e10vq
Table of Contents

 
 
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 March 31, 2006
 
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o
      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
          Large accelerated filer þ Accelerated filer o Non-accelerated filer o          
      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ
      The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of May 5, 2006 was 134,280,938.
 
 


 

UNITED DOMINION REALTY TRUST, INC.
FORM 10-Q
INDEX
                 
        Page
         
 PART I — FINANCIAL INFORMATION
 
 Item 1.       2  
            2  
            3  
            4  
            5  
            6  
 Item 2.       14  
 Item 3.       25  
 Item 4.       25  
 PART II — OTHER INFORMATION
 Item 1A.       26  
 Item 2.       32  
 Item 6.       33  
            34  
 Second Amendment to the Amended and Restated Agreement
 Computation of Ratio of Earnings to Fixed Charges
 Rule 13a-14(a) Certification of the CEO
 Rule 13a-14(a) Certification of the CFO
 Section 1350 Certification of the CEO
 Section 1350 Certification of the CFO

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PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)
                     
    March 31,   December 31,
    2006   2005
         
ASSETS
Real estate owned:
               
 
Real estate held for investment
  $ 5,275,689     $ 5,215,688  
   
Less: accumulated depreciation
    (1,137,308 )     (1,080,616 )
             
      4,138,381       4,135,072  
 
Real estate under development (net of accumulated depreciation of $619 and $140)
    129,235       117,328  
 
Real estate held for disposition (net of accumulated depreciation of $44,373 and $43,073)
    123,038       136,195  
             
 
Total real estate owned, net of accumulated depreciation
    4,390,654       4,388,595  
Cash and cash equivalents
    36,336       15,543  
Restricted cash
    4,809       4,583  
Deferred financing costs, net
    30,436       31,036  
Notes receivable
    36,120       64,805  
Other assets
    31,019       33,938  
Other assets — real estate held for disposition
    1,468       3,093  
             
 
Total assets
  $ 4,530,842     $ 4,541,593  
             
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt
  $ 1,122,162     $ 1,116,259  
Unsecured debt
    2,092,003       2,043,518  
Real estate taxes payable
    21,208       24,433  
Accrued interest payable
    24,178       26,672  
Security deposits and prepaid rent
    25,331       25,535  
Distributions payable
    47,078       45,313  
Accounts payable, accrued expenses, and other liabilities
    32,752       55,147  
Other liabilities — real estate held for disposition
    6,681       13,173  
             
 
Total liabilities
    3,371,393       3,350,050  
Minority interests
    81,146       83,819  
Stockholders’ equity:
               
Preferred stock, no par value; 50,000,000 shares authorized
               
 
5,416,009 shares 8.60% Series B Cumulative Redeemable issued and outstanding (5,416,009 in 2005)
    135,400       135,400  
 
2,803,812 shares 8.00% Series E Cumulative Convertible issued and outstanding (2,803,812 in 2005)
    46,571       46,571  
Common stock, $0.01 par value; 250,000,000 shares authorized
               
 
134,279,842 shares issued and outstanding (134,012,053 in 2005)
    1,343       1,340  
Additional paid-in capital
    1,684,518       1,680,115  
Distributions in excess of net income
    (789,529 )     (755,702 )
             
 
Total stockholders’ equity
    1,078,303       1,107,724  
             
Total liabilities and stockholders’ equity
  $ 4,530,842     $ 4,541,593  
             
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
    March 31,
     
    2006   2005
         
REVENUES
               
 
Rental income
  $ 176,810     $ 158,636  
 
Non-property income:
               
   
Sale of technology investment
          12,306  
   
Other income
    1,178       618  
             
     
Total non-property income
    1,178       12,924  
             
     
Total revenues
    177,988       171,560  
             
EXPENSES
               
 
Rental expenses:
               
   
Real estate taxes and insurance
    23,232       19,172  
   
Personnel
    17,306       15,969  
   
Utilities
    11,283       9,571  
   
Repair and maintenance
    10,300       9,835  
   
Administrative and marketing
    5,423       5,570  
   
Property management
    4,991       4,813  
   
Other operating expenses
    298       290  
 
Real estate depreciation and amortization
    57,397       48,566  
 
Interest
    44,094       38,572  
 
General and administrative
    6,764       7,000  
 
Loss on early debt retirement
          6,644  
 
Other depreciation and amortization
    704       652  
             
   
Total expenses
    181,792       166,654  
             
(Loss)/income before minority interests and discontinued operations
    (3,804 )     4,906  
Minority interests of outside partnerships
    (16 )     (58 )
Minority interests of unitholders in operating partnerships
    468       (59 )
             
(Loss)/income before discontinued operations, net of minority interests
    (3,352 )     4,789  
Income from discontinued operations, net of minority interests
    15,359       10,152  
             
Net income
    12,007       14,941  
Distributions to preferred stockholders — Series B
    (2,911 )     (2,911 )
Distributions to preferred stockholders — Series E (Convertible)
    (931 )     (931 )
             
Net income available to common stockholders
  $ 8,165     $ 11,099  
             
Earnings per weighted average common share — basic and diluted:
               
 
(Loss)/income from continuing operations available to common stockholders, net of minority interests
  $ (0.05 )   $ 0.01  
 
Income from discontinued operations, net of minority interests
  $ 0.11     $ 0.07  
 
Net income available to common stockholders
  $ 0.06     $ 0.08  
Common distributions declared per share
  $ 0.3125     $ 0.3000  
Weighted average number of common shares outstanding — basic
    133,589       136,067  
Weighted average number of common shares outstanding — diluted
    133,589       137,073  
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)
                       
    Three Months Ended
    March 31,
     
    2006   2005
         
Operating Activities
               
 
Net income
  $ 12,007     $ 14,941  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
   
Depreciation and amortization
    59,435       52,390  
   
Net gains on the sale of land and depreciable property
    (15,347 )     (7,023 )
   
Minority interests
    549       749  
   
Amortization of deferred financing costs and other
    1,427       2,330  
   
Amortization of deferred compensation
    1,210       1,025  
   
Changes in operating assets and liabilities:
               
     
Decrease/(increase) in operating assets
    1,633       (2,715 )
     
Decrease in operating liabilities
    (28,697 )     (11,327 )
             
Net cash provided by operating activities
    32,217       50,370  
Investing Activities
               
 
Proceeds from sales of real estate investments, net
    29,135       70,451  
 
Repayment of note receivable
    29,385        
 
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures
    (18,556 )     (121,587 )
 
Development of real estate assets
    (12,575 )     (9,836 )
 
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (48,006 )     (26,483 )
 
Capital expenditures — non-real estate assets
    (367 )     (812 )
 
Decrease in funds held in escrow from 1031 exchanges pending the acquisition of real estate
          17,039  
             
Net cash used in investing activities
    (20,984 )     (71,228 )
Financing Activities
               
 
Scheduled principal payments on secured debt
    (955 )     (5,687 )
 
Proceeds from the issuance of unsecured debt
          105,152  
 
Proceeds from the issuance of secured debt
    6,858        
 
Payments on secured debt
          (108,952 )
 
Payments on unsecured debt
    (24,820 )      
 
Net proceeds from revolving bank debt
    73,400       70,700  
 
Payment of financing costs
    (827 )     (685 )
 
Proceeds from the issuance of common stock
    3,167       1,031  
 
Distributions paid to minority interests
    (3,192 )     (3,082 )
 
Distributions paid to preferred stockholders
    (3,842 )     (3,842 )
 
Distributions paid to common stockholders
    (40,229 )     (40,020 )
             
Net cash provided by financing activities
    9,560       14,615  
Net increase/(decrease) in cash and cash equivalents
    20,793       (6,243 )
Cash and cash equivalents, beginning of period
    15,543       7,904  
             
Cash and cash equivalents, end of period
  $ 36,336     $ 1,661  
             
Supplemental Information:
               
 
Interest paid during the period
  $ 46,622     $ 39,787  
 
Non-cash transactions:
               
   
Conversion of operating partnership minority interests to common stock (3,900 shares in 2006 and 84,380 shares in 2005)
    29       1,317  
   
Issuance of restricted stock awards
    201       8,725  
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)
                                                           
    Preferred Stock   Common Stock       Distributions in    
            Paid-in   Excess of    
    Shares   Amount   Shares   Amount   Capital   Net Income   Total
                             
Balance, December 31, 2005
    8,219,821     $ 181,971       134,012,053     $ 1,340     $ 1,680,115     $ (755,702 )   $ 1,107,724  
                                           
Comprehensive Income
                                                       
 
Net income
                                            12,007       12,007  
                                           
 
Comprehensive income
                                            12,007       12,007  
                                           
 
Issuance of common and restricted shares and other
                    263,889       3       4,374             4,377  
 
Adjustment for conversion of minority interests of unitholders in operating partnerships
                    3,900             29             29  
 
Common stock distributions declared ($0.3125 per share)
                                            (41,992 )     (41,992 )
 
Preferred stock distributions declared — Series B ($0.5375 per share)
                                            (2,911 )     (2,911 )
 
Preferred stock distributions declared — Series E ($0.3322 per share)
                                            (931 )     (931 )
                                           
Balance, March 31, 2006
    8,219,821     $ 181,971       134,279,842     $ 1,343     $ 1,684,518     $ (789,529 )   $ 1,078,303  
                                           
See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
1. CONSOLIDATION AND BASIS OF PRESENTATION
      United Dominion Realty Trust, Inc. is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. 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 March 31, 2006, there were 166,300,080 units in the Operating Partnership outstanding, of which 156,123,989 units or 94% were owned by United Dominion and 10,176,091 units or 6% were owned by limited partners (of which 1,764,662 are owned by the holders of the Series A OPPS, see Note 6). As of March 31, 2006, there were 5,542,200 units in the Heritage OP outstanding, of which 5,205,788 units or 94% were owned by United Dominion and 336,412 units or 6% 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, 2005, filed with the Securities and Exchange Commission on March 7, 2006.
      In the opinion of management, the consolidated financial statements reflect all adjustments which are necessary for the fair presentation of financial position at March 31, 2006, and results of operations for the interim periods ended March 31, 2006 and 2005. 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.
      United Dominion adopted the fair-value-based method of accounting for share-based payments effective January 1, 2004 using the prospective method described in FASB Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Prior to the adoption of Statement 123(R), United Dominion used the Black-Scholes-Merton formula to estimate the value of stock options granted to employees and has continued to use this acceptable option valuation model upon the required adoption of Statement 123(R) on January 1, 2006. Because Statement 123(R) must be applied not only to new awards but to previously granted awards that are not fully vested on the effective date, and because United Dominion adopted Statement 123 using the modified prospective transition method (which applied only to awards granted, modified or settled after the adoption date), compensation cost for some previously granted awards that were not recognized under Statement 123 were recognized under Statement 123(R). The adoption of the provisions of Statement 123(R) did not have a material impact on our financial position, results of operations, or cash flows.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
      In June 2005, the FASB ratified its consensus in EITF Issue 04-05, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (Issue 04-05). The effective date for Issue 04-05 was June 29, 2005 for all new or modified partnerships and January 1, 2006 for our remaining partnerships for the applicable provisions. We adopted the provisions of Issue 04-05 on January 1, 2006. The adoption of the provisions of EITF 04-05 did not have a material impact on our financial position, results of operations, or cash flows.
2. REAL ESTATE HELD FOR INVESTMENT
      At March 31, 2006, there are 247 communities with 72,267 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment (dollars in thousands):
                 
    March 31,   December 31,
    2006   2005
         
Land and land improvements
  $ 1,264,145     $ 1,267,167  
Buildings and improvements
    3,736,140       3,689,015  
Furniture, fixtures, and equipment
    275,404       259,506  
             
Real estate held for investment
    5,275,689       5,215,688  
Accumulated depreciation
    (1,137,308 )     (1,080,616 )
             
Real estate held for investment, net
  $ 4,138,381     $ 4,135,072  
             
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 actively marketed or contracted for sale which 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 March 31, 2006, 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 March 31, 2006, within the Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2006 and 2005.
      For the three months ended March 31, 2006, United Dominion sold 181 condominiums from four communities with a total of 612 condominiums. We recognized after-tax gains for financial reporting purposes of $9.1 million on these sales. At March 31, 2006, United Dominion had nine communities with a total of 2,753 homes and a net book value of $101.2 million, four communities with a total of 612 condominiums and a net book value of $16.6 million, and two parcels of land with a net book value of $5.2 million included in real estate held for disposition. During 2005, United Dominion sold 22 communities with a total of 6,352 apartment homes, 240 condominiums from five communities with a total of 648 condominiums, and one parcel of land. In conjunction with the sale of ten communities in July 2005, we received short-term notes for $124.7 million that bear interest at 6.75% and had maturities ranging from

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 2005 to July 2006. As of March 31, 2006, the balance on the notes receivable was $30.4 million. We recognized gains for financial reporting purposes of $6.2 million during the three months ended March 31, 2006, and will recognize $0.2 million in additional gains in 2006 as the notes receivable mature and are paid. 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 titled “Income from discontinued operations, net of minority interests.”
      United Dominion has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries, primarily those engaged in condominium conversion and sale activities. United Dominion recognized a provision for income taxes of $4.8 million and $0.4 million for the three months ended March 31, 2006 and 2005, respectively. These amounts were classified as reductions of the net gain on sale of depreciable property in the following summary of income from discontinued operations.
      The following is a summary of income from discontinued operations for the periods presented, (dollars in thousands):
                 
    Three Months Ended
    March 31,
     
    2006   2005
         
Rental income
  $ 4,704     $ 16,439  
Non-property income
          8  
             
      4,704       16,447  
Rental expenses
    2,357       7,116  
Real estate depreciation
    1,326       3,153  
Interest
          577  
Loss on early debt retirement
          1,821  
Other expenses
    8       19  
             
      3,691       12,686  
Income before net gain on the sale of depreciable property and minority interests
    1,013       3,761  
Net gain on the sale of depreciable property
    15,347       7,023  
             
Income before minority interests
    16,360       10,784  
Minority interests on income from discontinued operations
    (1,001 )     (632 )
             
Income from discontinued operations, net of minority interests
  $ 15,359     $ 10,152  
             

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. SECURED DEBT
      Secured debt on continuing and discontinued operations, which encumbers $1.9 billion or 35% of United Dominion’s real estate owned based upon book value ($3.7 billion or 65% of United Dominion’s real estate owned is unencumbered) consists of the following as of March 31, 2006 (dollars in thousands):
                                         
        Weighted   Weighted   Number of
    Principal Outstanding   Average   Average Years   Communities
        Interest Rate   to Maturity   Encumbered
    March 31,   December 31,            
    2006   2005   2006   2006   2006
                     
Fixed Rate Debt
                                       
Mortgage notes payable
  $ 358,373     $ 359,281       5.34%       5.2       14  
Tax-exempt secured notes payable
    26,400       26,400       5.85%       18.9       3  
Fannie Mae credit facilities
    363,875       363,875       6.09%       5.1       9  
                               
Total fixed rate secured debt
    748,648       749,556       5.72%       5.6       26  
Variable Rate Debt
                                       
Mortgage notes payable
    73,275       66,464       5.97%       4.5       4  
Tax-exempt secured note payable
    7,770       7,770       3.42%       22.3       1  
Fannie Mae credit facilities
    292,469       292,469       5.09%       6.7       47  
                               
Total variable rate secured debt
    373,514       366,703       5.23%       6.6       52  
                               
Total secured debt
  $ 1,122,162     $ 1,116,259       5.56%       5.9       78  
                               
      Approximate principal payments due during each of the next five calendar years and thereafter, as of March 31, 2006, are as follows (dollars in thousands):
                         
    Fixed   Variable   Total
    Rate   Rate   Secured
Year   Maturities   Maturities   Maturities
             
2006
  $ 31,217     $ 3,967     $ 35,184  
2007
    81,592       419       82,011  
2008
    9,254       31,474       40,728  
2009
    4,575             4,575  
2010
    237,147             237,147  
Thereafter
    384,863       337,654       722,517  
                   
    $ 748,648     $ 373,514     $ 1,122,162  
                   
      During the first quarter of 2005, we prepaid approximately $110 million of secured debt. In conjunction with these prepayments, we incurred prepayment penalties of $8.5 million in both continuing and discontinued operations as “Loss on early debt retirement.” These penalties were funded by the proceeds from the sale of our technology investment of $12.3 million.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. UNSECURED DEBT
      A summary of unsecured debt as of March 31, 2006 and December 31, 2005 is as follows (dollars in thousands):
                   
    2006   2005
         
Commercial Banks
               
 
Borrowings outstanding under an unsecured credit facility due May 2008(a)
  $ 284,200     $ 210,800  
Senior Unsecured Notes — Other
               
 
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
    75,000       75,000  
 
4.50% Medium-Term Notes due March 2008
    200,000       200,000  
 
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       50,000  
 
5.00% Medium-Term Notes due January 2012
    100,000       100,000  
 
5.13% Medium-Term Notes due January 2014
    200,000       200,000  
 
5.25% Medium-Term Notes due January 2015
    250,000       250,000  
 
5.25% Medium-Term Notes due January 2016
    100,000       100,000  
 
8.50% Debentures due September 2024
    54,118       54,118  
 
4.00% Convertible Senior Notes due December 2035
    250,000       250,000  
 
Other(b)
    275       370  
             
      1,761,103       1,761,198  
             
Unsecured Notes — Other
               
 
Verano Construction Loan due February 2006
          24,820  
 
ABAG Tax-Exempt Bonds due August 2008
    46,700       46,700  
             
      46,700       71,520  
             
 
Total Unsecured Debt
  $ 2,092,003     $ 2,043,518  
             
 
(a)  United Dominion has a three-year $500 million unsecured revolving credit facility. The credit facility matures on May 31, 2008, and at United Dominion’s option, can be extended for an additional year. United Dominion has the right to increase the credit facility to $750 million if the initial lenders increase their commitments or we receive commitments from additional lenders. Based on United Dominion’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 57.5 basis points, which represents a 12.5 basis point reduction to the previous unsecured revolver, and the facility fee was reduced from 20 basis points to 15 basis points. Under a competitive bid feature and for so long as United Dominion maintains an Investment Grade Rating, United Dominion has the right to bid out 100% of the commitment amount.
 
(b)  Represents deferred gains from the termination of interest rate risk management agreements.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. 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.
      The following table sets forth the computation of basic and diluted earnings per share for the periods presented, (dollars in thousands, except per share data):
                   
    Three Months Ended
    March 31,
     
    2006   2005
         
Numerator for basic and diluted earnings per share —
               
 
Net income available to common stockholders
  $ 8,165     $ 11,099  
             
Denominator:
               
Denominator for basic earnings per share —
               
 
Weighted average common shares outstanding
    134,216       136,913  
 
Non-vested restricted stock awards
    (627 )     (846 )
             
      133,589       136,067  
             
Effect of dilutive securities:
               
Employee stock options and non-vested restricted stock awards
          1,006  
             
Denominator for diluted earnings per share
    133,589       137,073  
             
Basic earnings per share
  $ 0.06     $ 0.08  
             
Diluted earnings per share
  $ 0.06     $ 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 months ended March 31, 2006 and 2005, would be 8,753,433 and 8,518,057 weighted average common shares, respectively. If the Series A Out-Performance Partnership Shares were converted to common stock, the additional shares of common stock outstanding for the three months ended March 31, 2006 and 2005, would be 1,764,662 and 1,791,329 weighted average common shares, respectively. If the convertible preferred stock were converted to common stock, the additional shares of common stock outstanding for the three months ended March 31, 2006 and 2005, would be 2,803,812 weighted average common shares.
7. COMPREHENSIVE INCOME
      Total comprehensive income for the three months ended March 31, 2006 and 2005, was $12.0 million and $14.9 million, respectively. There is no difference between net income and total comprehensive income for the periods presented.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. COMMITMENTS AND CONTINGENCIES
Commitments
      United Dominion is committed to completing its real estate under development, which has an estimated cost to complete of $36.4 million at March 31, 2006.
Contingencies
Series C Out-Performance Program
      In May 2005, the stockholders of United Dominion approved the Series C Out-Performance Program (the “Series C Program”) pursuant to which certain executive officers and other key employees of United Dominion (the “Series C Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in UDR Out-Performance III, LLC, a Delaware limited liability company (the “Series C LLC”), the only asset of which is a special class of partnership units of United Dominion Realty, L.P. (“Series C Out-Performance Partnership Shares” or “Series C OPPSs”). The purchase price for the Series C OPPSs was determined by the Compensation Committee of United Dominion’s board of directors to be $750,000, assuming 100% participation, and was based upon the advice of an independent valuation expert. The Series C Program will measure the cumulative total return on our common stock over the 36-month period from June 1, 2005 to May 30, 2008.
      The Series C 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 is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).
      At the conclusion of the measurement period, if United Dominion’s total cumulative return satisfies these criteria, the Series C LLC as holder of the Series C OPPSs will receive (for the indirect benefit of the Series C Participants as holders of interests in the Series C LLC) distributions and allocations of income and loss from the Operating Partnership 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 Minimum Return (such excess being the “Excess Return”);
 
        ii. multiplying 2% of the Excess Return by United Dominion’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, OP Units, and common stock equivalents) multiplied by the daily closing price of United Dominion’s common stock, up to a maximum of 1% 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 Series C Participants will forfeit their entire initial investment.
      Based on the results through March 31, 2006, no Series C OPPSs would have been issued had the program terminated on that date. However, since the ultimate determination of Series C OPPSs to be issued will not occur until May 2008, and the number of Series C OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Series D Out-Performance Program
      In February 2006, the board of directors of United Dominion approved the Series D Out-Performance Program (the “Series D Program”), pursuant to which certain executive officers and other key employees of United Dominion (the “Series D Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in UDR Out-Performance IV, LLC, a Delaware limited liability company (the “Series D LLC”), the only asset of which is a special class of partnership units of United Dominion Realty, L.P. (“Series D Out-Performance Partnership Shares” or “Series D OPPSs”). The Series D Program is part of the New Out-Performance Program approved by United Dominion’s stockholders in May 2005. The Series D LLC has agreed to sell 830,000 membership units to members of United Dominion’s senior management at a price of $1.00 per unit. The aggregate purchase price of $830,000 for the Series D OPPSs, assuming 100% participation, is based upon the advice of an independent valuation expert. The Series D Program will measure the cumulative total return on our common stock over the 36-month period from January 1, 2006 to December 31, 2008.
      The Series D 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 is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).
      At the conclusion of the measurement period, if United Dominion’s total cumulative return satisfies these criteria, the Series D LLC as holder of the Series D OPPSs will receive (for the indirect benefit of the Series D Participants as holders of interests in the Series D LLC) distributions and allocations of income and loss from the Operating Partnership 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 Minimum Return (such excess being the “Excess Return”);
 
        ii. multiplying 2% of the Excess Return by United Dominion’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, OP Units, and common stock equivalents) multiplied by the daily closing price of United Dominion’s common stock, up to a maximum of 1% 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, computed as the volume-weighted average price per day of the 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 Series D Participants will forfeit their entire initial investment.
      Based on the results through March 31, 2006, no Series D OPPSs would have been issued had the program terminated on that date. However, since the ultimate determination of Series D OPPSs to be issued will not occur until December 2008, and the number of Series D OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events.
Litigation and Legal Matters
      United Dominion is subject to various legal proceedings and claims arising in the ordinary course of business. United Dominion cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. United Dominion believes that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition, results of operations or cash flow.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
      This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause 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.
      The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
  •  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,
 
  •  potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs,
 
  •  risks from extraordinary losses for which we may not have insurance,
 
  •  uninsured losses due to insurance deductibles, self-insurance retention, uninsured claims or casualties, or losses in excess of applicable coverage,
 
  •  delays in completing developments and lease-ups on schedule,
 
  •  our failure to succeed in new markets,
 
  •  changing interest rates, which could increase interest costs and affect the market price of our securities,
 
  •  potential liability for environmental contamination, which could result in substantial costs,
 
  •  the imposition of federal taxes if we fail to qualify as a REIT in any taxable year,
 
  •  our internal control over financial reporting may not be considered effective which could result in a loss of investor confidence in our financial reports, and in turn have an adverse effect on our stock price, and
 
  •  changes in real estate tax and other laws.
      A discussion of these and other factors affecting our business and prospects is set forth below in Part II, Item 1A. Risk Factors. We encourage investors to review these risks factors.

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      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. Any forward-looking statement speaks only as of the date on which it is made. Except to fulfill our obligations under the federal securities laws, we undertake no obligation to update any such statement to reflect events or circumstances after the date on which it is made.
Business Overview
      We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our subsidiaries include two operating partnerships, Heritage Communities L.P., a Delaware limited partnership, and United Dominion Realty, L.P., a Delaware limited partnership. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.
      At March 31, 2006, our portfolio included 260 communities with 75,223 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
    As of March 31, 2006   March 31, 2006
         
    Number of   Number of   Percentage of   Carrying   Average   Total Income
    Apartment   Apartment   Carrying   Value   Physical   per Occupied
    Communities   Homes   Value   (In thousands)   Occupancy   Home(a)
                         
MID-ATLANTIC REGION
                                               
 
Metropolitan DC
    8       2,471       4.6 %   $ 253,346       96.6 %   $ 1,179  
 
Raleigh, NC
    11       3,663       4.0 %     221,357       93.2 %     689  
 
Baltimore, MD
    10       2,118       3.1 %     171,244       95.8 %     1,029  
 
Richmond, VA
    9       2,636       2.9 %     161,600       96.6 %     854  
 
Charlotte, NC
    7       1,686       2.0 %     112,373       93.9 %     707  
 
Wilmington, NC
    6       1,868       1.8 %     99,534       94.4 %     743  
 
Norfolk, VA
    6       1,438       1.3 %     70,665       95.5 %     901  
 
Other North Carolina
    16       4,016       3.5 %     193,115       93.5 %     635  
 
Other Mid-Atlantic
    6       1,156       1.1 %     61,905       94.5 %     893  
 
Other Virginia
    3       820       0.9 %     49,219       94.1 %     988  
WESTERN REGION
                                               
 
Southern California
    26       7,018       19.2 %     1,066,832       94.3 %     1,328  
 
Northern California
    10       2,689       6.4 %     357,616       95.3 %     1,291  
 
Seattle, WA
    8       1,984       3.0 %     167,902       95.2 %     870  
 
Monterey Peninsula, CA
    7       1,568       2.5 %     141,397       88.3 %     934  
 
Portland, OR
    6       1,374       1.5 %     84,098       94.5 %     722  
SOUTHEASTERN REGION
                                               
 
Tampa, FL
    12       4,245       4.7 %     264,260       92.8 %     911  
 
Orlando, FL
    14       4,140       4.2 %     235,803       95.0 %     852  
 
Nashville, TN
    9       2,580       2.8 %     157,891       95.0 %     741  
 
Jacksonville, FL
    4       1,557       1.9 %     105,014       93.9 %     825  
 
Atlanta, GA
    6       1,426       1.4 %     79,547       95.8 %     685  

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        Three Months Ended
    As of March 31, 2006   March 31, 2006
         
    Number of   Number of   Percentage of   Carrying   Average   Total Income
    Apartment   Apartment   Carrying   Value   Physical   per Occupied
    Communities   Homes   Value   (In thousands)   Occupancy   Home(a)
                         
 
Columbia, SC
    6       1,584       1.2 %     68,477       94.2 %     655  
 
Other Florida
    6       1,737       2.1 %     119,659       96.3 %     934  
 
Other Southeastern
    2       798       0.8 %     41,729       94.7 %     541  
SOUTHWESTERN REGION
                                               
 
Houston, TX
    16       5,447       4.6 %     257,159       95.2 %     667  
 
Dallas, TX
    4       1,543       1.9 %     106,422       95.9 %     775  
 
Phoenix, AZ
    6       1,511       1.9 %     106,198       87.6 %     884  
 
Arlington, TX
    7       2,156       1.9 %     106,075       96.0 %     649  
 
Denver, CO
    3       1,484       1.8 %     101,070       87.2 %     692  
 
Austin, TX
    5       1,425       1.5 %     84,227       95.8 %     710  
 
Other Southwestern
    10       3,676       3.7 %     203,412       94.7 %     681  
MIDWESTERN REGION
                                               
 
Columbus, OH
    6       2,530       2.9 %     161,019       94.4 %     726  
 
Other Midwestern
    3       444       0.4 %     24,142       92.1 %     758  
 
Real Estate Under Development
    2       435       2.0 %     108,846              
 
Land
                0.5 %     25,147              
                                     
   
Total
    260       75,223       100.0 %   $ 5,568,300       94.3 %   $ 857  
                                     
 
(a)  Total Income per Occupied Home represents total revenues per weighted average number of apartment homes occupied.
Liquidity and Capital Resources
      Liquidity is the ability to meet present and future financial obligations either through operating cash flows, 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 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 an indeterminate amount of common stock, preferred stock, debt securities, warrants, purchase contracts and units to facilitate future financing activities in the public capital markets. Access to capital markets is dependent on market conditions at the time of issuance.

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Future Capital Needs
      Future development expenditures are expected to be funded with proceeds from the sale of property, with construction loans, through joint ventures 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 properties.
      During the remainder of 2006, we have approximately $35.2 million of secured debt and $110.5 million of unsecured debt maturing and we anticipate repaying that debt with proceeds from borrowings under our secured or unsecured credit facilities, the issuance of new unsecured debt securities or equity, or from disposition proceeds.
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, and (3) 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, 2005. There have been no significant changes in our critical accounting policies from those reported in our 2005 Annual Report on Form 10-K. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
Statements of Cash Flow
      The following discussion explains the changes in net cash provided by operating activities and net cash used in investing and financing activities that are presented in our Consolidated Statements of Cash Flows.
Operating Activities
      For the three months ended March 31, 2006, our cash flow provided by operating activities was $32.2 million compared to $50.4 million for the same period in 2005. The decrease in cash flow from operating activities resulted primarily from a $13.0 million net decrease in operating assets/liabilities for the period, a decrease of $12.3 million in other income due to a 2005 sale of a technology investment, and a $4.9 million increase in interest expense, all of which was offset by an $8.5 million decrease in prepayment penalties and a $4.3 million increase in property operating income from our apartment community portfolio (see discussion under “Apartment Community Operations”).
Investing Activities
      For the three months ended March 31, 2006, net cash used in investing activities was $21.0 million compared to $71.2 million for the same period in 2005. 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 three months ended March 31, 2006, we acquired one apartment community with 160 apartment homes in Plano, Texas, that is adjacent to one of our existing communities. Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets.

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As a result, we have been expanding our interests in the fast growing Southern California, Florida, and Metropolitan DC markets over the past three years. During 2006, we plan to continue to channel new investments into those markets that we believe will provide the best investment returns. 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 three months of 2006, we spent $48.0 million or $647 per home on capital expenditures for all of our communities, excluding development and commercial properties. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as HVAC equipment, roofs, siding, parking lots, and other non-revenue enhancing capital expenditures, which aggregated $4.7 million or $63 per home. In addition, revenue enhancing capital expenditures, kitchen and bath upgrades, and other extensive interior upgrades totaled $34.5 million or $466 per home and major renovations totaled $8.8 million or $118 per home for the three months ended March 31, 2006.
      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:
                                                   
    Three Months Ended March 31,   Three Months Ended March 31,
    (Dollars in thousands)   (Per home)
         
    2006   2005   % Change   2006   2005   % Change
                         
Turnover capital expenditures
  $ 2,991     $ 4,578       -34.7 %   $ 40     $ 59       -32.2 %
Other recurring capital expenditures
    1,724       3,715       -53.6 %     23       48       -52.1 %
                                     
 
Total recurring capital expenditures
    4,715       8,293       -43.1 %     63       107       -41.1 %
Revenue enhancing improvements
    34,524       16,715       106.5 %     466       215       116.7 %
Major renovations
    8,767       1,475       494.4 %     118       19       521.1 %
                                     
 
Total capital improvements
  $ 48,006     $ 26,483       81.3 %   $ 647     $ 341       89.7 %
                                     
Repair and maintenance
    10,624       11,096       -4.3 %     143       143       0.0 %
                                     
 
Total expenditures
  $ 58,630     $ 37,579       56.0 %   $ 790     $ 484       63.2 %
                                     
      Total capital improvements increased $21.5 million or $306 per home for the three months ended March 31, 2006 compared to the same period in 2005. This increase was attributable to $8.8 million of major renovations at certain of our properties. These renovations may include the re-wiring and/or re-plumbing of an entire building as well as major structural changes and/or architectural revisions to existing buildings. The increase was also attributable to an additional $17.8 million being invested in revenue enhancing improvements compared to the same period in 2005. 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 2006 are currently expected to be approximately $530 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 three months ended March 31, 2006, we invested approximately $12.6 million on development projects, an increase of $2.8 million from $9.8 million for the same period in 2005.
      The following projects were under development as of March 31, 2006:
                                                   
    Number of   Completed   Cost to   Budgeted   Estimated   Expected
    Apartment   Apartment   Date   Cost   Cost   Completion
    Homes   Homes   (In thousands)   (In thousands)   Per Home   Date
                         
Verano at Town Square
                                               
 
Rancho Cucamonga, CA
    414       264     $ 62,217     $ 66,300     $ 160,100       2Q06  
Mandalay on the Lake
                                               
 
Irving, TX
    369       171       28,880       30,900       83,700       2Q06  
2000 Post — Phase III
                                               
 
San Francisco, CA
    24             6,481       9,000       375,000       3Q06  
Ridgeview
                                               
 
Plano, TX
    225             8,209       18,000       80,000       1Q07  
Lincoln Towne Square — Phase II
                                               
 
Plano, TX
    303             3,059       21,000       69,300       3Q07  
                                     
      1,335       435     $ 108,846     $ 145,200     $ 108,800          
                                     
      In addition, we own four parcels of land that we continue to hold for future development that had a carrying value at March 31, 2006 of $21.0 million
Disposition of Investments
      For the three months ended March 31, 2006, United Dominion sold 181 condominiums from four communities with a total of 612 condominiums for a gross consideration of $36.4 million. We recognized gains for financial reporting purposes of $9.1 million on these sales. Proceeds from the sales were used primarily to reduce debt.
      During 2006, 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 the proceeds from 2006 dispositions to reduce debt, acquire communities, and fund development activity.
Financing Activities
      Net cash provided by financing activities during the three months ended March 31, 2006, was $9.6 million compared to $14.6 million for the same period in 2005. As part of the plan to improve our balance sheet, we utilized proceeds from dispositions to pay down existing debt and purchase new properties.
      The following is a summary of our financing activities for the three months ended March 31, 2006:
  •  Repaid $1.0 million of secured debt and $24.8 million of unsecured debt.
 
  •  Authorized a new 10 million share repurchase program in February 2006. This program replaces our previous 11 million share program under which we repurchased approximately 10 million shares.
Credit Facilities
      We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million. As of March 31, 2006, $656.3 million was outstanding under the Fannie Mae credit facilities leaving $203.7 million of unused capacity. The Fannie Mae credit facilities are for an initial term of ten

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years, bear interest at floating and fixed rates, and can be extended for an additional five years at our discretion. We have $363.9 million of the funded balance fixed at a weighted average interest rate of 6.1%. The remaining balance on these facilities currently bears interest at a weighted average variable rate of 5.1%.
      We have a $500 million unsecured revolving credit facility that matures in May 2008, and, at our option, can be extended an additional year. We have the right to increase the credit facility to $750 million under certain circumstances. Based on our current credit ratings, the credit facility bears interest at a rate equal to LIBOR plus 57.5 basis points. As of March 31, 2006, $284.2 million was outstanding under the credit facility leaving $215.8 million of unused capacity.
      The Fannie Mae credit facility and the bank revolving credit facility are subject to customary financial covenants and limitations.
      Information concerning short-term bank borrowings under our credit facility is summarized in the table that follows (dollars in thousands):
                 
    Three Months Ended   Twelve Months Ended
    March 31, 2006   December 31, 2005
         
Total revolving credit facility
  $ 500,000     $ 500,000  
Borrowings outstanding at end of period
    284,200       210,800  
Weighted average daily borrowings during the period
    263,659       315,487  
Maximum daily borrowings during the period
    313,300       440,200  
Weighted average interest rate during the period
    4.8 %     3.6 %
Weighted average interest rate at end of period
    5.2 %     4.7 %
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 and cash flow as a measure of our activities in accordance with generally accepted accounting principles. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs.
      Historical cost accounting for real estate assets in accordance with 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 and defines FFO as net income (computed in accordance with accounting principles generally accepted in the United States), excluding gains (or losses) from sales of depreciable property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The use of FFO, combined with the required presentations, has been fundamentally beneficial, improving the understanding of operating results of REITs among the investing public and making comparisons of REIT operating results more meaningful. We generally consider FFO to be a useful measure for reviewing our comparative operating and financial performance (although FFO should be reviewed in conjunction with net income which remains the primary measure of performance) because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO can help one compare the operating

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performance of a company’s real estate between periods or as compared to different companies. We believe that FFO is the best measure of economic profitability for real estate investment trusts.
      The following table outlines our FFO calculation and reconciliation to generally accepted accounting principles for the three months ended March 31, (dollars and shares in thousands):
                   
    Three Months Ended
    March 31,
     
    2006   2005
         
Net income
  $ 12,007     $ 14,941  
Adjustments:
               
 
Distributions to preferred stockholders
    (3,842 )     (3,842 )
 
Real estate depreciation and amortization
    57,397       48,566  
 
Minority interests of unitholders in operating partnership
    (468 )     59  
 
Real estate depreciation related to unconsolidated entities
          62  
Discontinued Operations:
               
 
Real estate depreciation
    1,326       3,153  
 
Minority interests of unitholders in operating partnership
    1,001       632  
 
Net gains on the sale of depreciable property
    (15,347 )     (7,023 )
 
Net incremental gains on the sale of condominium homes
    8,481       459  
             
Funds from operations — basic
  $ 60,555     $ 57,007  
             
 
Distributions to preferred stockholders — Series E (Convertible)
    931       931  
             
Funds from operations — diluted
  $ 61,486     $ 57,938  
             
Weighted average number of common shares and OP Units outstanding — basic
    142,342       144,586  
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted
    147,801       150,187  
      In the computation of diluted FFO, OP units, out-performance partnership shares, and the shares of Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count
      Net incremental gains on the sale of condominium homes is defined as net sales proceeds less a tax provision and the gross investment basis of the asset before accumulated depreciation. We consider FFO with gains/losses on the sale of condominium homes to be a meaningful supplemental measure of performance because the short-term use of funds produce a profit that differs from the traditional long-term investment in real estate for REITs.

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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 months ended March 31, (shares in thousands):
                   
    Three Months Ended
    March 31,
     
    2006   2005
         
Weighted average number of common shares and OP units outstanding — basic
    142,342       144,585  
Weighted average number of OP units outstanding
    (8,753 )     (8,518 )
             
 
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations
    133,589       136,067  
             
Weighted average number of common shares, OP units, and common stock equivalents outstanding — diluted
    147,801       150,186  
Weighted average number of OP units outstanding
    (8,753 )     (8,518 )
Weighted average incremental shares from assumed conversion of stock options
    (772 )      
Weighted average incremental shares from unvested restricted stock
    (118 )      
Weighted average number of Series A OPPSs outstanding
    (1,765 )     (1,791 )
Weighted average number of Series E preferred shares outstanding
    (2,804 )     (2,804 )
             
 
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations
    133,589       137,073  
             
      FFO also does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by generally accepted accounting principles, as a measure of liquidity. Additionally, it is not necessarily indicative of cash availability to fund cash needs.
      A presentation of cash flow metrics based on generally accepted accounting principles for the three months ended March 31, (dollars in thousands):
                 
    Three Months Ended
    March 31,
     
    2006   2005
         
Net cash provided by operating activities
  $ 32,217     $ 50,370  
Net cash used in investing activities
    (20,984 )     (71,228 )
Net cash provided by financing activities
    9,560       14,615  
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 $8.2 million ($0.06 per diluted share) for the three months ended March 31, 2006, compared to $11.1 million ($0.08 per diluted share) for the same period in the prior year. The decrease for the three months ended March 31, 2006, when compared to the

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same period in 2005, resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
  •  an $11.8 million decrease in non-property income, and
 
  •  an $7.0 million increase in real estate depreciation and amortization expense, and
 
  •  a $4.9 million increase in interest expense.
      These decreases in income were partially offset by a $8.3 million more in gains recognized from the sale of depreciable property, $8.5 million less in losses on early debt retirements, and a $4.3 million increase in apartment community operating results during the first quarter of 2006 when compared to the same period in 2005.
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 the three months ended March 31, (dollars in thousands):
                         
    2006   2005   % Change
             
Property rental income
  $ 181,335     $ 174,981       3.6%  
Property operating expense*
    (69,245 )     (67,226 )     3.0%  
                   
Property operating income
  $ 112,090     $ 107,755       4.0%  
                   
Weighted average number of homes
    75,115       78,006       -3.7%  
Physical occupancy**
    94.3 %     94.1 %     0.2%  
 
  Excludes depreciation, amortization, and property management expenses.
**  Based upon weighted average stabilized homes.
      The following table is our reconciliation of property operating income to net income as reflected on the Consolidated Statements of Operations for the three months ended March 31, (dollars in thousands):
                   
    2006   2005
         
Property operating income
  $ 112,090     $ 107,755  
Commercial operating income
    88       87  
Non-property income
    1,178       12,932  
Real estate depreciation and amortization
    (59,435 )     (52,390 )
Interest
    (44,094 )     (39,149 )
General and administrative and property management
    (11,755 )     (11,813 )
Other operating expenses
    (863 )     (290 )
Loss on early debt retirement
          (8,465 )
Net gain on sale of depreciable property
    15,347       7,023  
Minority interests
    (549 )     (749 )
             
 
Net income per the Consolidated Statements of Operations
  $ 12,007     $ 14,941  
             
Same Communities
      Our same communities (those communities acquired, developed, and stabilized prior to March 31, 2005, and held on March 31, 2006, which consisted of 66,306 apartment homes) provided 89% of our property operating income for the three months ended March 31, 2006.

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      For the first quarter of 2006, same community property operating income increased 6.6% or $6.2 million compared to the same period in 2005. The increase in property operating income was primarily attributable to a 6.3% or $9.5 million increase in revenues from rental and other income that was offset by a 5.7% or $3.3 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 4.1% or $6.4 million increase in rental rates, a 26.1% or $1.0 million decrease in concession expense, an 8.8% or $0.8 million decrease in vacancy loss, and a 13.5% or $1.4 million increase in utility reimbursement income and fee income. Physical occupancy increased 0.6% to 94.8%.
      The increase in property operating expenses was primarily driven by a 14.7% or $1.3 million increase in utility costs, a 6.6% or $1.0 million increase in real estate taxes, and a 31.2% or $0.8 million increase in insurance 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) increased 0.2% to 62.1%.
Non-Mature Communities
      The remaining 11% of our property operating income during the first three months of 2006 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed in 2005 and 2006, sold properties (if any), and those properties classified as real estate held for disposition). The nine communities with 2,721 apartment homes that we acquired in 2005 and 2006 provided $5.9 million of property operating income. The nine communities with 2,753 apartment homes and four communities with 203 condominiums classified as real estate held for disposition provided $2.4 million of property operating income. Other non-mature communities provided $4.0 million of property operating income for the three months ended March 31, 2006.
Real Estate Depreciation and Amortization
      For the three months ended March 31, 2006, real estate depreciation and amortization on both continuing and discontinued operations increased 13.5% or $7.0 million, compared to the same period in 2005, primarily due to the significant increase in per home acquisition cost compared to the existing portfolio and other capital expenditures.
Interest Expense
      For the three months ended March 31, 2006, interest expense on both continuing and discontinued operations increased 12.6% or $4.9 million compared to the same period in 2005 primarily due to the issuance of debt and higher interest rates. For the three months ended March 31, 2006, the weighted average amount of debt outstanding increased 12.3% or $350.5 million compared to the same period in 2005 and the weighted average interest rate increased from 5.2% to 5.4% during 2006. The weighted average amount of debt outstanding during 2006 is higher than 2005 as acquisition costs in 2005 and in 2006 have been funded, in most part, by the issuance of debt. The increase in the weighted average interest rate during 2006 reflects short-term bank borrowings and variable rate debt that had higher interest rates when compared to the prior period.
General and Administrative
      For the three months ended March 31, 2006, general and administrative expenses decreased $0.2 million or 3.4% compared to the same period in 2005. This decrease was primarily due to an overall decrease in incentive compensation expense partially offset by growth in salaries, benefits and general expenses.
Gains on the Sales of Land and Depreciable Property
      For the three months ended March 31, 2006, we recognized after-tax gains for financial reporting purposes of $15.3 million compared to $7.0 million for the comparable period in 2005. Changes in the

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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.
Inflation
      We believe that the direct effects of inflation on our operations have been immaterial. While inflation primarily impacts our results through wage pressures, utilities and materials costs, substantially all of our leases are for a term of one year or less, which generally enables us to compensate for inflationary effects by increasing rents. Although extreme growth in energy prices could have a negative impact on our residents and their ability to absorb rent increases, this has not had a material impact on our results.
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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. In prior periods, United Dominion had used derivative instruments solely to manage its exposure to interest rates.
      See our Annual Report on Form 10-K for the year ended December 31, 2005 “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of our interest rate sensitive assets and liabilities. As of March 31, 2006, 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, 2005.
Item 4. CONTROLS AND PROCEDURES
      As of March 31, 2006, 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 March 31, 2006, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Our internal control over financial reporting is designed with the objective of providing reasonable assurance regarding the reliability of our financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
      It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. 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.

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PART II — OTHER INFORMATION
Item 1A.     RISK FACTORS
      There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of important factors that may cause our actual results of operations in future periods to differ materially from those currently expected or discussed in forward-looking statements set forth in this Report relating to our financial results, operations and business prospects. Except as required by law, we undertake no obligation to update any such forward-looking statements to reflect events or circumstances after the date on which it is made.
      Unfavorable Changes in Apartment Market and Economic Conditions Could Adversely Affect Occupancy Levels and Rental Rates. Market and economic conditions in the metropolitan areas in which we operate may significantly affect our occupancy levels and rental rates and, therefore, our profitability. Factors that may adversely affect these conditions include the following:
  •  a reduction in jobs and other local economic downturns,
 
  •  declines in mortgage interest rates, making alternative housing more affordable,
 
  •  government or builder incentives which enable first time homebuyers to put little or no money down, making alternative housing decisions easier to make,
 
  •  oversupply of, or reduced demand for, apartment homes,
 
  •  declines in household formation, and
 
  •  rent control or stabilization laws, or other laws regulating rental housing, which could prevent us from raising rents to offset increases in operating costs.
      The strength of the United States economy has become increasingly susceptible to global events and threats of terrorism. At the same time, productivity enhancements and the increased exportation of labor have resulted in limited job growth despite an improving economy. Continued weakness in job creation, or any worsening of current economic conditions, generally and in our principal market areas, could have a material adverse effect on our occupancy levels, our rental rates and our ability to strategically acquire and dispose of apartment communities. This may impair our ability to satisfy our financial obligations and pay distributions to our stockholders.
      New Acquisitions, Developments and Condominium Projects May Not Achieve Anticipated Results. We intend to continue to selectively acquire apartment communities that meet our investment criteria and to develop apartment communities for rental operations, to convert properties into condominiums and to develop condominium projects. Our acquisition, development and condominium activities and their success are subject to the following risks:
  •  an acquired community may fail to perform as we expected in analyzing our investment, or a significant exposure related to the acquired property may go undetected during our due diligence procedures,
 
  •  when we acquire an apartment community, we often invest additional amounts in it with the intention of increasing profitability. These additional investments may not produce the anticipated improvements in profitability,
 
  •  new developments may not achieve pro forma rents or occupancy levels, or problems with construction or local building codes may delay initial occupancy dates for all or a portion of a development community, and
 
  •  an over supply of condominiums in a given market may cause a decrease in the prices at which we expect to sell condominium properties.

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      Possible Difficulty of Selling Apartment Communities Could Limit Operational and Financial Flexibility. We periodically dispose of apartment communities that no longer meet our strategic objectives, but market conditions could change and purchasers may not be willing to pay prices acceptable to us. A weak market may limit our ability to change our portfolio promptly in response to changing economic conditions. Furthermore, a significant portion of the proceeds from our overall property sales may be held by intermediaries in order for some sales to qualify as like-kind exchanges under Section 1031 of the Internal Revenue Code, so that any related capital gain can be deferred for federal income tax purposes. As a result, we may not have immediate access to all of the cash flow generated from our property sales. In addition, federal tax laws limit our ability to profit on the sale of communities that we have owned for fewer than four years, and this limitation may prevent us from selling communities when market conditions are favorable.
      Increased Competition Could Limit Our Ability to Lease Apartment Homes or Increase or Maintain Rents. Our apartment communities compete with numerous housing alternatives in attracting residents, including other apartment communities and single-family rental homes, as well as owner occupied single-and multi-family homes. Competitive housing in a particular area could adversely affect our ability to lease apartment homes and increase or maintain rents.
      Insufficient Cash Flow Could Affect Our Debt Financing and Create Refinancing Risk. We are subject to the risks normally associated with debt financing, including the risk that our operating income and cash flow will be insufficient to make required payments of principal and interest, or could restrict our borrowing capacity under our line of credit due to debt covenant restraints. Sufficient cash flow may not be available to make all required principal payments and still satisfy our distribution requirements to maintain our status as a REIT for federal income tax purposes, and the full limits of our line of credit may not be available to us if our operating performance falls outside the constraints of our debt covenants. Additionally, we are likely to need to refinance substantially all of our outstanding debt as it matures. We may not be able to refinance existing debt, or the terms of any refinancing may not be as favorable as the terms of the existing debt, which could create pressures to sell assets or to issue additional equity when we would otherwise not choose to do so.
      Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to Stockholders. If our apartment communities do not generate sufficient net rental income to meet rental expenses, our ability to make required payments of interest and principal on our debt securities and to pay distributions to our stockholders will be adversely affected. The following factors, among others, may affect the net rental income generated by our apartment communities:
  •  the national and local economies,
 
  •  local real estate market conditions, such as an oversupply of apartment homes,
 
  •  tenants’ perceptions of the safety, convenience, and attractiveness of our communities and the neighborhoods where they are located,
 
  •  our ability to provide adequate management, maintenance and insurance, and
 
  •  rental expenses, including real estate taxes and utilities.
      Expenses associated with our investment in a community, such as debt service, real estate taxes, insurance and maintenance costs, are generally not reduced when circumstances cause a reduction in rental income from that community. If a community is mortgaged to secure payment of debt and we are unable to make the mortgage payments, we could sustain a loss as a result of foreclosure on the community or the exercise of other remedies by the mortgage holder.
      Debt Level May Be Increased. Our current debt policy does not contain any limitations on the level of debt that we may incur, although our ability to incur debt is limited by covenants in our bank and other credit agreements. We manage our debt to be in compliance with these debt covenants, but subject to compliance with these covenants, we may increase the amount of our debt at any time without a concurrent improvement in our ability to service the additional debt.

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      Financing May Not Be Available and Could be Dilutive. Our ability to execute our business strategy depends on our access to an appropriate blend of debt financing, including unsecured lines of credit and other forms of secured and unsecured debt, and equity financing, including common and preferred equity. Debt or equity financing may not be available in sufficient amounts, or on favorable terms or at all. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing stockholders could be diluted.
      Development and Construction Risks Could Impact Our Profitability. We intend to continue to develop and construct apartment communities. Development activities may be conducted through wholly owned affiliated companies or through joint ventures with unaffiliated parties. Our development and construction activities may be exposed to the following risks:
  •  we may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could result in increased development costs and could require us to abandon our activities entirely with respect to a project for which we are unable to obtain permits or authorizations,
 
  •  if we are unable to find joint venture partners to help fund the development of a community or otherwise obtain acceptable financing for the developments, our development capacity may be limited,
 
  •  we may abandon development opportunities that we have already begun to explore, and we may fail to recover expenses already incurred in connection with exploring such opportunities,
 
  •  we may be unable to complete construction and lease-up of a community on schedule, or incur development or construction costs that exceed our original estimates, and we may be unable to charge rents that would compensate for any increase in such costs,
 
  •  occupancy rates and rents at a newly developed community may fluctuate depending on a number of factors, including market and economic conditions, preventing us from meeting our profitability goals for that community, and
 
  •  when we sell to third parties homes or properties that we developed or renovated, we may be subject to warranty or construction defect claims that are uninsured or exceed the limits of our insurance.
      Construction costs have been increasing in our existing markets, and the costs of upgrading acquired communities have, in some cases, exceeded our original estimates. We may experience similar cost increases in the future. Our inability to charge rents that will be sufficient to offset the effects of any increases in these costs may impair our profitability.
      Some Potential Losses Are Not Covered by Insurance. We have a comprehensive insurance program covering our property and operating activities. We believe the policy specifications and insured limits of these policies are adequate and appropriate. There are, however, certain types of extraordinary losses for which we may not have insurance. Accordingly, we may sustain uninsured losses due to insurance deductibles, self-insured retention, uninsured claims or casualties, or losses in excess of applicable coverage.
      We may not be able to renew insurance coverage in an adequate amount or at reasonable prices. In addition, insurance companies may no longer offer coverage against certain types of losses, such as losses due to terrorist acts and mold, or, if offered, these types of insurance may be prohibitively expensive. If an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Material losses in excess of insurance proceeds may occur in the future. If one or more of our significant properties were to experience a catastrophic loss, it could seriously disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Such events could adversely affect our cash flow and ability to make distributions to stockholders.

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      Failure to Succeed in New Markets May Limit Our Growth. We may from time to time make acquisitions outside of our existing market areas if appropriate opportunities arise. We may be exposed to a variety of risks if we choose to enter new markets, and we may not be able to operate successfully in new markets. These risks include, among others:
  •  inability to accurately evaluate local apartment market conditions and local economies,
 
  •  inability to obtain land for development or to identify appropriate acquisition opportunities,
 
  •  inability to hire and retain key personnel, and
 
  •  lack of familiarity with local governmental and permitting procedures.
      Changing Interest Rates Could Increase Interest Costs and Adversely Affect Our Cash Flow and the Market Price of Our Securities. We currently have, and expect to incur in the future, interest-bearing debt at rates that vary with market interest rates. As of March 31, 2006, we had approximately $658 million of variable rate indebtedness outstanding, which constitutes approximately 20% of our total outstanding indebtedness as of such date. An increase in interest rates would increase our interest expenses to the extent our variable rate debt is not hedged effectively, and it would increase the costs of refinancing existing indebtedness and of issuing new debt. Accordingly, higher interest rates could adversely affect cash flow and our ability to service our debt and to make distributions to security holders. In addition, an increase in market interest rates may lead our security holders to demand a higher annual yield, which could adversely affect the market price of our common and preferred stock and debt securities.
      Risk of Inflation/ Deflation. Substantial inflationary or deflationary pressures could have a negative effect on rental rates and property operating expenses.
      Limited Investment Opportunities Could Adversely Affect Our Growth. We expect that other real estate investors will compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources than we do. As a result, we may not be able to make attractive investments on favorable terms, which could adversely affect our growth.
      Failure to Integrate Acquired Communities and New Personnel Could Create Inefficiencies. To grow successfully, we must be able to apply our experience in managing our existing portfolio of apartment communities to a larger number of properties. In addition, we must be able to integrate new management and operations personnel as our organization grows in size and complexity. Failures in either area will result in inefficiencies that could adversely affect our expected return on our investments and our overall profitability.
      Interest Rate Hedging Contracts May Be Ineffective and May Result in Material Charges. From time to time when we anticipate issuing debt securities, we may seek to limit our exposure to fluctuations in interest rates during the period prior to the pricing of the securities by entering into interest rate hedging contracts. We may do this to increase the predictability of our financing costs. Also, from time to time we may rely on interest rate hedging contracts to limit our exposure under variable rate debt to unfavorable changes in market interest rates. If the terms of new debt securities are not within the parameters of, or market interest rates fall below that which we incur under a particular interest rate hedging contract, the contract is ineffective. Furthermore, the settlement of interest rate hedging contracts has involved and may in the future involve material charges.
      Potential Liability for Environmental Contamination Could Result in Substantial Costs. Under various federal, state and local environmental laws, as a current or former owner or operator of real estate, we could be required to investigate and remediate the effects of contamination of currently or formerly owned real estate by hazardous or toxic substances, often regardless of our knowledge of or responsibility for the contamination and solely by virtue of our current or former ownership or operation of the real estate. In addition, we could be held liable to a governmental authority or to third parties for property

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damage and for investigation and clean-up costs incurred in connection with the contamination. These costs could be substantial, and in many cases environmental laws create liens in favor of governmental authorities to secure their payment. The presence of such substances or a failure to properly remediate any resulting contamination could materially and adversely affect our ability to borrow against, sell or rent an affected property.
      We Would Incur Adverse Tax Consequences if We Fail to Qualify as a REIT. We have elected to be taxed as a REIT under the Internal Revenue Code. Our qualification as a REIT requires us to satisfy numerous requirements, some on an annual and quarterly basis, established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial or administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. We intend that our current organization and method of operation enable us to continue to qualify as a REIT, but we may not so qualify or we may not be able to remain so qualified in the future. In addition, U.S. federal income tax laws governing REITs and other corporations and the administrative interpretations of those laws may be amended at any time, potentially with retroactive effect. Future legislation, new regulations, administrative interpretations or court decisions could adversely affect our ability to qualify as a REIT or adversely affect our stockholders.
      If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates, and would not be allowed to deduct dividends paid to our stockholders in computing our taxable income. Also, unless the Internal Revenue Service granted us relief under certain statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year in which we first failed to qualify. The additional tax liability from the failure to qualify as a REIT would reduce or eliminate the amount of cash available for investment or distribution to our stockholders. This would likely have a significant adverse effect on the value of our securities and our ability to raise additional capital. In addition, we would no longer be required to make distributions to our stockholders. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state and local taxes on our income and property.
      We May Conduct a Portion of Our Business Through Taxable REIT Subsidiaries, Which are Subject to Certain Tax Risks. We have established several taxable REIT subsidiaries. Despite our qualification as a REIT, our taxable REIT subsidiaries must pay income tax on their taxable income. In addition, we must comply with various tests to continue to qualify as a REIT for federal income tax purposes, and our income from and investments in our taxable REIT subsidiaries generally do not constitute permissible income and investments for these tests. While we will attempt to ensure that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, we cannot provide assurance that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, we may jeopardize our ability to retain future gains on real property sales, or our taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arm’s length in nature or are otherwise not respected.
      Certain Property Transfers May Generate Prohibited Transaction Income, Resulting in a Penalty Tax on Gain Attributable to the Transaction. From time to time, we may transfer or otherwise dispose of some of our properties. Under the Internal Revenue Code, any gain resulting from transfers of properties that we hold as inventory or primarily for sale to customers in the ordinary course of business would be treated as income from a prohibited transaction subject to a 100% penalty tax. Since we acquire properties for investment purposes, we do not believe that our occasional transfers or disposals of property are prohibited transactions. However, whether property is held for investment purposes is a question of fact that depends on all the facts and circumstances surrounding the particular transaction. The Internal Revenue Service may contend that certain transfers or disposals of properties by us are prohibited transactions. If the Internal Revenue Service were to argue successfully that a transfer or disposition of property constituted a prohibited transaction, then we would be required to pay a 100% penalty tax on any gain allocable to us from the prohibited transaction and we may jeopardize our ability to retain future

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gains on real property sales. In addition, income from a prohibited transaction might adversely affect our ability to satisfy the income tests for qualification as a REIT for federal income tax purposes.
      Changes in Market Conditions, and Volatility of Stock Prices Could Adversely Affect the Market Price of Our Common Stock. The stock markets, including the New York Stock Exchange, on which we list our common shares, have experienced significant price and volume fluctuations. As a result, the market price of our common stock could be similarly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects.
      Property Ownership Through Joint Ventures May Limit Our Ability to Act Exclusively in Our Interest. We have in the past and may in the future develop and acquire properties in joint ventures with other persons or entities when we believe circumstances warrant the use of such structures. If we use such a structure, we could become engaged in a dispute with one or more of our joint venture partners that might affect our ability to operate a jointly-owned property. Moreover, joint venture partners may have business, economic or other objectives that are inconsistent with our objectives, including objectives that relate to the appropriate timing and terms of any sale or refinancing of a property. In some instances, joint venture partners may have competing interests in our markets that could create conflicts of interest.
      Real Estate Tax and Other Laws. Generally we do not directly pass through costs resulting from compliance with or changes in real estate tax laws to residential property tenants. We also do not generally pass through increases in income, service or other taxes, to tenants under leases. These costs may adversely affect funds from operations and the ability to make distributions to stockholders. Similarly, compliance with or changes in (i) laws increasing the potential liability for environmental conditions existing on properties or the restrictions on discharges or other conditions or (ii) rent control or rent stabilization laws or other laws regulating housing, such as the Americans with Disabilities Act of 1990 and the Fair Housing Amendments Act of 1988, may result in significant unanticipated expenditures, which would adversely affect funds from operations and the ability to make distributions to stockholders.
      Any Weaknesses Identified in Our Internal Control Over Financial Reporting Could Have an Adverse Effect on Our Stock Price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal report over financial reporting. If we identify one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price.
      Maryland Law May Limit the Ability of a Third Party to Acquire Control of Us, Which May Not be in Our Stockholders’ Best Interests. Maryland business statutes may limit the ability of a third party to acquire control of us. As a Maryland corporation, we are subject to various Maryland laws which may have the effect of discouraging offers to acquire our company and of increasing the difficulty of consummating any such offers, even if our acquisition would be in our stockholders’ best interests. The Maryland General Corporation Law restricts mergers and other business combination transactions between us and any person who acquires beneficial ownership of shares of our stock representing 10% or more of the voting power without our board of directors’ prior approval. Any such business combination transaction could not be completed until five years after the person acquired such voting power, and generally only with the approval of stockholders representing 80% of all votes entitled to be cast and 662/3 % of the votes entitled to be cast, excluding the interested stockholder, or upon payment of a fair price. Maryland law also provides generally that a person who acquires shares of our equity stock that represents 10% (and certain higher levels) of the voting power in electing directors will have no voting rights unless approved by a vote of two-thirds of the shares eligible to vote.

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      Limitations on Share Ownership and Limitations on the Ability of Our Stockholders to Effect a Change in Control of Our Company May Prevent Takeovers That are Beneficial to Our Stockholders. One of the requirements for maintenance of our qualification as a REIT for federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Our charter contains ownership and transfer restrictions relating to our stock primarily to assist us in complying with this requirement. These restrictions include a provision that generally limits a person from beneficially owning or constructively owning shares of our outstanding equity stock in excess of a 9.9% ownership interest, unless our board of directors exempts the person from such ownership limitation, provided that any such exemption shall not allow the person to exceed 13% of the value of our outstanding equity stock. These provisions may have the effect of delaying, deferring or preventing someone from taking control of us, even though a change of control might involve a premium price for our stockholders or might otherwise be in our stockholders’ best interests.
      Under the terms of our shareholder rights plan, our board of directors can, in effect, prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock. Unless our board of directors approves the person’s purchase, after that person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other stockholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person. Our board of directors, however, can prevent the shareholder rights plan from operating in this manner. This gives our board of directors significant discretion to approve or disapprove a person’s efforts to acquire a large interest in us.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
      On March 17, 2006, United Dominion sold a total of 516,622 shares of its Series F Preferred Stock, without par value, to certain accredited investors who hold OP units, which are limited partnership interests in United Dominion’s two operating partnerships, United Dominion Realty, L.P. and Heritage Communities, L.P. The shares of Series F Preferred Stock were sold at a purchase price of $0.0001 per share, for an aggregate purchase price of $51.66. Because the shares of Series F Preferred Stock were sold to accredited investors in transactions not involving a public offering, the transactions are exempt from registration under the Securities Act of 1933 in accordance with Section 4(2) of the Securities Act. Information regarding the offering and sale of the share of our Series F Preferred Stock is set forth in our Current Report on Form 8-K dated March 17, 2006 and filed with the Securities and Exchange Commission on March 22, 2006.

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Repurchases of Equity Securities
      In February 2006, our Board of Directors authorized a new 10 million share repurchase program. This program replaces our previous 11 million share repurchase program (of which 1,180,737 shares were available for repurchase) and authorizes the repurchase of our common stock in open market purchases, block purchases, privately negotiated transactions, or otherwise. As reflected in the table below, no shares of common stock were repurchased under these programs during the quarter ended March 31, 2006.
                                 
            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
                 
Beginning Balance
                            1,180,737  
January 1, 2006 through January 31, 2006
    0       N/A       0       1,180,737  
February 1, 2006 through February 28, 2006
    0       N/A       0       10,000,000  
March 1, 2006 through March 31, 2006
    0       N/A       0       10,000,000  
                         
Balance as of March 31, 2006
    0       N/A       0       10,000,000  
                         
Item 6. EXHIBITS
      The exhibits filed or furnished with this Report are set forth in the Exhibit Index.

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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: May 10, 2006  
/s/ Christopher D. Genry
 
Christopher D. Genry
Executive Vice President — Corporate
Strategy and Chief Financial Officer
 
 
Date: May 10, 2006   /s/ David L. Messenger
 
David L. Messenger
Vice President and Chief Accounting Officer

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EXHIBIT INDEX
         
Exhibit No.   Description
     
  3 .1   Amendment No. 1 to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated February 9, 2006 and filed with the Commission on February 15, 2006, Commission File No. 1-10524)
  3 .2   Amended and Restated Bylaws (as amended through February 9, 2006)(incorporated by reference to Exhibit 3.02 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, Commission File No. 1-10524)
  10 .1   Summary of 2006 Director Compensation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated January 3, 2006 and filed with the Commission on January 6, 2006, Commission File No. 1-10524)
  10 .2   Executive Compensation Summary (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 15, 2006 and filed with the Commission on February 21, 2006, Commission File No. 1-10524)
  10 .3   Description of the Series D Out-Performance Program (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated February 9, 2006 and filed with the Commission on February 15, 2006, and Exhibit 10.1 to the Company’s Current Report on Form 8-K dated May 2, 2006 and filed with the Commission on May 8, 2006, Commission File No. 1-10524)
  10 .4   Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. dated as of February 23, 2004 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, Commission File No. 1-10524)
  10 .5   First Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P. (incorporated by reference to Exhibit 10.06 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, Commission File No. 1-10524)
  10 .6   Second Amendment to the Amended and Restated Agreement of Limited Partnership of United Dominion Realty, L.P.
  10 .7   Description of the New Out-Performance Program (incorporated by reference to Exhibit 10.01 to the Company’s Current Report on Form 8-K dated May 3, 2005 and filed with the Commission on May 9, 2005, Commission File No. 1-10524)
  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