
   
Total liabilities and stockholders’ equity
  $ 3,640,972     $ 3,543,643  
     
     
 

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)
(Unaudited)
                                     
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




REVENUES
                               
 
Rental income
  $ 156,754     $ 143,940     $ 309,745     $ 286,782  
 
Non-property income
    1,062       194       1,406       396  
     
     
     
     
 
   
Total revenues
    157,816       144,134       311,151       287,178  
EXPENSES
                               
 
Rental expenses:
                               
   
Real estate taxes and insurance
    19,021       16,576       37,788       33,184  
   
Personnel
    16,132       14,069       32,210       28,503  
   
Utilities
    9,051       8,346       19,123       17,021  
   
Repair and maintenance
    10,397       8,941       19,498       17,857  
   
Administrative and marketing
    5,622       5,383       11,075       10,568  
   
Property management
    4,390       4,201       8,751       8,379  
   
Other operating expenses
    291       316       561       610  
 
Real estate depreciation and amortization
    43,125       37,364       84,474       74,368  
 
Interest
    29,295       29,595       58,201       61,156  
 
General and administrative
    4,627       5,157       9,381       10,606  
 
Other depreciation and amortization
    849       753       1,783       1,496  
     
     
     
     
 
   
Total expenses
    142,800       130,701       282,845       263,748  
     
     
     
     
 
Income before minority interests and discontinued operations
    15,016       13,433       28,306       23,430  
Minority interests of outside partnerships
    (50 )     (239 )     (115 )     (614 )
Minority interests of unitholders in operating partnerships
    (522 )     14       (955 )     (187 )
     
     
     
     
 
Income before discontinued operations, net of minority interests
    14,444       13,208       27,236       22,629  
Income from discontinued operations, net of minority interests
    14,067       2,276       16,587       6,295  
     
     
     
     
 
Net income
    28,511       15,484       43,823       28,924  
Distributions to preferred stockholders — Series B
    (2,911 )     (2,911 )     (5,822 )     (5,822 )
Distributions to preferred stockholders — Series D (Convertible)
    (1,045 )     (3,393 )     (2,080 )     (7,428 )
Distributions to preferred stockholders — Series E (Convertible)
    (1,138 )     (228 )     (2,276 )     (228 )
Premium on preferred share conversions
    (1,562 )     (6,250 )     (3,125 )     (6,250 )
     
     
     
     
 
Net income available to common stockholders
  $ 21,855     $ 2,702     $ 30,520     $ 9,196  
     
     
     
     
 
Earnings per common share — basic and diluted:
                               
 
Income from continuing operations available to common stockholders, net of minority interests
  $ 0.06     $ 0.00     $ 0.11     $ 0.02  
 
Income from discontinued operations, net of minority interests
  $ 0.11     $ 0.02     $ 0.13     $ 0.06  
 
Net income available to common stockholders
  $ 0.17     $ 0.02     $ 0.24     $ 0.08  
Common distributions declared per share
  $ 0.2925     $ 0.2850     $ 0.5850     $ 0.5700  
Weighted average number of common shares outstanding — basic
    127,150       112,467       127,057       110,169  
Weighted average number of common shares outstanding — diluted
    128,065       113,439       127,996       111,101  

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
(Unaudited)
                       
Six Months Ended
June 30,

2004 2003


Operating Activities
               
 
Net income
  $ 43,823     $ 28,924  
   
Adjustments to reconcile net income to net cash provided
               
     
by operating activities:
               
     
Depreciation and amortization
    87,944       80,616  
     
Net gains on sales of land and depreciable property
    (15,019 )     (933 )
     
Minority interests
    2,199       1,209  
     
Gain on early debt retirement
          (171 )
     
Amortization of deferred financing costs and other
    3,199       2,942  
     
Changes in operating assets and liabilities:
               
     
Increase in operating assets
    (4,670 )     (2,133 )
     
Decrease in operating liabilities
    (10,715 )     (9,648 )
     
     
 
Net cash provided by operating activities
    106,761       100,806  
Investing Activities
               
   
Proceeds from sales of real estate investments, net
    56,943       11,350  
   
Acquisition of real estate assets, net of liabilities assumed and equity
    (143,019 )     (135,025 )
   
Development of real estate assets
    (10,759 )     (9,661 )
   
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (31,146 )     (23,535 )
   
Capital expenditures — non-real estate assets
    (862 )     (480 )
   
Decrease in funds held in escrow from tax free exchanges pending the acquisition of real estate
    12,108        
     
     
 
Net cash used in investing activities
    (116,735 )     (157,351 )
Financing Activities
               
   
Proceeds from the issuance of secured debt
          37,415  
   
Scheduled principal payments on secured debt
    (38,220 )     (7,746 )
   
Non-scheduled principal payments and prepayment penalties on secured debt
    (21,474 )      
   
Proceeds from the issuance of unsecured debt
    246,973       149,250  
   
Payments and prepayment premiums on unsecured debt
    (46,585 )     (207,307 )
   
Net (repayment)/proceeds of revolving bank debt
    (45,600 )     78,200  
   
Payment of financing costs
    (2,520 )     (7,413 )
   
Proceeds from the issuance of common stock
    2,704       91,312  
   
Proceeds from the repayment of officer loans
    459        
   
Proceeds from the issuance of performance shares
    80        
   
Distributions paid to minority interests
    (6,031 )     (4,024 )
   
Distributions paid to preferred stockholders
    (10,160 )     (13,858 )
   
Distributions paid to common stockholders
    (73,723 )     (60,738 )
   
Repurchase of common stock
          (71 )
     
     
 
Net cash provided by financing activities
    5,903       55,020  
Net decrease in cash and cash equivalents
    (4,071 )     (1,525 )
Cash and cash equivalents, beginning of period
    4,824       3,152  
     
     
 
Cash and cash equivalents, end of period
  $ 753     $ 1,627  
     
     
 
Supplemental Information:
               
   
Interest paid during the period
  $ 54,736     $ 59,986  
   
Non-cash transactions:
               
     
Conversion of operating partnership minority interests to common stock (82,867 shares in 2004 and 38,423 shares in 2003)
    641       476  
     
Issuance of restricted stock awards
    3,600       5,286  
     
Issuance of preferred stock in connection with acquisitions
          58,811  
     
Issuance of preferred operating partnership units in connection with acquisitions
          26,872  
     
Cancellation of a note receivable with the acquisition of a property
    8,000        
     
Secured debt assumed with the acquisition of a property
    41,324        
     
Receipt of note receivable in connection with sales of real estate investments
    75,586        
     
Deferred gain in connection with sales of real estate investments
    11,413        

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)
                                                                                     
Deferred Notes
Compensation — Receivable Accumulated
Preferred Stock Common Stock Distributions Unearned from Other


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










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  
     
     
     
     
     
     
     
     
     
     
 
Comprehensive Income
                                                                               
 
Net income
                                            43,823                               43,823  
 
Other comprehensive income:
                                                                               
   
Unrealized gain on derivative financial instruments
                                                                    1,862       1,862  
     
     
     
     
     
     
     
     
     
     
 
 
Comprehensive income
                                            43,823                       1,862       45,685  
     
     
     
     
     
     
     
     
     
     
 
 
Issuance of common shares to employees, officers, and director- stockholders
                    227,062       228       1,776                                       2,004  
 
Issuance of common shares through dividend reinvestment and stock purchase plan
                    37,487       37       663                                       700  
 
Issuance of restricted stock awards
                    128,841       128       3,472               (3,600 )                      
 
Adjustment for conversion of minority interests of unitholders in operating partnerships
                    82,867       83       558                                       641  
 
Principal repayments on notes receivable from officer- stockholders
                                                            459               459  
 
Accretion of premium on Series D redemptions
            3,125                               (3,125 )                              
 
Common stock distributions declared ($0.5850 per share)
                                            (74,863 )                             (74,863 )
 
Preferred stock distributions declared-Series B ($1.0750 per share)
                                            (5,822 )                             (5,822 )
 
Preferred stock distributions declared-Series D ($1.0446 per share)
                                            (2,080 )                             (2,080 )
 
Preferred stock distributions declared-Series E ($0.6644 per share)
                                            (2,276 )                             (2,276 )
 
Amortization of deferred compensation
                                                    1,085                       1,085  
     
     
     
     
     
     
     
     
     
     
 
Balance, June 30, 2004
    10,841,226     $ 239,689       127,771,383     $ 127,771     $ 1,465,452     $ (695,840 )   $ (8,103 )   $     $     $ 1,128,969  
     
     
     
     
     
     
     
     
     
     
 

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(UNAUDITED)
 
1. Consolidation and 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 June 30, 2004, there were 130,397,811 units in the Operating Partnership outstanding, of which 120,286,089 units or 92.2% were owned by United Dominion and 10,111,722 units or 7.8% were owned by limited partners. As of June 30, 2004, there were 5,542,200 units in the Heritage OP outstanding, of which 5,183,522 units or 93.5% were owned by United Dominion and 358,678 units or 6.5% 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.

      The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in United Dominion’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission as amended by the Current Report on Form 8-K filed May 14, 2004.

      In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for the fair presentation of financial position at June 30, 2004 and results of operations for the interim periods ended June 30, 2004 and 2003. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year.

      The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the dates of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual amounts realized or paid could differ from those estimates. Certain previously reported amounts have been reclassified to conform to the current financial statement presentation.

2.     Real Estate Held for Investment

      At June 30, 2004, there are 260 communities with 74,883 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment, (dollars in thousands):

                 
June 30, December 31,
2004 2003


Land and land improvements
  $ 860,478     $ 827,054  
Buildings and improvements
    3,276,345       3,116,436  
Furniture, fixtures, and equipment
    225,373       214,347  
     
     
 
Real estate held for investment
    4,362,196       4,157,837  
Accumulated depreciation
    (935,677 )     (852,461 )
     
     
 
Real estate held for investment, net
  $ 3,426,519     $ 3,305,376  
     
     
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

3.     Income from Discontinued Operations

      FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“FAS 144”) requires, among other things, that the primary assets and liabilities and the results of operations of United Dominion’s real properties which have been sold subsequent to January 1, 2002, or are held for disposition subsequent to January 1, 2002, be classified as discontinued operations and segregated in United Dominion’s Consolidated Statements of Operations and Balance Sheets. Properties classified as real estate held for disposition generally represent properties that are under contract for sale and are expected to close within the next twelve months.

      For purposes of these financial statements, FAS 144 results in the presentation of the primary assets and liabilities and the net operating results of those properties sold or classified as held for disposition through June 30, 2004, as discontinued operations for all periods presented. The adoption of FAS 144 does not have an impact on net income available to common stockholders. FAS 144 only results in the reclassification of the operating results of all properties sold or classified as held for disposition through June 30, 2004, within the Consolidated Statements of Operations for the quarters ended June 30, 2004 and 2003, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2004 and 2003.

      For the six months ended June 30, 2004, United Dominion sold eight communities with 1,910 apartment homes. In conjunction with the sales, we received a note receivable for $75.6 million that bears interest at 7.0%. The note matures December 31, 2004. As of June 30, 2004, the balance on the note receivable was $39.6 million. We recognized gains for financial reporting purposes of $15.0 million on these sales and will recognize $11.4 million in additional gains as the note receivable matures. At June 30, 2004, United Dominion had two communities with a total of 1,190 apartment homes and a net book value of $44.0 million and one parcel of land with a net book value of $3.9 million included in real estate held for disposition. For the year ended December 31, 2003, United Dominion sold seven communities with a total of 1,927 apartment homes and two commercial properties. The results of operations for these properties and the interest expense associated with the secured debt on these properties are classified on the Consolidated Statements of Operations in the line item entitled “Income from discontinued operations, net of minority interests.”

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

                                 
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Rental income
  $ 2,937     $ 9,041     $ 8,565     $ 18,635  
Rental expenses
    1,614       4,062       4,180       8,104  
Real estate depreciation
    109       2,429       1,670       4,730  
Other expenses
    4       15       18       33  
     
     
     
     
 
      1,727       6,506       5,868       12,867  
Income before gain/(loss) on sale of depreciable property and minority interests
    1,210       2,535       2,697       5,768  
Net gain/(loss) on sale of depreciable property
    13,814       (112 )     15,019       935  
     
     
     
     
 
Income before minority interests
    15,024       2,423       17,716       6,703  
Minority interests on income from discontinued operations
    (957 )     (147 )     (1,129 )     (408 )
     
     
     
     
 
Income from discontinued operations, net of minority interests
  $ 14,067     $ 2,276     $ 16,587     $ 6,295  
     
     
     
     
 

7


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

4.     Investment in Unconsolidated Development Joint Venture

      On September 10, 2002, United Dominion entered into a development joint venture with AEGON USA Realty Advisors, Inc. in which United Dominion is 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 United Dominion providing 20%. United Dominion is serving as the developer, general contractor, and property manager for the joint venture and has 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 estimate that the likelihood of funding guarantor obligations is remote and that the impact to United Dominion would be immaterial. In June 2003, United Dominion contributed land with a carrying value of $3.3 million to the joint venture.

      The following is a summary of the financial position of the joint venture as of June 30, 2004 (dollars in thousands):

               
Assets
 
Real estate under development
  $ 22,894  
   
Less: accumulated depreciation
    (222 )
     
 
 
Real estate under development, net of accumulated depreciation
    22,672  
 
Cash and cash equivalents
    41  
 
Deferred financing costs
    225  
     
 
     
Total assets
  $ 22,938  
     
 
 
Liabilities and Members’ Equity
 
Mortgage note payable
  $ 14,369  
 
Accrued real estate taxes payable
    158  
 
Security deposits and prepaid rent
    54  
 
Accrued interest payable
    19  
 
Accounts payable and other accrued liabilities
    127  
     
 
   
Total liabilities
    14,727  
 
Members’ equity:
       
   
Capital contributions UDR/ AEGON Development Venture I, LLC
    8,501  
   
Net loss
    (290 )
     
 
     
Total members’ equity
    8,211  
     
 
 
Total liabilities and members’ equity
  $ 22,938  
     
 

8


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

5.     Secured Debt

      Secured debt on continuing and discontinued operations, which encumbers $1.5 billion or 34% of United Dominion’s real estate owned based upon book value ($3.0 billion or 66% of United Dominion’s real estate owned is unencumbered) consists of the following as of June 30, 2004 (dollars in thousands):

                                         
Weighted
Weighted Average Number of
Principal Outstanding Average Years to Communities

Interest Rate Maturity Encumbered
June 30, December 31,


2004 2003 2004 2004 2004





Fixed Rate Debt
                                       
Mortgage notes payable
  $ 159,576     $ 174,520       6.92 %     5.8       11  
Tax-exempt secured notes payable
    39,345       42,540       6.13 %     17.2       4  
Fannie Mae credit facilities
    288,875       288,875       6.40 %     6.6       9  
Fannie Mae credit facilities — swapped
          17,000                    
     
     
     
     
     
 
Total fixed rate secured debt
    487,796       522,935       6.55 %     7.2       24  
Variable Rate Debt
                                       
Mortgage notes payable
    45,954       46,185       2.31 %     7.4       4  
Tax-exempt secured note payable
    7,770       7,770       1.05 %     23.7       1  
Fannie Mae credit facilities
    387,469       370,469       1.75 %     12.9       51  
Freddie Mac credit facility
    70,669       70,669       1.49 %     6.6       8  
     
     
     
     
     
 
Total variable rate secured debt
    511,862       495,093       1.75 %     11.7       64  
     
     
     
     
     
 
Total secured debt
  $ 999,658     $ 1,018,028       4.09 %     9.5       88  
     
     
     
     
     
 

      Weighted average years to maturity include certain extension options.

      Approximate principal payments due during each of the next five calendar years and thereafter, as of June 30, 2004, are as follows (dollars in thousands):

                         
Total
Fixed Rate Variable Rate Secured
Year Maturities Maturities Maturities




2004
  $ 2,270     $ 173     $ 2,443  
2005
    18,805       4,660       23,465  
2006
    59,943       3,706       63,649  
2007
    7,491       70,669       78,160  
2008
    10,641             10,641  
Thereafter
    388,646       432,654       821,300  
     
     
     
 
    $ 487,796     $ 511,862     $ 999,658  
     
     
     
 

9


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

6.     Unsecured Debt

      A summary of unsecured debt as of June 30, 2004 and December 31, 2003 is as follows (dollars in thousands):

                     
2004 2003


Commercial Banks
               
 
Borrowings outstanding under an unsecured credit facility due March 2006(a)
  $ 92,300     $ 137,900  
Senior Unsecured Notes – Other
               
 
7.67% Medium-Term Notes due January 2004
          46,585  
 
7.73% Medium-Term Notes due April 2005
    21,100       21,100  
 
7.02% Medium-Term Notes due November 2005
    49,760       49,760  
 
Verano Construction Loan due February 2006
    21,018        
 
7.95% Medium-Term Notes due July 2006
    85,374       85,374  
 
7.07% Medium-Term Notes due November 2006
    25,000       25,000  
 
7.25% Notes due January 2007
    92,255       92,255  
 
4.30% Medium-Term Notes due July 2007
    50,000        
 
4.50% Medium-Term Notes due March 2008
    200,000       200,000  
 
ABAG Tax-Exempt Bonds due August 2008
    46,700       46,700  
 
8.50% Monthly Income Notes due November 2008
    29,081       29,081  
 
4.25% Medium-Term Notes due January 2009
    50,000       50,000  
 
6.50% Notes due June 2009
    200,000       200,000  
 
3.90% Medium-Term Notes due March 2010
    50,000        
 
5.13% Medium-Term Notes due January 2014
    200,000       75,000  
 
8.50% Debentures due September 2024(b)
    54,118       54,118  
 
Other(c)
    944       1,136  
     
     
 
      1,175,350       976,109  
     
     
 
   
Total Unsecured Debt
  $ 1,267,650     $ 1,114,009  
     
     
 

(a)  United Dominion has a three-year $500 million unsecured revolving credit facility. If United Dominion receives commitments from additional lenders or if the initial lenders increase their commitments, United Dominion will be able to increase the credit facility to $650 million. At United Dominion’s option, the credit facility can be extended for one year to March 2007. At June 30, 2004, United Dominion had one interest rate swap agreement associated with commercial bank borrowings under the revolver with a notional value of $5.0 million under which United Dominion pays a fixed rate of interest and receives a variable rate of interest on the notional amount. The interest rate swap, which matures July 1, 2004, effectively changes United Dominion’s interest rate exposure on the $5.0 million of borrowings from a variable rate to a weighted average fixed rate of approximately 7.8%. As of June 30, 2004, the weighted average interest rate of commercial borrowings, after giving effect to the swap agreement, was 1.9%.
 
(b)  Includes an investor put feature that grants a one-time option to redeem the debentures in September 2004.
 
(c)  Represents deferred gains from the termination of interest rate risk management agreements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

7.     Financial Instruments

      United Dominion accounts for its derivative instruments in accordance with Statements of Financial Accounting Standards No. 133 and No. 138, “Accounting for Certain Derivative Instruments and Hedging Activities.” At June 30, 2004, United Dominion’s derivative financial instrument is an interest rate swap agreement that is designated as a cash flow hedge of debt with variable interest rate features, and is a qualifying hedge for financial reporting purposes. For a derivative instrument that qualifies as a cash flow hedge, 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 fair value of United Dominion’s derivative instrument is reported on the balance sheet at its current fair value. The estimated fair value for our interest rate swap relies on prevailing market interest rates. The fair value amount should not be viewed in isolation, but rather in relation to the value of the underlying hedged transaction and investment and to the overall reduction in exposure to adverse fluctuations in interest rates. The interest rate swap agreement is designated with all or a portion of the principal balance and term of a specific debt obligation. The interest rate swap involves the periodic exchange of payments over the life of the related agreements. An amount received or paid on the interest rate swap is 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 amount payable to and receivable from counterparties is included in other liabilities and other assets, respectively.

      As of June 30, 2004, United Dominion had one interest rate swap agreement associated with commercial bank borrowings under our revolver with a notional value of $5.0 million under which United Dominion pays a fixed rate of interest and receives a variable rate of interest on the notional amount. The interest rate swap, which matured on July 1, 2004, has a fair value of $0 at June 30, 2004, and, therefore, we have no derivative financial instrument liabilities reported on our Consolidated Balance Sheet at June 30, 2004. For the quarter ended June 30, 2004, United Dominion recognized $0.9 million of unrealized gains in comprehensive income.

8.     Earnings Per Share

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

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

                                     
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Numerator for basic and diluted earnings per share —
                               
 
Net income available to common stockholders
  $ 21,855     $ 2,702     $ 30,520     $ 9,196  
     
     
     
     
 
Denominator:
                               
Denominator for basic earnings per share —
                               
 
Weighted average common shares outstanding
    127,764       112,952       127,642       110,525  
   
Non-vested restricted stock awards
    (614 )     (485 )     (585 )     (356 )
     
     
     
     
 
      127,150       112,467       127,057       110,169  
     
     
     
     
 
Effect of dilutive securities:
                               
Employee stock options and non-vested restricted stock awards
    915       972       939       932  
     
     
     
     
 
Denominator for diluted earnings per share
    128,065       113,439       127,996       111,101  
     
     
     
     
 
Basic and diluted earnings per share
  $ 0.17     $ 0.02     $ 0.24     $ 0.08  
     
     
     
     
 

      The effect of the conversion of the operating partnership units, Series A Out-Performance Partnership Shares, and convertible preferred stock is not dilutive and is therefore not included in the above calculations. If the operating partnership units were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2004 would be 8,680,217 and 8,683,229 weighted average common shares, and 7,286,193 and 7,124,753 weighted average common shares for the three and six months ended June 30, 2003. If the Series A Out-Performance Partnership Shares were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2004 would be 1,791,329 weighted average common shares, and 1,853,204 weighted average common shares for the three and six months ended June 30, 2003. If the convertible preferred stock were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2004 would be 6,502,140 weighted average common shares, and 11,632,713 and 11,968,318 weighted average common shares for the three and six months ended June 30, 2003, respectively.

9.     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.

12


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

      The following table sets forth United Dominion’s earnings and earnings per share had United Dominion’s stock-based compensation expense been determined based upon the fair value method at the date of grant, consistent with the provisions of SFAS 123 (dollars in thousands, except per share data):

                                       
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Reported net income available to common stockholders
  $ 21,855     $ 2,702     $ 30,520     $ 9,196  
   
Stock-based employee compensation cost
                               
     
included in net income
    271       543       1,096       1,056  
   
Stock-based employee compensation cost that would have been included in net income under the fair value method
    (287 )     (617 )     (1,163 )     (1,204 )
     
     
     
     
 
Adjusted net income available to common stockholders
  $ 21,839     $ 2,628     $ 30,453     $ 9,048  
     
     
     
     
 
Earnings per common share — basic and diluted
                               
 
As reported
  $ 0.17     $ 0.02     $ 0.24     $ 0.08  
     
     
     
     
 
 
Pro forma
  $ 0.17     $ 0.02     $ 0.24     $ 0.08  
     
     
     
     
 

10.     Comprehensive Income

      Total comprehensive income for the three and six months ended June 30, 2004 and 2003 was $29.5 million and $45.7 million for 2004 and $17.8 million and $34.3 million for 2003, respectively. The difference between net income and total comprehensive income is primarily due to the fair value accounting for interest rate swaps.

11.     Commitments and Contingencies

Commitments

      United Dominion is committed to completing its real estate under development, which has an estimated cost to complete of $67.2 million at June 30, 2004.

Contingencies

 
Series B Out-Performance Program

      In May 2003, the stockholders of United Dominion approved the Series B Out-Performance Program (the “Series B Program”) pursuant to which certain executive officers of United Dominion (the “Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in a limited liability company (the “Series B LLC”), the only asset of which is a special class of partnership units of United Dominion Realty, L.P. (“Series B Out-Performance Partnership Shares” or “Series B OPPSs”) . The purchase price for the Series B OPPSs was determined by United Dominion’s board of directors to be $1 million, assuming 100% participation, and was based upon the advice of an independent valuation expert. The Series B Program will measure the cumulative total return on our common stock over the 24-month period from June 1, 2003 to May 31, 2005.

      The Series B Program is designed to provide participants with the possibility of substantial returns on their investment if the total cumulative return on United Dominion’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period (a) exceeds the cumulative total return of the Morgan Stanley REIT Index peer group index over the same period; and (b) is at least the equivalent of a 22% total return, or 11% annualized.

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —(Continued)

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

        i. determining the amount by which the cumulative total return of United Dominion’s common stock over the measurement period exceeds the greater of the cumulative total return of the Morgan Stanley REIT Index, which is the peer group index, or the minimum return (such excess being the “excess return”);
 
        ii. multiplying 5% of the excess return by United Dominion’s market capitalization (defined as the average number of shares outstanding over the 24-month period, including common stock, OP Units, outstanding options, and convertible securities) multiplied by the daily closing price of United Dominion’s common stock, up to a maximum of 2% of market capitalization; and
 
        iii. dividing the number obtained in (ii) by the market value of one share of United Dominion’s common stock on the valuation date, determined by the volume-weighted average price per day of common stock for the 20 trading days immediately preceding the valuation date.

      If, on the valuation date, the cumulative total return of United Dominion’s common stock does not meet the minimum return, then the participants will forfeit their entire initial investment.

12.     Related Party Transactions

      United Dominion’s notes receivable from certain officers matured in June 2004. The purpose of the loans was for the borrowers to purchase shares of United Dominion’s common stock pursuant to United Dominion’s 1991 Stock Purchase and Loan Plan. The loans were evidenced by promissory notes between the borrowers and United Dominion and secured by a pledge of the shares of common stock.

      In addition, United Dominion had entered into a Servicing and Purchase Agreement (the “Servicing Agreement”) with SunTrust Bank (the “Bank”) whereby United Dominion acted as servicing agent for and to purchase certain loans made by the Bank to officers and directors of United Dominion (the “Borrowers”) to finance the purchase of shares of United Dominion’s common stock. The loans were evidenced by promissory notes (“Notes”) between each Borrower and the Bank. The Servicing Agreement provided that the Bank could require United Dominion to purchase the Notes upon an event of default by the Borrower or United Dominion under the Servicing Agreement and at certain other times during the term of the Servicing Agreement. All of the Notes matured in June 2004.

13.     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 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.

14


Table of Contents

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

Forward-Looking Statements

      This quarterly 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 2003. 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.

      At June 30, 2004, our portfolio included 262 communities with 76,073 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):

                                                                 
Three Months Ended Six Months Ended
As of June 30, 2004 June 30, 2004 June 30, 2004



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








Southern California
    12       3,142       7.6 %   $ 339,809       94.4 %   $ 1,112       94.5 %   $ 1,107  
Houston, TX
    21       6,034       6.0 %     267,413       91.2 %     635       91.0 %     637  
Dallas, TX
    12       4,076       5.2 %     232,679       95.8 %     677       95.9 %     667  
Phoenix, AZ
    11       3,635       4.9 %     219,293       89.8 %     709       89.1 %     710  
Orlando, FL
    14       4,140       4.8 %     214,287       93.8 %     703       93.4 %     702  
Raleigh, NC
    11       3,663       4.7 %     209,537       93.1 %     647       93.0 %     649  
Metropolitan DC
    7       2,245       4.6 %     208,437       96.2 %     1,065       96.0 %     1,060  
Northern CA
    6       1,894       4.5 %     199,764       94.6 %     1,151       94.2 %     1,150  
Tampa, FL
    11       3,836       4.3 %     192,263       94.8 %     720       94.4 %     718  
Arlington, TX
    10       3,465       3.6 %     161,817       92.8 %     635       93.4 %     636  
Baltimore, MD
    10       2,118       3.5 %     158,702       95.4 %     1,262       96.0 %     1,081  
Columbus, OH
    6       2,530       3.4 %     151,592       92.1 %     675       91.7 %     676  
Nashville, TN
    9       2,580       3.4 %     150,908       94.6 %     661       94.0 %     657  

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Table of Contents

                                                                   
Three Months Ended Six Months Ended
As of June 30, 2004 June 30, 2004 June 30, 2004



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








Monterey Peninsula, CA
    8       1,604       3.1 %     139,617       93.0 %     926       91.9 %     926  
Richmond, VA
    9       2,636       3.0 %     133,804       94.5 %     743       94.2 %     742  
Charlotte, NC
    7       2,034       2.5 %     113,671       91.0 %     598       91.3 %     601  
Greensboro, NC
    8       2,123       2.4 %     106,548       93.4 %     582       93.2 %     582  
Denver, CO
    3       1,484       2.2 %     98,869       92.9 %     774       92.9 %     773  
Wilmington, NC
    6       1,868       2.1 %     92,701       94.7 %     630       94.3 %     627  
Atlanta, GA
    6       1,426       1.7 %     74,242       92.2 %     616       91.3 %     620  
Columbia, SC
    6       1,584       1.4 %     64,257       93.8 %     597       92.7 %     598  
Austin, TX
    4       1,116       1.4 %     63,783       91.9 %     649       91.6 %     652  
Jacksonville, FL
    3       1,157       1.4 %     60,520       93.4 %     691       93.7 %     689  
Norfolk, VA
    6       1,438       1.3 %     56,985       96.7 %     767       96.6 %     760  
Lansing, MI
    4       1,226       1.2 %     52,145       92.2 %     643       92.0 %     644  
Portland, OR
    4       994       1.1 %     50,669       91.2 %     720       91.3 %     720  
Seattle, WA
    3       628       0.8 %     35,009       93.8 %     742       94.1 %     741  
Other Southwestern
    9       2,805       3.0 %     135,093       92.7 %     588       92.7 %     590  
Other Mid-Atlantic
    7       1,604       1.9 %     83,450       93.1 %     879       92.5 %     879  
Other North Carolina
    8       1,893       1.7 %     77,421       96.3 %     595       96.2 %     591  
Other Pacific
    4       1,281       1.7 %     75,623       94.0 %     761       94.3 %     760  
Other Midwestern
    7       1,188       1.5 %     66,219       93.2 %     700       92.9 %     701  
Other Southeastern
    3       1,153       1.4 %     60,675       93.8 %     552       93.8 %     556  
Other Florida
    5       1,101       1.0 %     44,951       93.8 %     659       93.7 %     658  
Other Northeastern
    2       372       0.4 %     18,474       95.7 %     710       94.9 %     710  
Real Estate Under Development
                0.7 %     33,156                          
Land
                0.6 %     28,840                          
     
     
     
     
     
     
     
     
 
 
Total
    262       76,073       100.0 %   $ 4,473,223       93.5 %   $ 729       93.2 %   $ 725  
     
     
     
     
     
     
     
     
 

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 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

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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 which provides for the issuance of up to an aggregate of $1.5 billion in common shares, preferred shares, and debt securities to facilitate future financing activities in the public capital markets. This shelf registration statement replaces our previous $1.0 billion shelf registration statement and includes $331.3 million of unissued securities carried forward from the previous $1.0 billion shelf registration statement. During the first six months of 2004, we completed various financing activities under our shelf registration statements. These activities are summarized in the section entitled “Financing Activities” that follows. As of June 30, 2004, approximately $1.45 billion of equity and debt securities remained available for issuance under our new $1.5 billion shelf registration statement. Access to capital markets is dependent on market conditions at the time of issuance.

      In July 2004, Moody’s Investors Service upgraded our rating outlook on our senior unsecured debt from Baa3 to Baa2 and our preferred stock from Ba1 to Baa3 with a stable outlook.

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.

      During the remainder of 2004, we have approximately $2.4 million of secured debt maturing that we anticipate repaying with proceeds from borrowings under our secured or unsecured credit facilities, or the issuance of new unsecured debt securities or equity. We also have $54.1 million of unsecured debt with a one-time investor put feature that can be triggered in September of this year. We believe that the likelihood of having this debt put back to us is highly remote given the current low rate environment.

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 activities, and (4) real estate investment properties. Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2003. There have been no significant changes in our critical accounting policies from those reported in our 2003 Annual Report on Form 10-K. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.

Statements of Cash Flow

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

 
Operating Activities

      For the six months ended June 30, 2004, our cash flow provided by operating activities was $106.8 million compared to $100.8 million for the same period in 2003. The increase in cash flow from operating activities resulted primarily from a $4.6 million increase in property operating activities, a $3.0 million decrease in interest expense, and a $1.2 million decrease in general and administrative expenses.

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Investing Activities

      For the six months ended June 30, 2004, net cash used in investing activities was $116.7 million compared to $157.4 million for the same period in 2003. 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

      During the six months ended June 30, 2004, we acquired six apartment communities with 1,739 apartment homes and one parcel of land. Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding our interests in the fast growing Southern California market over the last two years. 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.

     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 the first six months of 2004, we spent $31.1 million or $414 per home on capital expenditures for all of our communities, excluding development. 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 $15.9 million or $211 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 $15.0 million or $200 per home and major renovations totaled $0.2 million or $3 per home for the six months ended June 30, 2004.

      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:

                                                   
Six Months Ended June 30, Six Months Ended June 30,
(dollars in thousands) (per home)


2004 2003 % Change 2004 2003 % Change






Turnover capital expenditures
  $ 8,173     $ 6,906       18.3 %   $ 108     $ 94       14.9 %
Other recurring capital expenditures
    7,726       10,585       -27.0 %     103       144       -28.5 %
     
     
     
     
     
     
 
 
Total recurring capital expenditures
    15,899       17,491       -9.1 %     211       238       -11.3 %
Revenue enhancing improvements
    15,050       4,242       254.8 %     200       58       244.8 %
Major renovations
    197       1,802       -89.1 %     3       25       -88.0 %
     
     
     
     
     
     
 
 
Total capital improvements
  $ 31,146     $ 23,535       32.3 %   $ 414     $ 321       29.0 %
     
     
     
     
     
     
 
Repair and maintenance
    20,389       19,332       5.5 %     271       264       2.7 %
     
     
     
     
     
     
 
 
Total expenditures
  $ 51,535     $ 42,867       20.2 %   $ 685     $ 585       17.1 %
     
     
     
     
     
     
 

      Total capital improvements increased $7.6 million or $93 per home for the first six months of 2004 compared to the same period in 2003. 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 $490 per home.

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Real Estate Under Development

      Development activity is focused in core markets in which we have strong operations in place. For the six months ended June 30, 2004, we invested approximately $10.8 million on development projects, an increase of $1.1 million from $9.7 million for the same period in 2003.

      The following projects were under development as of June 30, 2004:

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







2000 Post III
    San Francisco, CA       24           $ 2,600     $ 7,000     $ 291,700       3Q05  
Verano at Town Square
    Rancho Cucamonga, CA       414             23,000       65,100       157,200       4Q05  
Mandalay on the Lake
    Irving, TX       369             7,500       28,200       76,400       1Q06  
             
     
     
     
     
         
              807           $ 33,100     $ 100,300     $ 124,300          
             
     
     
     
     
         

      In addition, we own eight parcels of land that we continue to hold for future development that had a carrying value at June 30, 2004 of $24.9 million. Six of the eight parcels represent additional phases to existing communities as we plan to add apartment homes adjacent to currently owned communities that are in improving markets.

 
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 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 United Dominion 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 estimate 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 $3.3 million to the joint venture.

      As of June 30, 2004, Villa Toscana, a 504 apartment home community located in Houston, Texas, was under development and total costs incurred as of June 30, 2004, were $22.9 million with 268 apartment homes complete. The estimated budgeted costs for the project are approximately $28.4 million or $56,300 per apartment home. We anticipate that the project will be completed in the third quarter of 2005.

 
Disposition of Investments

      For the six months ended June 30, 2004, we sold eight communities with 1,910 apartment homes for a gross consideration of $99.4 million. In conjunction with the sales, we received a note receivable for $75.6 million that bears interest at 7.0%. The note matures December 31, 2004. As of June 30, 2004, the balance on the note receivable was $39.6 million. We recognized gains for financial reporting purposes of $15.0 million on these sales and will recognize $11.4 million in additional gains as the note receivable matures. Proceeds from the sales were used primarily to reduce debt.

      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 the six months ended June 30, 2004, was $5.9 million compared to $55.0 million for the same period in 2003. 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 six months ended June 30, 2004:

  •  Repaid $59.7 million of secured debt and $46.6 million of unsecured debt.
 
  •  Sold $125 million aggregate principal amount of 5.13% senior unsecured notes due January 2014 ($75 million in January and $50 million in March) under our previous medium-term note program. These notes represent a re-opening of the 5.13% senior notes due January 2014 that we issued in October 2003, and these notes constitute a single series of notes, bringing the aggregate principal amount outstanding of the 5.13% senior notes to $200 million. The net proceeds from the issuances of $126.0 million were used to repay secured and unsecured debt obligations maturing in the first quarter of 2004 and to fund the acquisition of apartment homes.
 
  •  Sold $50 million aggregate principal amount of 3.90% medium-term notes due March 2010 in March 2004 under our previous medium-term note program. The net proceeds from the issuance of approximately $49.4 million were used to fund the acquisition of apartment communities.
 
  •  Increased our existing $1.0 billion shelf registration statement to $1.5 billion in debt securities and preferred and common stock in June 2004. The $1.5 billion shelf registration statement includes $331.1 million of unissued securities carried forward from our previous shelf registration statement.
 
  •  Sold $50 million aggregate principal amount of 4.30% medium-term notes due July 2007 in June 2004 under our new $750 million medium-term note program. The net proceeds from the issuance of approximately $49.8 million will be used to fund acquisitions of apartment communities and repay amounts outstanding on our $500 million unsecured credit facility.
 
  •  Moody’s Investors Service upgraded our rating outlook on our senior unsecured debt from Baa3 to Baa2 and our preferred stock from Ba1 to Baa3 with a stable outlook in July 2004.
 
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 June 30, 2004, $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 June 30, 2004, $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 June 30, 2004, aggregate borrowings under both the Fannie Mae and Freddie Mac credit facilities were $747 million. We have $288.9 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. 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 June 30, 2004, $92.3 million was outstanding under the credit facility leaving $407.7 million of unused capacity.

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

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      Information concerning short-term bank borrowings under our credit facility and unsecured term loan is summarized in the table that follows (dollars in thousands):

                   
Three Months Ended Twelve Months Ended
June 30, 2004 December 31, 2003


Total revolving credit facility
  $ 500,000     $ 500,000  
Borrowings outstanding at end of period
    92,300       137,900  
Weighted average daily borrowings during the period
    113,665       171,179  
Maximum daily borrowings during the period
    167,100       272,800  
Weighted average interest rate during the period
    1.5 %     2.1 %
Weighted average interest rate at end of period
    1.5 %     1.6 %
Weighted average interest rate at end of period —
               
 
after giving effect to swap agreements
    1.9 %     4.2 %
 
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 the first six months of 2004, the fair value of our derivative instruments improved from an unfavorable $1.6 million at December 31, 2003, to $0 at June 30, 2004. This decrease is primarily due to the normal progression of the fair market value of derivative instruments towards zero as they near expiration. As of June 30, 2004, United Dominion had only one interest rate swap agreement remaining associated with commercial bank borrowings under our revolver with a notional value of $5.0 million. The interest rate swap, which matured on July 1, 2004, had a fair value of $0 at June 30, 2004.

 
Funds from Operations

      Funds from operations, or 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. 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 as a measure of our operating performance. 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 of real estate assets, 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 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

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different companies. We believe that FFO is the best measure of economic profitability for real estate investment trusts.

      The following table outlines our FFO calculation and reconciliation to generally accepted accounting principles for the three and six months ended June 30, (dollars and shares in thousands):

                                   
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Net income
  $ 28,511     $ 15,484     $ 43,823     $ 28,924  
Adjustments:
                               
 
Distributions to preferred stockholders
    (5,094 )     (6,532 )     (10,178 )     (13,478 )
 
Real estate depreciation and amortization, net of outside partners’ interest in 2003
    43,125       37,126       84,474       73,933  
 
Minority interests of unitholders in operating partnership
    522       (14 )     955       187  
 
Real estate depreciation related to unconsolidated entities
    80       52       137       84  
Discontinued Operations:
                               
 
Real estate depreciation
    109       2,429       1,670       4,730  
 
Minority interests of unitholders in operating partnership
    957       147       1,129       408  
 
Net (gain)/loss on sale of depreciable property
    (13,814 )     112       (15,019 )     (935 )
     
     
     
     
 
Funds from operations (“FFO”) — basic
  $ 54,396     $ 48,804     $ 106,991     $ 93,853  
     
     
     
     
 
 
Distributions to preferred stockholders — Series D and E (Convertible)
    2,183       3,621       4,356       7,656  
     
     
     
     
 
Funds from operations — diluted
  $ 56,579     $ 52,425     $ 111,347     $ 101,509  
     
     
     
     
 
Weighted average number of common shares and OP Units outstanding — basic
    135,830       119,754       135,740       117,294  
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted
    145,039       134,211       144,973       132,048  

      In the computation of diluted FFO, OP Units, out-performance partnership shares, and the shares of Series D and Series E convertible preferred stock are dilutive; therefore, they are included in the diluted share count. For the three and six months ended June 30, 2004, distributions to preferred stockholders exclude $1.6 million and $3.1 million, respectively, related to a premium on preferred share conversions. For both the three and six months ended June 30, 2003, distributions to preferred stockholders exclude $6.3 million related to a premium on preferred share conversions.

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

                                   
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Weighted average number of common shares and OP units outstanding — basic
    135,830       119,754       135,740       117,294  
Weighted average number of OP units outstanding
    (8,680 )     (7,287 )     (8,683 )     (7,125 )
     
     
     
     
 
 
Weighted average number of common shares and OP units outstanding — basic per the Consolidated Statements of Operations
    127,150       112,467       127,057       110,169  
     
     
     
     
 
Weighted average number of common shares and OP units outstanding — diluted
    145,039       134,211       144,973       132,048  
Weighted average number of OP units outstanding
    (8,680 )     (7,287 )     (8,683 )     (7,125 )
Weighted average number of Series A OPPSs outstanding
    (1,792 )     (1,852 )     (1,792 )     (1,852 )
Weighted average number of Series D preferred shares outstanding
    (3,077 )     (10,955 )     (3,077 )     (11,628 )
Weighted average number of Series E preferred shares outstanding
    (3,425 )     (678 )     (3,425 )     (342 )
     
     
     
     
 
 
Weighted average number of common shares and OP units outstanding — diluted per the Consolidated Statements of Operations
    128,065       113,439       127,996       111,101  
     
     
     
     
 

      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.

      The following is a presentation of cash flow metrics based on generally accepted accounting principles for the three and six months ended June 30 (dollars in thousands):

                                 
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Net cash provided by operating activities
  $ 68,506     $ 63,742     $ 106,761     $ 100,806  
Net cash used in investing activities
    (41,898 )     (152,182 )     (116,735 )     (157,351 )
Net cash (used in)/provided by financing activities
    (27,828 )     85,554       5,903       55,020  

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

      Net income available to common stockholders was $21.9 million ($0.17 per diluted share) for the quarter ended June 30, 2004, compared to $2.7 million ($0.02 per diluted share) for the same period in the prior year.

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The increase for the quarter ended June 30, 2004 when compared to the same period in 2003 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this report:

  •  $13.9 million more in gains recognized from the sale of depreciable property;
 
  •  a $4.7 million decrease in premiums paid on preferred share conversions;
 
  •  a $2.3 million increase in operating results;
 
  •  a $0.9 million increase in non-property income;
 
  •  a $0.3 million decrease in interest expense; and
 
  •  a $0.5 million decrease in general and administrative expense.

      These increases in income were partially offset by a $3.4 million increase in depreciation expense during the second quarter of 2004 when compared to the same period in 2003.

      Net income available to common stockholders was $30.5 million ($0.24 per diluted share) for the six months ended June 30, 2004, compared to $9.2 million ($0.08 per diluted share) for the same period in the prior year. The increase for the six months ended June 30, 2004 when compared to the same period in 2003 resulted primarily from the following items, all of which are discussed in further detail elsewhere within this report:

  •  $14.1 million more in gains recognized from the sale of depreciable property;
 
  •  a $4.6 million increase in operating results;
 
  •  a $3.1 million decrease in premiums paid on preferred share conversions;
 
  •  a $3.0 million decrease in interest expense;
 
  •  a $1.2 million decrease in general and administrative expense; and
 
  •  a $1.0 million increase in non-property income.

      These increases in income were partially offset by a $7.0 million increase in depreciation expense during the first six months of 2004 when compared to the same period in 2003.

 
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):

                                                 
Three Months Ended June 30, Six Months Ended June 30,


2004 2003 % Change 2004 2003 % Change






Property rental income
  $ 159,578     $ 152,751       4.5 %   $ 318,083     $ 304,675       4.4 %
Property operating expense*
    (61,830 )     (57,301 )     7.9 %     (123,861 )     (115,075 )     7.6 %
     
     
     
     
     
     
 
Property operating income
  $ 97,748     $ 95,450       2.4 %   $ 194,222     $ 189,600       2.4 %
     
     
     
     
     
     
 
Weighted average number of homes
    75,106       73,806       1.8 %     75,710       73,717       2.7 %
Physical occupancy**
    93.5 %     93.6 %     -0.1 %     93.2 %     93.5 %     -0.3 %


  Excludes depreciation, amortization, and property management expenses.

**  Based upon weighted average stabilized homes.

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      The following table is our reconciliation of property operating income to net income as reflected on the Consolidated Statements of Operations for the three and six months ended June 30, (dollars in thousands):

                                   
Three Months Ended Six Months Ended
June 30, June 30,


2004 2003 2004 2003




Property operating income
  $ 97,748     $ 95,450     $ 194,222     $ 189,600  
Commercial operating income
    106       154       214       580  
Non-property income
    1,062       194       1,406       396  
Real estate depreciation and amortization
    (44,083 )     (40,546 )     (87,927 )     (80,594 )
Interest
    (29,295 )     (29,595 )     (58,201 )     (61,156 )
General and administrative and property management
    (9,017 )     (9,358 )     (18,132 )     (18,985 )
Other operating expenses
    (295 )     (331 )     (579 )     (643 )
Net gain/(loss) on sale of depreciable property
    13,814       (112 )     15,019       935  
Minority interests
    (1,529 )     (372 )     (2,199 )     (1,209 )
     
     
     
     
 
 
Net income per the Consolidated Statements of Operations
  $ 28,511     $ 15,484     $ 43,823     $ 28,924  
     
     
     
     
 
 
Same Communities

      Our same communities (those communities acquired, developed, and stabilized prior to June 30, 2003 and held on June 30, 2004, which consisted of 69,286 apartment homes) provided 89% of our property operating income for the six months ended June 30, 2004.

      For the second quarter of 2004, same community property operating income decreased 3.1% or $2.8 million compared to the same period in 2003. The overall decrease in property operating income was primarily attributable to a 0.2% or $0.3 million decrease in revenues from rental and other income and a 4.7% or $2.5 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 0.8% or $1.2 million decrease in rental rates. This decrease in income was partially offset by an 11.6% or $0.5 million increase in utility reimbursement income, a 4.8% or $0.2 million decrease in concession expense, and a 1.5% or $0.1 million decrease in vacancy loss. Physical occupancy remained constant at 93.6%.

      The increase in property operating expenses was primarily driven by a 3.0% or $0.4 million increase in real estate taxes, a 13.1% or $0.4 million increase in insurance costs, a 6.6% or $0.9 million increase in personnel costs, and a 8.2% or $0.7 million increase in repair and maintenance costs.

      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 1.8% to 61.1%.

      For the six months ended June 30, 2004, same community property operating income decreased 3.1% or $5.6 million compared to the same period in 2003. The overall decrease in property operating income was primarily attributable to a 0.4% or $1.1 million decrease in revenues from rental and other income and a 4.2% or $4.5 million increase in operating expenses. The decrease in revenues from rental and other income was primarily driven by a 1.2% or $3.6 million decrease in rental rates. This decrease in income was partially offset by a 15.6% or $1.3 million increase in utility reimbursement income, and a 7.5% or $0.7 million decrease in concession expense. Physical occupancy decreased 0.2% to 93.3%.

      The increase in property operating expenses was primarily driven by a 5.3% or $1.5 million increase in personnel costs, a 6.1% or $1.1 million increase in repair and maintenance costs, a 16.9% or $1.0 million increase in insurance costs, and a 4.2% or $0.7 million increase in utilities expense.

      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 1.7% to 60.9%.

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Non-Mature Communities

      The remaining 11% of our property operating income during the first six months of 2004 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed during 2003 and 2004, sold properties, and those properties classified as real estate held for disposition). The 17 communities with 5,253 apartment homes that we acquired during 2003 and 2004 provided $15.8 million of property operating income. The eight communities with 1,910 apartment homes sold during 2004 provided $2.5 million of property operating income. In addition, our development communities, which included 178 apartment homes constructed since January 1, 2003, provided $0.4 million of property operating income during 2004, the two communities with 1,190 apartment homes classified as real estate held for disposition provided $1.9 million of property operating income, and other non-mature communities provided $0.8 million of property operating income for the six months ended June 30, 2004.

 
Real Estate Depreciation and Amortization

      For the three and six months ended June 30, 2004, real estate depreciation and amortization on both continuing and discontinued operations increased 8.6% or $3.4 million and 8.9% or $7.0 million, respectively, compared to the same period in 2003, primarily due to the overall increase in the weighted average number of apartment homes.

 
Interest Expense

      For the three months ended June 30, 2004, interest expense on both continuing and discontinued operations decreased 1.0% or $0.3 million from the same period in 2003 primarily due to debt refinancings and decreasing interest rates. For the quarter ended June 30, 2004, the weighted average amount of debt outstanding increased 15.0% or $300.3 million compared to the prior year. However, this was more than offset by the weighted average interest rate declining from 5.7% to 5.1% during 2004. The weighted average amount of debt outstanding during 2004 is higher than 2003 as acquisition costs in 2004 have been funded, in most part, by the issuance of debt. The decrease in the average interest rate during 2004 reflects our ability to take advantage of lower interest rates through refinancing and the utilization of variable rate debt.

      For the six months ended June 30, 2004, interest expense on both continuing and discontinued operations decreased 4.8% or $3.0 million from the same period in 2003 primarily due to debt refinancings and decreasing interest rates. For the six months ended June 30, 2004, the weighted average amount of debt outstanding increased 9.7% or $196.5 million compared to the prior year. However, this was more than offset by the weighted average interest rate declining from 5.5% to 5.1% during 2004. The weighted average amount of debt outstanding during 2004 is higher than 2003 as acquisition costs in 2004 have been funded, in most part, by the issuance of debt. The decrease in the average interest rate during 2004 reflects our ability to take advantage of lower interest rates through refinancing and the utilization of variable rate debt.

 
General and Administrative

      For the three months ended June 30, 2004, general and administrative expenses decreased $0.5 million or 10.3% compared to the same period in 2003 primarily as a result of a decrease in incentive compensation expense and legal costs. For the six months ended June 30, 2004, general and administrative expense decreased $1.2 million or 11.6% over the comparable period in 2003. The decrease for the six-month period was primarily due to a decrease in incentive compensation expense, legal costs, and professional service costs.

 
Gains on Sales of Land and Depreciable Property

      For the three and six months ended June 30, 2004, we recognized gains for financial reporting purposes of $13.8 million and $15.0 million, respectively, compared to a loss of $0.1 million and a gain of $0.9 million for the comparable period in 2003. 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.

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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.

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.

      For a discussion of these and other factors affecting our business and prospects, see “Item 1. — Business — Factors Affecting Our Business and Prospects” in our Annual Report on Form 10-K for the year ended December 31, 2003.

 
Item 3. Quantitative and Qualitative Disclosure About Market Risk

      United Dominion is exposed to interest rate changes associated with our unsecured credit facility and other variable rate debt as well as refinancing risk on our fixed rate debt. United Dominion’s involvement with derivative financial instruments is limited and we do not expect to use them for trading or other speculative purposes. United Dominion uses derivative instruments solely to manage its exposure to interest rates.

      See our Annual Report on Form 10-K for the year ended December 31, 2003 “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities. As of June 30, 2004, our market risk has not changed materially from the amounts reported on our Annual Report on Form 10-K for the year ended December 31, 2003.

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Item 4.     Controls and Procedures

      As of June 30, 2004, 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 quarter ended June 30, 2004, 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. However, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective under circumstances where our disclosure controls and procedures should reasonably be expected to operate effectively.

PART II

 
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

      On June 3, 1999, our Board of Directors authorized the repurchase in open market transactions, in block transactions, or otherwise, of up to 5.5 million shares of common stock. On December 5, 2000, our Board of Directors authorized the purchase of up to an additional 5.5 million shares of common stock in open market transactions, in block purchases or otherwise. As of June 30, 2004, we have repurchased a total of 8,749,763 shares of common stock under this program. As disclosed in the table below, we did not purchase any shares of our common stock during the quarter ended June 30, 2004.

                                           
Total Number Maximum
of Shares Number of
Purchased as Shares that
Part of Publicly May Yet Be
Total Number Average Announced Purchased
of Shares Price Per Plans or Under the Plans
Period Purchased Share Programs or Programs





January 1, 2004 through January 31, 2004
    0       N/A       0       2,250,237          
February 1, 2004 through February 29, 2004
    0       N/A       0       2,250,237          
March 1, 2004 through March 31, 2004
    0       N/A       0       2,250,237          
April 1, 2004 through April 30, 2004
    0       N/A       0       2,250,237          
May 1, 2004 through May 31, 2004
    0       N/A       0       2,250,237          
June 1, 2004 through June 30, 2004
    0       N/A       0       2,250,237          
 
Total
    0       N/A       0       2,250,237          

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Item 4. Submission of Matters to a Vote of Security Holders

      On May 4, 2004, United Dominion held its Annual Meeting of Stockholders. At the meeting, the stockholders voted on the election of directors and a proposal to ratify the selection of Ernst & Young LLP to serve as our independent auditors for the year ending December 31, 2004.

      The following persons were elected directors of United Dominion, to serve as such for the term indicated and under their respective successors are duly elected and qualified or until their earlier resignation or removal, by the indicated vote:

                 
Name Votes For Votes Withheld



Eric J. Foss
    113,682,723       498,916  
Robert P. Freeman
    112,564,523       1,617,116  
Jon A. Grove
    83,872,764       30,308,875  
James D. Klingbeil
    83,960,454       30,221,185  
Robert C. Larson
    113,480,127       701,512  
Thomas R. Oliver
    113,594,441       587,199  
Lynne B. Sagalyn
    112,570,526       1,611,113  
Mark J. Sandler
    113,687,210       494,429  
Robert W. Scharar
    112,709,880       1,471,760  
Thomas W. Toomey
    113,768,492       413,147  

      The stockholders approved the proposal to ratify the selection of Ernst & Young LLP to serve as independent auditors for the year ending December 31, 2004, by the indicated vote:

                     
Votes For Votes Against Votes Abstained



  110,895,725       3,038,211       247,703  

      There were no broker non-votes.

 
Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits.

      The exhibits filed or furnished 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 June 30, 2004. 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 April 19, 2004, furnished to the Securities and Exchange Commission on April 20, 2004, under Item 12. Results of Operations and Financial Condition.

      Current Report on Form 8-K dated May 14, 2004, filed with the Securities and Exchange Commission on May 14, 2004, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

      Current Report on Form 8-K dated June 17, 2004, filed with the Securities and Exchange Commission on June 18, 2004, under Item 5. Other Events and under Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

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SIGNATURES

      Pursuant to the requirements 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.
  (Registrant)

Date: August 5, 2004

  /s/ CHRISTOPHER D. GENRY
 
  Christopher D. Genry
  Executive Vice President and Chief Financial Officer

Date: August 5, 2004

  /s/ SCOTT A. SHANABERGER
 
  Scott A. Shanaberger
  Senior Vice President and Chief Accounting Officer

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EXHIBIT INDEX

         
Exhibit Description


  4.1     4.30% Medium-Term Note due July 2007 dated June 25, 2004.
  12     Computation of Ratio of Earnings to Fixed Charges.
  31.1     Rule 13a-14(a) Certification of the Chief Executive Officer.
  31.2     Rule 13a-14(a) Certification of the Chief Financial Officer.
  32.1     Section 1350 Certification of the Chief Executive Officer.
  32.2     Section 1350 Certification of the Chief Financial Officer.

31