UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

 

Commission file number 1-10524

United Dominion Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

1745 Shea Center Drive, Suite 200,

Highlands Ranch, Colorado 80129

(Address of principal executive offices) (zip code)

(720) 283-6120

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of August 4, 2006 was 134,630,352.

UNITED DOMINION REALTY TRUST, INC.
FORM 10-Q
INDEX

 

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PART I—FINANCIAL INFORMATION

Item 1.                        FINANCIAL STATEMENTS

UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
(Unaudited)

 

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

 

See accompanying notes to consolidated financial statements.

3

UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for share data)
(Unaudited)

 

See accompanying notes to consolidated financial statements.

4

UNITED DOMINION REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

 

See accompanying notes to consolidated financial statements.

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UNITED DOMINION REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)

1.   CONSOLIDATION AND BASIS OF PRESENTATION

United Dominion Realty Trust, Inc. is a self-administered real estate investment trust, or REIT, that owns, acquires, renovates, develops, and manages apartment communities nationwide. The accompanying consolidated financial statements include the accounts of United Dominion and its subsidiaries, including United Dominion Realty, L.P. (the “Operating Partnership”), and Heritage Communities L.P. (the “Heritage OP”) (collectively, “United Dominion”). As of June 30, 2006, there were 166,281,241 units in the Operating Partnership outstanding, of which 156,139,206 units or 94% were owned by United Dominion and 10,142,035 units or 6% were owned by limited partners (of which 1,764,662 are owned by the holders of the Series A OPPS, see Note 6). As of June 30, 2006, there were 5,542,200 units in the Heritage OP outstanding, of which 5,212,993 units or 94% were owned by United Dominion and 329,207 units or 6% were owned by limited partners. The consolidated financial statements of United Dominion include the minority interests of the unitholders in the Operating Partnership and the Heritage OP. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying interim unaudited consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted according to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and related notes appearing in United Dominion’s Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission as updated by the Current Report on Form 8-K filed May 17, 2006.

In the opinion of management, the consolidated financial statements reflect all adjustments that are necessary for the fair presentation of financial position at June 30, 2006, and results of operations for the interim periods ended June 30, 2006 and 2005. Such adjustments are normal and recurring in nature. The interim results presented are not necessarily indicative of results that can be expected for a full year.

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

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

2.   REAL ESTATE HELD FOR INVESTMENT

At June 30, 2006, there are 240 communities with 70,264 apartment homes classified as real estate held for investment. The following table summarizes the components of real estate held for investment (dollars in thousands):

 

3.   INCOME FROM DISCONTINUED OPERATIONS

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

For purposes of these financial statements, FAS 144 results in the presentation of the primary assets and liabilities and the net operating results of those properties sold or classified as held for disposition through June 30, 2006, as discontinued operations for all periods presented. The adoption of FAS 144 does not have an impact on net income available to common stockholders. FAS 144 only results in the reclassification of the operating results of all properties sold or classified as held for disposition through June 30, 2006, within the Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005, and the reclassification of the assets and liabilities within the Consolidated Balance Sheets for 2006 and 2005.

For the six months ended June 30, 2006, United Dominion sold seven communities with a total of 1,903 apartment homes and 300 condominiums from four communities with a total of 612 condominiums. We recognized gains for financial reporting purposes of $48.8 million on these sales. At June 30, 2006, United Dominion had 14 communities with a total of 4,405 homes and a net book value of $162.9 million, three communities with a total of 84 condominiums and a net book value of $7.4 million, and one parcel of land with a net book value of $0.2 million included in real estate held for disposition. During 2005, United Dominion sold 22 communities with a total of 6,352 apartment homes, 240 condominiums from five communities with a total of 648 condominiums, and one parcel of land. In conjunction with the sale of ten communities in July 2005, we received short-term notes for $124.7 million that bear interest at 6.75% and had maturities ranging from September 2005 to July 2006. As of June 30, 2006, the balance on the notes receivable was $8.0 million. We recognized gains for financial reporting purposes of $10.6 million during the six months ended June 30, 2006. The results of operations for these properties and the interest expense associated with the secured debt on these properties are classified on the Consolidated Statements of Operations in the line item titled “Income from discontinued operations, net of minority interests.”

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

United Dominion has elected Taxable REIT Subsidiary (“TRS”) status for certain of its corporate subsidiaries, primarily those engaged in condominium conversion and sale activities. United Dominion recognized a provision for income taxes of $2.5 million and $1.0 million for the three months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, United Dominion recognized a provision for income taxes of $7.2 million and $1.4 million, respectively. These amounts were classified as reductions of the net gain on sale of depreciable property in the accompanying consolidated statement of operations.

The following is a summary of income from discontinued operations for the periods presented, (dollars in thousands):

 

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

4.   SECURED DEBT

Secured debt on continuing and discontinued operations, which encumbers $2.0 billion or 34% of United Dominion’s real estate owned based upon book value ($3.8 billion or 66% of United Dominion’s real estate owned is unencumbered) consists of the following as of June 30, 2006 (dollars in thousands):

 

Approximate principal payments due during each of the next five calendar years and thereafter, as of June 30, 2006, are as follows (dollars in thousands):

 

During the first quarter of 2005, United Dominion prepaid approximately $110 million of secured debt. In conjunction with these prepayments, we incurred prepayment penalties of $8.5 million in both continuing and discontinued operations as “Loss on early debt retirement.” These penalties were funded by the proceeds from the sale of our technology investment of $12.3 million.

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

5.   UNSECURED DEBT

A summary of unsecured debt as of June 30, 2006 and December 31, 2005 is as follows (dollars in thousands):

        (a) United Dominion has a three-year $500 million unsecured revolving credit facility. The credit facility matures on May 31, 2008, and at United Dominion’s option, can be extended for an additional year. United Dominion has the right to increase the credit facility to $750 million if the initial lenders increase their commitments or we receive commitments from additional lenders. Based on United Dominion’s current credit ratings, the credit facility carries an interest rate equal to LIBOR plus a spread of 57.5 basis points, which represents a 12.5 basis point reduction to the previous unsecured revolver, and the facility fee was reduced from 20 basis points to 15 basis points. Under a competitive bid feature and for so long as United Dominion maintains an Investment Grade Rating, United Dominion has the right to bid out 100% of the commitment amount.

       (b) In June 2006, United Dominion issued $125 million of 6.05% medium-term notes. Interest is payable semiannually on June 1 and December 1, with the first interest payment due December 1, 2006. The notes mature on June 1, 2013.

        (c) Represents deferred gains from the termination of interest rate risk management agreements.

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

6.   EARNINGS PER SHARE

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

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

 

The effect of the conversion of the operating partnership units, Series A Out-Performance Partnership Shares, and convertible preferred stock is not dilutive and is therefore not included in the above calculations. If the operating partnership units were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2006 would be 8,742,297 and 8,747,834 weighted average common shares, and 8,507,349 and 8,512,674 weighted average common shares for the three and six months ended June 30, 2005. If the Series A Out-Performance Partnership Shares were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2006 and 2005 would be 1,764,662 and 1,791,329 weighted average common shares. If the convertible preferred stock were converted to common stock, the additional shares of common stock outstanding for the three and six months ended June 30, 2006 and 2005 would be 2,803,812 weighted average common shares.

7.   COMPREHENSIVE INCOME

Total comprehensive income for the three and six months ended June 30, 2006 and 2005, was $32.2 million and $44.2 million for 2006 and $52.4 million and $67.4 million for 2005, respectively. There is no difference between net income and total comprehensive income for the periods presented.

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

8.   COMMITMENTS AND CONTINGENCIES

Commitments

United Dominion is committed to completing its real estate under development, which has an estimated cost to complete of $37.9 million at June 30, 2006.

United Dominion has entered into two contracts to purchase apartment communities upon their development completion. Provided that the developer meets certain conditions, United Dominion will purchase these communities for $73.7 million.

Contingencies

Series C Out-Performance Program

In May 2005, the stockholders of United Dominion approved the Series C Out-Performance Program (the “Series C Program”) pursuant to which certain executive officers and other key employees of United Dominion (the “Series C Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in UDR Out-Performance III, LLC, a Delaware limited liability company (the “Series C LLC”), the only asset of which is a special class of partnership units of the Operating Partnership (“Series C Out-Performance Partnership Shares” or “Series C OPPSs”). The purchase price for the Series C OPPSs was determined by the Compensation Committee of United Dominion’s board of directors to be $750,000, assuming 100% participation, and was based upon the advice of an independent valuation expert. United Dominion’s performance for the Series C Program will be measured over the 36-month period from June 1, 2005 to May 30, 2008.

The Series C Program is designed to provide participants with the possibility of substantial returns on their investment if the cumulative total return on United Dominion’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).

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

i.       determining the amount by which the cumulative total return of United Dominion’s common stock over the measurement period exceeds the Minimum Return (such excess being the “Excess Return”);

ii.     multiplying 2% of the Excess Return by United Dominion’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, OP Units, and common stock equivalents); and

iii.    dividing the number obtained in (ii) by the market value of one share of United Dominion’s common stock on the valuation date, determined by the volume-weighted average price per day of common stock for the 20 trading days immediately preceding the valuation date.

For the Series C OPPSs, the number determined pursuant to (ii) above is capped at 1% of market capitalization.

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

If, on the valuation date, the cumulative total return of United Dominion’s common stock does not meet the Minimum Return, then the Series C Participants will forfeit their entire initial investment.

Based on the results through June 30, 2006, the Series C LLC would not be entitled to receive distributions or allocations of income had the program terminated on that date. However, since the ultimate determination of Series C OPPSs to be issued will not occur until May 2008, and the number of Series C OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events.

Series D Out-Performance Program

In February 2006, the board of directors of United Dominion approved the Series D Out-Performance Program (the “Series D Program”), pursuant to which certain executive officers and other key employees of United Dominion (the “Series D Participants”) were given the opportunity to invest indirectly in United Dominion by purchasing interests in UDR Out-Performance IV, LLC, a Delaware limited liability company (the “Series D LLC”), the only asset of which is a special class of partnership units of the Operating Partnership (“Series D Out-Performance Partnership Shares” or “Series D OPPSs”). The Series D Program is part of the New Out-Performance Program approved by United Dominion’s stockholders in May 2005. The Series D LLC has agreed to sell 830,000 membership units to members of United Dominion’s senior management at a price of $1.00 per unit. The aggregate purchase price of $830,000 for the Series D OPPSs, assuming 100% participation, is based upon the advice of an independent valuation expert. United Dominion’s performance for the Series D Program will be measured over the 36-month period from January 1, 2006 to December 31, 2008.

The Series D Program is designed to provide participants with the possibility of substantial returns on their investment if the cumulative total return on United Dominion’s common stock, as measured by the cumulative amount of dividends paid plus share price appreciation during the measurement period is at least the equivalent of a 36% total return, or 12% annualized (“Minimum Return”).

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

i.       determining the amount by which the cumulative total return of United Dominion’s common stock over the measurement period exceeds the Minimum Return (such excess being the “Excess Return”);

ii.     multiplying 2% of the Excess Return by United Dominion’s market capitalization (defined as the average number of shares outstanding over the 36-month period, including common stock, OP Units, and common stock equivalents); and

iii.    dividing the number obtained in (ii) by the market value of one share of United Dominion’s common stock on the valuation date, computed as the volume-weighted average price per day of the common stock for the 20 trading days immediately preceding the valuation date.

For the Series D OPPSs, the number determined pursuant to clause (ii) above is capped at 1% of market capitalization.

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

If, on the valuation date, the cumulative total return of United Dominion’s common stock does not meet the Minimum Return, then the Series D Participants will forfeit their entire initial investment.

Based on the results through June 30, 2006, the Series D LLC would not be entitled to receive distributions or allocations of income had the program terminated on that date. However, since the ultimate determination of Series D OPPSs to be issued will not occur until December 2008, and the number of Series D OPPSs is determinable only upon future events, the financial statements do not reflect any impact for these events.

Litigation and Legal Matters

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

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