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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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
(State or other jurisdiction of
incorporation or organization)
  54-0857512
(I.R.S. Employer
Identification No.)
 
1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado 80129
(Address of principal executive offices) (zip code)
 
Registrant’s telephone number, including area code: (720) 283-6120
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
Preferred Stock Purchase Rights
8.60% Series B Cumulative Redeemable Preferred Stock
8.50% Monthly Income Notes Due 2008
  New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or other information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.  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 aggregate market value of the shares of common stock held by non-affiliates on June 30, 2006 was approximately $3.7 billion. This calculation excludes shares of common stock held by the registrant’s officers and directors and each person known by the registrant to beneficially own more than 5% of the registrant’s outstanding shares, as such persons may be deemed to be affiliates. This determination of affiliate status should not be deemed conclusive for any other purpose. As of February 20, 2007 there were 135,544,953 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
The information required by Part III of this Report, to the extent not set forth herein, is incorporated by reference from the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on May 8, 2007.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
  Business   2
  Risk Factors   11
  Unresolved Staff Comments   18
  Properties   18
  Legal Proceedings   19
  Submission of Matters to a Vote of Security Holders   19
 
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   20
  Selected Financial Data   24
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   25
  Quantitative and Qualitative Disclosures about Market Risk   40
  Financial Statements and Supplementary Data   40
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   40
  Controls and Procedures   40
  Other Information   41
 
  Directors, Executive Officers and Corporate Governance   41
  Executive Compensation   41
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   41
  Certain Relationships and Related Transactions, and Director Independence   42
  Principal Accountant Fees and Services   42
 
  Exhibits, Financial Statement Schedules   42
 Credit Agreement - August 14, 2001
 Credit Agreement - December 12, 2001
 Amended and Restated Master Credit Facility Agreement
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries
 Consent of Independent Registered Public Accounting Firm
 Rule 13a-14(a) Certification of CEO
 Rule 13a-14(a) Certification of CFO
 Section 1350 Certification of CEO
 Section 1350 Certification of CFO


Table of Contents

 
PART I
 
Item 1.   BUSINESS
 
General
 
United Dominion Realty Trust, Inc. is a self administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. At December 31, 2006, our apartment portfolio included 242 communities located in 33 markets, with a total of 70,339 completed apartment homes. In addition, we had five apartment communities under development.
 
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code. To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than our net capital gain) to our stockholders. As a qualified REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on our net income to the extent we distribute such net income to our stockholders. In 2006, we declared total distributions of $1.25 per common share to our stockholders, which represents our 30th year of consecutive dividend increases to our stockholders.
 
We were formed in 1972 as a Virginia corporation. In June 2003, we changed our state of incorporation from Virginia to Maryland. Our corporate headquarters is located at 400 East Cary Street, Richmond, Virginia. Our principal executive offices are located at 1745 Shea Center Drive, Suite 200, Highlands Ranch, Colorado. As of February 20, 2007, we had 1,809 full-time employees and 127 part-time employees.
 
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 “UDR” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.
 
2006 Accomplishments
 
  •  We increased our common stock dividend for the 30th consecutive year.
 
  •  We completed over $1.2 billion of capital transactions in 2006.
 
  •  We authorized a new 10 million share repurchase program that replaced our previous 11 million share repurchase program.
 
  •  We acquired 2,763 apartment homes in eight communities for approximately $327.5 million and two parcels of land for $19.9 million.
 
  •  We completed the disposition of 24 apartment communities with 7,653 apartment homes for an aggregate sales price of approximately $444.9 million. In addition, we sold 384 condominiums within four communities for a total consideration of $72.1 million.
 
Business Objectives and Operating Strategies
 
Our principal business objective is to maximize the economic returns of our apartment communities to provide our stockholders with the greatest possible total return and value. To achieve this objective, we intend to continue to pursue the following goals and strategies:
 
  •  own and operate apartments across a national platform, thus enhancing stability and predictability of returns to our stockholders,
 
  •  manage real estate cycles by taking an opportunistic approach to buying, selling, and building apartment communities,
 
  •  empower site associates to manage our communities efficiently and effectively,


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  •  measure and reward associates based on specific performance targets, and
 
  •  manage our capital structure to ensure predictability of earnings and dividends.
 
Acquisitions
 
During 2006, using the proceeds from our disposition program, as well as debt offerings, we acquired eight communities with 2,763 apartment homes at a total cost of approximately $327.5 million, including the assumption of secured debt. In addition, we purchased two parcels of land for $19.9 million.
 
When evaluating potential acquisitions, we consider:
 
  •  research in the following areas: population growth, cost of alternative housing, overall potential for economic growth and the tax and regulatory environment of the community in which the property is located,
 
  •  geographic location, including proximity to our existing communities which can deliver significant economies of scale,
 
  •  construction quality, condition and design of the community,
 
  •  current and projected cash flow of the property and the ability to increase cash flow,
 
  •  potential for capital appreciation of the property,
 
  •  ability to increase the value and profitability of the property through upgrades and repositioning,
 
  •  terms of resident leases, including the potential for rent increases,
 
  •  occupancy and demand by residents for properties of a similar type in the vicinity,
 
  •  prospects for liquidity through sale, financing, or refinancing of the property, and
 
  •  competition from existing multifamily communities and the potential for the construction of new multifamily properties in the area.
 
The following table summarizes our apartment acquisitions and our year-end ownership position for the past five years (dollars in thousands):
 
                                         
    2006     2005     2004     2003     2002  
 
Homes acquired
    2,763       2,561       8,060       5,220       4,611  
Homes owned at December 31
    70,339       74,875       78,855       76,244       74,480  
Total real estate owned, at carrying value
  $ 5,820,122     $ 5,512,424     $ 5,243,296     $ 4,351,551     $ 3,967,483  
 
Dispositions
 
We regularly monitor and adjust our assets to increase the quality and performance of our portfolio. During 2006, we sold over 7,600 of our slower growing, non-core apartment homes while exiting some markets in an effort to increase the quality and performance of our portfolio. Proceeds from the disposition program were used primarily to reduce debt and fund acquisitions.
 
Factors we consider in deciding whether to dispose of a property include:
 
  •  current market price for an asset compared to projected economics for that asset,
 
  •  potential increases in new construction in the market area,
 
  •  areas where the economy is not expected to grow substantially, and
 
  •  markets where we do not intend to establish long-term concentration.


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At December 31, 2006, we had two communities with a total of 475 apartment homes, one community with a total of 320 condominiums, one commercial unit, and one parcel of land classified as real estate held for disposition. We are in the market for replacement properties that will correspond with our expected sales activity to prevent dilution to earnings.
 
Upgrading and Development Activities
 
During 2006, we continued to reposition properties in targeted markets where we concluded there was an opportunity to add value and achieve greater than inflationary increases in rents over the long term. In 2006, we spent $21.6 million on five development projects that are expected to be completed in 2007 and 2008. Revenue enhancing capital expenditures, including kitchen and bath renovations, and other extensive interior upgrades totaled $144.1 million or $2,002 per home for the year ended December 31, 2006. In addition, we spent $37.0 million on major renovation projects that included major structural changes and/or architectural revisions to existing buildings and the wiring and/or re-plumbing of an entire building.
 
The following wholly owned projects were under development as of December 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        
 
2000 Post — Phase III
                                                       
San Francisco, CA
    24       24     $ 10,254     $ 11,000     $ 458,300       1Q07          
Villas at Ridgeview Townhomes
                                                       
Plano, TX
    48             7,022       10,000       208,300       3Q07          
Ridgeview Apartments
                                                       
Plano, TX
    202             8,296       18,000       89,100       3Q07          
Northwest Houston — Phase I
                                                       
Houston, TX
    320             4,421       22,000       68,800       2Q08          
Lincoln Towne Square — Phase II
                                                       
Plano, TX
    302             4,384       26,000       86,100       3Q08          
                                                         
      896       24     $ 34,377     $ 87,000     $ 97,100                  
                                                         
 
In addition, we owned five parcels of land held for future development aggregating $35.4 million at December 31, 2006.
 
The following consolidated joint venture projects were under development as of December 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  
 
Jefferson at Marina del Rey
                                               
Marina del Rey, CA
    298           $ 76,601     $ 138,000     $ 463,100       2Q08  
Ashwood Commons
                                               
Bellevue, WA
    271             23,660       97,000       357,900       4Q08  
Bellevue Plaza
                                               
Bellevue, WA
    400             34,220       135,000       270,000       4Q09  
                                                 
      969           $ 134,481     $ 370,000     $ 381,800          
                                                 


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Financing Activities
 
As part of our plan to strengthen our capital structure, we utilized proceeds from dispositions, debt and equity offerings and refinancings to extend maturities, pay down existing debt, and acquire apartment communities. The following is a summary of our major financing activities in 2006:
 
  •  Repaid $70.3 million of secured debt and $138.8 million of unsecured debt.
 
  •  Authorized a new 10 million share repurchase program in February 2006. This program replaces our previous 11 million share repurchase program under which we repurchased approximately 10 million shares.
 
  •  Sold $125 million aggregate principal amount of 6.05% senior unsecured notes due June 2013 in June 2006 under our medium-term note program. The net proceeds of approximately $124 million were used for debt repayment.
 
  •  Sold $250 million aggregate principal amount of 3.625% convertible senior unsecured notes due 2011 in October 2006. The net proceeds of approximately $245 million were used for the repayment of indebtedness under our revolving credit facility, the cost of a capped call transaction, and for other general corporate purposes. The capped call instrument effectively increased the conversion premium to 40%.
 
Markets and Competitive Conditions
 
At December 31, 2006, we owned 242 apartment communities in 33 markets in 16 states. When comparing fourth quarter 2006 to the same period in the prior year, 90% of the portfolio generated positive revenue growth and 75% of the portfolio generated positive net operating income growth. We have a geographically diverse portfolio and we believe that this diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of our earnings.
 
We believe changing demographics will have a significant impact on the apartment industry over the next two decades. In particular, we believe the annual number of young people entering the workforce and creating households will be significantly higher over the next 10 to 15 years as compared to the number who entered the workforce over the past 10 years. The number of single people and single parent households continues to grow significantly. The immigrant population is also expected to grow at an accelerated pace. Each of these population segments has a high propensity to rent.
 
In many of our markets, competition for new residents is intense. Some competing communities offer features that our communities do not have. Competing communities can use concessions or lower rents to obtain temporary competitive advantages. Also, some competing communities are larger or newer than our communities. The competitive position of each community is different depending upon many factors including sub-market supply and demand. In addition, other real estate investors compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources, or lower capital costs, than we do.
 
We believe that, in general, we are well-positioned to compete effectively for residents and investments. We believe our competitive advantages include:
 
  •  a fully integrated organization with property management, development, acquisition, marketing and financing expertise,
 
  •  scalable operating and support systems,
 
  •  purchasing power,


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  •  geographic diversification with a presence in 33 markets across the country, and
 
  •  significant presence in many of our major markets that allows us to be a local operating expert.
 
Moving forward, we will continue to emphasize aggressive lease management, improved expense control, increased resident retention efforts and the realignment of employee incentive plans tied to our bottom line performance. We believe this plan of operation, coupled with the portfolio’s strengths in targeting renters across a geographically diverse platform, should position us for continued operational improvement.
 
Communities
 
At December 31, 2006, our apartment portfolio included 242 communities having a total of 70,339 completed apartment homes. In addition, we had five apartment communities under development. The overall quality of our portfolio has significantly improved since 2001 with the disposition of non-core apartment homes and our upgrade and rehabilitation program. The upgrading of the portfolio provides several key benefits related to portfolio profitability. It enables us to raise rents more significantly and to attract residents with higher levels of disposable income who are more likely to accept the transfer of expenses, such as water and sewer costs, from the landlord to the resident. In addition, it potentially reduces recurring capital expenditures per apartment home, and therefore should result in increased cash flow.
 
Same Community Comparison
 
For 2006, same community property operating income increased 8.6% or $30.4 million compared to 2005. The increase in property operating income was primarily attributable to a 6.0% or $34.2 million increase in revenues from rental and other income that was offset by a 1.8% or $3.9 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 4.9% or $28.4 million increase in rental rates, a 17.6% or $2.2 million decrease in concession expense, and a 12.5% or $5.0 million increase in utility reimbursement income and fee income. Physical occupancy increased 0.1% to 94.7%.
 
The increase in property operating expenses was primarily driven by a 15.8% or $1.6 million increase in insurance costs, a 4.4% or $1.5 million increase in utility costs, a 2.8% or $1.5 million increase in personnel costs, a 1.1% or $0.4 million increase in repair and maintenance expenses, and a 0.5% or $0.3 million increase in real estate taxes. These increases in operating expenses were partially offset by a 6.0% or $1.2 million decrease in administrative and marketing expenses.
 
Customers
 
Our upgrade and rehabilitation programs enable us to raise rents and attract residents with higher levels of disposable income who are more likely to accept the transfer of expenses, such as water and sewer costs, from the landlord to the resident. We believe this segment provides the highest profit potential in terms of rent growth, stability of occupancy and investment opportunities.
 
We believe there will be a significant increase in the number of younger renters over the next 10 to 15 years, and that the immigrant population will remain a significant and growing part of the renter base. Accordingly, we plan to target some of our incremental investments to communities that will be attractive to younger households or to the immigrant populations. These communities will often be located close to where these residents work, shop and play.
 
Tax Matters
 
We have elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, we must continue to meet certain tests that, among other things, generally require that our assets consist primarily of real estate assets, our income be derived primarily from real estate assets, and that we distribute at least 90% of our REIT taxable income (other than net capital gains) to our stockholders. Provided we maintain our qualification as a REIT, we generally will not be subject to U.S. federal income taxes at the corporate level on


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our net income to the extent such net income is distributed 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 utilize taxable REIT subsidiaries to engage in activities that REITs may be prohibited from performing, including the provision of management and other services to third parties and the conduct of certain nonqualifying real estate transactions. Taxable REIT subsidiaries generally are taxable as regular corporations and therefore are subject to federal, state and local income taxes.
 
Inflation
 
Substantially all of our leases are for a term of one year or less, which may enable us to realize increased rents upon renewal of existing leases or the beginning of new leases. Such short-term leases generally minimize the risk to us of the adverse effects of inflation, although as a general rule these leases permit residents to leave at the end of the lease term without penalty. Short-term leases and relatively consistent demand allow rents to provide an attractive hedge against inflation.
 
Environmental Matters
 
Various environmental laws govern certain aspects of the ongoing operation of our communities. Such environmental laws include those regulating the existence of asbestos-containing materials in buildings, management of surfaces with lead-based paint (and notices to residents about the lead-based paint), use of active underground petroleum storage tanks, and waste-management activities. The failure to comply with such requirements could subject us to a government enforcement action and/or claims for damages by a private party.
 
To date, compliance with federal, state and local environmental protection regulations has not had a material effect on our capital expenditures, earnings or competitive position. We have a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigations and reports have been completed for each property we acquire. In addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase or development of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we have abandoned otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. We believe that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a relatively conservative posture toward accepting known environmental risk, we can minimize our exposure to potential liability associated with environmental hazards.
 
Federal legislation requires owners and landlords of residential housing constructed prior to 1978 to disclose to potential residents or purchasers of the communities any known lead paint hazards and imposes treble damages for failure to provide such notification. In addition, lead based paint in any of the communities may result in lead poisoning in children residing in that community if chips or particles of such lead based paint are ingested, and we may be held liable under state laws for any such injuries caused by ingestion of lead based paint by children living at the communities.
 
We are unaware of any environmental hazards at any of our properties that individually or in the aggregate may have a material adverse impact on our operations or financial position. We have not been notified by any governmental authority, and we are not otherwise aware, of any material non-compliance, liability, or claim relating to environmental liabilities in connection with any of our properties. We do not believe that the cost of continued compliance with applicable environmental laws and regulations will have a material adverse effect on us or our financial condition or results of operations. Future environmental laws, regulations, or ordinances, however, may require additional remediation of existing conditions that are not currently actionable. Also, if more stringent requirements are imposed on us in the future, the costs of compliance could have a material adverse effect on us and our financial condition.


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Insurance
 
We carry comprehensive general liability coverage on our communities, with limits of liability customary within the industry to insure against liability claims and related defense costs. We are also insured, in all material respects, against the risk of direct physical damage in amounts necessary to reimburse us on a replacement cost basis for costs incurred to repair or rebuild each property, including loss of rental income during the reconstruction period.
 
Executive Officers of the Company
 
The following table sets forth information about our executive officers as of February 20, 2007. The executive officers listed below serve in their respective capacities at the discretion of our board of directors.
 
                     
Name
 
Age
 
Office
 
Since
 
Thomas W. Toomey
  46   Chief Executive Officer — President and Director   2001
W. Mark Wallis
  56   Senior Executive Vice President   2001
Michael A. Ernst
  46   Executive Vice President & Chief Financial Officer   2006
Martha R. Carlin
  44   Executive Vice President — Operations   2001
Richard A. Giannotti
  51   Executive Vice President — Asset Quality   1985
Matthew T. Akin
  39   Senior Vice President — Acquisitions & Dispositions   1994
Lester C. Boeckel
  58   Senior Vice President — Condominiums   2001
Mark M. Culwell, Jr. 
  55   Senior Vice President — Development   2006
Erin Ditto O’Brien
  37   Senior Vice President — Director Property Operations   1996
Patrick S. Gregory
  57   Senior Vice President & Chief Information Officer   1997
David L. Messenger
  36   Senior Vice President & Chief Accounting Officer   2002
Thomas A. Spangler
  46   Senior Vice President — Business Development   1998
S. Douglas Walker
  51   Senior Vice President — Transactions   2006
Mary Ellen Norwood
  52   Vice President — Legal Administration & Secretary   2001
Thomas P. Simon
  46   Vice President & Treasurer   2006
 
Set forth below is certain biographical information about our executive officers.
 
Mr. Toomey spearheads the vision and strategic direction of the company and oversees its executive officers. He joined us in February 2001 as President, Chief Executive Officer and Director. Prior to joining us, Mr. Toomey was with Apartment Investment and Management Company (AIMCO) from January 1996 until February 2001, where he served as Chief Operating Officer for two years and Chief Financial Officer for four years. During his tenure at AIMCO, Mr. Toomey was instrumental in the growth of AIMCO from 34,000 apartment homes to 360,000 apartment homes. He has also served, from 1990 to 1995, as a Senior Vice President and Treasurer at Lincoln Property Company, a national real estate development, property management and real estate consulting company. Mr. Toomey began his career at Arthur Andersen & Co. serving real estate and banking clients as an Audit Manager. He currently serves as a member of the boards of the National Association of Real Estate Investment Trusts and the National Multihousing Council, and he serves as a consultant to the Homeland Security Task Force of the Real Estate Roundtable and Chairman of the Pandemic Flu Preparedness Committee of the Real Estate Roundtable.
 
Mr. Wallis oversees the areas of acquisitions, dispositions, condominium conversions, asset quality and development. He joined us in April 2001 as Senior Executive Vice President responsible for acquisitions, dispositions, legal and certain administrative matters. Since that time, his focus has shifted to acquisitions, dispositions, asset quality, condominium conversions and development. Prior to joining us, Mr. Wallis was the


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President of Golden Living Communities, a company he established in 1995 to develop senior housing. During his tenure at Golden Living, Mr. Wallis was involved in the development of eight communities containing over 1,200 assisted and independent living apartments. From 1980 to 1995, Mr. Wallis was Executive Vice President of Finance and Administration at Lincoln Property Company where he handled interim and permanent financing for office, retail, multi-family and mixed-use developments. His responsibilities also included the negotiation of acquisitions, dispositions, and management contracts, and oversaw the direction of the national accounting and computer services divisions. Prior to joining Lincoln, Mr. Wallis served as Vice President of Finance for Folsom Investments, Inc., a large diversified real estate developer. Mr. Wallis began his career as an auditor at Alford, Meroney and Company, a Dallas CPA firm.
 
Mr. Ernst oversees the areas of corporate accounting, financial planning and analysis, investor relations, treasury operations, tax and property tax administration, risk management, SEC reporting and legal administration. He joined us in July 2006 as Executive Vice President and Chief Financial Officer. Prior to joining us, Mr. Ernst was with Prentiss Properties Trust (Prentiss), where he most recently served as Executive Vice President and Chief Financial Officer. He joined Prentiss in 1997 in the role of Vice President and Treasurer, and was promoted to Senior Vice President and Chief Financial Officer in 1999, and then to Executive Vice President and Chief Financial Officer in 2001. During his tenure at Prentiss, Mr. Ernst was involved in the development of corporate strategy, was active in corporate mergers and acquisitions activity and structured in excess of $3.5 billion in capital transactions. He was a member of Prentiss’s investment committee and was responsible for corporate and property accounting, capital markets, investor relations and financial planning and analysis. Prior to that, Mr. Ernst worked for Nations Bank, now Bank of America, where he was a Senior Vice President in their real estate finance group.
 
Ms. Carlin oversees all operations, including property operations, human resources, technology, internet strategy and business development. She joined the company in March 2001 as Senior Vice President responsible for operational efficiencies and revenue enhancement. She was promoted to Senior Vice President, Director of Property Operations in 2004 and to Executive Vice President, Director of Property Operations in 2005. Ms. Carlin was Senior Vice President of Operations for opsXchange, Inc., a real estate procurement technology developer, from 1999 until March 2001. Prior to that, Ms. Carlin was with Apartment Investment and Management Company, from 1996 through 1999, where she served as Senior Vice President of Ancillary Services, President of Buyers Access and was involved in Dispositions and Secured Financing. Ms. Carlin began her accounting career as a member of Arthur Andersen’s Real Estate Services Group.
 
Mr. Giannotti oversees redevelopment projects in the mid-Atlantic region. He joined us in September 1985 as Director of Development and Construction. He was elected Assistant Vice President in 1988, Vice President in 1989, and Senior Vice President in 1996. In 1998, he was assigned the additional responsibilities of Director of Development for the Eastern Region. In 2003 Mr. Giannotti was promoted to Executive Vice President — Asset Quality to manage the company’s Asset Quality program and to be responsible for the direction of recurring capital expenditures for asset preservation, initial capital expenditures relating to acquisitions and redevelopment projects. In 2006 Mr. Giannotti’s responsibilities shifted to focus on acquisition efforts and development projects in the mid-Atlantic region as well as redevelopment projects.
 
Mr. Akin oversees our acquisition and disposition efforts. He joined us in 1996 in connection with the merger with SouthWest Property Trust, where he had been a Financial Analyst since 1994. He was promoted to Due Diligence Analyst in April 1998 and to Asset Manager for the Western Region in 1999. Mr. Akin was promoted to Vice President, Senior Business Analyst in September 2000 and his focus shifted to acquisitions for the Western Region. In May 2004 he was promoted to Vice President — Acquisitions, and in August 2006 he was promoted to Senior Vice President — Acquisitions and Dispositions. Prior to joining SouthWest Property Trust, Mr. Akin was with Lexford Properties from 1989 to 1994, where he began as Staff Accountant and was promoted to Assistant Controller.
 
Mr. Boeckel oversees the conversion of existing apartment properties, the acquisition of properties for conversion, and the development of condominium communities. He joined us in July 2001 as Vice President of Dispositions and Acquisitions and was promoted in February 2002 to Senior Vice President — Dispositions and Acquisitions. His title was changed to Senior Vice President — Condominiums in December of 2004,


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when his focus shifted from acquisitions and dispositions to condo conversions and the development of multi-family for-sale housing. Prior to joining us, Mr. Boeckel was with Apartment Investment and Management Company (AIMCO), from 1998 to 2001. Mr. Boeckel served as Regional Vice President, a position with operating responsibilities for a portfolio of 12,000 apartment homes, and as Senior Vice President of Asset Management. Before joining AIMCO, Mr. Boeckel had over 20 years of real estate experience with various firms, including a national multi-family development company, a pension fund advisor, a regional investment banking firm and several national apartment syndication firms.
 
Mr. Culwell oversees all aspects of in-house development, joint venture development and pre-sale opportunities. He joined us in June 2006 as Senior Vice President — Development. Prior to joining us, Mr. Culwell served as Regional Vice President of Development for Gables Residential, where he established a $300 million pipeline of new development and redevelopment opportunities. Before joining Gables Residential, Mr. Culwell had over 30 years of real estate experience, including working for Elsinore Group, LLC, Lexford Residential Trust, Cornerstone Housing Corporation and Trammell Crow Residential Company, where his development and construction responsibilities included site selection and acquisition, construction oversight, asset management, as well as obtaining financing for acquisitions and rehabilitations. Mr. Culwell began his career, in Houston, as a broker with Vallone and Associates Real Estate Brokerage.
 
Ms. O’Brien oversees our property operations. She joined us in 1996 as a Community Director and in 1997 she was promoted to Assistant Vice President, District Manager for our Greensboro, North Carolina portfolio. In 2001, Ms. O’Brien joined a real estate company headquartered in Greensboro as a Regional Manager, and then returned to UDR the same year as a Pricing Manager. In June 2002, she was promoted to the position of District Manager, and in October 2003 she was promoted to Vice President-Operations, which encompassed all of North Carolina except Charlotte. In November 2004, she was promoted to Vice President-Operations, which expanded her responsibilities to the entire portfolio. In January 2007, she was promoted to Senior Vice President-Property Operations. Prior to joining us, Ms. O’Brien served as a Property Manager, a Leasing Director and a Regional Marketing Director for several national multi-family housing companies, where her focus was primarily on the development of marketing plans and troubleshooting for underperforming properties.
 
Mr. Gregory oversees all aspects of our Technology Management. He joined us in March 1997 as Vice President, Chief Information Officer, responsible for the planning and management of all Information Services related activities, including systems development, network operations, training, enterprise applications and end user support. In 1999, Mr. Gregory was promoted to Senior Vice President, Chief Information Officer. In addition to oversight of Information Services, his responsibilities include the development of a strategic technology plan for the company and ensuring that the company’s technology supports the company’s strategic business goals as well as the day-to-day operational needs. Prior to joining us, Mr. Gregory was with Crestar Bank for over 20 years, where he began as a Training Manager, managing the technical training for the Information Systems professionals. He was promoted to Solution Center Manager, where he managed the introduction and assimilation of fourth generation languages, personal computers, personal productivity software and local area networks; to Internet Developer, where he researched new technologies and developed internet-based applications, and identified new technologies that would lower costs and improve services to both internal and external customers.
 
Mr. Messenger oversees all aspects of our accounting functions. He joined us in August 2002 as Vice President and Controller. In that role, Mr. Messenger was responsible for SEC reporting, Sarbanes-Oxley compliance and supervision of all accounting functions. In March 2006, Mr. Messenger was promoted to Vice President and Chief Accounting Officer. In January 2007, Mr. Messenger was promoted to Senior Vice President and Chief Accounting Officer. Prior to joining us, Mr. Messenger was owner and President of TRC Management Company, a restaurant management company, in Chicago. He has worked as a Controller at HMS Resource, Inc. Mr. Messenger began his career with Ernst & Young LLP, as a manager in their Chicago real estate division.
 
Mr. Spangler oversees internal audit, utilities management, procurement and non-rental revenue programs. He joined us in August 1998 as Assistant Vice President, Operational Planning and Asset Management, and


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was promoted to Vice President, Director of Operational Planning and Asset Management that same year. He was promoted to Senior Vice President — Business Development in February 2003. Prior to joining us, Mr. Spangler served for nine years as an Asset Manager for Summit Enterprises, Inc. of Virginia, a private investment management firm, where he oversaw a portfolio consisting of agricultural, commercial, mixed-use commercial, industrial and residential properties.
 
Mr. Walker oversees our Asset Quality, Kitchen & Bath and “Green Building” programs in addition to all non-residential owned and leased real estate. He joined us in May 2006 as Senior Vice President — Transactions. Prior to joining us, Mr. Walker served as a consultant to the multi-family industry. He served as President of Harwood Pacific, a Dallas-based developer of mixed-use high-rise office projects. He was also President of Harwood Management, a division of Harwood International, from 1994 to 2002, where he was responsible for operations of an $800 million portfolio of properties in Europe and the U.S.
 
Ms. Norwood oversees our legal department, coordinates outside legal services and is our Corporate Secretary. She joined us in August 2001 as Vice President — Legal Administration and Corporate Secretary. Prior to joining us, Ms. Norwood was employed by Centex Corporation in various legal capacities for 15 years, the most recent of which was as its Legal Administrator. Centex is a New York Stock Exchange listed company that operates in the home building, financial services, construction products, construction services and investment real estate business segments.
 
Mr. Simon oversees capital markets and treasury management. He joined us in October 2006 as Vice President and Treasurer. Prior to joining us, Mr. Simon was with Prentiss Properties Trust (Prentiss) where he most recently served as Senior Vice President and Treasurer. Mr. Simon’s tenure at Prentiss began in 1985 when he joined Cadillac Fairview US, a publicly-held precursor to Prentiss, in the role of tax analyst. In 1987 he was promoted to Corporate Controller, to Vice President Accounting in 1992, and to Senior Vice President and Chief Accounting Officer in 1999. In May 2004 Mr. Simon took over the role of Senior Vice President and Treasurer. During his tenure at Prentiss, Mr. Simon was responsible for the design and implementation of new accounting systems; project leader for the implementation of Sarbanes Oxley; negotiation of construction financing, property level financing, corporate financings and interest rate hedge transactions. He was integrally involved in the merger of Prentiss with Brandywine Realty Trust, including the transfer, pay-off, or defeasance of the Prentiss debt portfolio. Mr. Simon began his career at Fox & Company, now Grant Thornton, as a tax accountant.
 
Available Information
 
We file electronically with the Securities and Exchange Commission our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to those reports on the day of filing with the SEC on our website at www.udrt.com, or by sending an e-mail message to ir@udrt.com.
 
NYSE Certification
 
On May 19, 2006, our Chief Executive Officer submitted to the New York Stock Exchange the annual certification required by Section 303A.12(a) of the NYSE Listed Company Manual regarding our compliance with NYSE corporate governance listing standards. In addition, the certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2, respectively, to this Report.
 
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


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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 apartment 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.
 
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. 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 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


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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.
 
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, 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


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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 homes or properties that we developed or renovated to third parties, 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 maintain insurance policies covering our property and operating activities which are of the type and in amounts we believe are reasonable and appropriate to cover our business. There are, however, certain types of extraordinary losses for which we may not have insurance, including certain extraordinary losses resulting from environmental damage or successive natural disasters or other catastrophes. 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 occurs, 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.
 
Failure to Succeed in New Markets May Limit Our Growth.  We may 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.


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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 December 31, 2006, we had approximately $492.5 million of variable rate indebtedness outstanding, which constitutes approximately 15% 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 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 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 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


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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, and applicable relief provisions under the Code were not available, we would be subject to U.S. 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, or “IRS,” 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 taxable REIT subsidiaries in which we conduct a portion of our business. 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 U.S. 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 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 IRS may contend that certain transfers or disposals of properties by us are prohibited transactions. If the IRS 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 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 U.S. 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 expect in the future to develop and acquire properties in joint ventures with other persons or entities when we believe circumstances warrant the use of such structures. As a result, 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.


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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.
 
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 U.S. 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 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 and other REIT ownership requirements; however, the restrictions may have the effect of preventing a change of control, which does not threaten REIT status. These restrictions include a provision that generally limits ownership by any person of more than 9.9% of the value of our outstanding equity stock, 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. Additional information regarding our shareholder rights plan is set forth in Note 6 in the Notes to Consolidated Financial Statement included elsewhere in this Report.


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Item 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
Item 2.   PROPERTIES
 
At December 31, 2006, our apartment portfolio included 242 communities located in 33 markets, with a total of 70,339 completed apartment homes. In addition, we had five apartment communities under development. We own approximately 53,000 square feet of office space in Richmond, Virginia, for our corporate offices and we lease approximately 11,000 square feet of office space in Highlands Ranch, Colorado, for our principal executive offices. The table below sets forth a summary of our real estate portfolio by geographic market at December 31, 2006.
 
SUMMARY OF REAL ESTATE PORTFOLIO BY GEOGRAPHIC MARKET AT DECEMBER 31, 2006
 
                                                                         
                                Total
   
                                Income
  Average
    Number of
  Number of
  Percentage of
  Carrying
              per
  Home Size
    Apartment
  Apartment
  Carrying
  Value
  Encumbrances
  Cost per
  Physical
  Occupied
  (Square
    Communities   Homes   Value   (In thousands)   (In thousands)   Home   Occupancy   Home(a)   Feet)
 
WESTERN REGION
                                                                       
Orange Co., CA
    13       4,067       11.8 %   $ 684,460     $ 114,255     $ 168,296       94.9 %   $ 1,435       821  
San Francisco, CA
    10       2,425       7.7 %     445,360       19,645       183,654       96.8 %     1,543       786  
Los Angeles, CA
    6       1,210       3.4 %     197,287       90,722       163,047       94.0 %     1,412       937  
San Diego, CA
    5       1,123       2.8 %     162,878       39,176       145,038       94.1 %     1,241       797  
Inland Empire, CA
    4       1,282       2.7 %     156,495       13,394       122,071       91.4 %     1,033       830  
Monterey Peninsula, CA
    7       1,568       2.5 %     144,133             91,922       89.8 %     955       724  
Seattle, WA
    7       1,466       2.2 %     130,875       58,621       89,274       96.4 %     921       886  
Portland, OR
    5       1,365       1.5 %     86,644       20,576       63,475       94.5 %     745       887  
Sacramento, CA
    2       914       1.1 %     64,563       45,837       70,638       92.7 %     869       820  
MID-ATLANTIC REGION
                                                                       
Metropolitan DC
    8       2,469       4.3 %     249,270       30,691       100,960       95.9 %     1,208       922  
Raleigh, NC
    11       3,663       3.9 %     229,947       68,059       62,776       92.8 %     695       957  
Baltimore, MD
    10       2,118       3.0 %     176,424       13,286       83,297       95.9 %     1,054       925  
Richmond, VA
    9       2,636       3.0 %     174,696       61,532       66,273       95.5 %     864       954  
Wilmington, NC
    6       1,868       1.8 %     103,893             55,617       95.2 %     755       952  
Charlotte, NC
    6       1,226       1.5 %     88,685             72,337       94.3 %     739       990  
Norfolk, VA
    6       1,438       1.3 %     74,475       9,118       51,791       95.4 %     913       1,016  
Other Mid-Atlantic
    13       2,817       2.5 %     145,972       36,232       51,818       95.0 %     861       922  
SOUTHEASTERN REGION
                                                                       
Tampa, FL
    12       4,138       4.7 %     273,531       63,253       66,102       94.1 %     929       977  
Orlando, FL
    12       3,476       3.8 %     219,802       47,871       63,234       93.1 %     900       955  
Nashville, TN
    10       2,966       3.2 %     187,754       71,585       63,302       95.1 %     747       918  
Jacksonville, FL
    4       1,557       1.9 %     110,344       17,043       70,870       94.0 %     845       913  
Atlanta, GA
    6       1,426       1.5 %     84,779       23,884       59,452       95.4 %     701       908  
Other Florida
    8       2,400       2.8 %     164,164       52,588       68,402       91.6 %     918       917  
Other Southeastern
    7       1,752       1.4 %     79,467             45,358       95.2 %     644       819  
SOUTHWESTERN REGION
                                                                       
Houston, TX
    16       5,447       4.6 %     265,438       40,693       48,731       94.4 %     677       811  
Dallas, TX
    6       2,684       3.4 %     199,570       23,971       74,355       94.2 %     811       909  
Arlington, TX
    6       1,828       1.6 %     95,916       20,543       52,470       94.5 %     679       807  
Phoenix, AZ
    4       1,234       1.6 %     92,293       27,771       74,792       93.7 %     905       1,008  
Austin, TX
    5       1,425       1.5 %     87,073       6,073       61,104       96.4 %     726       805  
Denver, CO
    2       884       1.2 %     70,425             79,666       91.9 %     748       878  
Other Southwestern
    6       2,469       2.6 %     149,892       41,674       60,710       95.7 %     739       879  


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Table of Contents

                                                                         
                                Total
   
                                Income
  Average
    Number of
  Number of
  Percentage of
  Carrying
              per
  Home Size
    Apartment
  Apartment
  Carrying
  Value
  Encumbrances
  Cost per
  Physical
  Occupied
  (Square
    Communities   Homes   Value   (In thousands)   (In thousands)   Home   Occupancy   Home(a)   Feet)
 
MIDWESTERN REGION
                                                                       
Columbus, OH
    6       2,530       2.8 %     165,785       40,635       65,528       93.5 %     734       904  
Other Midwestern
    3       444       0.4 %     24,890       6,241       56,059       91.4 %     763       955  
Real Estate Under Development
    1       24       1.1 %     63,828             n/a       n/a       n/a       n/a  
Land
    n/a       n/a       2.5 %     144,633       67,674       n/a       n/a       n/a       n/a  
                                                                         
Total Apartments(b)
    242       70,339       99.6 %   $ 5,795,641     $ 1,172,643     $ 82,396       94.3 %   $ 899       895  
                                                                         
Commercial Property
    n/a       n/a       0.3 %     20,390       10,276       n/a       n/a       n/a       n/a  
Richmond — Corporate
    n/a       n/a       0.1 %     4,091             n/a       n/a       n/a       n/a  
                                                                         
Total Real Estate Owned
    242       70,339       100.0 %   $ 5,820,122     $ 1,182,919     $ 82,396       94.3 %   $ 899       895  
                                                                         
 
 
(a) Total Income per Occupied Home represents total revenues per weighted average number of homes occupied.
 
(b) Includes real estate held for disposition, real estate under development, and land, but excludes commercial property.
 
Item 3.   LEGAL PROCEEDINGS
 
We are subject to various legal proceedings and claims arising in the ordinary course of business. We cannot determine the ultimate liability with respect to such legal proceedings and claims at this time. We believe that such liability, to the extent not provided for through insurance or otherwise, will not have a material adverse effect on our financial condition, results of operations or cash flow.
 
Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2006.

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Table of Contents

 
PART II
 
Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Common Stock
 
Our common stock is traded on the New York Stock Exchange under the symbol “UDR.” The following tables set forth the quarterly high and low sale prices per common share reported on the NYSE for each quarter of the last two fiscal years. Distribution information for common stock reflects distributions declared per share for each calendar quarter and paid at the end of the following month.
 
                         
                Distributions
 
    High     Low     Declared  
 
2006
                       
1st Quarter
  $ 29.05     $ 23.41     $ .3125  
2nd Quarter
    28.82       25.50       .3125  
3rd Quarter
    30.81       26.97       .3125  
4th Quarter
    33.75       29.95       .3125  
                         
2005
                       
1st Quarter
  $ 24.75     $ 20.55     $ .3000  
2nd Quarter
    24.15       20.57       .3000  
3rd Quarter
    25.97       22.70       .3000  
4th Quarter
    23.97       20.88       .3000  
 
On February 20, 2007, the closing sale price of our common stock was $33.95 per share on the NYSE and there were 5,871 holders of record of the 135,544,953 outstanding shares of our common stock.
 
We have determined that, for federal income tax purposes, approximately 38% of the distributions for each of the four quarters of 2006 represented ordinary income, 37% represented long-term capital gain, and 25% represented unrecaptured section 1250 gain.
 
We pay regular quarterly distributions to holders of shares of our common stock. Future distributions will be at the discretion of our board of directors and will depend on our actual funds from operations, financial condition and capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, and other factors. The annual distribution payment for calendar year 2006 necessary for us to maintain our status as a REIT was approximately $0.43 per share of common stock. We declared total distributions of $1.25 per share of common stock for 2006.
 
Series E Preferred Stock
 
The Series E Cumulative Convertible Preferred Stock has no stated par value and a liquidation preference of $16.61 per share. Subject to certain adjustments and conditions, each share of the Series E is convertible at any time and from time to time at the holder’s option into one share of our common stock. The holders of the Series E are entitled to vote on an as-converted basis as a single class in combination with the holders of common stock at any meeting of our stockholders for the election of directors or for any other purpose on which the holders of common stock are entitled to vote. The Series E has no stated maturity and is not subject to any sinking fund or any mandatory redemption.
 
Distributions declared on the Series E in 2006 were $1.33 per share or $0.3322 per quarter. The Series E is not listed on any exchange. At December 31, 2006, a total of 2,803,812 shares of the Series E were outstanding.


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Table of Contents

 
Series F Preferred Stock
 
We are authorized to issue up to 20,000,000 shares of our Series F Preferred Stock. Our Series F Preferred Stock may be purchased by holders of our operating partnership units, or OP Units, described below under “Operating Partnership Units,” at a purchase price of $0.0001 per share. OP Unitholders are entitled to subscribe for and purchase one share of our Series F Preferred Stock for each OP Unit held. At December 31, 2006, a total of 666,293 shares of the Series F Preferred Stock were outstanding at a value of $66.63. Holders of the Series F Preferred Stock are entitled to one vote for each share of the Series F Preferred Stock they hold, voting together with the holders of our common stock, on each matter submitted to a vote of securityholders at a meeting of our stockholders. The Series F Preferred Stock does not entitle its holders to any other rights, privileges or preferences.
 
Dividend Reinvestment and Stock Purchase Plan
 
We have a Dividend Reinvestment and Stock Purchase Plan under which holders of our common stock and our Series B Cumulative Redeemable Preferred Stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of our common stock. Stockholders who do not participate in the plan continue to receive dividends as declared. As of February 20, 2007, there were 3,372 participants in the plan.
 
Operating Partnership Units
 
From time to time we issue shares of our common stock in exchange for OP Units tendered to our operating partnerships, United Dominion Realty, L.P. and Heritage Communities L.P., for redemption in accordance with the provisions of their respective partnership agreements. At December 31, 2006, there were 9,692,058 OP Units (of which 1,650,322 are owned by the holders of the Series A OPPS) and 329,207 OP Units in United Dominion Realty, L.P. and Heritage Communities L.P., respectively, that were owned by limited partners. The holder of the OP Units has the right to require United Dominion Realty, L.P. to redeem all or a portion of the OP Units held by the holder in exchange for a cash payment based on the market value of our common stock at the time of redemption. However, United Dominion Realty, L.P.’s obligation to pay the cash amount is subject to the prior right of the company to acquire such OP Units in exchange for either the cash amount or shares of our common stock. Heritage Communities L.P. OP Units are convertible into common stock in lieu of cash, at our option, once the holder elects to convert, at an exchange ratio of 1.575 shares for each OP Unit. During 2006, we issued a total of 381,001 shares of common stock in exchange for OP Units.
 
Purchases 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, in block purchases, privately negotiated transactions, or otherwise. As reflected in the table below, no shares of common stock were repurchased under this program or otherwise during the quarter ended December 31, 2006.


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Table of Contents

The following table sets forth certain information regarding our common stock repurchases during the quarter ended December 31, 2006:
 
                                 
                Total Number of Shares
       
                Purchased as
    Maximum Number of Shares
 
    Total Number of
    Average
    Part of Publicly
    that May Yet Be
 
    Shares
    Price per
    Announced Plans or
    Purchased Under the
 
Period
  Purchased     Share     Programs     Plans or Programs  
 
October 1, 2006 through
October 31, 2006
    0       N/A       0       10,000,000  
November 1, 2006 through November 30, 2006
    0       N/A       0       10,000,000  
December 1, 2006 through December 31, 2006
    0       N/A       0       10,000,000  
                                 
Total
    0       N/A       0       10,000,000  
                                 
 
Recent Sales of Unregistered Securities
 
On October 12, 2006, we completed the sale of $250 million principal amount of our 3.625% convertible senior notes due 2011. These notes are convertible into shares of our common stock at an initial conversion rate of 26.6326 shares per $1,000 principal amount of notes, which equates to an initial conversion price of approximately $37.55 per share. Because the notes and the shares of common stock issuable upon conversion of the notes 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. In connection with the offering of the notes, we also entered into a capped call transaction with respect to our common stock with JPMorgan Chase Bank, National Association, London Branch, an affiliate of one of the initial purchasers of the notes. The capped call transaction covers, subject to anti-dilution adjustments similar to those contained in the notes, approximately 6,658,150 shares of our common stock. Information regarding the offering of our 3.625% convertible senior notes due 2011, the shares of our common stock issuable upon conversion of the notes, and the capped call transaction is set forth in our Current Report on Form 8-K dated October 5, 2006 and filed with the SEC on October 12, 2006, and is incorporated herein by reference.


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Table of Contents

Comparison of Cumulative Total Returns
 
The following graph provides a comparison from December 31, 2001 through December 31, 2006 of the cumulative total stockholder return (assuming reinvestment of any dividends) among UDR, the NAREIT Equity REIT Index, Standard & Poor’s 500 Stock Index, the NAREIT Equity Apartment Index and the MSCI US REIT Index. The graph assumes that $100 was invested on December 31, 2001, in each of our common stock and the indices presented. Historical stock price performance is not necessarily indicative of future stock price performance.
 
Performance Graph
 
 
                                                             
      December 31  
      2001       2002       2003       2004       2005       2006  
UDR 
    $ 100       $ 122.30       $ 153.29       $ 210.58       $ 209.93       $ 297.63  
NAREIT Equity REIT Index
    $ 100       $ 103.82       $ 142.37       $ 187.33       $ 210.12       $ 283.78  
S&P 500 Index
    $ 100       $ 77.90       $ 100.24       $ 111.15       $ 116.61       $ 135.02  
NAREIT Equity Apartment Index
    $ 100       $ 93.85       $ 117.77       $ 158.66       $ 181.91       $ 254.57  
MSCI US REIT Index
    $ 100       $ 103.51       $ 141.72       $ 186.70       $ 208.95       $ 284.00  
                                                             
 
The foregoing graph and chart shall not be deemed incorporated by reference by any general statement incorporating by reference this Report into any filing under the Securities Act or under the Exchange Act, except to the extent we specifically incorporate this information by reference.


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Table of Contents

 
Item 6.   SELECTED FINANCIAL DATA
 
The following table sets forth selected consolidated financial and other information as of and for each of the years in the five-year period ended December 31, 2006. The table should be read in conjunction with our consolidated financial statements and the notes thereto, and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Report.
 
                                         
    Years Ended December 31,
 
    (In thousands, except per share data and apartment homes owned)  
    2006     2005     2004     2003     2002  
 
Operating Data(a)
                                       
Rental income
  $ 694,473     $ 621,904     $ 513,463     $ 450,572     $ 429,726  
(Loss)/income before minority interests and discontinued operations
    (30,026 )     (81 )     5,928       5,039       (31,210 )
Income from discontinued operations, net of minority interests
    156,012       154,437       90,176       63,318       82,151  
Net income
    128,605       155,166       97,152       70,404       53,229  
Distributions to preferred stockholders
    15,370       15,370       19,531       26,326       27,424  
Net income available to common stockholders
    113,235       139,796       71,892       24,807       25,805  
Common distributions declared
    168,408       163,690       152,203       134,876       118,888  
Weighted average number of common shares outstanding — basic
    133,732       136,143       128,097       114,672       106,078  
Weighted average number of common shares outstanding — diluted
    133,732       136,143       128,097       114,672       106,078  
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted
    147,981       150,141       145,842       136,975       127,838  
Per share — basic and diluted:
                                       
Loss from continuing operations available to common stockholders, net of minority interests
  $ (0.32 )   $ (0.11 )   $ (0.14 )   $ (0.33 )   $ (0.53 )
Income from discontinued operations, net of minority interests
    1.17       1.14       0.70       0.55       0.77  
Net income available to common stockholders
    0.85       1.03       0.56       0.22       0.24  
Common distributions declared
    1.25       1.20       1.17       1.14       1.11  
Balance Sheet Data
                                       
Real estate owned, at carrying value
  $ 5,820,122     $ 5,512,424     $ 5,243,296     $ 4,351,551     $ 3,967,483  
Accumulated depreciation
    1,253,727       1,123,829       1,007,887       896,630       748,733  
Total real estate owned, net of accumulated depreciation
    4,566,395       4,388,595       4,235,409       3,454,921       3,218,750  
Total assets
    4,675,875       4,541,593       4,332,001       3,543,643       3,276,136  
Secured debt
    1,182,919       1,116,259       1,197,924       1,018,028       1,015,740  
Unsecured debt
    2,155,866       2,043,518       1,682,058       1,114,009       1,041,900  
Total debt
    3,338,785       3,159,777       2,879,982       2,132,037       2,057,640  
Stockholders’ equity
    1,055,255       1,107,724       1,195,451       1,163,436       1,001,271  
Number of common shares outstanding
    135,029       134,012       136,430       127,295       106,605  
Other Data
                                       
Cash Flow Data
                                       
Cash provided by operating activities
  $ 229,613     $ 248,186     $ 251,747     $ 234,945     $ 229,001  
Cash used in investing activities
    (149,973 )     (219,017 )     (595,966 )     (304,217 )     (67,363 )
Cash (used in)/provided by financing activities
    (93,040 )     (21,530 )     347,299       70,944       (163,127 )
Funds from Operations(b)
                                       
Funds from operations — basic
  $ 244,471     $ 238,254     $ 211,670     $ 193,750     $ 153,016  
Funds from operations — diluted
    248,197       241,980       219,557       208,431       168,795  
Apartment Homes Owned
                                       
Total apartment homes owned at December 31
    70,339       74,875       78,855       76,244       74,480  
Weighted average number of apartment homes owned during the year
    73,731       76,069       76,873       74,550       76,567  


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(a) Reclassified to conform to current year presentation in accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as described in Note 3 to the consolidated financial statements.
 
(b) 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 depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. This definition conforms with the National Association of Real Estate Investment Trust’s definition issued in April 2002. We consider FFO in evaluating property acquisitions and our operating performance and believe that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of our activities in accordance with generally accepted accounting principles. 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. For 2005, FFO includes $2.5 million of hurricane related insurance recoveries. For 2004, FFO includes a charge of $5.5 million to cover hurricane related expenses. For the years ended December 31, 2004 and 2003, distributions to preferred stockholders exclude $5.7 million and $19.3 million, respectively, related to premiums on preferred stock conversions.
 
Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting us, or our properties, adverse changes in the real estate markets and general and local economies and business conditions. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore such statements included in this Report may not prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that the results or conditions described in such statements or our objectives and plans will be achieved.
 
Business Overview
 
We are a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages 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 “UDR” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.


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At December 31, 2006, our portfolio included 242 communities with 70,339 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):
 
                                                 
    As of December 31, 2006   Year Ended December 31, 2006
    Number of
  Number of
  Percentage of
  Carrying
  Average
  Total Income per
    Apartment
  Apartment
  Carrying
  Value
  Physical
  Occupied
    Communities   Homes   Value   (In thousands)   Occupancy   Home(a)
 
WESTERN REGION
                                               
Orange Co., CA
    13       4,067       11.8%     $ 684,460       94.9 %   $ 1,435  
San Francisco, CA
    10       2,425       7.7%       445,360       96.8 %     1,543  
Los Angeles, CA
    6       1,210       3.4%       197,287       94.0 %     1,412  
San Diego, CA
    5       1,123       2.8%       162,878       94.1 %     1,241  
Inland Empire, CA
    4       1,282       2.7%       156,495       91.4 %     1,033  
Monterey Peninsula, CA
    7       1,568       2.5%       144,133       89.8 %     955  
Seattle, WA
    7       1,466       2.3%       130,875       96.4 %     921  
Portland, OR
    5       1,365       1.5%       86,644       94.5 %     745  
Sacramento, CA
    2       914       1.1%       64,563       92.7 %     869  
MID-ATLANTIC REGION
                                               
Metropolitan DC
    8       2,469       4.3%       249,270       95.9 %     1,208  
Raleigh, NC
    11       3,663       4.0%       229,947       92.8 %     695  
Baltimore, MD
    10       2,118       3.0%       176,424       95.9 %     1,054  
Richmond, VA
    9       2,636       3.0%       174,696       95.5 %     864  
Wilmington, NC
    6       1,868       1.8%       103,893       95.2 %     755  
Charlotte, NC
    6       1,226       1.5%       88,685       94.3 %     739  
Norfolk, VA
    6       1,438       1.3%       74,475       95.4 %     913  
Other Mid-Atlantic
    13       2,817       2.5%       145,972       95.0 %     861  
SOUTHEASTERN REGION
                                               
Tampa, FL
    12       4,138       4.7%       273,531       94.1 %     929  
Orlando, FL
    12       3,476       3.8%       219,802       93.1 %     900  
Nashville, TN
    10       2,966       3.2%       187,754       95.1 %     747  
Jacksonville, FL
    4       1,557       1.9%       110,344       94.0 %     845  
Atlanta, GA
    6       1,426       1.5%       84,779       95.4 %     701  
Other Florida
    8       2,400       2.8%       164,164       91.6 %     918  
Other Southeastern
    7       1,752       1.4%       79,467       95.2 %     644  
SOUTHWESTERN REGION
                                               
Houston, TX
    16       5,447       4.6%       265,438       94.4 %     677  
Dallas, TX
    6       2,684       3.4%       199,570       94.2 %     811  
Arlington, TX
    6       1,828       1.7%       95,916       94.5 %     679  
Phoenix, AZ
    4       1,234       1.6%       92,293       93.7 %     905  
Austin, TX
    5       1,425       1.5%       87,073       96.4 %     726  
Denver, CO
    2       884       1.2%       70,425       91.9 %     748  
Other Southwestern
    6       2,469       2.6%       149,892       95.7 %     739  
MIDWESTERN REGION
                                               
Columbus, OH
    6       2,530       2.9%       165,785       93.5 %     734  
Other Midwestern
    3       444       0.4%       24,890       91.4 %     763  
Real Estate Under Development
    1       24       1.1%       63,828              
Land
                2.5%       144,633              
                                                 
Total
    242       70,339       100.0%     $ 5,795,641       94.3 %   $ 899  
                                                 
 
 
(a) Total Income per Occupied Home represents total revenues per weighted average number of apartment homes occupied.


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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.
 
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 2007, we have approximately $81.7 million of secured debt and $167.3 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. With respect to these critical accounting policies, we believe that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.
 
Capital Expenditures
 
In conformity with accounting principles generally accepted in the United States, we capitalize those expenditures related to acquiring new assets, materially enhancing the value of an existing asset, or substantially extending the useful life of an existing asset. Expenditures necessary to maintain an existing property in ordinary operating condition are expensed as incurred.
 
During 2006, $215.7 million or $2,996 per home was spent on capital expenditures for all of our communities, excluding development, condominium conversions and commercial properties. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as roofs, siding, parking lots, and other non-revenue enhancing capital expenditures, which


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aggregated $34.6 million or $480 per home. In addition, revenue enhancing capital expenditures, kitchen and bath upgrades, upgrades to HVAC equipment, and other extensive exterior/interior upgrades totaled $144.1 million or $2,002 per home, and major renovations totaled $37.0 million or $514 per home for the year ended December 31, 2006.
 
The following table outlines capital expenditures and repair and maintenance costs for all of our communities, excluding real estate under development, condominium conversions and commercial properties for the periods presented:
 
                                                 
    Year Ended December 31,
    Year Ended December 31,
 
    (dollars in thousands)     (per home)  
    2006     2005     % Change     2006     2005     % Change  
 
Turnover capital expenditures
  $ 14,214     $ 17,916       (20.7 )%   $ 197     $ 237       (16.9 )%
Other recurring capital expenditures
    20,409       20,928       (2.5 )%     283       276       2.5 %
                                                 
Total recurring capital expenditures
    34,623       38,844       (10.9 )%     480       513       (6.4 )%
Revenue enhancing improvements
    144,102       98,592       46.2 %     2,002       1,302       53.8 %
Major renovations
    36,996       18,686       98.0 %     514       247       108.1 %
                                                 
Total capital improvements
  $ 215,721     $ 156,122       38.2 %   $ 2,996     $ 2,062       45.3 %
                                                 
Repair and maintenance
    43,498       45,266       (3.9 )%     604       598       1.0 %
                                                 
Total expenditures
  $ 259,219     $ 201,388       28.7 %   $ 3,600     $ 2,660       35.3 %
                                                 
 
Total capital improvements increased $59.6 million or $934 per home for the year ended December 31, 2006 compared to the same period in 2005. This increase was attributable to an additional $18.3 million of major renovations at certain of our properties. These renovations included 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 $45.5 million being invested in revenue enhancing improvements. These increases were offset by a $4.2 million decrease in recurring capital expenditures. 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 2007 are currently expected to be approximately $610 per home.
 
Impairment of Long-Lived Assets
 
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by the future operation and disposition of those assets are less than the net book value of those assets. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. The net book value of impaired assets is reduced to fair market value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.
 
Real Estate Investment Properties
 
We purchase real estate investment properties from time to time and allocate the purchase price to various components, such as land, buildings, and intangibles related to in-place leases in accordance with FASB Statement No. 141, “Business Combinations.” The purchase price is allocated based on the relative fair value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present


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value of all cash flows expected to be generated from the property including an initial lease-up period. We determine the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. In addition, we consider the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining contractual lease period.
 
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 year ended December 31, 2006, our net cash flow provided by operating activities was $229.6 million compared to $248.2 million for 2005. During 2006, the decrease in cash flow from operating activities resulted primarily from an $18.5 million increase in interest expense, a decrease of $17.1 million in other income due to a 2005 sale of a technology investment, an $11.4 million increase in operating assets and a $9.8 million decrease in operating liabilities in 2006 as compared to 2005. These decreases in cash flow from operating activities were partially offset by a $34.2 million increase in property operating results from our apartment community portfolio (see discussion under “Apartment Community Operations”), $5.1 million more in gains recognized from the sale of depreciable property and an unconsolidated joint venture in 2006 as compared to 2005, and an $8.5 million decrease in prepayment penalties from 2005.
 
Investing Activities
 
For the year ended December 31, 2006, net cash used in investing activities was $150.0 million compared to $219.0 million for 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
 
For the year ended December 31, 2006, we acquired eight apartment communities with 2,763 apartment homes for an aggregate consideration of $327.5 million and two parcels of land for $19.9 million. For 2005, we acquired eight apartment communities with 2,561 apartment homes for an aggregate consideration of $390.9 million and one parcel of land for $2.9 million. Our long-term strategic plan is to achieve greater operating efficiencies by investing in fewer, more concentrated markets. As a result, we have been expanding our interests in the fast growing Southern California, Florida, and Metropolitan Washington DC markets over the past three years. During 2007, we plan to continue to channel new investments into those markets 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.
 
Real Estate Under Development
 
Development activity is focused in core markets in which we have strong operations in place. For the year ended December 31, 2006, we invested approximately $101.8 million in development projects, an increase of $52.5 million from our 2005 level of $49.3 million.


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The following wholly owned projects were under development as of December 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  
 
2000 Post — Phase III
                                               
San Francisco, CA
    24       24     $ 10,254     $ 11,000     $ 458,300       1Q07  
Villas at Ridgeview Townhomes
                                               
Plano, TX
    48             7,022       10,000       208,300       3Q07  
Ridgeview Apartments
                                               
Plano, TX
    202             8,296       18,000       89,100       3Q07  
Northwest Houston — Phase I
                                               
Houston, TX
    320             4,421       22,000       68,800       2Q08  
Lincoln Towne Square — Phase II
                                               
Plano, TX
    302             4,384       26,000       86,100       3Q08  
                                                 
      896       24     $ 34,377     $ 87,000     $ 97,100          
                                                 
 
In addition, we owned five parcels of land held for future development aggregating $35.4 million at December 31, 2006.
 
Development Joint Ventures
 
In June 2006, we completed the formation of a development joint venture that will invest approximately $138 million to develop one apartment community with 298 apartment homes in Marina del Rey, California. UDR is the financial partner and is responsible for funding the costs of development and receives a preferred return from 7% to 8.5% before our partner receives a 50% participation. Our initial investment was $27.5 million.
 
In July 2006, we closed on a joint venture to develop a site in Bellevue, Washington. At closing, we owned 49% of the $135 million project that involves building a 400 home high rise apartment building with ground floor retail. Our initial investment was $5.7 million.
 
In November 2006, we closed on a joint venture to develop a site close to Bellevue Plaza in the central business district of Bellevue, Washington. This project will include the development of 271 apartment homes. Construction began in the fourth quarter of 2006 and is scheduled for completion in 2008. At closing, we owned 49% of the $97 million project. Our initial investment was $10.0 million.
 
Under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” these ventures have been consolidated into UDR’s financial statements. Our joint venture partners are the managing partners as well as the developers, general contractors, and property managers.
 
The following consolidated joint venture projects were under development as of December 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  
 
Jefferson at Marina del Rey
                                               
Marina del Rey, CA
    298           $ 76,601     $ 138,000     $ 463,100       2Q08  
Ashwood Commons
                                               
Bellevue, WA
    271             23,660       97,000       357,900       4Q08  
Bellevue Plaza
                                               
Bellevue, WA
    400             34,220       135,000       270,000       4Q09  
                                                 
      969           $ 134,481     $ 370,000     $ 381,800          
                                                 


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Disposition of Investments
 
For the year ended December 31, 2006, UDR sold 24 communities with 7,653 apartment homes for a gross consideration of $444.9 million. In addition, we sold 384 condominiums from four communities with a total of 612 condominiums for a gross consideration of $72.1 million. We recognized after-tax gains for financial reporting purposes of $148.6 million on these sales. Proceeds from the sales were used primarily to reduce debt.
 
For the year ended December 31, 2005, UDR sold 22 communities with 6,352 apartment homes and 240 condominiums from five communities with a total of 648 condominiums for a gross consideration of $456.3 million. In addition, we sold our investment in an unconsolidated joint venture for $39.2 million and one parcel of land for $0.9 million. We recognized gains for financial reporting purposes of $143.5 million on these sales. Proceeds from the sales were used primarily to reduce debt and acquire additional communities. 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 September 2005 to July 2006. As of December 31, 2006, all of the notes receivable had matured and had been repaid. We recognized previously deferred gains for financial reporting purposes of $6.4 million for the year ended December 31, 2006.
 
During 2007, we plan to continue to pursue our strategy of exiting markets where long-term growth prospects are limited and redeploying capital into those markets we believe will provide the best investment returns. We intend to use the proceeds from 2007 dispositions to reduce debt, acquire communities, and fund development activity.
 
Financing Activities
 
Net cash used in financing activities during 2006 was $93.0 million compared to $21.5 million in 2005. As part of the plan to improve our balance sheet, we utilized proceeds from dispositions, equity and debt offerings, and refinancings to extend maturities, pay down existing debt, and purchase new properties.
 
The following is a summary of our financing activities for the year ended December 31, 2006:
 
  •  Repaid $70.3 million of secured debt and $138.8 million of unsecured debt.
 
  •  Authorized a new 10 million share repurchase program in February 2006. This program replaces our previous 11 million share repurchase program under which we repurchased approximately 10 million shares.
 
  •  Sold $125 million aggregate principal amount of 6.05% senior unsecured notes due June 2013 in June 2006 under our medium-term note program. The net proceeds of approximately $124 million were used for debt repayment.
 
  •  Sold $250 million aggregate principal amount of 3.625% convertible senior unsecured notes due 2011 in October 2006. The net proceeds of approximately $245 million were used for the repayment of indebtedness under our revolving credit facility, the cost of a capped call transaction, and for other general corporate purposes. The capped call instrument effectively increased the conversion premium to 40%.
 
Credit Facilities
 
We have four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million. As of December 31, 2006, $691.8 million was outstanding under the Fannie Mae credit facilities leaving $168.2 million of unused capacity. The Fannie Mae credit facilities are for an initial term of ten years, bear interest at floating and fixed rates, and can be extended for an additional five years at our discretion. We have $399.4 million of the funded balance fixed at a weighted average interest rate of 6.1% and the remaining balance on these facilities is currently at a weighted average variable rate of 5.9%.
 
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


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certain circumstances. Based on our current credit ratings, the credit facility bears interest at a rate equal to LIBOR plus 57.5 basis points. Under a competitive bid feature, and for so long as we maintain an Investment Grade Rating, we have the right to bid out 100% of the commitment amount. As of December 31, 2006, $87.2 million was outstanding under the credit facility leaving $412.8 million of unused capacity.
 
The Fannie Mae credit facility and the bank revolving credit facility are subject to customary financial covenants and limitations.
 
Interest Rate Risk
 
We are exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. We do not hold financial instruments for trading or other speculative purposes, but rather issue these financial instruments to finance our portfolio of real estate assets. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. Our earnings are affected as changes in short-term interest rates impact our cost of variable rate debt and maturing fixed rate debt. A large portion of our market risk is exposure to short-term interest rates from variable rate borrowings outstanding under our Fannie Mae credit facility and our bank revolving credit facility, which totaled $292.5 million and $87.2 million, respectively, at December 31, 2006. The impact on our financial statements of refinancing fixed rate debt that matured during 2006 was immaterial.
 
If market interest rates for variable rate debt average 100 basis points more in 2007 than they did during 2006, our interest expense would increase, and income before taxes would decrease by $4.9 million. Comparatively, if market interest rates for variable rate debt had averaged 100 basis points more in 2006 than in 2005, our interest expense would have increased, and net income would have decreased by $6.0 million. If market rates for fixed rate debt were 100 basis points higher at December 31, 2006, the fair value of fixed rate debt would have decreased from $2.7 billion to $2.6 billion. If market interest rates for fixed rate debt were 100 basis points lower at December 31, 2006, the fair value of fixed rate debt would have increased from $2.7 billion to $2.9 billion.
 
These amounts are determined by considering the impact of hypothetical interest rates on our borrowing cost. These analyses do not consider the effects of the adjusted level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no change in our financial structure.
 
Funds from Operations
 
Funds from operations, 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


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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 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 years ended December 31, 2006 (dollars in thousands):
 
                         
    2006     2005     2004  
 
Net income
  $ 128,605     $ 155,166     $ 97,152  
Adjustments:
                       
Distributions to preferred stockholders
    (15,370 )     (15,370 )     (19,531 )
Real estate depreciation and amortization
    236,523       193,517       147,133  
Minority interests of unitholders in operating partnership
    (2,722 )     (918 )     (1,230 )
Real estate depreciation related to unconsolidated entities
          311       279  
Discontinued Operations:
                       
Real estate depreciation
    7,366       18,907       33,495  
Minority interests of unitholders in operating partnership
    10,082       9,648       6,073  
Net gain on the sale of land and depreciable property
    (148,614 )     (139,724 )     (52,903 )
Net incremental gains on the sale of condominium homes and assets developed for sale
    28,601       16,717       1,202  
                         
Funds from operations — basic
  $ 244,471     $ 238,254     $ 211,670  
                         
Distributions to preferred stockholders — Series D and E (Convertible)
    3,726       3,726       7,887  
                         
Funds from operations — diluted
  $ 248,197     $ 241,980     $ 219,557  
                         
Weighted average number of common shares and OP Units outstanding — basic
    142,426       144,689       136,852  
Weighted average number of common shares, OP Units, and common stock equivalents outstanding — diluted
    147,981       150,141       145,842  
 
In the computation of diluted FFO, OP Units, out-performance partnership shares, and the shares of Series D Cumulative Convertible Redeemable Preferred Stock and Series E Cumulative Convertible Preferred Stock are dilutive; therefore, they are included in the diluted share count. For the year ended December 31, 2004, distributions to preferred stockholders exclude $5.7 million related to premiums on preferred stock conversions.
 
Net incremental gains on the sale of condominium homes and the net incremental gain on the disposition of real estate investments developed for sale are 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 and gains/losses on the disposition of real estate investments developed for sale 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 years ended December 31, 2006 (shares in thousands):
 
                         
    2006     2005     2004  
 
Weighted average number of common shares and OP units outstanding — basic
    142,426       144,689       136,852  
Weighted average number of OP units outstanding
    (8,694 )     (8,546 )     (8,755 )
                         
Weighted average number of common shares outstanding — basic per the Consolidated Statements of Operations
    133,732       136,143       128,097  
                         
Weighted average number of common shares, OP units, and common stock equivalents outstanding — diluted
    147,981       150,141       145,842  
Weighted average number of OP units outstanding
    (8,694 )     (8,546 )     (8,755 )
Weighted average number of incremental shares from assumed conversion of stock options
    (966 )     (870 )     (897 )
Weighted average number of incremental shares from assumed conversion of $250 million convertible debt
    (68 )            
Weighted average number of Series A OPPSs outstanding
    (1,717 )     (1,778 )     (1,791 )
Weighted average number of Series D preferred stock outstanding
                (2,892 )
Weighted average number of Series E preferred stock outstanding
    (2,804 )     (2,804 )     (3,410 )
                         
Weighted average number of common shares outstanding — diluted per the Consolidated Statements of Operations
    133,732       136,143       128,097  
                         
 
FFO also does not represent cash generated from operating activities in accordance with generally accepted accounting principles, and therefore should not be considered an alternative to net cash flows from operating activities, as determined by generally accepted accounting principles, as a measure of liquidity. Additionally, it is not necessarily indicative of cash availability to fund cash needs. A presentation of cash flow metrics based on generally accepted accounting principles is as follows (dollars in thousands):
 
                         
    2006     2005     2004  
 
Net cash provided by operating activities
  $ 229,613     $ 248,186     $ 251,747  
Net cash used in investing activities
    (149,973 )     (219,017 )     (595,966 )
Net cash (used in)/provided by financing activities
    (93,040 )     (21,530 )     347,299  
 
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
 
2006-vs.-2005
 
Net income available to common stockholders was $113.2 million ($0.85 per diluted share) for the year ended December 31, 2006, compared to $139.8 million ($1.03 per diluted share) for the year ended December 31, 2005, representing a decrease of $26.6 million ($0.18 per diluted share). The decrease for the year ended December 31, 2006, when compared to the same period in 2005, resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
 
  •  $31.7 million more in depreciation and amortization expense in 2006,
 
  •  $18.5 million more in interest expense in 2006,


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  •  $17.1 million less in non-property income in 2006, and
 
  •  $6.4 million more in general and administrative expense in 2006.
 
These decreases in net income were partially offset by $5.1 million more in gains recognized from the sale of depreciable property and an unconsolidated joint venture, an $8.5 million decrease in losses on early debt retirement, and a $34.2 million increase in apartment community operating results in 2006 when compared to 2005.
 
2005-vs.-2004
 
Net income available to common stockholders was $139.8 million ($1.03 per diluted share) for the year ended December 31, 2005, compared to $71.9 million ($0.56 per diluted share) for the year ended December 31, 2004, representing an increase of $67.9 million ($0.47 per diluted share). The increase in net income for the year ended December 31, 2005, when compared to the same period in 2004, resulted primarily from the following items, all of which are discussed in further detail elsewhere within this Report:
 
  •  $90.6 million more in gains recognized from the sale of depreciable property and an unconsolidated joint venture in 2005,
 
  •  a $32.6 million increase in apartment community operating results in 2005,
 
  •  an $18.1 million increase in non-property income in 2005,
 
  •  a $5.7 million decrease in premiums paid on preferred stock conversions in 2005,
 
  •  a $5.5 million charge recorded for hurricane related expenses in 2004,
 
  •  $4.2 million less in preferred stock distributions in 2005, and
 
  •  $2.5 million in hurricane related insurance recoveries in 2005.
 
These increases in net income were partially offset by a $38.7 million increase in interest expense, a $31.8 million increase in real estate depreciation and amortization expense, an $8.5 million increase in losses on early debt retirement, and a $5.5 million increase in general and administrative expense in 2005 when compared to 2004.
 
Apartment Community Operations
 
Our net income is primarily generated from the operation of our apartment communities. The following table summarizes the operating performance of our total apartment portfolio for each of the periods presented (dollars in thousands):
 
                                                 
    Year Ended December 31,     Year Ended December 31,  
    2006     2005     % Change     2005     2004     % Change  
 
Property rental income
  $ 736,329     $ 700,344       5.1 %   $ 700,344     $ 649,952       7.8 %
Property operating expense*
    (271,297 )     (269,486 )     0.7 %     (269,486 )     (251,697 )     7.1 %
                                                 
Property operating income
  $ 465,032     $ 430,858       7.9 %   $ 430,858     $ 398,255       8.2 %
                                                 
Weighted average number of homes
    73,731       76,069       (3.1 )%     76,069       76,873       (1.0 )%
Physical occupancy**
    94.3 %     94.1 %     0.2 %     94.1 %     93.6 %     0.5 %
 
 
* Excludes depreciation, amortization, and property management expenses. Also excludes $5.5 million of hurricane related expenses in 2004 and $2.5 million of hurricane related insurance recoveries in 2005.
 
** Based upon weighted average stabilized units.


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The following table is our reconciliation of property operating income to net income as reflected on the Consolidated Statements of Operations for the periods presented (dollars in thousands):
 
                         
    2006     2005     2004  
 
Property operating income
  $ 465,032     $ 430,858     $ 398,255  
Commercial operating (loss)/income
    (350 )     1,997       427  
Non-property income
    3,590       20,672       2,606  
Depreciation and amortization
    (246,934 )     (215,192 )     (184,087 )
Interest
    (181,183 )     (162,723 )     (124,001 )
General and administrative and property management
    (51,463 )     (44,128 )     (37,197 )
Other operating expenses
    (1,238 )     (1,178 )     (1,226 )
Net gain on the sale of land and depreciable property
    148,614       139,724       52,903  
Loss on early debt retirement
          (8,483 )      
Hurricane related expenses
                (5,503 )
Hurricane related insurance recoveries
          2,457        
Minority interests
    (7,463 )     (8,838 )     (5,025 )
                         
Net income per the Consolidated Statements of Operations
  $ 128,605     $ 155,166     $ 97,152  
                         
 
2006-vs.-2005
 
Same Communities
 
Our same communities (those communities acquired, developed, and stabilized prior to December 31, 2005 and held on December 31, 2006, which consisted of 60,062 apartment homes) provided 82% of our property operating income for the year ended December 31, 2006.
 
For the year ended December 31, 2006, same community property operating income increased 8.6% or $30.4 million compared to 2005. The increase in property operating income was primarily attributable to a 6.0% or $34.2 million increase in revenues from rental and other income that was offset by a 1.8% or $3.9 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 4.9% or $28.4 million increase in rental rates, a 17.6% or $2.2 million decrease in concession expense, and a 12.5% or $5.0 million increase in utility reimbursement income and fee income. Physical occupancy increased 0.1% to 94.7%.
 
The increase in property operating expenses was primarily driven by a 15.8% or $1.6 million increase in insurance costs, a 4.4% or $1.5 million increase in utility costs, a 2.8% or $1.5 million increase in personnel costs, a 1.1% or $0.4 million increase in repair and maintenance expenses, and a 0.5% or $0.3 million increase in real estate taxes. These increases in operating expenses were partially offset by a 6.0% or $1.2 million decrease in administrative and marketing expenses.
 
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 1.5% to 63.5%.
 
Non-Mature Communities
 
The remaining 18% of our property operating income during 2006 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed in 2005 and 2006, sold properties, and those properties classified as real estate held for disposition). The 16 communities with 5,324 apartment homes that we acquired in 2005 and 2006 provided $32.8 million of property operating income. The 46 communities with 14,005 homes and the 624 condominiums from five communities that we sold in 2005 and 2006 provided $18.3 million of property operating income. In addition, our development communities, which included 438 apartment homes completed in 2005 and 2006, provided $2.2 million of operating income and the two communities with 475 apartment homes, one community with 320


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condominiums, and the one commercial unit classified as real estate held for disposition provided $5.5 million of property operating income. Other non-mature communities provided $23.1 million of property operating income for the year ended December 31, 2006.
 
2005-vs.-2004
 
Same Communities
 
Our same communities (those communities acquired, developed, and stabilized prior to September 30, 2004 and held on December 31, 2005, which consisted of 58,840 apartment homes) provided 73% of our property operating income for the year ended December 31, 2005.
 
For the year ended December 31, 2005, same community property operating income increased 3.4% or $10.3 million compared to 2004. The increase in property operating income was primarily attributable to a 3.8% or $18.6 million increase in revenues from rental and other income that was partially offset by a 4.4% or $8.3 million increase in operating expenses. The increase in revenues from rental and other income was primarily driven by a 2.0% or $10.3 million increase in rental rates, a 20.2% or $2.9 million decrease in concession expense, a 7.5% or $2.6 million increase in utility reimbursement income and fee income, a 7.8% or $2.5 million decrease in vacancy loss, and a 15.6% or $0.4 million decrease in bad debt expense. Physical occupancy increased 0.6% to 94.5%.
 
The increase in property operating expenses was primarily driven by a 4.3% or $2.0 million increase in real estate taxes, a 3.8% or $1.9 million increase in personnel costs, a 3.8% or $1.1 million increase in utilities expense, a 2.9% or $0.9 million increase in repair and maintenance costs, a 4.7% or $0.8 million increase in administrative and marketing costs, a 46.7% or $0.7 million increase in incentive compensation, and a 5.4% or $0.5 million increase in insurance costs.
 
As a result of the percentage changes in property rental income and property operating expenses, the operating margin decreased 0.3% to 61.5%.
 
Non-Mature Communities
 
The remaining 27% of our property operating income during 2005 was generated from communities that we classify as “non-mature communities” (primarily those communities acquired or developed in 2003, 2004 and 2005, sold properties, and those properties classified as real estate held for disposition). The 41 communities with 12,458 apartment homes that we acquired in the fourth quarter of 2003, and in 2004 and 2005, provided $87.5 million of property operating income. The 22 communities with 6,352 apartment homes and 240 condominiums sold during 2005 provided $10.0 million of property operating income. In addition, our development communities, which included 244 apartment homes constructed since January 1, 2003, provided $0.7 million of property operating income during 2005, the four communities with a total of 384 condominiums classified as real estate held for disposition provided $0.3 million of property operating income, and other non-mature communities which includes homes that are undergoing major rehabilitation, provided $17.5 million of property operating income for the year ended December 31, 2005.
 
Real Estate Depreciation and Amortization
 
For the year ended December 31, 2006, real estate depreciation and amortization on both continuing and discontinued operations increased $31.7 million or 14.8% compared to 2005, primarily due to the significant increase in per home acquisition cost compared to the existing portfolio and other capital expenditures.
 
For the year ended December 31, 2005, real estate depreciation and amortization on both continuing and discontinued operations increased $31.8 million or 17.6% compared to 2004, primarily due to the significant increase in the per home acquisition cost compared to the existing portfolio and other capital expenditures.


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Interest Expense
 
For the year ended December 31, 2006, interest expense on both continuing and discontinued operations increased $18.5 million or 11.3% from 2005 primarily due to the issuance of debt and higher interest rates. For the year ended December 31, 2006, the weighted average amount of debt outstanding increased 11.7% or $350.4 million compared to 2005 and the weighted average interest rate increased from 5.3% 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 year that were partially offset by the retirement of higher coupon debt with lower coupon debt.
 
For the year ended December 31, 2005, interest expense on both continuing and discontinued operations increased $47.2 million or 38.1% from 2004 primarily due to the issuance of debt and $8.5 million in prepayment penalties. For the year ended December 31, 2005, the weighted average amount of debt outstanding increased 30.7% or $697.4 million compared to 2004 and the weighted average interest rate increased from 5.0% to 5.3% during 2005. The weighted average amount of debt outstanding during 2005 is higher than 2004 as acquisition costs in 2005 have been funded, in most part, by the issuance of debt. The increase in the weighted average interest rate during 2005 reflects short-term bank borrowings and variable rate debt that had higher interest rates when compared to the prior year.
 
General and Administrative
 
For the year ended December 31, 2006, general and administrative expenses increased $6.4 million or 25.7% over 2005 due to a number of factors, including increases in incentive compensation, professional fees, relocation costs, and an operating lease on an airplane.
 
For the year ended December 31, 2005, general and administrative expenses increased $5.5 million or 28.5% over 2004 primarily as a result of an increase in personnel and incentive compensation costs, an operating lease on an airplane, compliance costs and an operations improvement initiative.
 
Hurricane Related Expenses and Hurricane Related Insurance Recoveries
 
In 2005, $2.5 million of hurricane related insurance recoveries were recorded. In 2004, we recognized a $5.5 million charge to cover expenses associated with the damage in Florida caused by hurricanes Charley, Frances, and Jeanne. UDR reported that 25 of our 34 Florida communities were affected by the hurricanes.
 
Gains on the Sale of Land, Depreciable Property and an Unconsolidated Joint Venture
 
For the years ended December 31, 2006 and 2005, we recognized after-tax gains for financial reporting purposes of $148.6 million and $143.5 million, respectively. Changes in the level of gains recognized from period to period reflect the changing level of our divestiture activity from period to period as well as the extent of gains related to specific properties sold.
 
Premium on Preferred Stock Conversions
 
In the fourth quarter of 2004, we exercised our right to redeem 2 million shares of our Series D Cumulative Convertible Redeemable Preferred Stock. Upon receipt of our redemption notice, the shares to be redeemed were converted by the holder into 3,076,769 shares of common stock at a price of $16.25 per share. As a result, we recognized a $5.7 million premium on preferred stock conversions.
 
The premium amount recognized to convert these shares represents the cumulative accretion to date between the conversion value of the preferred stock and the value at which it was recorded at the time of issuance.


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eBay Purchase of Rent.com
 
On December 16, 2004, eBay announced that it had agreed to acquire privately held Rent.com, a leading Internet listing web site in the apartment and rental housing industry, for approximately $415 million plus acquisition costs, net of Rent.com’s cash on hand. On February 23, 2005, eBay announced that it had completed the acquisition. We owned shares in Rent.com, and as a result of the transaction, we recorded a one-time pre-tax gain of $12.3 million on the sale. In August 2006, we received an additional $0.8 million representing our portion of the escrow balance.
 
Inflation
 
We believe that the direct effects of inflation on our operations have been immaterial. Substantially all of our leases are for a term of one year or less which generally minimizes our risk from the adverse effects of inflation.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.
 
Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2006 (dollars in thousands):
 
                                         
    Payments Due by Period  
Contractual Obligations
  Total     2007     2008-2009     2010-2011     Thereafter  
 
Long-Term Debt Obligations
  $ 3,338,785     $ 248,985     $ 695,892     $ 946,462     $ 1,447,446  
Capital Lease Obligations
                             
Operating Lease Obligations
    32,882       2,770       5,460       3,681       20,971  
Purchase Obligations
                             
Other Long-Term Liabilities Reflected on the Balance Sheet Under GAAP
                             
 
During 2006, we incurred interest costs of $181.2 million, of which $5.2 million was capitalized.
 
Factors Affecting Our Business and Prospects
 
There are many factors that affect our business and the results of our operations, some of which are beyond our control. These factors include:
 
  •  unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels, rental rates and purchase or sale prices of apartment communities,
 
  •  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,


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  •  potential damage from natural disasters, including hurricanes and other weather-related events, which could result in substantial costs,
 
  •  delays in completing developments and lease-ups on schedule,
 
  •  our failure to succeed in new markets,
 
  •  changing interest rates, which could increase interest costs and affect the market price of our securities,
 
  •  potential liability for environmental contamination, which could result in substantial costs, and
 
  •  the imposition of federal taxes if we fail to qualify as a REIT in any taxable year.
 
Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Information required by this item is included in and incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report.
 
Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The consolidated financial statements and related financial information required to be filed are attached to this Report. Reference is made to page 44 of this Report for the Index to Consolidated Financial Statements and Schedule.
 
Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
Item 9A.   CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
As of December 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.
 
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.
 
Management’s Report on Internal Control over Financial Reporting
 
UDR’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, UDR’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations (COSO).
 
Based on UDR’s evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2006. Management’s assessment of the effectiveness of our internal control over


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financial reporting as of December 31, 2006, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
 
Changes in Internal Control Over Financial Reporting
 
Our Chief Executive Officer and our Chief Financial Officer concluded that during the quarter ended December 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.
 
Item 9B.   OTHER INFORMATION
 
None.
 
PART III
 
Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The information required by this item is incorporated by reference to the information set forth under the headings “Election of Directors,” “Corporate Governance Matters,” “Audit Committee Report,” “Corporate Governance Matters-Audit Committee Financial Expert,” “Corporate Governance Matters-Identification and Selection of Nominees for Directors,” “Corporate Governance Matters-Board of Directors and Committee Meetings” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 8, 2007.
 
Information required by this item regarding our executive officers is included in Part I of this Report in the section entitled “Business-Executive Officers of the Company.”
 
We have a code of ethics for senior financial officers that applies to our principal executive officer, all members of our finance staff, including the principal financial officer, the principal accounting officer, the treasurer and the controller, our director of investor relations, our corporate secretary, and all other company officers. We also have a code of business conduct and ethics that applies to all of our employees. Information regarding our codes is available on our website, www.udrt.com, and is incorporated by reference to the information set forth under the heading “Corporate Governance Matters” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 8, 2007. We intend to satisfy the disclosure requirements under Item 10 of Form 8-K regarding an amendment to, or a waiver from, a provision of our codes by posting such amendment or waiver on our website.
 
Item 11.   EXECUTIVE COMPENSATION
 
The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management,” “Corporate Governance Matters-Compensation Committee Interlocks and Insider Participation,” “Executive Compensation,” “Compensation of Directors” and “Compensation Committee Report” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 8, 2007.
 
Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management,” “Executive Compensation” and “Equity Compensation Plan Information” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 8, 2007.


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Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is incorporated by reference to the information set forth under the heading “Security Ownership of Certain Beneficial Owners and Management,” “Corporate Governance Matters-Corporate Governance Overview,” “Corporate Governance Matters-Director Independence,” “Corporate Governance Matters-Independence of Audit, Compensation and Governance Committees,” and “Executive Compensation” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 8, 2007.
 
Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this item is incorporated by reference to the information set forth under the headings “Audit Fees” and “Pre-Approval Policies and Procedures” in our definitive proxy statement for our Annual Meeting of Stockholders to be held on May 8, 2007.
 
PART IV
 
Item 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES
 
(a) The following documents are filed as part of this Report:
 
1. Financial Statements.  See Index to Consolidated Financial Statements and Schedule on page 44 of this Report.
 
2. Financial Statement Schedule.  See Index to Consolidated Financial Statements and Schedule on page 44 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.
 
3. Exhibits.  The exhibits filed with this Report are set forth in the Exhibit Index.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
         
    UNITED DOMINION REALTY TRUST, INC.
         
Date: March 1, 2007
  By:  
/s/  Thomas W. Toomey

Thomas W. Toomey
Chief Executive Officer and President
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 1, 2007 by the following persons on behalf of the registrant and in the capacities indicated.
 
         
/s/  Thomas W. Toomey

Thomas W. Toomey
Chief Executive Officer, President, and Director
 
/s/  Jon A. Grove

Jon A. Grove
Director
     
/s/  Michael A. Ernst

Michael A. Ernst
Executive Vice President and Chief Financial Officer
 
/s/  Thomas R. Oliver

Thomas R. Oliver
Director
     
/s/  David L. Messenger

David L. Messenger
Senior Vice President and Chief Accounting Officer
 
/s/  Lynne B. Sagalyn

Lynne B. Sagalyn
Director
     
/s/  Robert C. Larson

Robert C. Larson
Chairman of the Board
 
/s/  Mark J. Sandler

Mark J. Sandler
Director
     
/s/  James D. Klingbeil

James D. Klingbeil
Vice Chairman of the Board
 
/s/  Thomas C. Wajnert

Thomas C. Wajnert
Director
     
/s/  Katherine A. Cattanach

Katherine A. Cattanach
Director
   
     
/s/  Eric J. Foss

Eric J. Foss
Director
   
     
/s/  Robert P. Freeman

Robert P. Freeman
Director
   


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
 
UNITED DOMINION REALTY TRUST, INC.
 
         
    Page
 
  45
       
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT
   
  46
  47
  48
  49
  50
  52
       
SCHEDULE FILED AS PART OF THIS REPORT
   
  75
 
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto.


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Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
 
Board of Directors and Stockholders
United Dominion Realty Trust, Inc.
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting included at Item 9A, that United Dominion Realty Trust, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006 of United Dominion Realty Trust, Inc. and our report dated February 23, 2007 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Richmond, Virginia
February 23, 2007


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Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders
United Dominion Realty Trust, Inc.
 
We have audited the accompanying consolidated balance sheets of United Dominion Realty Trust, Inc. (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Dominion Realty Trust, Inc. at December 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2007 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
Richmond, Virginia
February 23, 2007


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UNITED DOMINION REALTY TRUST, INC.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
 
                 
    December 31,  
    2006     2005  
 
ASSETS
Real estate owned:
               
Real estate held for investment
  $ 5,559,156     $ 4,931,085  
Less: accumulated depreciation
    (1,238,392 )     (1,000,109 )
                 
      4,320,764       3,930,976  
Real estate under development (net of accumulated depreciation of $527 and $140)
    203,786       90,769  
Real estate held for disposition (net of accumulated depreciation of $14,808 and $123,580)
    41,845       366,850  
                 
Total real estate owned, net of accumulated depreciation
    4,566,395       4,388,595  
Cash and cash equivalents
    2,143       15,543  
Restricted cash
    5,602       4,583  
Deferred financing costs, net
    35,160       31,036  
Notes receivable
    10,500       64,805  
Other assets
    43,123       33,727  
Other assets — real estate held for disposition
    12,952       3,304  
                 
Total assets
  $ 4,675,875     $ 4,541,593  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Secured debt
  $ 1,182,919     $ 1,062,526  
Secured debt — real estate held for disposition
     —       53,733  
Unsecured debt
    2,155,866       2,043,518  
Real estate taxes payable
    25,557       22,413  
Accrued interest payable
    34,347       26,672  
Security deposits and prepaid rent
    25,249       24,046  
Distributions payable
    46,936       45,313  
Accounts payable, accrued expenses, and other liabilities
    54,878       53,162  
Other liabilities — real estate held for disposition
    6,035       18,667  
                 
Total liabilities
    3,531,787       3,350,050  
Minority interests
    88,833       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,
135,029,126 shares issued and outstanding (134,012,053 in 2005)
    1,350       1,340  
Additional paid-in capital
    1,682,809       1,680,115  
Distributions in excess of net income
    (810,875 )     (755,702 )
                 
Total stockholders’ equity
    1,055,255       1,107,724  
                 
Total liabilities and stockholders’ equity
  $ 4,675,875     $ 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)
 
                         
    Years Ended December 31,  
    2006     2005     2004  
 
REVENUES
                       
Rental income
  $ 694,473     $ 621,904     $ 513,463  
Non-property income:
                       
Sale of technology investment
    796       12,306        
Sale of unconsolidated joint venture
          3,823        
Other income
    2,789       4,535       2,608  
                         
Total non-property income
    3,585       20,664       2,608  
                         
Total revenues
    698,058       642,568       516,071  
                         
EXPENSES
                       
Rental expenses:
                       
Real estate taxes and insurance
    83,527       74,510       59,795  
Personnel
    67,928       62,674       52,937  
Utilities
    39,821       36,494       30,897  
Repair and maintenance
    40,942       36,595       37,829  
Administrative and marketing
    21,348       21,463       17,904  
Property management
    20,265       19,309       17,881  
Other operating expenses
    1,238       1,178       1,226  
Real estate depreciation and amortization
    236,523       193,517       147,133  
Interest
    182,285       162,773       122,024  
General and administrative
    31,198       24,819       19,316  
Other depreciation and amortization
    3,009       2,655       3,201  
Loss on early debt retirement
     —       6,662        
                         
Total expenses
    728,084       642,649       510,143  
                         
(Loss)/income before minority interests and discontinued operations
    (30,026 )     (81 )     5,928  
Minority interests of outside partnerships
    (103 )     (108 )     (182 )
Minority interests of unitholders in operating partnerships
    2,722       918       1,230  
                         
(Loss)/income before discontinued operations, net of minority interests
    (27,407 )     729       6,976  
Income from discontinued operations, net of minority interests
    156,012       154,437       90,176  
                         
Net income
    128,605       155,166       97,152  
Distributions to preferred stockholders — Series B
    (11,644 )     (11,644 )     (11,644 )
Distributions to preferred stockholders — Series D (Convertible)
     —             (3,473 )
Distributions to preferred stockholders — Series E (Convertible)
    (3,726 )     (3,726 )     (4,414 )
Premium on preferred stock conversions
     —             (5,729 )
                         
Net income available to common stockholders
  $ 113,235     $ 139,796     $ 71,892  
                         
Earnings per common share — basic and diluted:
                       
Loss from continuing operations available to common stockholders, net of minority interests
  $ (0.32 )   $ (0.11 )   $ (0.14 )
Income from discontinued operations, net of minority interests
  $ 1.17     $ 1.14     $ 0.70  
Net income available to common stockholders
  $ 0.85     $ 1.03     $ 0.56  
Common distributions declared per share
  $ 1.25     $ 1.20     $ 1.17  
Weighted average number of common shares outstanding — basic
    133,732       136,143       128,097  
Weighted average number of common shares outstanding — diluted
    133,732       136,143       128,097  
 
See accompanying notes to consolidated financial statements.


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UNITED DOMINION REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
                         
    Years Ended December 31,  
    2006     2005     2004  
 
Operating Activities
                       
Net income
  $ 128,605     $ 155,166     $ 97,152  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    246,934       215,192       184,088  
Net gains on the sale of land and depreciable property
    (148,614 )     (139,724 )     (52,903 )
Cancellation of operating partnership units in connection with the sale of equity investment
          (1,000 )      
Gain on the sale of technology investment
    (796 )     (12,306 )      
Gain on the sale of unconsolidated joint venture
          (3,823 )      
Distribution of earnings from unconsolidated joint venture
          124        
Minority interests
    7,463       8,838       5,025  
Amortization of deferred financing costs and other
    6,063       5,287       7,206  
Amortization of deferred compensation
          2,939       2,780  
Prepayments on income taxes
    (6,288 )            
Changes in operating assets and liabilities:
                       
(Increase)/decrease in operating assets
    (2,713 )     8,695       (1,769 )
(Decrease)/increase in operating liabilities
    (1,041 )     8,798       10,168  
                         
Net cash provided by operating activities
    229,613       248,186       251,747  
Investing Activities
                       
Proceeds from the sale of real estate investments, net
    492,744       308,753       190,105  
Repayment of notes receivable
    59,805       64,845       75,586  
Acquisition of real estate assets (net of liabilities assumed) and initial capital expenditures
    (365,606 )     (413,744 )     (755,966 )
Development of real estate assets
    (101,849 )     (49,343 )     (19,131 )
Capital expenditures and other major improvements — real estate assets, net of escrow reimbursement
    (215,721 )     (156,122 )     (82,390 )
Capital expenditures — non-real estate assets
    (3,465 )     (3,209 )     (1,578 )
Distributions to consolidated joint venture partners
    (6,823 )            
Proceeds from the sale of technology investment
    796       12,306        
Purchase deposits on pending real estate acquisitions
    (4,354 )            
Issuance of notes receivable
    (5,500 )            
Distribution of capital from unconsolidated joint venture
     —       458        
Decrease/(increase) in funds held in escrow from tax free exchanges pending the acquisition of real estate
     —       17,039       (2,592 )
                         
Net cash used in investing activities
    (149,973 )     (219,017 )     (595,966 )
Financing Activities
                       
Proceeds from the issuance of secured debt
    78,860       25,342        
Scheduled principal payments on secured debt
    (70,339 )     (8,611 )     (36,814 )
Non-scheduled principal payments on secured debt
     —       (125,221 )     (95,011 )
Proceeds from the issuance of unsecured debt
    375,000       499,983       475,775  
Payments on unsecured debt
    (138,849 )     (70,860 )     (46,585 )
Net (repayment)/proceeds of revolving bank debt
    (123,600 )     (67,300 )     140,200  
Purchase of capped call equity instrument
    (12,588 )            
Payment of financing costs
    (10,284 )     (14,455 )     (8,849 )
Proceeds from the issuance of common stock
    5,303       4,334       99,461  
Proceeds from the repayment of officer loans
     —             459  
Proceeds from the issuance of performance shares
    400       343       (50 )
Purchase of minority interests owned by Series A LLC
    (2,059 )            
Purchase of minority interest from outside partners
     —       (522 )      
Conversion of operating partnership units to cash
     —       (50 )      
Distributions paid to minority interests
    (12,729 )     (12,900 )     (13,553 )
Distributions paid to preferred stockholders
    (15,370 )     (15,370 )     (20,347 )
Distributions paid to common stockholders
    (166,785 )     (163,001 )     (147,387 )
Repurchases of common and preferred stock
          (73,242 )      
                         
Net cash (used in)/provided by financing activities
    (93,040 )     (21,530 )     347,299  
Net (decrease)/increase in cash and cash equivalents
    (13,400 )     7,639       3,080  
Cash and cash equivalents, beginning of year
    15,543       7,904       4,824  
                         
Cash and cash equivalents, end of year
  $ 2,143     $ 15,543     $ 7,904  
                         
Supplemental Information:
                       
Interest paid during the period
  $ 174,871     $ 160,367     $ 115,519  
Non-cash transactions:
                       
Conversion of operating partnership minority interests to common stock
(381,001 shares in 2006, 99,573 shares in 2005, 170,209 shares in 2004)
    7,988       1,444       2,035  
Conversion of minority interests in Series B, LLC
     —       690        
Issuance of restricted stock awards
    2,754       7,709       3,250  
Issuance of operating partnership units in connection with acquisitions
     —       7,653        
Cancellation of a note receivable with the acquisition of a property
     —             8,000  
Secured debt assumed with the acquisition of properties
    24,512       26,825       311,714  
Receipt of a note receivable in connection with sales of real estate investments
     —       124,650       75,586  
Deferred gain in connection with the sale of real estate investments
     —       6,410        
Non-cash transactions associated with consolidated joint venture:
                       
Real estate assets acquired
    62,059              
Secured debt assumed
    33,627              
Operating liabilities assumed
    3,840              
 
See accompanying notes to consolidated financial statements.


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UNITED DOMINION REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
 
                                                                                 
                                        Deferred
    Notes
             
                                  Distributions
    Compensation-
    Receivable
    Accumulated
       
                                  in
    Unearned
    from
    Other
       
    Preferred Stock     Common Stock     Paid-in
    Excess of
    Restricted
    Officer-
    Comprehensive
       
    Shares     Amount     Shares     Amount     Capital     Net Income     Stock Awards     Stockholders     Loss     Total  
 
Balance, December 31, 2003
    10,841,226     $ 236,564       127,295,126     $ 127,295     $ 1,458,983     $ (651,497 )   $ (5,588 )   $ (459 )   $ (1,862 )   $ 1,163,436  
                                                                                 
Comprehensive Income
                                                                               
Net income
                                            97,152                               97,152  
Other comprehensive income:
                                                                               
Unrealized gain on derivative financial instruments
                                                                    1,862       1,862  
                                                                                 
Comprehensive income
                                            97,152                       1,862       99,014  
                                                                                 
Issuance of common and restricted shares
                    769,083       769       10,171                                       10,940  
Issuance of common shares through public offering
                    4,497,000       4,497       86,804                                       91,301  
Adjustment for conversion of minority interests of unitholders in operating partnerships
                    170,209       170       1,865                                       2,035  
Principal repayments on notes receivable from officer-stockholders
                                                            459               459  
Accretion of premium on Series D conversions
            5,729                               (5,729 )                              
Conversion of 7.50%
                                                                               
Series D Cumulative
                                                                               
Convertible Redeemable shares
    (2,000,000 )     (50,000 )     3,076,769       3,077       46,923                                        
Conversion of 8.00% Series E Cumulative
                                                                               
Convertible shares
    (621,405 )     (10,322 )     621,405       622       9,700                                        
Common stock distributions declared ($1.17 per share)
                                            (152,203 )                             (152,203 )
Preferred stock distributions declared-Series B ($2.15 per share)
                                            (11,644 )                             (11,644 )
Preferred stock distributions declared-Series D ($2.09 per share)
                                            (3,473 )                             (3,473 )
Preferred stock distributions declared-Series E ($1.33 per share)
                                            (4,414 )                             (4,414 )
Adjustment for FASB 123 adoption
                                    (5,588 )             5,588                        
                                                                                 
Balance, December 31, 2004
    8,219,821       181,971       136,429,592       136,430       1,608,858       (731,808 )                       1,195,451  
                                                                                 
Comprehensive Income
                                                                               
Net income
                                            155,166                               155,166  
                                                                                 
Comprehensive income
                                            155,166                               155,166  
                                                                                 
Issuance of common and restricted shares
                    663,238       680       6,595                                       7,275  
Common shares repurchased
                    (3,180,350 )     (32 )     (73,210 )                                     (73,242 )
Adjustment for change in par value from $1.00 to $0.01
                            (135,822 )     135,822                                        
Adjustment for conversion of minority interests of unitholders in operating partnerships
                    99,573       84       1,360                                       1,444  
Adjustment for conversion of minority interests in Series B LLC
                                    690                                       690  
Common stock distributions declared ($1.20 per share)
                                            (163,690 )                             (163,690 )
Preferred stock distributions declared-Series B ($2.15 per share)
                                            (11,644 )                             (11,644 )
Preferred stock distributions declared-Series E ($1.33 per share)
                                            (3,726 )                             (3,726 )
                                                                                 


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UNITED DOMINION REALTY TRUST, INC.
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)
(In thousands, except share data)

                                                                                 
                                        Deferred
    Notes
             
                                  Distributions
    Compensation-
    Receivable
    Accumulated
       
                                  in
    Unearned
    from
    Other
       
    Preferred Stock     Common Stock     Paid-in
    Excess of
    Restricted
    Officer-
    Comprehensive
       
    Shares     Amount     Shares     Amount     Capital     Net Income     Stock Awards     Stockholders     Loss     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
                                            128,605                               128,605  
                                                                                 
Comprehensive income
                                            128,605                               128,605  
                                                                                 
Issuance of common and restricted shares and other
                    636,072       6       9,357                                       9,363  
Adjustment for conversion of minority interests of unitholders in operating partnerships
                    381,001       4       7,984                                       7,988  
Adjustment for conversion of minority interests owned by Series A LLC
                                    (2,059 )                                     (2,059 )
Purchase of capped call equity instrument
                                    (12,588 )                                     (12,588 )
Common stock distributions declared ($1.25 per share)
                                            (168,408 )                             (168,408 )
Preferred stock distributions declared-Series B ($2.15 per share)
                                            (11,644 )                             (11,644 )
Preferred stock distributions declared-Series E ($1.33 per share)
                                            (3,726 )                             (3,726 )
                                                                                 
Balance, December 31, 2006
    8,219,821     $ 181,971       135,029,126     $ 1,350     $ 1,682,809     $ (810,875 )   $     $     $     $ 1,055,255  
                                                                                 
 
See accompanying notes to consolidated financial statements.


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UNITED DOMINION REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
 
1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization and formation
 
United Dominion Realty Trust, Inc., a Maryland corporation, was formed in 1972. We operate within one defined business segment with activities related to the ownership, management, development, acquisition, renovation, and disposition of multifamily apartment communities nationwide. At December 31, 2006, we owned 242 communities and had five communities under development.
 
Basis of presentation
 
The accompanying consolidated financial statements include the accounts of UDR and its subsidiaries, including United Dominion Realty, L.P., (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”), (collectively, “UDR”). As of December 31, 2006, there were 166,185,740 units in the Operating Partnership outstanding, of which 156,493,682 units or 94% were owned by UDR and 9,692,058 units or 6% were owned by limited partners (of which 1,650,322 are owned by the holders of the Series A OPPS). As of December 31, 2006, there were 5,542,200 units in the Heritage OP outstanding, of which 5,212,993 units or 94% were owned by UDR and 329,207 units or 6% were owned by limited partners. The consolidated financial statements of UDR 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.
 
Use of estimates
 
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.
 
Real estate
 
Real estate assets held for investment are carried at historical cost less accumulated depreciation and any recorded impairment losses.
 
Expenditures for ordinary repair and maintenance costs are charged to expense as incurred. Expenditures for improvements, renovations, and replacements related to the acquisition and/or improvement of real estate assets are capitalized at cost and depreciated over their estimated useful lives if the value of the existing asset will be materially enhanced or the life of the related asset will be substantially extended beyond the original life expectancy.
 
UDR recognizes impairment losses on long-lived assets used in operations when there is an event or change in circumstance that indicates an impairment in the value of an asset and the undiscounted future cash flows are not sufficient to recover the asset’s carrying value. Our cash flow estimates are based upon historical results adjusted to reflect our best estimate of future market and operating conditions and our estimated holding periods. If such indicators of impairment are present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. Our estimates of fair market value represent our best estimate based upon industry trends and reference to market rates and transactions.
 
UDR purchases real estate investment properties from time to time and allocates the purchase price to various components, such as land, buildings, and intangibles related to in-place leases in accordance with FASB Statement No. 141, “Business Combinations.” The purchase price is allocated based on the relative fair


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UNITED DOMINION REALTY TRUST, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

value of each component. The fair value of buildings is determined as if the buildings were vacant upon acquisition and subsequently leased at market rental rates. As such, the determination of fair value considers the present value of all cash flows expected to be generated from the property including an initial lease up period. UDR determines the fair value of in-place leases by assessing the net effective rent and remaining term of the lease relative to market terms for similar leases at acquisition. The fair value of in-place leases is recorded and amortized as amortization expense over the remaining contractual lease period. UDR determines the fair value of in-place leases by considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period, and the carrying costs associated with the lease-up period.
 
For long-lived assets to be disposed of, impairment losses are recognized when the fair value of the asset less estimated cost to sell is less than the carrying value of the asset. Properties classified as real estate held for disposition generally represent properties that are actively marketed or contracted for sale which are expected to close within the next twelve months. Real estate held for disposition is carried at the lower of cost, net of accumulated depreciation, or fair value, less the cost to dispose, determined on an asset-by-asset basis. Expenditures for ordinary repair and maintenance costs on held for disposition properties are charged to expense as incurred. Expenditures for improvements, renovations, and