Edgar Filing: UNITED DOMINION REALTY TRUST INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

¨ 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)

Virginia		54-0857512
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(Address of principal executive offices, including zip code)

(720) 283-6120

(Registrant’s telephone number, including area code)

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

Title of each class		Name of exchange on which registered
Common Stock, $1 par value		New York Stock Exchange
Preferred Stock Purchase Rights		New York Stock Exchange
8.60% Series B Cumulative Redeemable Preferred Stock		New York Stock Exchange
8.50% Monthly Income Notes Due 2008		New York Stock Exchange

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

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

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. ¨

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

The aggregate market value of the shares of common stock held by non-affiliates on June 28, 2002 was approximately $1.7 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 March 18, 2003 there were 108,792,959 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 Shareholders to be held on May 6, 2003.

TABLE OF CONTENTS

		Page
PART I.
Item 1.	Business	2
Item 2.	Properties	16
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18

PART II.
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	18
Item 6.	Selected Financial Data	19
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 8.	Financial Statements and Supplementary Data	35
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	35

PART III.
Item 10.	Directors and Executive Officers of the Registrant	35
Item 11.	Executive Compensation	35
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	35
Item 13.	Certain Relationships and Related Transactions	35
Item 14.	Controls and Procedures	35

PART IV.
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	36

PART I

Item 1. BUSINESS

General

United Dominion Realty Trust, Inc. is a self-administered equity real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. At December 31, 2002, our apartment portfolio included 260 communities located in 57 markets, with a total of 74,480 completed apartment homes. In addition, we had 616 apartment homes under development.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To continue to qualify as a REIT, we must continue to meet certain tests which, among other things, generally require that our assets consist primarily of real estate, our income be derived primarily from real estate, and that we distribute at least 90% of our REIT taxable income (other than our net capital gain) to our shareholders. As a qualified REIT, we generally will not be subject to federal income taxes on our REIT taxable income to the extent we distribute such income to our shareholders. In 2002, we declared total distributions of $1.11 per share to our shareholders, which represents our 26th year of consecutive dividend increases to our shareholders.

We were formed in 1972 as a Virginia corporation. 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 March 1, 2003, we had 1,734 full-time employees and 175 part-time employees.

Our subsidiaries include two operating partnerships, United Dominion Realty, L.P. and Heritage Communities, L.P. Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “the company,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.

2002 Accomplishments

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We provided a total shareholder return of 22%, which is above the total shareholder return attained by the Morgan Stanley REIT Index, the NAREIT Equity Index, and the NAREIT Equity Apartment Index.

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We increased our dividend for the 26th consecutive year.

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We generated growth of funds from operations, or FFO, of 10.1% per diluted share and growth of adjusted funds from operations, or AFFO, of 12.3% per diluted share over 2001.

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We lowered the weighted average rate on our debt from 6.6% at January 1, 2002 to 5.9% at December 31, 2002.

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We increased the size of our unencumbered pool of assets to $2.4 billion.

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We issued $200 million of seven-year 6.50% senior unsecured notes and used the net proceeds of $198.5 million to reduce outstanding debt on our revolving credit facility.

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We refinanced $294 million of mortgage debt that had a weighted average interest rate of 8.0%.

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We repurchased $138 million of outstanding debt securities with a weighted average interest rate of 8.3%.

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We completed the sale of 3.0 million shares of our common stock at a price of $14.91 per share and used the net proceeds of $42.3 million to acquire apartment communities.

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We acquired 3,041 apartment homes in nine communities and one parcel of land for approximately $267 million and invested an additional $69 million to acquire the interests held by development and investment partners in four existing communities with a total of 1,570 apartment homes.

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We completed the disposition of 25 apartment communities with 6,990 apartment homes, one commercial property, and one parcel of land for an aggregate sales price of approximately $319 million, exiting markets that no longer met our investment criteria.

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We formed a new development joint venture which is expected to develop $210 million of new apartment homes over the next three to five years.

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We launched process improvement programs in purchasing, pricing, lease standardization, revenue assurance, and payables processing to reduce costs and improve resident services.

Business Objectives and Operating Strategies

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

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own and operate middle-market apartments across a national platform, thus enhancing stability and predictability of returns to our shareholders,

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manage real estate cycles by taking an opportunistic approach to buying, selling, and building apartment communities,

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empower site associates to manage our communities efficiently and effectively,

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measure and reward associates based on specific performance targets, and

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manage the capital structure to ensure predictability of earnings and dividends.

In 2001, management established a long-term strategy that resulted in certain fundamental conclusions and initial steps towards achieving our goals. We believe that we must distinguish ourselves within the industry to maintain a leadership position over the long-term. We believe an increased focus on being an excellent operator of apartment homes will be a compelling and successful business model to differentiate United Dominion in the eyes of residents, associates, and investors. With this strategy, we believe that we can become the best in the multifamily industry based upon the following key principles:

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Operational Excellence. Operational excellence is a way of doing business with consistent, standard systems and business processes throughout our organization, to provide customers, residents, and associates similar experiences regardless of location. Through operational excellence, we believe that we can enhance our existing portfolio and new properties we seek to acquire, deliver superior service to our residents, and provide greater returns to our investors.

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Middle-Market. We will focus our efforts on owning and managing apartments that provide housing for customers who cannot typically afford an entry-level home, or customers who choose apartment living over other alternatives. We will primarily serve the price-sensitive, value-for-money customers, in the broad middle-market segments of the population.

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Portfolio Management. We intend to continue to own and operate middle-market apartment homes across a geographically diverse platform. We believe that enhancing our presence in 25 to 30 core markets will enable us to capitalize on operating efficiencies. As local market cycles create opportunities, we intend to exit current markets where long-term growth is below the national average (the “non-core markets”), and redeploy capital within our core markets.

We believe that over the long-term, the fundamental principles of operational excellence, middle-market focus, and proactive portfolio management will better position us to serve our residents, increase profitability, provide rewarding careers to our associates, and capitalize on changes in the marketplace.

Acquisitions and Mergers

Acquisitions. During the past five years, we have increased our property portfolio by nearly 36,000 apartment homes by acquiring other REITs, private portfolios, and individual communities as part of our strategy

to enhance our geographic diversification. During the past four years, our dispositions have exceeded acquisitions, with acquisitions mostly utilizing disposition proceeds to complete Section 1031 tax-deferred exchanges. During 2002, using the proceeds from our disposition program and our equity offering, we acquired nine communities with 3,041 apartment homes and one parcel of land at a total cost of approximately $267 million, including the assumption of debt and the use of tax-free exchange funds. In addition, we invested an additional $69 million to acquire the interests held by development and investment partners in four existing communities with a total of 1,570 apartment homes.

When evaluating potential acquisitions, we consider:

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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,

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geographic location and type of community, including proximity to our existing communities which can deliver significant economies of scale,

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construction quality, condition, and design of the community,

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current and projected cash flow of the property and the ability to increase cash flow,

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potential for capital appreciation of the property,

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ability to increase the value and profitability of the property through upgrades and repositioning,

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terms of resident leases, including the potential for rent increases,

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occupancy and demand by residents for properties of a similar type in the vicinity,

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prospects for liquidity through sale, financing, or refinancing of the property, and

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competition from existing multifamily communities and the potential for the construction of new multifamily properties in the area.

Mergers. The apartment sector of the real estate industry has undergone modest but steady consolidation over the past decade. Some apartment REITs and privately owned portfolios may seek to be acquired by large, well capitalized REITs that have superior access to the capital markets. In 1998, we participated in this consolidation process by completing the following mergers:

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On March 27, 1998, we acquired ASR Investments Corporation in a statutory merger. ASR was a publicly traded multifamily REIT that owned 39 communities with 7,550 apartment homes located in Arizona, Texas, New Mexico and the state of Washington. The merger furthered our investment in Southwestern markets, provided an initial presence in the Pacific Northwest and added communities in Houston and Phoenix.

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On December 7, 1998, we acquired American Apartment Communities II, Inc., or AAC, in a statutory merger. In connection with this acquisition, we acquired 53 communities with 14,001 apartment homes located primarily in California, the Pacific Northwest, the Midwest, and Florida. The merger enabled us to enter new major markets, many of which are strong growth markets. Through the merger, we entered Portland, San Francisco, Sacramento, San Jose, Monterey, Los Angeles, Denver, Indianapolis, and Detroit. In addition, AAC added communities to our portfolios in Columbus, Tampa, South Florida and Seattle.

The following table summarizes our apartment acquisitions, including acquisitions through mergers, during the past five years (dollars in thousands):

	2002		2001		2000		1999		1998
Homes acquired		4,611		1,304		267		1,230		28,510
Homes owned at December 31		74,480		77,567		77,219		82,154		86,893
Total real estate owned, at carrying value	$	3,967,483	$	3,907,667	$	3,836,320	$	3,953,045	$	3,952,752
Total rental income	$	628,873	$	619,539	$	627,269	$	625,103	$	482,017

Dispositions

We regularly monitor and adjust our assets to increase portfolio profitability. During 2002, we sold nearly 7,000 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 to acquire replacement communities, fund development projects, and to a lesser extent, to reduce outstanding debt balances.

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

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current market price for an asset compared to projected economics for that asset,

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potential increases in new construction in the market area,

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areas where the economy is not expected to grow substantially, and

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markets where we do not intend to establish long-term concentration.

At December 31, 2002, there were two apartment communities, two parcels of land, and one commercial property classified as real estate held for disposition. In addition, we were actively marketing 17 apartment communities for sale in non-core markets. We are in the market for replacement properties that will correspond with our expected sales activity to prevent dilution to earnings.

Development and Upgrading Activities

During 2002, we continued to reposition properties in targeted markets where there was an opportunity to add value and achieve greater than inflationary increases in rents over the long term. In 2002, we spent $31.7 million to finish 462 apartment homes in two additional phases to two existing communities. In addition, revenue enhancing capital expenditures, including water sub-metering, the initial installation of microwaves or washer-dryers, and extensive interior upgrades totaled $9.4 million or $124 per home for the year ended December 31, 2002.

In September 2002, we signed a development joint venture agreement with AEGON USA Realty Advisors, Inc. in which we serve as the managing member. The joint venture is expected to develop approximately eight to ten garden style apartment communities over the next three to five years, with a total development cost of up to $210 million. The joint venture will obtain bank construction financing for 65% to 80% of total costs. The joint venture will provide equity contributions for the balance of the costs with AEGON providing 80% and United Dominion providing 20%. We will serve as the developer, general contractor, and property manager for the joint venture, and will guarantee those project development costs, excluding financing costs (including fees and interest), which exceed the defined project cost budgeted amounts for each respective project, as they come to fruition. As of December 31, 2002, the joint venture had not commenced operations.

We will continue to seek out development opportunities in our core markets and seek to raise equity with potential joint venture partners to start new development programs in 2003. We anticipate that any potential starts will occur in mid-2003. Until then, we will strive to create value for the portfolio through rehabilitation of existing properties and phase II opportunities within the existing portfolio.

Financing Activities

As part of our plan to strengthen our capital structure, we utilized proceeds from dispositions, equity offerings, and refinancings to extend maturities, pay down existing debt, and acquire apartment communities. The following is a list of our major financing activities in 2002:

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We borrowed an additional $253.6 million under our existing Fannie Mae credit facilities and $70.7 million under a new $72 million Freddie Mac revolving credit facility.

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We repaid $305.8 million of secured debt and $210.4 million of unsecured debt (includes tender offer and prepayment penalties referred to below), assumed $41.6 million of secured debt in connection with the acquisition of properties, and repaid $35.9 million of secured debt in connection with the disposition of properties.

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We sold 3.0 million shares of common stock at a price of $14.91 per share in March 2002. The net proceeds of $42.3 million were used to acquire apartment communities.

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We refinanced secured debt during the first quarter of 2002 using proceeds from the new Fannie Mae and Freddie Mac credit facilities and incurred prepayment penalties of $15.8 million on the refinancing of these mortgages, while freeing $8.2 million of cash previously escrowed with former lenders. Management believes that the net present value of these refinancing transactions ranges from approximately $17 million to $20 million.

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We issued $200 million of 6.50% senior unsecured notes due in June 2009 in June 2002. The net proceeds from the issuance of $198.5 million were used to reduce outstanding debt under our $375 million unsecured revolving credit facility.

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We repurchased a total of $137.8 million of unsecured debt during the third and fourth quarters of 2002 and paid premiums of $17.9 million. Management believes that these redemptions will generate a net present value savings of approximately $1 million to $3 million.

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We repurchased 914,000 shares of common stock at an average price of $14.16. As of December 31, 2002, approximately 2.3 million common shares remained available for repurchase under our common stock repurchase program.

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We filed with the Securities and Exchange Commission in December 2002 a new shelf registration statement that provides for the issuance of up to $1 billion aggregate amount of debt securities, preferred stock, and common stock from time to time in one or more offerings to facilitate future financing activities in the public capital markets. The new $1 billion shelf registration statement replaces the $294 million remaining on our previous $700 million shelf registration statement filed in December 1999.

Markets

At December 31, 2002, we owned apartment communities in 57 markets in 20 states. Of those markets, 28 markets, or 49%, generated positive same community net operating income growth. We have a geographically diverse portfolio and we believe that this diversification increases investment opportunity and decreases the risk associated with cyclical local real estate markets and economies, thereby increasing the stability and predictability of our earnings.

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

The weakness in the overall United States economy has adversely affected employment and other significant elements of the economy that drive productivity and the financial strength of business. To maintain our occupancy levels during these economic conditions, we have provided certain concessions to our residents.

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

Communities

At December 31, 2002, our apartment portfolio included 260 communities having a total of 74,480 completed apartment homes. In addition, we had 616 apartment homes under development. The overall quality of our portfolio has significantly improved since 1998 with the disposition of non-core apartment homes

and the upgrading of most of our communities. The upgrading of the portfolio provides several key benefits related to portfolio profitability. It enables us to raise rents more significantly and to attract residents with higher levels of disposable income who are more likely to accept the transfer of expenses, such as water and sewer costs, from the landlord to the resident. In addition, it potentially reduces recurring capital expenditures per apartment home, and therefore increases cash flow.

Same Communities

Our primary earnings driver is same apartment community operations. During 2002, our same communities provided 87% of our property operating income. In 2002, same community property operating income decreased 0.8% or $2.8 million compared to the prior year. The overall decrease in property operating income was primarily driven by a 17.1% increase in vacancy loss and a 37.1% increase in concessions. These decreases in income were partially offset by a 32.8% increase in sub-meter, trash, and vacant utility reimbursements, a 0.3% increase in rental rates, and a 13.0% increase in other income. Operating expenses increased by 0.9%, much of which resulted from a 10.6% increase in repairs and maintenance costs and a 3.4% increase in real estate taxes, both of which were partially offset by a 5.1% decrease in utilities expense, a 40.2% decrease in incentive compensation expense, and a 9.5% decrease in insurance costs.

Average physical occupancy, rental rates, and operating margins at our same communities for the years ended December 31, 2002, 2001, and 2000 are set forth below:

	2002			2001			2000
Physical occupancy		93.3	%		94.0	%		94.2	%
Average monthly rental rates	$	709		$	698		$	667
Operating margin		63.3	%		63.2	%		63.1	%

Customers

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

We believe there will be a significant increase in the number of younger renters over the next 10 to 15 years. Accordingly, we plan to target some of our incremental investments to communities that will be attractive to younger households. These communities will often be located close to where young people work, shop, and play.

Tax Matters

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

Competitive Conditions

In most of our markets, competition for new residents is intense. Some competing communities offer features that our communities do not have. Some competing communities may use concessions or lower rents to obtain 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 than we do.

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

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a fully integrated organization with property management, development, acquisition, marketing, and financing expertise,

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scalable operating and support systems,

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purchasing power,

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geographic diversification with a presence in more than 57 markets across the country, and

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local presence in many of our major markets which allows us to be a local operating expert.

Inflation

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

Environmental Matters

To date, compliance with federal, state, and local environmental protection regulations has not had a material effect on our capital expenditures, earnings, or competitive position. However, over the past 15 years, the issue has been raised regarding the presence of asbestos and other hazardous materials in existing real estate properties, and within the past year there has been an increase in the number of claims of potential health-related issues allegedly caused by the presence of mold in confined spaces. We have a property management plan for hazardous materials. As part of the plan, Phase I environmental site investigations and reports have been completed for each property we own. In addition, all proposed acquisitions are inspected prior to acquisition. The inspections are conducted by qualified environmental consultants, and we review the issued report prior to the purchase or development of any property. Nevertheless, it is possible that our environmental assessments will not reveal all environmental liabilities, or that some material environmental liabilities exist of which we are unaware. In some cases, we have abandoned otherwise economically attractive acquisitions because the costs of removal or control of hazardous materials have been prohibitive or we have been unwilling to accept the potential risks involved. We do not believe we will be required to engage in any large-scale abatement at any of our properties. Management believes that through professional environmental inspections and testing for asbestos, lead paint and other hazardous materials, coupled with a conservative posture toward accepting known risk, we can minimize our exposure to potential liability associated with environmental hazards.

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

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

Insurance

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

Factors Affecting Our Business and Prospects

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

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

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a reduction in jobs and other local economic downturns,

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declines in mortgage interest rates, making alternative housing more affordable,

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oversupply of, or reduced demand for, apartment homes,

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declines in household formation, and

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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 weakness in the United States economy has been exacerbated by the events of September 11, 2001, as well as by the United States’ war on terrorism. The weak economy has adversely affected employment and other significant elements of the economy that drive productivity and the financial strength of businesses. Any continuation or 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 shareholders.

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

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An acquired community may fail to perform as we expected in analyzing our investment, or a significant exposure related to the acquired property may go undetected during our due diligence procedures.

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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.

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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.

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

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

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

Failure to Generate Sufficient Revenue Could Impair Debt Service Payments and Distributions to Shareholders. 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 shareholders will be adversely affected. The following factors, among others, may affect the net rental income generated by our apartment communities:

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the national and local economies,

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local real estate market conditions, such as an oversupply of apartment homes,

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tenants’ perceptions of the safety, convenience, and attractiveness of our communities and the neighborhoods where they are located,

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our ability to provide adequate management, maintenance, and insurance, and

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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, or on favorable terms or at all. If we issue additional equity securities to finance developments and acquisitions instead of incurring debt, the interests of our existing shareholders could be diluted.

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

•

We may be unable to obtain, or face delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could result in increased development costs and could require us to abandon our activities entirely with respect to a project for which we are unable to obtain permits or authorizations.

•

If we are unable to find joint venture partners to help fund the development of a community or otherwise obtain acceptable financing for the developments, our development potential 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 them.

•

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.

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

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

•

inability to accurately evaluate local apartment market conditions and local economies,

•

inability to obtain land for development or to identify appropriate acquisition opportunities,

•

inability to hire and retain key personnel, and

•

lack of familiarity with local governmental and permitting procedures.

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

Limited Investment Opportunities Could Adversely Affect Our Growth. We expect that other real estate investors will compete with us to acquire existing properties and to develop new properties. These competitors include insurance companies, pension and investment funds, developer partnerships, investment companies and other apartment REITs. This competition could increase prices for properties of the type that we would likely pursue, and our competitors may have greater resources than we do. As a result, we may not be able to make attractive investments on favorable terms, which could adversely affect our growth.

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

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

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

Compliance With REIT Share Ownership Limit May Prevent Takeovers Beneficial to Shareholders. One of the requirements for maintenance of our qualification as a REIT for federal income tax purposes is that no more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals, including entities specified in the Internal Revenue Code, during the last half of any taxable year. Our charter includes provisions allowing us to stop transfers of and redeem our shares that are intended to assist us in complying with this requirement. 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 shareholders or might otherwise be in our shareholders’ best interests.

We are Subject to Certain Tax Risks. We have elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, we must satisfy numerous requirements (some on an annual and quarterly basis)

established under highly technical and complex Internal Revenue Code provisions. Only limited judicial or administrative interpretation exists for these provisions and involves the determination of various factual matters and circumstances not entirely within our control. In addition, future legislation, new regulations, administrative interpretations, or court decisions may apply to us, potentially with retroactive effect, and adversely affect our ability to qualify as a REIT. We may receive significant non-qualifying income or acquire non-qualifying assets, which as a result, may cause us to approach the income and assets test limits imposed by the Internal Revenue Code. There is a risk that we may not satisfy these tests. If we fail to qualify as a REIT in any taxable year, we would be subject to federal income tax on our taxable income at corporate rates. We may also be disqualified from treatment as a REIT for the four taxable years following the year in which we failed to qualify. This would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. Even if we continue to qualify as a REIT, we will continue to be subject to certain federal, state, and local taxes on our income and property.

Adverse Legislative or Regulatory Tax Changes May Affect the Tax Treatment of Our Company or Our Shareholders or the Value of Our Stock. The U.S. federal income tax governing REITs and other corporations or the administrative interpretations of those laws may be amended at any time. Any of those new laws or interpretations thereof may take effect retroactively and could adversely affect our company or our shareholders. On January 7, 2003, the Bush Administration released a proposal that would exclude corporate dividends from a stockholder’s taxable income, to the extent that the earnings from which the dividends are paid have been subject to corporate income tax. REIT dividends generally would not be exempt from income tax in the hands of a stockholder under the Bush Administration’s proposal in its current form, because a REIT’s income generally is not subject to corporate-level tax. However, under the current proposal, if a REIT receives excludable dividend income from an investment in another corporation (such as a taxable REIT subsidiary), the REIT can pass that dividend income through to the REIT’s stockholders without subjecting the stockholders to tax on that income. If enacted, the Bush Administration’s proposal could cause investors to view the stock of non-REIT corporations as more attractive relative to the stock of REITs than is the case currently. There can be no assurance regarding the form in which this proposal ultimately will be enacted, whether it will in fact be enacted, or what effect, if any, its enactment may have on the value of our stock.

The Ability of Our Shareholders to Control Our Policies and Effect a Change of Control of Our Company is Limited, Which May Not Be in Our Shareholders’ 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 shareholders will have the right to purchase securities from us at a price that is less than their then fair market value. Purchases by other shareholders would substantially reduce the value and influence of the shares of our common stock owned by the acquiring person. Our Board of Directors, however, can prevent the shareholder rights plan from operating in this manner. This gives our Board of Directors significant discretion to approve or disapprove a person’s efforts to acquire a large interest in us.

Executive Officers of the Company

The following table sets forth information about our executive officers as of March 18, 2003. The executive officers listed below serve in their respective capacities for approximate one-year terms.

Name	Age	Office	Since
Thomas W. Toomey	42	Chief Executive Officer, President and Director	2001

W. Mark Wallis	52	Senior Executive Vice President Legal, Acquisitions, Dispositions, & Development	2001

Christopher D. Genry	42	Executive Vice President Chief Financial Officer	2001

Ella S. Neyland	48	Executive Vice President Treasurer & Investor Relations	2001

G. Daniel Adams	44	Executive Vice President Operational Strategy	2002

Lester C. Boeckel	54	Senior Vice President Acquisitions & Dispositions	2001

Martha R. Carlin	41	Senior Vice President Operations	2001

Thomas J. Corcoran	56	Senior Vice President Human Resources	1997

Richard A. Giannotti	47	Senior Vice President Development and Acquisitions, Eastern Region	1985

Patrick S. Gregory	53	Senior Vice President Chief Information Officer	1997

Kevin M. McCabe	38	Senior Vice President Real Estate Operations	2001

Rodney A. Neuheardt	41	Senior Vice President Finance	2001

Scott A. Shanaberger	34	Senior Vice President Chief Accounting Officer	1994

Mark E. Wood	50	Senior Vice President Development and Acquisitions, Western Region	1996

Mary Ellen Norwood	48	Vice President Legal Administration, and Secretary	2001

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

Mr. Toomey joined us as Chief Executive Officer, President and a Director in February 2001. Prior to joining us, Mr. Toomey was with Apartment Investment and Management Company, or AIMCO, a publicly

traded real estate investment trust, where he served as Chief Operating Officer for two years and Chief Financial Officer for four years. During his tenure at AIMCO, Mr. Toomey was instrumental in the growth of AIMCO from 34,000 apartment units to 360,000 units. He has also served as a Senior Vice President at Lincoln Property Company, a national real estate development, property management, and real estate consulting company, from 1990 to 1995 and as an Audit Manager serving real estate clients at Arthur Andersen & Co.

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

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

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

Mr. Adams joined us in December 2002 as Executive Vice President of Operational Strategy. Prior to joining us, Mr. Adams was the Chief Operating Officer at Digital Lighthouse Corporation, a NASDAQ-listed technology-based service company. Digital Lighthouse filed a voluntary petition under Chapter 11 of the federal bankruptcy laws on July 16, 2001. Prior to Digital Lighthouse, Mr. Adams served as Chief Operating Officer and Chief Financial Officer at Switch Manufacturing, a sporting good company. Mr. Adam’s career also includes experience with KENETECH Windpower as Senior Director—Operations, senior operating roles with Black & Decker, and a Management Consultant at McKinsey & Company.

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

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

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

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

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

Mr. McCabe joined us in June 2001 as Senior Vice President responsible for property operations. Prior to joining us, Mr. McCabe was President of AutoTrac Information Solutions, a customer relationship management and database marketing company based in Wheat Ridge, Colorado. Mr. McCabe also worked as a senior manager in the strategy and business transformation consulting group for E&Y Kenneth Leventhal and as a manager with Pritchett and Associates, a consulting firm specializing in M&A integration.

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

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

Mr. Wood joined us as Vice President of Construction in connection with the merger of SouthWest in 1996. He was promoted to Senior Vice President and Director of Development-West in 2000.

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

Available Information

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

Item 2. PROPERTIES

At December 31, 2002, our apartment portfolio included 260 communities located in 57 markets, with a total of 74,480 completed apartment homes. In addition, we had 616 apartment homes under development. We own approximately 53,000 square feet of office space in Richmond, Virginia, for our corporate offices and we lease approximately 9,700 square feet of office space in Highlands Ranch, Colorado, for our principal executive offices. The table below sets forth a summary of our real estate portfolio by geographic market at December 31, 2002.

Summary of Real Estate Portfolio By Geographic Market At December 31, 2002

	Number of Apartment Communities	Number of Apartment Homes	Percentage of Carrying Value		Carrying Value (in thousands)		Encumbrances (in thousands)		Cost Per Home		Physical Occupancy		Average Monthly Rental Rates (a)		Concessions (b)		Annualized Resident Turnover (c)		Average Unit Size (Square Feet)
Dallas, TX	15	5,133	6.6	%	$	262,197	$	50,188	$	51,081	93.6	%	$	703	3.7	%	67.1	%	818
Houston, TX	22	5,726	5.8	%		231,886		57,954		40,497	93.8	%		644	2.3	%	80.6	%	820
Phoenix, AZ	12	3,855	5.7	%		227,703		61,371		59,067	93.1	%		717	9.8	%	73.8	%	918
Orlando, FL	14	4,140	5.2	%		205,970		92,000		49,751	91.8	%		739	4.3	%	68.9	%	937
Raleigh, NC	11	3,663	5.1	%		203,887		58,593		55,661	89.5	%		738	4.5	%	66.5	%	957
Metropolitan DC	8	2,330	4.3	%		172,734		70,676		74,135	95.8	%		937	0.9	%	49.4	%	890
Arlington, TX	10	3,465	4.0	%		158,031		39,056		45,608	94.5	%		677	3.2	%	63.0	%	809
Tampa, FL	10	3,372	3.9	%		153,925		57,405		45,648	91.6	%		706	3.6	%	65.9	%	950
Columbus, OH	6	2,530	3.8	%		149,247		56,576		58,991	94.0	%		689	2.7	%	66.6	%	904
San Francisco, CA	4	980	3.6	%		141,245		21,112		144,128	97.2	%		1,590	2.1	%	58.2	%	776
Charlotte, NC	10	2,711	3.5	%		139,050		12,043		51,291	90.8	%		643	3.3	%	73.8	%	982
Southern California	5	1,558	3.3	%		130,459		11,484		83,735	95.1	%		928	1.4	%	51.2	%	742
Nashville, TN	8	2,220	3.0	%		120,572		—		54,312	92.4	%		669	1.5	%	72.0	%	943
Greensboro, NC	8	2,122	2.6	%		104,653		—		49,318	90.4	%		613	2.1	%	68.5	%	981
Monterey Peninsula, CA	9	1,706	2.5	%		98,264		2,581		57,599	92.1	%		914	0.2	%	58.1	%	727
Richmond, VA	8	2,372	2.5	%		97,759		66,657		41,214	94.5	%		723	2.2	%	65.9	%	945
Wilmington, NC	6	1,868	2.3	%		91,247		—		48,847	91.4	%		655	2.8	%	85.5	%	952
Baltimore, MD	7	1,470	2.2	%		89,345		28,410		60,779	96.0	%		861	0.9	%	47.8	%	905
Atlanta, GA	6	1,426	1.8	%		72,547		30,446		50,874	89.3	%		728	4.9	%	69.0	%	908
Columbia, SC	6	1,584	1.6	%		62,716		5,000		39,593	95.0	%		592	1.7	%	70.7	%	838
Jacksonville, FL	3	1,157	1.5	%		58,974		23,202		50,971	95.0	%		675	3.8	%	63.2	%	896
Norfolk, VA	6	1,438	1.4	%		54,727		7,359		38,058	97.3	%		698	0.5	%	64.6	%	1,016
Lansing, MI	4	1,226	1.3	%		50,185		31,570		40,934	93.2	%		675	2.9	%	86.2	%	816
Seattle, WA	3	628	0.9	%		34,291		25,830		54,604	92.6	%		748	2.9	%	84.4	%	823
Other Western	6	2,650	4.0	%		157,164		46,720		59,307	91.7	%		760	4.1	%	59.8	%	904
Other Pacific	8	2,275	3.1	%		124,176		55,177		54,583	91.7	%		742	3.5	%	61.5	%	915
Other Southwestern	8	2,077	2.8	%		110,066		9,765		52,993	91.0	%		717	7.1	%	88.9	%	871
Other Florida	8	2,089	2.7	%		107,797		—		51,602	93.8	%		783	2.4	%	73.5	%	1,206
Other Midwestern	10	2,122	2.4	%		95,627		26,320		45,065	93.9	%		635	2.4	%	65.0	%	945
Other North Carolina	8	1,893	1.9	%		75,865		11,550		40,077	95.2	%		572	0.6	%	87.2	%	895
Other Southeastern	4	1,394	1.7	%		69,273		35,021		49,694	90.0	%		591	3.9	%	65.6	%	908
Other Mid-Atlantic	5	928	1.1	%		42,835		12,542		46,158	97.0	%		801	0.3	%	82.1	%	931
Other Northeastern	2	372	0.5	%		18,253		5,167		49,067	96.9	%		692	0.6	%	64.0	%	889
Real Estate Under Development	n/a	n/a	0.5	%		21,269		n/a		n/a	n/a			n/a	n/a		n/a		n/a
Land	n/a	n/a	0.4	%		16,196		n/a		n/a	n/a			n/a	n/a		n/a		n/a

Total Apartments (d)	260	74,480	99.5	%	$	3,950,135	$	1,011,775	$	53,036	93.0	%	$	721	3.2	%	69.0	%	901

Commercial Property	n/a	n/a	0.3	%		10,023		—		n/a	n/a			n/a	n/a		n/a		n/a
Richmond—Corporate	n/a	n/a	0.2	%		7,325		3,965		n/a	n/a			n/a	n/a		n/a		n/a

Total Real Estate Owned	260	74,480	100	%	$	3,967,483	$	1,015,740	$	53,036	93.0	%	$	721	3.2	%	69.0	%	901

(a)

Average Monthly Rental Rates for the Year Ended December 31, 2002, represent potential rent collections (gross potential rents less market adjustments), which approximate net effective rents, based on weighted average number of homes.

(b)

Concessions disclosed as a percentage of gross potential.

(c)

Annualized Resident Turnover represents the percentage of units that would be turned in the course of the year if the average weekly move-outs experienced throughout the most recent quarter were duplicated for the entire year.

(d)

Includes real estate held for disposition, real estate under development, and land, but excludes commercial property.

Item 3. LEGAL PROCEEDINGS

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

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, 2002.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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 years. Distribution information for common stock reflects distributions declared per share for each calendar quarter and paid at the end of the following month.

	High		Low		Distributions Declared
2002
1st Quarter	$	16.0100	$	13.9400	$	.2775
2nd Quarter		16.8100		15.2300		.2775
3rd Quarter		16.6500		13.1800		.2775
4th Quarter		16.4200		13.6600		.2775

2001
1st Quarter	$	12.7000	$	10.5625	$	.2700
2nd Quarter		14.3800		11.9000		.2700
3rd Quarter		14.6000		13.7200		.2700
4th Quarter		14.8500		13.8600		.2700

On March 18, 2003, the closing sale price of our common stock was $15.79 per share on the NYSE and there were 7,464 holders of record of the 108,792,959 outstanding shares of our common stock.

We have determined that, for federal income tax purposes, approximately 50% of the distributions for each of the four quarters of 2002 represented ordinary income to our shareholders, 12% represented long-term capital gain, 10% represented unrecaptured section 1250 gain, and 28% represented return of capital to our shareholders.

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 2002 necessary for United Dominion to maintain its status as a REIT was approximately $0.49 per share. We declared total distributions of $1.11 per share for 2002.

Series D Preferred Stock

The Series D Convertible Redeemable Preferred Stock has no stated par value and a liquidation preference of $25 per share. The Series D has no voting rights, no stated maturity, and is not subject to any sinking fund or mandatory redemption, and is convertible into 1.5385 shares of common stock at the option of the holder of the Series D at any time at $16.25 per share. We have the right to cause the holder of the Series D to convert the Series D to common shares at $16.25 based on twenty trading days at or above $17.06 for the life of the security. We have the right to purchase 2 million shares of the Series D in accordance with a predetermined schedule, provided that the volume weighted average price of our common shares is $16.25 for a twenty day trading period. The repurchase price payable will be computed in accordance with the table below, expressed as a percentage of the liquidation preference, determined by the period in which the Series D repurchase date occurs, together with all accrued and unpaid dividends to and including the repurchase date:

Series D Repurchase Date Occurs During Period			Repurchase Price
January 1, 2003	to	June 30, 2003	101.0	%
July 1, 2003	to	December 6, 2003	100.5	%

After December 7, 2003, we may, at our option, redeem at any time all or part of the Series D at a price per share of $25, payable in cash, plus all accrued and unpaid dividends, provided that the current market price of our common stock at least equals the conversion price, initially set at $16.25 per share. The redemption is payable solely out of the sale proceeds of other capital stock. In addition, we may not redeem in any consecutive twelve-month period a number of shares of Series D having an aggregate liquidation preference of more than $100 million.

Distributions declared on the Series D in 2002 were $1.98 per share or $.4955 per quarter. The Series D is not listed on any exchange.

Dividend Reinvestment and Stock Purchase Plan

We have a Dividend Reinvestment and Stock Purchase Plan under which holders of our common and preferred stock may elect to automatically reinvest their distributions and make additional cash payments to acquire additional shares of our common stock. Shareholders who do not participate in the plan continue to receive dividends as declared. As of March 18, 2003, there were 3,532 participants in the plan.

Operating Partnership Units

From time to time we issue shares of our common stock in exchange for operating partnership units, or OP Units, tendered to our operating partnerships, United Dominion Realty, L.P. and Heritage Communities, L.P., for redemption in accordance with the provisions of their respective agreements. At December 31, 2002, there were 6,368,570 OP Units and 377,418 OP Units in United Dominion Realty, L.P. and Heritage Communities, L.P., respectively, that were owned by non-affiliated limited partners. United Dominion Realty, L.P. OP Units are convertible into common stock at an exchange ratio of one share for each OP Unit. Heritage Communities, L.P. OP Units are convertible into common stock at an exchange ratio of 1.575 shares for each OP Unit. During 2002, we issued a total of 92,159 shares of common stock in exchange for OP Units.

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, 2002. 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.

UNITED DOMINION REALTY TRUST, INC.

SELECTED FINANCIAL DATA

(in thousands, except per share data and apartment homes owned)

	Years ended December 31,
	2002			2001*			2000*			1999*			1998*
Operating Data *(a)*
Rental income	$	594,314		$	565,322		$	575,657		$	576,215		$	441,259
Income before gains on sales of investments, minority interests, discontinued operations, and extraordinary items		51,724			32,495			33,015			46,722			35,122
Gains on sales of land and depreciable property		1,248			24,748			31,450			37,995			26,672
Income from discontinued operations, net of minority interests		36,937			11,424			14,642			12,653			12,217
Extraordinary items-early extinguishment of debt, net of minority interests		(33,766	)		(3,240	)		775			859			(138	)
Net income		53,229			61,828			76,615			93,622			72,332
Distributions to preferred shareholders		27,424			31,190			36,891			37,714			23,593
Net income available to common shareholders		25,805			27,142			42,653			55,908			48,739
Common distributions declared		118,888			108,956			110,225			109,607			107,758
Weighted average number of common shares outstanding-basic		106,078			100,339			103,072			103,604			99,966
Weighted average number of common shares outstanding-diluted		106,952			101,037			103,208			103,639			100,062
Weighted average number of common shares, OP Units, and common share equivalents-diluted		127,838			120,728			123,005			124,127			103,793
Per share:
Income before discontinued operations and extraordinary items per share, net of minority interests	$	0.21		$	0.19		$	0.26		$	0.41		$	0.37
Basic earnings per share		0.24			0.27			0.41			0.54			0.49
Diluted earnings per share		0.24			0.27			0.41			0.54			0.49
Common distributions declared		1.11			1.08			1.07			1.06			1.05

Balance Sheet Data *(a)*
Real estate owned, at carrying value	$	3,967,483		$	3,907,667		$	3,836,320		$	3,953,045		$	3,952,752
Accumulated depreciation		748,733			646,366			509,405			395,864			316,630
Total real estate owned, net of accumulated depreciation		3,218,750			3,261,301			3,326,915			3,557,181			3,636,122
Total assets		3,276,136			3,348,091			3,453,957			3,688,317			3,762,940
Secured debt		1,015,740			974,177			866,115			1,000,136			1,072,185
Unsecured debt		1,041,900			1,090,020			1,126,215			1,127,169			1,045,564
Total debt		2,057,640			2,064,197			1,992,330			2,127,305			2,117,749
Shareholders’ equity		1,001,271			1,042,725			1,218,892			1,310,212			1,374,121
Number of common shares outstanding		106,605			103,133			102,219			102,741			103,639

Other Data *(a)*
*Cash Flow Data*
Cash provided by operating activities	$	226,700		$	224,411		$	224,160		$	190,602		$	140,597
Cash (used in)/provided by investing activities		(65,062	)		(64,055	)		58,705			(103,836	)		(263,864	)
Cash (used in)/provided by financing activities		(163,127	)		(166,020	)		(280,238	)		(105,169	)		148,875

*Funds from Operations (b)*
Net income	$	53,229		$	61,828		$	76,615		$	93,622		$	72,332
Adjustments:
Distributions to preferred shareholders		(27,424	)		(31,190	)		(36,891	)		(37,714	)		(23,593	)
Real estate depreciation, net of other partnerships’ interest		150,743			135,958			140,322			109,847			91,081
Gains on sales of depreciable property, net of other partnerships’ interest		(1,244	)		(24,007	)		(30,300	)		(37,995	)		(26,672	)
Minority interests of unitholders in operating partnership		1,500			1,374			1,766			3,362			1,430
Real estate depreciation related to unconsolidated entities		471			1,105			251			181			24
Extraordinary items-early extinguishment of debt, net of minority interests		33,766			3,240			(775	)		(859	)		138
Discontinued Operations:
Real estate depreciation		6,986			14,248			11,198			10,696			8,507
Minority interests of unitholders in operating partnership		2,433			828			1,063			1,004			—
Impairment loss on real estate		2,301			—			—			—			—
Gains on sales of depreciable property		(31,450	)		—			—			—			—
Extraordinary items-early extinguishment of debt, net of minority interests		975			(4	)		—			—			—

Funds from operations-basic	$	192,286		$	163,380		$	163,249		$	142,144		$	123,247


Adjustment:
Distributions to preferred shareholders-Series D (Convertible)		15,779			15,428			15,300			15,154			986

Funds from operations-diluted	$	208,065		$	178,808		$	178,549		$	157,298		$	124,233


Adjustment:
Recurring capital expenditures		(32,341	)		(31,535	)		(24,794	)		(43,528	)		(25,019	)

*Adjusted Funds from Operations-diluted (c)*	$	175,724		$	147,273		$	153,755		$	113,770		$	99,214

*Apartment Homes Owned*
Total apartment homes owned at December 31		74,480			77,567			77,219			82,154			86,893
Weighted average number of apartment homes owned during the year		76,567			76,487			80,253			85,926			70,724

(a)

In 1998, United Dominion completed the following statutory mergers: (i) ASR Investments Corporation Inc. on March 27, 1998 for an aggregate purchase price of $323 million and; (ii) American Apartment Communities II on December 7, 1998 for an aggregate purchase price of $794 million.

(b)

Funds from operations (“FFO”) is defined as net income (computed in accordance with generally accepted accounting principles), excluding gains (losses) from sales of depreciable property, plus depreciation and amortization, less preferred dividends 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 October 1999 which was effective beginning January 1, 2000. United Dominion considers FFO in evaluating property acquisitions and its operating performance and believes that FFO should be considered along with, but not as an alternative to, net income and cash flows as a measure of United Dominion’s activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs. For 2001, FFO includes a non-recurring charge of $8.6 million related to workforce reductions, other severance costs, executive office relocation costs, and the write down of seven undeveloped land sites along with United Dominion’s investment in an online apartment leasing company. For 2000, FFO includes a non-recurring charge of $3.7 million related to the settlement of litigation and an organizational charge.

(c)

Adjusted funds from operations is defined as FFO less recurring capital expenditures for our stabilized portfolio.

Reclassified to conform to current year presentation as described in Note 3 to the consolidated financial statements.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This annual report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, without limitation, statements concerning property acquisitions and dispositions, development activity and capital expenditures, capital raising activities, rent growth, occupancy, and rental expense growth. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of United Dominion Realty Trust, Inc. to be materially different from the results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting United Dominion, or its properties, adverse changes in the real estate markets and general and local economies and business conditions. Although United Dominion believes 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 United Dominion or any other person that the results or conditions described in such statements or the objectives and plans of United Dominion will be achieved.

Business Overview

United Dominion is a real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages middle-market apartment communities nationwide. We were formed in 1972 as a Virginia corporation and our subsidiaries include two operating partnerships, United Dominion Realty, L.P. and Heritage Communities, L.P. Unless the context otherwise requires, all references in this report to “we,” “us,” “our,” or “United Dominion” refer collectively to United Dominion Realty Trust, Inc. and its subsidiaries.

From 1996 through 1999, United Dominion acquired other REITs, private portfolios, and individual communities to create a national platform. Since that time, we have upgraded the quality of our portfolio through capital reinvestment, development, divestitures and acquisitions, and invested in infrastructure and technology to support our portfolio of assets. In 2001, management established a long-term strategy that resulted in certain fundamental conclusions and initial steps towards achieving our goals.

We believe that we must distinguish ourselves within the industry to maintain a leadership position over the long-term. We believe an increased focus on being an excellent operator of apartment homes will be a compelling and successful business model to differentiate United Dominion in the eyes of residents, associates, and investors. With this strategy, we believe that we can become the best in the multifamily industry based upon the following key principles:

OPERATIONAL EXCELLENCE—In short, operational excellence is a way of doing business with consistent, standard systems and business processes throughout our organization, to provide customers, residents,

and associates similar experiences regardless of location. Through operational excellence, we believe that we can enhance our existing portfolio and new properties we seek to acquire, deliver superior service to our residents, and provide greater returns to our investors.

MIDDLE-MARKET—United Dominion will focus efforts on owning and managing apartments that provide housing for customers who cannot typically afford an entry-level home, or customers who choose apartment living over other alternatives. We will primarily serve the price-sensitive, value-for-money customers, in the broad middle-market segments of the population.

PORTFOLIO MANAGEMENT—We intend to continue to own and operate middle-market apartment homes across a geographically diverse platform. We believe that enhancing our presence in 25 to 30 core markets will enable us to capitalize on operating efficiencies. As local market cycles create opportunities, we intend to exit current markets where long-term growth is below the national average (the “non-core markets”), and redeploy capital within our core markets.

We believe that over the long-term, the fundamental principles of operational excellence, middle-market focus, and proactive portfolio management will better position United Dominion to serve its residents, increase profitability, provide rewarding careers to our associates, and capitalize on changes in the marketplace.

At December 31, 2002, United Dominion’s portfolio included 260 communities with 74,480 apartment homes nationwide. The following table summarizes United Dominion’s 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, 2002						Year Ended December 31, 2002
	Number of Apartment Communities	Number of Apartment Homes	Percentage of Carrying Value		Carrying Value (in thousands)		Average Physical Occupancy		Average Monthly Rental Rates
Dallas, TX	15	5,133	6.6	%	$	262,197	93.6	%	$	703
Houston, TX	22	5,726	5.9	%		231,886	93.8	%		644
Phoenix, AZ	12	3,855	5.8	%		227,703	93.1	%		717
Orlando, FL	14	4,140	5.2	%		205,970	91.8	%		739
Raleigh, NC	11	3,663	5.2	%		203,887	89.5	%		738
Metropolitan DC	8	2,330	4.4	%		172,734	95.8	%		937
Arlington, TX	10	3,465	4.0	%		158,031	94.5	%		677
Tampa, FL	10	3,372	3.9	%		153,925	91.6	%		706
Columbus, OH	6	2,530	3.8	%		149,247	94.0	%		689
San Francisco, CA	4	980	3.6	%		141,245	97.2	%		1,590
Charlotte, NC	10	2,711	3.5	%		139,050	90.8	%		643
Southern California	5	1,558	3.3	%		130,459	95.1	%		928
Nashville, TN	8	2,220	3.0	%		120,572	92.4	%		669
Greensboro, NC	8	2,122	2.6	%		104,653	90.4	%		613
Monterey Peninsula, CA	9	1,706	2.5	%		98,264	92.1	%		914
Richmond, VA	8	2,372	2.5	%		97,759	94.5	%		723
Wilmington, NC	6	1,868	2.3	%		91,247	91.4	%		655
Baltimore, MD	7	1,470	2.3	%		89,345	96.0	%		861
Atlanta, GA	6	1,426	1.8	%		72,547	89.3	%		728
Columbia, SC	6	1,584	1.6	%		62,716	95.0	%		592
Jacksonville, FL	3	1,157	1.5	%		58,974	95.0	%		675
Norfolk, VA	6	1,438	1.4	%		54,727	97.3	%		698
Lansing, MI	4	1,226	1.3	%		50,185	93.2	%		675
Seattle, WA	3	628	0.9	%		34,291	92.6	%		748
Other Western	6	2,650	4.0	%		157,164	91.7	%		760
Other Pacific	8	2,275	3.1	%		124,176	91.7	%		742
Other Southwestern	8	2,077	2.8	%		110,066	91.0	%		717
Other Florida	8	2,089	2.7	%		107,797	93.8	%		783
Other Midwestern	10	2,122	2.4	%		95,627	93.9	%		635
Other North Carolina	8	1,893	1.9	%		75,865	95.2	%		572
Other Southeastern	4	1,394	1.7	%		69,273	90.0	%		591
Other Mid-Atlantic	5	928	1.1	%		42,835	97.0	%		801
Other Northeastern	2	372	0.5	%		18,253	96.9	%		692
Real Estate Under Development	—	—	0.5	%		21,269	—			—
Land	—	—	0.4	%		16,196	—			—

Total Apartments	260	74,480	100.0	%	$	3,950,135	93.0	%	$	721

Liquidity and Capital Resources

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

United Dominion expects to meet its short-term liquidity requirements generally through its 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 of United Dominion. 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 United Dominion 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.

United Dominion filed a shelf registration statement in December 1999 providing for the issuance of up to an aggregate of $700 million in common shares, preferred shares, and debt securities to facilitate future financing activities in the public capital markets. Under this shelf registration statement, United Dominion sold 3.0 million shares of common stock at a price of $14.91 per share in March 2002 and issued $200 million of 6.50% senior unsecured notes due June 2009 in June 2002. In December 2002, United Dominion replaced its existing shelf with a new shelf registration statement providing for the issuance of up to an aggregate of $1 billion in debt securities, preferred stock, and common stock and, as a result, the previous shelf registration will no longer be used for our securities offerings. In January 2003, coinciding with our inclusion in the S&P MidCap 400 Index, United Dominion sold 2.0 million shares of common stock at a public offering price of $15.71 per share under the new shelf registration statement. We received net proceeds from this offering of approximately $31 million, which will be used to repay debt and for general corporate purposes. In February 2003, United Dominion sold $150 million of 4.50% medium-term notes due in March 2008 under a new $300 million medium-term note program. The net proceeds from the issuance of approximately $149 million are anticipated to be used to repay amounts outstanding on United Dominion’s $375 million unsecured revolving credit facility. 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 primarily through joint ventures or with proceeds from the sale of property and, to a lesser extent, 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 of secured debt, and by the reinvestment of proceeds from the sale of property in non-strategic markets.

During 2003, United Dominion has approximately $19.5 million of secured debt and $115.1 million of unsecured debt maturing that we anticipate repaying using proceeds from mortgage refinancing activity, borrowings under secured or unsecured credit facilities, or the issuance of new unsecured debt securities.

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) derivatives and hedging activities. With respect to these critical accounting policies, management believes that the application of judgments and assessments is consistently applied and produces financial information that fairly depicts the results of operations for all periods presented.

Capital Expenditures

In conformity with accounting principles generally accepted in the United States, United Dominion capitalizes 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 2002, $42.8 million or $563 per home was spent on capital expenditures for all of United Dominion’s communities excluding development and commercial properties. These capital improvements included turnover related expenditures for floor coverings and appliances, other recurring capital expenditures such as HVAC equipment, roofs, landscaping, siding, parking lots, and other non-revenue enhancing capital expenditures, which aggregated $32.3 million or $425 per home. In addition, revenue enhancing capital expenditures, including water sub-metering, the initial installation of microwaves or washer-dryers, and extensive interior upgrades totaled $9.4 million or $124 per home and major renovations totaled $1.1 million or $14 per home for the year ended December 31, 2002.

The following table outlines capital expenditures and repairs and maintenance costs for United Dominion’s total portfolio, excluding real estate under development and commercial properties for the periods presented (dollars in thousands):

	Year ended December 31,						Year ended December 31, (per home)
	2002		2001		% Change		2002		2001		% Change
Turnover capital expenditures	$	16,474	$	16,776	(1.8	)%	$	216	$	222	(2.7	)%

Other recurring capital expenditures		15,867		14,759	7.5	%		209		196	6.6	%


Total recurring capital expenditures		32,341		31,535	2.6	%		425		418	1.7	%

Revenue enhancing improvements		9,405		17,967	(47.7	)%		124		238	(47.9	)%

Major renovations		1,081		3,594	(69.9	)%		14		48	(70.8	)%

Total capital improvements	$	42,827	$	53,096	(19.3	)%	$	563	$	704	(20.0	)%

Repairs and maintenance		40,078		36,197	10.7	%		527		480	9.8	%

Total expenditures	$	82,905	$	89,293	(7.2	)%	$	1,090	$	1,184	(7.9	)%

Total capital improvements decreased $10.3 million or $141 per home in 2002 compared to 2001 as challenging economic conditions negatively impacted our potential to generate investment returns. United Dominion will continue to selectively add revenue enhancing improvements which we believe will provide a return on investment substantially in excess of United Dominion’s cost of capital. Recurring capital expenditures during 2003 are currently expected to be approximately $435 per home.

Impairment of Long-Lived Assets

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

We review the carrying value of our portfolio of assets on a regular basis. During 2002, United Dominion pursued its strategy of exiting markets where long-term growth prospects are limited. As a result, 25 apartment communities were placed under contract and two of these assets were ultimately sold at net selling prices below their net book values. Accordingly, United Dominion recorded an aggregate $2.3 million impairment loss for the write down of a portfolio of apartment communities in Memphis, Tennessee. In 2001, in connection with management’s analysis of the carrying value of all undeveloped land parcels, United Dominion recognized an aggregate $2.8 million impairment loss on seven undeveloped sites in selected markets. An impairment loss was indicated as a result of the net book value of the assets being greater than the estimated fair market value less the cost of disposal.

Derivatives and Hedging Activities

United Dominion uses derivative financial instruments in the normal course of business to reduce its exposure to fluctuations in interest rates. As of December 31, 2002, United Dominion had 13 interest rate swap agreements with a notional value aggregating $232 million that are used to fix the interest rate on a portion of our variable rate debt. These derivatives qualify for hedge accounting as discussed in Note 1 to our consolidated financial statements. While we intend to continue to meet the conditions for hedge accounting, if a particular interest rate swap does not qualify as highly effective, any change in the fair value of the derivative used as a hedge would be reflected in current earnings. Furthermore, should any change in management strategy, or any other circumstance, cause an existing highly effective hedge to become ineffective, the accumulated loss or gain in the value of the derivative instrument since its inception would be immediately reclassified from the shareholders’ equity section of the balance sheet to current earnings.

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

Potential losses are limited to counterparty risk in situations where United Dominion is owed money; that is, when United Dominion holds contracts with positive fair values. We do not expect any losses from counterparties failing to meet their obligations as the counterparties are highly rated credit quality U.S. financial institutions and management believes that the likelihood of realizing material losses from counterparty non-performance is remote. At December 31, 2002, United Dominion had unrealized losses totaling $9.6 million on derivative transactions, which if terminated, would require a cash outlay. United Dominion presently has no intention to terminate these contracts. There are no credit concerns related to our obligations and we expect to meet those obligations without default.

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 United Dominion’s Consolidated Statements of Cash Flows.

Operating Activities

For the year ended December 31, 2002, United Dominion’s cash flow provided by operating activities was $226.7 million compared to $224.4 million for 2001. During 2002, cash flow from operating activities resulted

primarily from increased rental revenues from a larger portfolio and decreased interest expense that were partially offset by increased rental expenses, lower collections on escrow accounts and receivables, and increased payments of accrued incentive compensation.

Investing Activities

For the year ended December 31, 2002, net cash used in investing activities was $65.1 million compared to $64.1 million for 2001. Changes in the level of investing activities from period to period reflects United Dominion’s strategy as it relates to its acquisition, capital expenditure, development, and disposition programs, as well as the impact of the capital market environment on these activities.

Acquisitions

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

During 2003, we plan to continue to channel new investments to those markets that are projected to provide the best investment returns for us over the next ten years. Markets will be targeted based upon defined criteria including past performance, expected job growth, current and anticipated housing supply and demand, and the ability to attract and support household formation.

Real Estate Under Development

Development activity is focused in core markets that have strong operations in place. For the year ended December 31, 2002, United Dominion invested approximately $22.8 million in development projects, down $30.8 million from its 2001 level of $53.6 million.

The following projects were under development at December 31, 2002:

	Location	Number of Apartment Homes	Completed Apartment Homes	Cost to Date (In thousands)		Budgeted Cost (In thousands)		Estimated Cost Per Home		Expected Completion Date
The Mandolin II	Dallas, TX	178	—	$	5,400	$	13,300	$	74,700	4Q03
2000 Post III	San Francisco, CA	24	—		2,100		6,600		275,000	3Q04
Rancho Cucamonga	Los Angeles, CA	414	—		13,800		60,400		145,900	4Q05

		616	—	$	21,300	$	80,300	$	130,400

In addition, United Dominion owns seven parcels of land that it continues to hold for future development that had a carrying value at December 31, 2002 of $9.4 million. Six of the seven parcels represent additional phases to existing communities as United Dominion plans to add apartment homes adjacent to currently owned communities that are in improving markets.

The following projects were completed during the year ended December 31, 2002:

	Location	Number of Apartment Homes	Development Cost (In thousands)		Cost Per Home		Date Completed	% Leased at 12/31/02
Greensview II	Denver, CO	192	$	16,900	$	88,000	3/02	72.4	%
The Meridian II	Dallas, TX	270		14,800		54,800	6/02	95.6	%

		462	$	31,700	$	68,600

Disposition of Investments

For the year ended December 31, 2002, United Dominion sold 25 communities with a total of 6,990 apartment homes, one commercial property, and one parcel of land for an aggregate sales price of approximately $319 million and recognized gains for financial reporting purposes of $31.5 million. Proceeds from the sales were applied primarily to acquire communities and reduce debt. In addition, during the first quarter of 2002, $3.1 million in proceeds was received on the condemnation of 96 units of a community in Fresno, California that resulted in a gain of $1.2 million. For the year ended December 31, 2001, United Dominion sold nine communities with 1,889 apartment homes and five parcels of land for an aggregate sales price of approximately $141.3 million and recognized gains for financial reporting purposes of $24.7 million. Proceeds from the sales were used primarily to repurchase United Dominion’s 9.25% Series A Cumulative Redeemable Preferred Stock during the second quarter of 2001, and to a lesser extent, to reduce long-term debt, repurchase common shares, and to complete Section 1031 exchanges to defer taxable gains.

During 2003, United Dominion plans to continue to pursue its strategy of exiting markets where long-term growth prospects are limited and redeploying capital into markets that would enhance future growth rates and economies of scale. We intend to use proceeds from 2003 dispositions to acquire communities, fund development activity, and reduce debt.

Development Joint Ventures

In June 2000, United Dominion completed the formation of a joint venture that would invest approximately $101 million to develop five apartment communities with a total of 1,438 apartment homes. United Dominion owned a 25% interest in the joint venture and served as the managing partner of the joint venture as well as the developer, general contractor, and property manager. For the years ended December 31, 2002, 2001, and 2000, United Dominion recognized fee income of approximately $0.6 million, $2.6 million, and $3.0 million, respectively, for general contracting, developer, and management services provided by United Dominion to the joint venture. In December 2001, United Dominion purchased three of the five apartment communities for a total aggregate cost of approximately $61 million. In June 2002, United Dominion purchased the remaining two communities for a total aggregate cost of approximately $52 million.

In September 2002, United Dominion signed a development joint venture agreement with AEGON USA Realty Advisors, Inc. in which United Dominion serves as the managing member. The joint venture is expected to develop approximately eight to ten garden style apartment communities over the next three to five years, with a total development cost of up to $210 million. The joint venture will obtain bank construction financing for 65% to 80% of total costs. The joint venture will provide equity contributions for the balance of the costs with AEGON providing 80% and United Dominion providing 20%. United Dominion will serve as the developer, general contractor, and property manager for the joint venture, and will guarantee those project development costs, excluding financing costs (including fees and interest), which exceed the defined project cost budgeted amounts for each respective project, as they come to fruition. As of December 31, 2002, the joint venture had not commenced operations.

Financing Activities

Net cash used in financing activities during 2002 was $163.1 million compared to $166.0 million for 2001. As part of the plan to improve United Dominion’s balance sheet position, 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, 2002:

•

Borrowed an additional $253.6 million under our existing Fannie Mae credit facilities and $70.7 million under a new $72 million Freddie Mac revolving credit facility.

•

Repaid $305.8 million of secured debt and $210.4 million of unsecured debt (includes tender offer and prepayment penalties referred to below), assumed $41.6 million of secured debt in connection with the acquisition of properties, and repaid $35.9 million of secured debt in connection with the disposition of properties.

•

Sold 3.0 million common shares at a price of $14.91 per share in March 2002. The net proceeds of $42.3 million were used to acquire apartment communities.

•

Refinanced secured debt during the first quarter of 2002 using proceeds from the new Fannie Mae and Freddie Mac credit facilities and incurred prepayment penalties of $15.8 million on the refinancing of these mortgages, while freeing $8.2 million of cash previously escrowed with former lenders. Management believes that the net present value of these refinancing transactions ranges from approximately $17 million to $20 million.

•

Issued $200 million of 6.50% senior unsecured notes due in June 2009 in June 2002. The net proceeds from the issuance of $198.5 million were used to reduce outstanding debt under our $375 million unsecured revolving credit facility.

•

Repurchased the following unsecured debt during the third and fourth quarters of 2002 (dollars in thousands):

Issuance *(in order of maturity)*	Purchase Price		Premium Paid
8.63% Notes due March 2003	$	25	$	1
7.67% Medium-Term Notes due January 2004		6,925		371
7.73% Medium-Term Notes due April 2005		1,300		96
7.95% Medium-Term Notes due July 2006		17,805		1,771
7.25% Notes due January 2007		12,755		900
8.50% Monthly Income Notes due November 2008		28,180		3,382
8.50% Debentures due September 2024		70,802		11,335

	$	137,792	$	17,856

Management believes that these redemptions will generate a net present value savings of approximately $1 million to $3 million.

•

Repurchased 914,000 common shares at an average price of $14.16. As of December 31, 2002, approximately 2.3 million common shares remained available for repurchase under the common share repurchase program.

•

Filed with the Securities and Exchange Commission in December 2002 a new shelf registration statement that provides for the issuance of up to $1 billion aggregate amount of debt securities, preferred stock, and common stock from time to time in one or more offerings to facilitate future financing activities in the public capital markets. The new $1 billion shelf registration statement replaces the $294 million remaining on our previous $700 million shelf registration statement filed in December 1999.

Credit Facilities

United Dominion has four secured revolving credit facilities with Fannie Mae with an aggregate commitment of $860 million and one with Freddie Mac for $72 million. As of December 31, 2002, $676.3 million was outstanding under the Fannie Mae credit facilities leaving $183.7 million of unused capacity. The Fannie Mae credit facilities are for an initial term of ten years, bear interest at floating and fixed rates, and can be extended for an additional five years at United Dominion’s discretion. As of December 31, 2002, $70.7 million had been funded under the Freddie Mac credit facility leaving $1.3 million of unused capacity. The Freddie Mac credit facility is for an initial term of five years with an option by United Dominion to extend for an additional four-year term at the then market rate.

As of December 31, 2002, the aggregate borrowings under both the Fannie Mae and Freddie Mac credit facilities was $747 million. We have $305.9 million of the funded balance fixed at a weighted average interest rate of 6.4%. The remaining balance on these facilities is currently at a weighted average variable rate of 2.0%.

United Dominion has a $375 million three-year unsecured bank revolving credit facility that matures in August 2003. As of December 31, 2002, $175.8 million was outstanding under the bank credit facility leaving $199.2 million of unused capacity. Under the bank credit facility, United Dominion may borrow at a rate of LIBOR plus 1.1%, and pays an annual facility fee equal to 0.25% of the commitment.

The Fannie Mae and Freddie Mac credit facilities and the bank revolving credit facility are subject to customary financial covenants and limitations. As of December 31, 2002, management believes that United Dominion is in compliance with all covenants and limitations.

Derivative Instruments

As part of United Dominion’s overall interest rate risk management strategy, we use derivatives as a means to fix the interest rates of variable rate debt obligations or to hedge anticipated financing transactions. United Dominion’s derivative transactions used for interest rate risk management include various interest rate swaps with indices that relate to the pricing of specific financial instruments of United Dominion. United Dominion believes that it has appropriately controlled its interest rate risk through the use of derivative instruments. During 2002, the fair value of United Dominion’s derivative instruments has improved from an unfavorable value position of $14.9 million at December 31, 2001 to an unfavorable value position of $9.6 million at December 31, 2002. This decrease is primarily due to the normal progression of the fair market value of derivative instruments to get closer to zero as they near the end of their terms (see Note 8 to the consolidated financial statements).

Interest Rate Risk

United Dominion is exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. United Dominion does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. United Dominion’s interest rate sensitivity position is managed by our finance department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. United Dominion’s earnings are affected as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed rate debt. A large portion of United Dominion’s market risk is exposure to short-term interest rates from variable rate borrowings outstanding under the unhedged portion of its Fannie Mae credit facilities and its bank revolving credit facility, which totaled $370.5 million and $70.7 million, respectively, at December 31, 2002. The impact on United Dominion’s financial statements of refinancing fixed rate debt that matured during 2002 was immaterial.

At December 31, 2002, the notional value of United Dominion’s derivative products for the purpose of managing interest rate risk was $232 million, representing interest rate swaps under which United Dominion pays a fixed rate of interest and receives a variable rate. These agreements effectively fix $232 million of United Dominion’s variable rate notes payable to a weighted average fixed rate of 7.72%. At December 31, 2002, the fair market value of the interest rate swaps was an unfavorable value position of $9.6 million. If interest rates were 100 basis points more or less at December 31, 2002, the fair market value of the interest rate swaps would have increased or decreased approximately $1.9 million and $2.0 million, respectively.

If market interest rates for variable rate debt average 100 basis points more in 2003 than they did during 2002, United Dominion’s interest expense, after considering the effects of its interest rate swap agreements, would increase, and income before taxes would decrease by $5.3 million. Comparatively, if market interest rates

for variable rate debt had averaged 100 basis points more in 2002 than in 2001, United Dominion’s interest expense, after considering the effects of its interest rate swap agreements, would have increased, and income before taxes would have decreased by $5.2 million. If market rates for fixed rate debt were 100 basis points higher at December 31, 2002, the fair value of fixed rate debt would have decreased from $1.38 billion to $1.33 billion. If market interest rates for fixed rate debt were 100 basis points lower at December 31, 2002, the fair value of fixed rate debt would have increased from $1.38 billion to $1.45 billion.

These amounts are determined by considering the impact of hypothetical interest rates on United Dominion’s borrowing cost and interest rate swap agreements. These analyses do not consider the effects of the reduced 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 its 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 United Dominion’s financial structure.

Results of Operations

Effective January 1, 2002, United Dominion adopted the provisions of Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 extends the reporting requirements of discontinued operations to include the components of an entity that have either been disposed of or are classified as held for disposition (see Note 3 to the consolidated financial statements). During 2002, United Dominion sold 25 communities, one commercial property, and one parcel of land and, at December 31, 2002, had five properties classified as real estate held for disposition. Accordingly, the operating results of these properties have been reclassified as discontinued operations in the Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002. The following discussion includes the results of both continuing and discontinued operations for the periods presented.

Net Income Available to Common Shareholders

2002-vs-2001

Net income available to common shareholders was $25.8 million ($0.24 per share) for the year ended December 31, 2002, compared to $27.1 million ($0.27 per share) for the prior year. The decrease in net income available to common shareholders resulted primarily from non-recurring charges incurred during 2002. These consisted primarily of extraordinary charges for prepayment penalties and premiums paid in connection with the refinancing of mortgage debt and the repurchase of unsecured debt, aggregating $37.0 million before minority interests. These non-recurring charges are reflected in the Consolidated Statements of Operations as an extraordinary charge to earnings. The increase in extraordinary charges was partially offset by higher gains recognized on the sales of depreciable property during 2002 compared to 2001, most of which are included in income from discontinued operations (see Note 3 to the consolidated financial statements), and non-recurring charges in 2001 (see discussion that follows under “Restructuring Charges” and “Impairment Loss on Real Estate and Investments”). In addition, consolidated property operations generated $9.0 million more in rental income during 2002 compared to 2001 as a result of the continued lease-up and stabilization of development communities, and interest expense decreased $11.4 million due to refinancing activities.

2001-vs-2000

Net income available to common shareholders was $27.1 million ($0.27 per share) for the year ended December 31, 2001, compared to $42.7 million ($0.41 per share) for 2000, representing a decrease of $15.6 million ($0.14 per share). Excluding non-recurring charges (see discussion that follows under “Restructuring Charges” and “Impairment Loss on Real Estate and Investments”) and extraordinary items, net

income available to common shareholders was $41.5 million ($0.41 per share) for the year ended December 31, 2001, compared to $45.5 million ($0.44 per share) for 2000, representing a decrease of $4.0 million ($0.04 per share). Excluding non-recurring charges and extraordinary items, the decrease for the period was primarily due to the overall decrease in United Dominion’s portfolio of assets that generated rental income of $618.6 million, representing a decrease of $8.0 million from 2000. In addition, United Dominion recognized lower gains on the sale of land and depreciable property during 2001 and incurred the write-off of unamortized original issuance costs associated with its 9.25% Series A Cumulative Redeemable Preferred Stock during the second quarter of 2001. This decrease was moderated, in part, by a decrease in rental expenses of $4.2 million to $246.2 million and lower interest costs of $144.4 million during 2001 compared to $156.0 million in 2000.

Apartment Community Operations

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

	Year Ended December 31,								Year Ended December 31,
	2002			2001			% Change		2001			2000			% Change
Property rental income	$	627,625		$	617,690		1.6	%	$	617,690		$	625,481		(1.2	)%
Property operating expense*		(233,071	)		(227,820	)	2.3	%		(227,820	)		(230,489	)	(1.2	)%

Property operating income	$	394,554		$	389,870		1.2	%	$	389,870		$	394,992		(1.3	)%

Weighted average number of homes		76,567			76,487		0.1	%		76,487			80,253		(4.7	)%
Physical occupancy**		93.0	%		93.9	%	(0.9	)%		93.9	%		94.2	%	(0.3	)%

Excludes depreciation, amortization, and property management expenses.

Based upon weighted average homes.

The increase in property operating income provided by the same communities, development communities, and acquisition communities since December 31, 2001 is primarily due to the continued lease-up and stabilization of development communities.

2002-vs-2001

Same Communities

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

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

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

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

Non-Mature Communities

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

2001-vs-2000

Same Communities

United Dominion’s same communities (those communities acquired, developed, or stabilized prior to January 1, 2000 and held on January 1, 2001, which consisted of 72,997 apartment homes at December 31, 2001) provided 95% of United Dominion’s property operating income for the year ended December 31, 2001.

In 2001, property operating income for the same communities increased 2.3% or $8.5 million compared to 2000. The growth in property operating income resulted from a $17.8 million or 3.1% increase in property rental income over the same period in the prior year. The increase was driven by a $22.9 million or 3.9% increase in rental rates. The increased rental rates were partially offset by higher concessions and an increase in bad debt expense. Physical occupancy decreased 0.2% to 94.0% in 2001 compared to 2000.

For 2001, property operating expenses at these same communities increased $9.3 million or 4.5% compared to 2000. The increase in property operating expenses resulted primarily from a $3.6 million or 11.1% increase in utility costs experienced by United Dominion as a result of the increase in prices for natural gas and overall increases in electricity costs. In addition, United Dominion experienced a $2.4 million or 7.3% increase in repairs and maintenance, a $1.6 million or 3.1% increase in taxes, and a $1.2 million or 2.1% increase in personnel costs compared to 2000.

Non-Mature Communities

The remaining 5% of United Dominion’s property operating income during 2001 was generated from its non-mature communities (those communities acquired or developed during 2000 and 2001 and sold properties). The six communities with 1,571 apartment homes acquired by United Dominion during 2000 and 2001 provided an additional $3.8 million of property operating income during 2001. In addition, United Dominion’s development communities, which included 2,022 apartment homes constructed since January 1, 2000, provided an additional $9.5 million of property operating income for the year ended December 31, 2001, and the nine communities with 1,889 apartment homes sold in 2001 provided $2.5 million of property operating income during 2001.

Real Estate Depreciation

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

During the year ended December 31, 2001, real estate depreciation on both continuing and discontinued operations decreased $1.1 million or 0.8% compared to 2000. The decrease in depreciation expense was attributable to the overall decrease in the weighted average number of apartment homes partially offset by the impact of completed development communities, acquisitions, and capital expenditures.

Interest Expense

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

For the year ended December 31, 2001, interest expense decreased $11.7 million from the corresponding amount in 2000 primarily due to decreasing interest rates and, to a lesser extent, the overall decrease in the level of debt outstanding. For the year ended December 31, 2001, the weighted average amount of debt outstanding decreased 2.9% or $60.2 million from 2000 levels and the weighted average interest rate decreased from 7.6% in 2000 to 7.1% in 2001. The weighted average amount of debt employed during 2001 is lower as a portion of disposition proceeds was used to repay outstanding debt. The decrease in the average interest rate during 2001 reflects the ability of United Dominion to take advantage of declining interest rates through refinancing and the utilization of variable rate debt.

Restructuring Charge

In 2001, management undertook a comprehensive review of the organizational structure of United Dominion and its operations subsequent to the appointment of a new senior management team and CEO. As a result, we recorded $4.5 million of expense related to the termination of approximately 10% of United Dominion’s workforce in operations and at the corporate headquarters. In addition, United Dominion recognized expense in the aggregate of $0.9 million related to relocation costs associated with the new executive offices in Colorado and other miscellaneous costs.

Impairment Loss on Real Estate and Investments

In 2002, United Dominion pursued its strategy of exiting markets where long-term growth prospects are limited and the redeployment of capital would enhance future growth rates and economies of scale. During 2002, United Dominion sold 25 apartment communities with a total of 6,990 apartment homes, one commercial property, and one parcel of land with an aggregate net book value of approximately $285 million. Although these sales resulted in an aggregate net gain of $31.5 million, certain of these assets were sold at net selling prices below their net book values. As a result, United Dominion recorded an aggregate $2.3 million impairment loss during 2002 for the write down of a portfolio of apartment communities in Memphis, Tennessee.

In 2001, in connection with the evaluation of United Dominion’s real estate assets and operations, senior management determined that it was in our best interest to dispose of a majority of United Dominion’s undeveloped tracts of land at an accelerated pace and redeploy the proceeds elsewhere. This represented a change from prior management in the holding period of these assets and their respective values. Prior management had purchased these tracts of land in 1999 and 2000 with the intent to build apartment communities on them. To accelerate the disposition of these undeveloped land sites, we recorded an aggregate $2.8 million impairment loss during the first quarter of 2001 for the write down of seven undeveloped sites in selected markets. The $2.8 million charge represented the discount necessary to dispose of these assets in a short time frame coupled with decreases in market value in 2001 for these properties. In addition, United Dominion recognized a $0.4 million charge for the write down of its investment in an online apartment leasing company.

During the fourth quarter of 2001, Realeum, Inc., a property management software venture in which United Dominion made significant investments prior to 2001, successfully completed an equity offering in which it raised approximately $15 million of new capital in exchange for a 45.6% ownership stake. As a result of the equity offering, the market value of United Dominion’s ownership stake was established at approximately $1.3 million, and its $3.5 million aggregate investment was adjusted to $1.3 million.

General and Administrative

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

For the year ended December 31, 2001, general and administrative expenses increased $6.0 million or 38.2% compared to 2000. The increase was primarily due to an increase in costs related to incentive compensation, employee benefits, and state and local taxes.

Gains on Sales of Land and Depreciable Property

For the years ended December 31, 2002 and 2001, United Dominion recognized gains for financial reporting purposes of $32.7 million and $24.7 million, respectively. Changes in the level of gains recognized from period to period reflect the changing level of United Dominion’s divestiture activity from period to period, as well as the extent of gains related to specific properties sold.

Inflation

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

Factors Affecting Our Business Prospects

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

•

Unfavorable changes in apartment market and economic conditions that could adversely affect occupancy levels and rental rates.

•

The failure of acquisitions to achieve anticipated results.

•

Possible difficulty in selling apartment communities.

•

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 shareholders.

•

Development and construction risks that may impact our profitability.

•

Our failure to succeed in new markets.

•

Changing interest rates, which could increase interest costs and affect the market price of our securities.

•

Potential liability for environmental contamination, which could result in substantial costs.

•

The imposition of federal taxes if we fail to qualify as a REIT in any taxable year.

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 40 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.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to the information set forth under the headings “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for our Annual Meeting of Shareholders to be held on May 6, 2003.

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.”

Item 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the information set forth under the heading “Compensation of Executive Officers” in our definitive proxy statement for our Annual Meeting of Shareholders to be held on May 6, 2003.

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

The information required by this item is incorporated by reference to the information set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our definitive proxy statement for our Annual Meeting of Shareholders to be held on May 6, 2003.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to the information set forth under the heading “Certain Business Relationships” in our definitive proxy statement for our Annual Meeting of Shareholders to be held on May 6, 2003.

Item 14. CONTROLS AND PROCEDURES

Within the 90 days prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our 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 our 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.

There have been no significant changes in our internal controls or in other factors, which could significantly affect internal controls subsequent to the date of this evaluation.

PART IV

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

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

1. Financial Statements. See Index to Consolidated Financial Statements and Schedule on page 40 of this Report.

2. Financial Statement Schedule. See Index to Consolidated Financial Statements and Schedule on page 40 of this Report. All other schedules are omitted because they are not required, are inapplicable, or the required information is included in the financial statements or notes thereto.

3. Exhibits. The exhibits filed with this Report are set forth in the Exhibit Index.

(b) Reports on Form 8-K.

We filed the following Current Report on Form 8-K during the quarter ended December 31, 2002:

•

Current Report on Form 8-K dated November 27, 2002, filed with the Securities and Exchange Commission on December 3, 2002, under Item 5. Other Events and Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

SIGNATURES

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

UNITED DOMINION REALTY TRUST, INC.

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

Date: March 26, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 26, 2003 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/ Christopher D. Genry Christopher D. Genry		Executive Vice President and Chief Financial Officer

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

/s/ Robert C. Larson Robert C. Larson		Chairman of the Board

/s/ James D. Klingbeil James D. Klingbeil		Vice Chairman of the Board

/s/ John P. McCann John P. McCann		Chairman Emeritus

/s/ R. Toms Dalton, Jr. R. Toms Dalton, Jr.		Director

/s/ Robert P. Freeman Robert P. Freeman		Director

/s/ Jon A. Grove Jon A. Grove		Director

/s/ Lynne B. Sagalyn Lynne B. Sagalyn		Director

/s/ Mark J. Sandler Mark J. Sandler		Director

/s/ Robert W. Scharar Robert W. Scharar		Director

CERTIFICATIONS

I, Thomas W. Toomey, Chief Executive Officer and President of United Dominion Realty Trust, Inc., certify that:

I have reviewed this annual report on Form 10-K of United Dominion Realty Trust, Inc.;

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize, and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 26, 2003

/s/ THOMAS W. TOOMEY

Thomas W. Toomey

Chief Executive Officer and President

CERTIFICATIONS

I, Christopher D. Genry, Executive Vice President and Chief Financial Officer of United Dominion Realty Trust, Inc., certify that:

I have reviewed this annual report on Form 10-K of United Dominion Realty Trust, Inc.;

(a)

(b)

evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

(c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: March 26, 2003

/s/ CHRISTOPHER D. GENRY

Christopher D. Genry
Executive Vice President and
Chief Financial Officer

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

UNITED DOMINION REALTY TRUST, INC.


		Page
FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT

Report of Ernst & Young LLP, Independent Auditors		41

Consolidated Balance Sheets at December 31, 2002 and 2001		42

Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002		43

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2002		44

Consolidated Statements of Shareholders’ Equity for each of the three years in the period ended December 31, 2002		45

Notes to Consolidated Financial Statements		47

SCHEDULE FILED AS PART OF THIS REPORT

Schedule III—Summary of Real Estate Owned		71

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.

Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Shareholders

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, 2002 and 2001, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Dominion Realty Trust, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 2 to the consolidated financial statements, in 2002 the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” As discussed in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative financial instruments.

ERNST & YOUNG LLP

Richmond, Virginia

January 27, 2003,

except for Note 14, as to which the date is

February 27, 2003

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share data)

	December 31,
	2002			2001
ASSETS
Real estate owned (Note 2):
Real estate held for investment	$	3,908,746		$	3,858,579
Less: accumulated depreciation		(742,876	)		(646,366	)

		3,165,870			3,212,213
Real estate under development		30,624			40,240
Real estate held for disposition (net of accumulated depreciation of $5,857 and $0) (Note 3)		22,256			8,848

Total real estate owned, net of accumulated depreciation		3,218,750			3,261,301
Cash and cash equivalents		3,152			4,641
Restricted cash		11,773			26,830
Deferred financing costs, net		17,548			15,802
Investment in unconsolidated development joint venture (Note 4)		—			3,355
Other assets		24,913			36,162

Total assets	$	3,276,136		$	3,348,091


LIABILITIES AND SHAREHOLDERS’ EQUITY

Secured debt (Note 5)	$	1,015,740		$	974,177
Unsecured debt (Note 6)		1,041,900			1,090,020
Real estate taxes payable		29,743			28,099
Accrued interest payable		11,908			16,779
Security deposits and prepaid rent		21,379			20,481
Distributions payable		35,141			33,457
Accounts payable, accrued expenses, and other liabilities		49,634			66,688
Real estate held for disposition liabilities		204			—

Total liabilities		2,205,649			2,229,701

Minority interests		69,216			75,665

Shareholders’ equity (Note 7):
Preferred stock, no par value; $25 liquidation preference, 25,000,000 shares authorized;
5,416,009 shares 8.60% Series B Cumulative Redeemable issued and outstanding (5,416,009 in 2001)		135,400			135,400
8,000,000 shares 7.50% Series D Cumulative Convertible Redeemable issued and outstanding (8,000,000 in 2001)		175,000			175,000
Common stock, $1 par value; 150,000,000 shares authorized 106,605,259 shares issued and outstanding (103,133,279 in 2001)		106,605			103,133
Additional paid-in capital		1,140,786			1,098,029
Distributions in excess of net income		(541,428	)		(448,345	)
Deferred compensation—unearned restricted stock awards		(2,504	)		(1,312	)
Notes receivable from officer-shareholders		(2,630	)		(4,309	)
Accumulated other comprehensive loss, net (Note 8)		(9,958	)		(14,871	)

Total shareholders’ equity		1,001,271			1,042,725

Total liabilities and shareholders’ equity	$	3,276,136		$	3,348,091

See accompanying notes to consolidated financial statements.

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years ended December 31,
	2002			2001			2000
Revenues
Rental income	$	594,314		$	565,322		$	575,657
Non-property income		1,806			4,593			5,326

Total revenues		596,120			569,915			580,983

Expenses
Rental expenses:
Real estate taxes and insurance		64,495			60,054			62,706
Personnel		60,580			57,443			60,020
Utilities		34,529			34,905			33,765
Repairs and maintenance		37,909			33,517			33,115
Administrative and marketing		21,876			20,583			21,358
Property management		17,240			17,107			18,392
Other operating expenses		1,203			1,391			1,421
Real estate depreciation		152,169			137,597			141,797
Interest		130,956			139,695			151,711
Severance costs and other organizational charges		—			5,404			1,020
Litigation settlement charges		—			—			2,700
Impairment loss on real estate and investments		—			4,661			—
General and administrative		19,343			21,730			15,724
Other depreciation and amortization		4,096			3,333			4,239

Total expenses		544,396			537,420			547,968


Income before gains on sales of investments, minority interests, discontinued operations, and extraordinary items		51,724			32,495			33,015
Gains on sales of land and depreciable property		1,248			24,748			31,450

Income before minority interests, discontinued operations, and extraordinary items		52,972			57,243			64,465
Minority interests of outside partnerships		(1,414	)		(2,225	)		(1,501	)
Minority interests of unitholders in operating partnerships		(1,500	)		(1,374	)		(1,766	)

Income before discontinued operations and extraordinary items		50,058			53,644			61,198
Income from discontinued operations, net of minority interests (Note 3)		36,937			11,424			14,642

Income before extraordinary items		86,995			65,068			75,840
Extraordinary items—early extinguishment of debt, net of minority interests		(33,766	)		(3,240	)		775

Net income		53,229			61,828			76,615
Distributions to preferred shareholders—Series A and B		(11,645	)		(15,762	)		(21,591	)
Distributions to preferred shareholders—Series D (Convertible)		(15,779	)		(15,428	)		(15,300	)
(Premium)/discount on preferred share repurchases		—			(3,496	)		2,929

Net income available to common shareholders	$	25,805		$	27,142		$	42,653


Earnings/(loss) per common share—basic and diluted:
Income before discontinued operations and extraordinary items, net of minority interests	$	0.21		$	0.19		$	0.26
Income from discontinued operations, net of minority interests	$	0.35		$	0.11		$	0.14
Extraordinary items, net of minority interests	$	(0.32	)	$	(0.03	)	$	0.01

Net income available to common shareholders	$	0.24		$	0.27		$	0.41


Common distributions declared per share	$	1.11		$	1.08		$	1.07

Weighted average number of common shares outstanding—basic		106,078			100,339			103,072
Weighted average number of common shares outstanding—diluted		106,952			101,037			103,208

See accompanying notes to consolidated financial statements.

UNITED DOMINION REALTY TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years ended December 31,
	2002			2001			2000
Operating Activities
Net income	$	53,229		$	61,828		$	76,615
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		163,328			155,327			157,361
Impairment loss on real estate and investments		—			5,436			—
Gains on sales of land and depreciable property		(32,698	)		(24,748	)		(31,450	)
Minority interests		3,122			4,192			4,386
Extraordinary items-early extinguishment of debt		36,965			3,471